December 13, 2012

At the Fed, It’s QE as Far as the Eye Can See (Also See Discussion Question: What If the Fed Just ‘Forgives’ U.S. Debt?)

Filed under: Economy,Taxes & Government — Tom @ 8:43 am

Also, see below for today’s discussion question.


The Fed’s insistence on continued easing is foolish, as explained in a Wednesday Wall Street Journal editorial published in today’s paper:

The Fed’s Contradiction
Easier money hasn’t led to more growth, so we need still easier money.

Four years ago this month the Federal Reserve began its epic program of monetary easing to rescue an economy in recession. On Wednesday, Chairman Ben Bernanke declared that this has worked so well that the Fed must keep easing money for as long as anyone can predict in order to save a still-sputtering recovery.

That’s the contradiction at the heart of the Fed’s latest foray into “unconventional policy,” which is a euphemism for finding new ways to print money: The economy needs more monetary stimulus because it is still too weak despite four years of previous and historic amounts of monetary stimulus. …

… The Fed committed Wednesday to purchase an additional $45 billion in long-term Treasury securities each month well into 2013, in addition to the $40 billion in mortgage assets it is already buying each month. At $85 billion a month, the Fed’s balance sheet will thus keep growing from its current $2.9 trillion, heading toward $4 trillion by the end of the year. Four years ago it was less than $1 trillion.

… All of this will create a fiscal cliff of its own when interest rates start to rise. The Congressional Budget Office says that every 100 basis-point increase in interest rates adds about $100 billion a year to government borrowing costs. Pity the President and Congress who have to refinance $15 trillion in debt at 6%. If Mr. Bernanke really wants to drive the President and Congress to reduce future spending, he shouldn’t keep bailing them out with easier money.

The overarching illusion is that ever-easier monetary policy can return the U.S. economy to a durable expansion and broad-based prosperity. The bill for unbridled government spending stimulus is already coming due. Sooner or later the bill for open-ended monetary stimulus will arrive too.

Here’s the dirty little secret: The Fed is buying all of these Treasury securities and mortgage assets because no one else will, at least not in the monthly volumes required to keep the entire house of cards from falling.

Now here’s today’s question: What if the Fed at some point simply decides to forgive the U.S. government debt on its balance sheet? Then what?



  1. Exactly the ultimate logical conclusion of Keynesism.

    The debt means nothing because the money means nothing.

    But to the comment of refinancing $16 trillion at 6%, this simple snark lays bare the whole fallacy of the Federal Reserve printing money at the behest of the Treasury. The Fed will NEVER allow rates to rise since to do so would bury the government. Zero interest rates are the sprung trap of bad governance.

    The Congress has no incentive to balance it’s budget when borrowing is “same as cash.” Why bother when there is no down side to it from their POV? Democrats have lulled themselves into a false sense of security believing they can borrow indefinitely as the Fed willingly obliges their largess when others won’t. The Fed is under no obligation to purchase Treasuries when others won’t, that’s how they use to indirectly discipline Congress to reign in on spending due to higher interest rates. It is clear then that Ben Bernanke and others at the Fed have colluded with Obama and his pals to game the financial system to their benefit – staying in power.

    Even if the GOP agrees to all of Obama’s terms to avoid the so called fiscal cliff, the tax increases WILL NOT COVER the existing deficit spending. Hence the Fed will buy, buy, buy indefinitely.

    But let us expose the charade for what it is, a farce conceived by politicians to scare the public into accepting tax increases so they can continue to waste money on themselves and their campaign contributors. If the government curtailed its spending, campaign contributors would be feeling the financial bite. The public will though feel the lash of Clinton level taxation which is not what Democrats want to have characterized.

    Thus we come to the real issue, indefinite funding of government operations via the Fed magically creating wealth and wiring it to the Treasury. We come full circle to Keynes and his logical outcome. Wealth can be created honestly by Capitalists whose distribution is naturally unequitable or wealth can be created dishonestly by the government and distributed equitably. As long as you believe the Dollar is worth something, it is, however, when you don’t, it isn’t. We will be shortly testing the limits of that faith and the (we) isn’t just us but all the foreigners who hold Dollars and Treasuries. They will act first because they have a greater frame of reference to judge against.

    Comment by dscott — December 13, 2012 @ 9:58 am

  2. #1, so does the ruinous hyperinflation start before or after the loss of faith?

    Comment by Tom — December 13, 2012 @ 10:07 am

  3. This is propping up the stock market to make people feel good so they will start spending. It is complete nonsense, devaluing the dollar in a race to the bottom. Inflation is inevitable, and gold may be the only refuge.

    Comment by Jim — December 13, 2012 @ 2:18 pm

  4. #2, interesting thought exercise.

    For a definitive answer one would have to review the modern debacles in Zimbabwe, Argentina, Mexico and Chile. But then Iran also is going through it right now but for a different reason.

    My guess would be simultaneous as in a cascade effect, i.e. a panic or run for the exits. The smart ones will be unloading their dollar and bond positions while buying US goods with US dollars to repatriate the value via hard goods. I believe it will begin in earnest when we see exports increase despite the crappy economic climate in the rest of the world.

    Example, the Chinese would use their massive dollar reserves to buy up companies, plants and then individual products to ship them all back home. At first it would seem the US economy is getting better from the export driven boom and the Chinese would be seen as being reasonable with the balance of trade, but then as the Chinese run out of bonds to sell to the Fed on the secondary market, their buying will suddenly stop. They may even pay top dollar for most items realizing that time is short and their dollar denominated instruments could evaporate in their hands. I believe the Chinese being more shrewd in monetary matters will be the first ones to make the move, all the other countries will scratch their heads until they realize the massive draw down of their dollar denominated holdings. At that point hyper inflation is going to kick in as the rush for the exits begin in earnest.

    Also let us not forget that inflation comes with a psychology where sellers pass on price increases because they believe they can as demonstrated by the robust sales. This is reinforced by the realization by the consumer who accepts that prices will endlessly rise and then buys multiple items to effect a savings via stocking up versus buy as you need. The paradigm always starts when sellers are ALL forced to pass on a price increase they can not absorb or find a way to become ever more efficient in delivering.

    Comment by dscott — December 13, 2012 @ 4:19 pm

  5. #3, the only financial salvation is an economic bust where those who led us into the mess are finally held accountable at the voting booth.

    As for refuge, hard assets and equities. That is the experience of Zimbabwe. BTW- as hyper inflation sets in, people will stop using the dollar to use another currency for daily purchases, this has happened in every historical case. Equities will be valued on their book value, not the sales based TTM (Trailing Twelve Months). That monetary book value will be determined by the rate of exchange of the dollar to some other currency.

    Comment by dscott — December 13, 2012 @ 4:27 pm

  6. [...] At the Fed, It’s QE as Far as the Eye Can See (Also See Discussion Question: What If the Fed Just … [...]

    Pingback by At the Fed, It’s QE as Far as the Eye Can See (Also See Discussion Question: What If the Fed Just ‘Forgives’ U.S. Debt?) | PERSUASION IN INK — December 13, 2012 @ 6:53 pm

RSS feed for comments on this post.

Sorry, the comment form is closed at this time.