From his recent CATO podcast.
Very good speech. Some of the stuff should be obvious but still needs repeating because so many people just haven’t thought about it.
While there’s a big deficit, the government needs the Fed to keep QE going and keep monetizing that deficit. This is equivalent to printing money, thus (monetary) inflation follows from this. How long before this works through to (price) inflation is the big question, but it can’t go indefinately.
As soon as prices start to inflate, the Fed will be forced to choose whether to say “No” to Obama and throttle the money tap, or whether to say “Yes” to (price) inflation and let rip even worse cost of living increase than we have seen already. The winner will come down to politics but I can’t even imagine Yellen saying “No” to Obama.
The Treasury does not need the Fed to purchase bonds. The three month bond yields 0.0837%. Reserves are yielding .25%. The fed is obviously not the one keeping short term interest rates low. Demand for treasuries is keeping it low.
You are saying that supply and demand don’t exist and the rapidly growing bond portfolio at the Fed has no effect whatsoever on the market?
Can you think of another market where this might happen?
I don’t think that he know the difference between cause and effect.
I think things make much more since when you accept the fact that the Fed is part of The Federal Government and it has no independence. The Fed does what the 3 branches tell it to. Sometimes the 3 branches do what the Reserve tells them to do. It is not always clear who is leading but it is clear they are all on the same team.
Of course the Fed is the enabler, what regime would not want/need an enabler. IT is all to convenient, think about it.
First of all, interest rates on floating exchange are a policy variable, subject to FOMC vote.
And the yield curve for Treasury bonds reflects market expectations of FED policy changes.
So it’s like a way for the market to tell policymakers what it thinks they are going to do.
And on floating exchange, with the presence of gov’t deficits, the minimum interest in the economy is 0%, unless GOV’T INTERVENES.
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