Several prominent economists had an attention-grabbing op-ed in the Journal yesterday. Some key sentences:
Did you know that, during the last fiscal year, around three-quarters of the deficit was financed by the Federal Reserve? Foreign governments accounted for most of the rest, as American citizens’ and institutions’ purchases and sales netted to about zero. The Fed now owns one in six dollars of the national debt, the largest percentage of GDP in history, larger than even at the end of World War II.
1) QE3 seems like the right thing to do, but debt monetization on this scale surely raises a reasonable prospect of stagflation. I have no doubt that the Fed will try to claw back all the money it’s issued in the last five years, but will it succeed? This is uncharted territory.
2) No wonder interest rates on Treasuries are so low.
I was just about to post a link to this, so good to see I’m not the only one that thinks it worth our attention. A real downer to read with your morning Joe or juice, but important.
Yes, we are in uncharted territory here. Though I think QE3 is the wisest choice, it is not hard to imagine scenarios where things go terribly wrong.
Even though the total increase in money has been very high, the Fed has seemed cautious about easing. It is essential that the Fed responds decisively when it comes to to tighten, but I’m not entirely confident that it will. If prices start to accelerate when we are still at high unemployment, we definitely could get stagflation if the Fed is not sufficiently aggressive.