THE PARADOX OF AVAILABILITY OF MONEY MASSES AS A POLICY TOOL FOR THEIR HOLDERS

It is important to repeat here what we said in Chapter 7 about the price determination of financial instruments being independent of the original exchanges that created them. Masses in the hands of their holders are consequently a tool for changing prices just by intervening in financial markets. So when imbalances like deficits create finance instruments such as debt instruments, this generates a paradox. Instead of determining a rise in interest rates to cover increased risk coverage needs, excessive indebtedness may just have the opposite result. Having the capacity to use the existing money issuance capacity, including the mass of their own balance sheet as guarantee, the holder may buy additional debt instruments on the markets to reimburse, partially, their existing debt, whose fluidity is no longer total just because of its excess. Regulatory prudential guidance (such as that of the FED and ECB) may have frozen some of it in representation of financial institution equity, or made their sale process rigid because of duration needs with the tax set-up deemed to favour long-term investments often developed for retirement benefit structures (401ks and insurance contracts). Then, buying these on the market will trigger a rise in their price and reduce the prevailing interest rates. The debt issuers, as most states are, have good reasons for reducing the cost of refinancing to play such an unequal game. The only risk governments take is the limit where free investors quit the playing field for sunnier skies, and leave the other players alone until the market becomes out of control. This paradox is an instability component, as it facilitates increased debt levels and, by artificially modifying the interest scale, disorganizes economic planning calculations for investors with the wrong risk costs. This is an extra reason for better analysis of flows and interactions. Conducting such a policy will lead to further distortion. It will reward the debt holder with increased valuations in their balance sheet and will support its net equity, leading to the convergence of interest between issuer and debtor. Ultimately, it will be detrimental to the economy by deriving money from productive investments to debt financing.

 
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