Wednesday, September 12, 2012
Thought of the Day
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Actually, I came over here 'cuz Phil Gramm and John Taylor have a really good op/ed in today's WSJ about the Fed and its QEs, and why the current absence of inflation does not necessarily mean that all will be well.
I wanted to share it, but it's behind a paywall. You a subscriber? If not, I've copied what I believe are the key points. Apologies for the length; I had to capture enough so that it made some sense. Here goes:
"Inflation is not, however, the only cost of these unconventional monetary interventions. As investors try to predict the timing and effect of Fed policy on financial markets and the economy, monetary policy adds to the climate of economic uncertainty and stasis already caused by current fiscal policy. There will be even greater costs when the economy begins to grow and the Fed, to prevent inflation, has to reverse course and sell bonds and securities to the public.
"Since September 2008, the Fed has acquired $1.16 trillion of government securities—in fiscal year 2011 (Oct. 1, 2010-Sept. 30, 2011), the central bank bought 77% of all the additional debt issued by the Treasury. Aside from the monetary impact of these debt purchases, the Fed allowed the federal government to borrow a trillion dollars without raising the external debt of the Treasury and without having to pay net interest on that portion of the debt, since the central bank rebated the interest payments to the Treasury.
"When the Fed must, in Chairman Ben Bernanke's words, begin "removing liquidity," by selling bonds, the external debt of the federal government will rise and the Treasury will then have to pay interest on that debt to the public. Selling a trillion dollars of Treasury bonds on the market—at the same time the government is running trillion-dollar annual deficits—will drive up interest rates, crowd out private-sector borrowers and impede the recovery. Debt-service costs to the Treasury will spiral as every 1% increase in federal borrowing costs add $100 billion to the annual budget deficit.
"In addition, Operation Twist, by shortening the average maturity date of externally held debt, will require the Treasury to borrow more money sooner when the economy recovers and interest rates start to rise. This too will drive up interest costs and the deficit.
"The same problems will occur as the Fed begins to sell its holdings of mortgage-backed securities to reduce the monetary base. When the Fed bought these securities, it may have marginally reduced mortgage interest rates. Selling them during a real recovery will likely cause mortgage rates to rise.
"Proponents of QE3 argue that while the Fed's balance sheet must be reduced at some future time, it has the tools to minimize the impact on interest rates by slowing down the pace of the sales. But the Fed's ability to act has already been compromised by its pledge to maintain low interest rates through 2014. Having to time open-market sales to minimize interest-rate increases will further limit the Fed's ability to preserve price stability. In short, the Federal Reserve in future years will face significant constraints that are being forged now."
Sounds convincing to me....
I wanted to share it, but it's behind a paywall. You a subscriber? If not, I've copied what I believe are the key points. Apologies for the length; I had to capture enough so that it made some sense. Here goes:
"Inflation is not, however, the only cost of these unconventional monetary interventions. As investors try to predict the timing and effect of Fed policy on financial markets and the economy, monetary policy adds to the climate of economic uncertainty and stasis already caused by current fiscal policy. There will be even greater costs when the economy begins to grow and the Fed, to prevent inflation, has to reverse course and sell bonds and securities to the public.
"Since September 2008, the Fed has acquired $1.16 trillion of government securities—in fiscal year 2011 (Oct. 1, 2010-Sept. 30, 2011), the central bank bought 77% of all the additional debt issued by the Treasury. Aside from the monetary impact of these debt purchases, the Fed allowed the federal government to borrow a trillion dollars without raising the external debt of the Treasury and without having to pay net interest on that portion of the debt, since the central bank rebated the interest payments to the Treasury.
"When the Fed must, in Chairman Ben Bernanke's words, begin "removing liquidity," by selling bonds, the external debt of the federal government will rise and the Treasury will then have to pay interest on that debt to the public. Selling a trillion dollars of Treasury bonds on the market—at the same time the government is running trillion-dollar annual deficits—will drive up interest rates, crowd out private-sector borrowers and impede the recovery. Debt-service costs to the Treasury will spiral as every 1% increase in federal borrowing costs add $100 billion to the annual budget deficit.
"In addition, Operation Twist, by shortening the average maturity date of externally held debt, will require the Treasury to borrow more money sooner when the economy recovers and interest rates start to rise. This too will drive up interest costs and the deficit.
"The same problems will occur as the Fed begins to sell its holdings of mortgage-backed securities to reduce the monetary base. When the Fed bought these securities, it may have marginally reduced mortgage interest rates. Selling them during a real recovery will likely cause mortgage rates to rise.
"Proponents of QE3 argue that while the Fed's balance sheet must be reduced at some future time, it has the tools to minimize the impact on interest rates by slowing down the pace of the sales. But the Fed's ability to act has already been compromised by its pledge to maintain low interest rates through 2014. Having to time open-market sales to minimize interest-rate increases will further limit the Fed's ability to preserve price stability. In short, the Federal Reserve in future years will face significant constraints that are being forged now."
Sounds convincing to me....
# posted by 
: 7:33 PM
: 7:33 PM
Yes. But I also thought it was funny.
I always wish I knew more economics when people who do write things predicting the near future based on the economic rules and recent history. I do believe inflation is caused almost solely by monetary policy. I believe that government borrowing does indeed crowd out the need for financing in the private sector, which is bad for all of us. I believe that we have raised the money supply way too much and that these actions of the past three years will have a bad effect fairly soon. But do I really understand what will happen? Do I really understand what Taylor and Gramm are fearing?
No.
Thanks for bringing it to my attention though. Any new knowledge of economics is welcome.
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I always wish I knew more economics when people who do write things predicting the near future based on the economic rules and recent history. I do believe inflation is caused almost solely by monetary policy. I believe that government borrowing does indeed crowd out the need for financing in the private sector, which is bad for all of us. I believe that we have raised the money supply way too much and that these actions of the past three years will have a bad effect fairly soon. But do I really understand what will happen? Do I really understand what Taylor and Gramm are fearing?
No.
Thanks for bringing it to my attention though. Any new knowledge of economics is welcome.
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