16
May
2013
“If the Fed Ever Started Monetizing the Debt, We’d Be in Trouble…”
The CBO recently revised its estimate of the FY2013 deficit down to “only” $642 billion. The Fed is still buying $45 billion per month in Treasury securities, on average.
So that means the Fed will monetize 84% of the Treasury’s deficit this fiscal year. And it’s not chump change, the deficit is still over half a trillion dollars.
Bob, isn’t it misleading to look at how much of the deficit, rather than the total outstanding debt, is being monitored by the Fed? I remember Krugman talking about this a while back.
I can’t immediately find the Krugman post I was talking about, but I found this post that you may want to respond to:
krugman.blogs.nytimes.com/2013/03/26/the-unnatural-rate-hypothesis/
“In fact, the notion that rates are low just because the Fed is buying up debt is wrong on at least three levels.
First, as Bernanke stressed, long-term interest rates have moved very similarly across a wide range of countries, including countries where the central bank is buying up lots of bonds and countries where it isn’t. …
Second, if Fed purchases of bonds are crucial to keeping rates down, we should see spikes in rates when those purchases stop. In fact, a lot of people predicted that this would happen in mid-2011, when QE2 came to an end — and lost a lot of money as a result.
…
But finally and most importantly, since when do we believe that central banks can hold interest rates down at will, for extended periods, without consequences? Isn’t “printing money” supposed to be dangerously inflationary?
Or think of it in terms of the original Wicksellian concept of the natural rate of interest. This was supposed to be the interest rate consistent with price stability; if the central bank tried to keep rates below this level, it might be able to for a while, but the result would be an overheating economy and accelerating inflation. (Milton Friedman would later appropriate this concept by analogy to unemployment).”
“isn’t it misleading to look at how much of the deficit, rather than the total outstanding debt, is being [monetized] by the Fed?”
No.
“In fact, the notion that rates are low just because the Fed is buying up debt is wrong on at least three levels.”
None of those refute the theory that interest rates are low in the US because the Fed is buying up debt.
“But finally and most importantly, since when do we believe that central banks can hold interest rates down at will, for extended periods, without consequences? Isn’t “printing money” supposed to be dangerously inflationary?”
Depends on a number of factors, particularly the rate at which credit is deflating, which puts downward pressure on the money supply, as well as the Fed paying interest on reserves.
“Or think of it in terms of the original Wicksellian concept of the natural rate of interest. This was supposed to be the interest rate consistent with price stability; if the central bank tried to keep rates below this level, it might be able to for a while, but the result would be an overheating economy and accelerating inflation.”
Since when did every time period of holding interest rates below their “natural” rates and generating undue inflation become identical?
“Depends on a number of factors, particularly the rate at which credit is deflating, which puts downward pressure on the money supply, as well as the Fed paying interest on reserves.” I don’t understand what you mean by “puts downward pressure on the money supply”. It couldn’t have put that much downward pressure, could it, since at least according to Krugman, the monetary base has tripled?
Also, when seeing whether the Fed is Treasury prices high by buying lots of Treasury securities, isn’t the relevant question how much of the total Treasury securities are owned by the Fed? Why does it matter what percentage of new Treasury securities issued are owned by the Fed?
What he means by “puts downward pressure on the money supply” is “circulating money”.
The following discussion will be helpful in understanding the concept he’s expressing:
So Where’s the Inflation? Tom Woods Talks to Mark Thornton
http://www.youtube.com/watch?v=n0RusrwYsRE#t=5m16s
monetized, not monitored
If NGDP growth is below 3, inflation isn’t high enough.
If the market process doesn’t determine the money supply and NGDP, you don’t know if inflation is too high or too low.
Sorry, M_F. As per usual, I was trying to be arch with mixed success.
I think that I liked it better when the comment link was broken.