Economics, Pethokoukis

2 charts that show the Fed is not monetizing the debt

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While there’s much in Fed policy to criticize over the past decade, there’s no need to overstate things. Right now, for instance, we see lots of talk that the Fed is monetizing the debt, which would be indistinguishable from money printing. In fact, it is money printing and risks a dangerous bout of inflation. But is that really what the Fed is doing? As Ben Bernanke said last month:

By buying securities, are you “monetizing the debt”–printing money for the government to use–and will that inevitably lead to higher inflation? No, that’s not what is happening, and that will not happen. Monetizing the debt means using money creation as a permanent source of financing for government spending. In contrast, we are acquiring Treasury securities on the open market and only on a temporary basis, with the goal of supporting the economic recovery through lower interest rates. At the appropriate time, the Federal Reserve will gradually sell these securities or let them mature, as needed, to return its balance sheet to a more normal size. Moreover, the way the Fed finances its securities purchases is by creating reserves in the banking system. Increased bank reserves held at the Fed don’t necessarily translate into more money or cash in circulation, and, indeed, broad measures of the supply of money have not grown especially quickly, on balance, over the past few years.

Sure, that’s his story. But what about the claim that the “Federal Reserve purchased 77% of the net increase in the debt by the Federal government in 2011″? Economist David Beckworth puts the Fed’s bond buying in perspective with two facts of his own. First, the Fed overall holds just 15% of marketable treasuries as seen in the “All Years” category in the below chart.

 

Second, Beckworth notes, “while the Fed did purchase a large share of new treasuries in 2011, these purchases only returned the Fed’s share of total marketable treasuries to its pre-crisis level.”

To be sure, the Fed will need to unwind it balance sheet at some point, and that move will expose it to considerable political pressure if the economy is still subpar. That’s why communications and transparency are crucial — and why the central bank might want to adopt an explicit NGDP targeting rule to guide its actions.

8 thoughts on “2 charts that show the Fed is not monetizing the debt

  1. Since hearing our Treasury Secretary insisting that there should be no debt limit, it is now clear that the children in charge of our economy have neither the ability nor desire to restore the US to financial health. If we cannot find grownups to take over, then we will be Greece by the end of the decade.

  2. From Michael Pento, Forbes 11.22.2012:
    “Certain deflationists have recently gone on record saying that the increase in the Fed’s balance sheet is meaningless with regard to creating inflation because our central bank can’t print money, it can only create bank reserves. The problem with their view is that it both disregards the definition of money and ignores the process of creating bank reserves.”
    http://www.forbes.com/sites/michaelpento/2010/11/22/does-the-fed-create-money/

  3. As for the market expectations argument, the market or the experts didn’t there was a housing bubble either. And who will bail put the Fed when it takes Billions of losses on unwinding its balance sheet?

    • And who will bail out the Fed when it takes Billions of losses on unwinding its balance sheet?

      I believe that the agreement between the Fed and Treasury ensures that the taxpayer will have to take the losses from the purchases of government debt. It is always the taxpayer that gets fleeced while the politicians and the courtiers in the media and academia get paid to keep spinning false arguments about the necessity of continuing policies that make workers and investors poorer.

  4. To be sure, the Fed will need to unwind it balance sheet at some point, and that move will expose it to considerable political pressure if the economy is still subpar. That’s why communication and transparency are crucial — and why the central bank might want to adopt an explicit NGDP targeting rule to guide its actions.

    The Fed created the problem by blowing up a credit bubble. It is now using treasury purchases to keep the credit bubble going. How long will it take for the ‘analysts’ here to realize that the Fed’s activities are the problem and the solution is competition by taking away its monopoly on the creation of money?

  5. Monetizing the debt is defined as printing money with the purpose to repay the national debt. It is the process of “converting the government debt from interest bearing securities into money. This process has the purpose of depressing the interest rates for a short period of time then spawning a higher interest rate and lower bond prices in the long term. Governments over the last few years have had difficulty finding a place to unload their debt in the market, thus they have resulted to monetizing the debt. The United States has done this many times and now China is also considering similar actions. Although many sources believe the Fed has been monetizing debt James Pethokoukis’ article is trying to demonstrate that this is the exact opposite of what the Fed has actually been doing. When looking at the charts in the article above it can be seen that the Fed has purchased 77% of the overall net increase of debt by the Federal Government in the year 2011. Overall the Fed holds 15% of marketable securities. During the times if the recession in the United States the Federal Reserve severely decreased starting in 2007 then returning to pre recession rates toward 2011. The creation of money by the Federal Reserve has been incorporated into this process because that can be seen as the opposite of monetizing the debt. The Federal Reserve over the last few years has been printing money although much of the public believes that they Federal Reserve has been attempting to monetize the debit.

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