I realized something wasn’t adding up with the numbers, and went and double-checked the JP Morgan report that led me (in this video) to say that the Fed may monetize the entire federal budget deficit in 2013.
Well, that’s a misleading way to describe it (which is why I’m posting this clarification). What the JP Morgan report (and Zero Hedge blogger) are saying is that in its latest announcement, the Fed pledges to continue buying $40 billion of agency-issued mortgage-backed securities per month, but will also start buying on net $45 billion of Treasuries. (Before, with “Operation Twist,” the Fed was buying $45 billion of long-term Treasuries but was simultaneously selling off the same amount in short-term Treasuries. Now it’s going to engage in net purchases.)
So what the JP Morgan report was saying, is that $85 billion per month x 12 months = $1.02 trillion for the year in the growth of the Fed’s balance sheet, and that’s just about what the federal budget deficit is projected to be. Hence, in their words, “QE will offset almost all of next year’s government deficit.”
But the problem with saying it this way, is that the word “offset” makes you think it’s a euphemism for “monetize” when it’s arguably not. For example, suppose the Fed planned on buying $1 trillion of real estate in Hong Kong. Would we still say “QE will offset almost all of next year’s government deficit”?
Now it’s true, the MBS that the Fed is buying, is ultimately backed by the US taxpayer through Fannie Mae et al. So in a sense, those MBS are federal government obligations, just like Treasuries.
Yet in another sense, they’re not “just like Treasuries.” If the borrowers faithfully make their mortgage payments, then the US taxpayer doesn’t kick in a dime. Another problem is that even if you count MBS as equivalent to Treasuries, then “next year’s government deficit” would have to include not just the net increase in Treasuries held by the public (and Fed), but you’d also have to include the net increase in outstanding agency-issued MBS.
So, unless someone corrects me yet again in the comments here, I’m going to stop saying the Fed plans on monetizing the entire deficit next year, since I don’t think that’s really accurate.