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.