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?)
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?