Sunday, December 23, 2012

Just A Quick Thought On QE4

So to revisit something from a while back, Fed Chairman Ben Bernanke has begun QE4 where he will buy $45B of Federal debt every month until inflation is higher and unemployment is lower.

Isn't he forgetting something?

While his purchases have an indirect effect on unemployment and more direct effect on inflation, they have a direct, dominant effect on government funding.

The Federal government will borrow more than $1T this year, at least half of which will be loaned to them by the Fed through QE4 and other programs. If unemployment were to fall to 6.4% and inflation to rise to, say, 3%, the Fed would be facing a real quandary. The minute they stop buying government debt, the government will have to find a new buyer for $500B of bonds.

Good luck with that.


W.C. Varones said...

Exactly right.

And what about not just stopping purchases, but actually reducing its balance sheet? How can the Fed possibly sell hundreds of billions of Treasuries into a rising interest rate environment? The Fed would take massive losses which by law would flow through to the Treasury.

There is no exit.

K T Cat said...

WC, it was a SLOB post that slapped me in the face with this one, perhaps one of yours. I meant to link, but I was in a hurry. Later, I promise.

The whole "help the economy" thing is just a fantasy, promulgated by a gullible and financially illiterate media.

Anonymous said...

can't we just agree to call it QE (infinity sign)?

Jeff Burton said...

Old story. Governments that monetize debt usually claim its for their citizens good. Check out the classic Fiat Money Inflation in France. So many familiar themes. Here is how it starts out:

Early in the year 1789 the French nation found itself in deep financial embarrassment: there was a heavy debt and a serious deficit.

The parallels continue from there.