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Here is a brief commentary from Panzner Insights, my members-only website, which I posted earlier
today:
In “The Biggest Myth About the Fed,”David Beckworth, an assistant
professor of economics at Western Kentucky University, suggests that the
pessimists are wrong to be concerned about what Mr. Bernanke and Co. are up
to.
There many myths about Fed policy over the past few
years, but the biggest one has to be that the Fed has been monetizing the
national debt. This simply is not true, but it does not stop some folks from
making this claim. For example, at last week’s Cato Monetary Conference
we find former Fed officials pounding the Fed-is-monetizing-the-debt drums:
Mr Warsh and Mr Poole (who was filling in for Allan Meltzer) made a
sharp distinction between the “legitimate” efforts to fight the
crisis and the subsequent easing actions that were, allegedly, unjustified by
the economic fundamentals. According to them, the interventions of 2007-2009
were required to ensure that “the markets could clear”, as Mr Warsh put it, while the
second round of easing was done to satisfy “political masters” by
monetising the debt. In fact, Mr
Warsh said that the Fed was being actively
unhelpful by “crowding in” Congress’s supposedly poor
policy choices.
My first response is how can they
can say this with historically-low U.S. treasury yields and muted
inflation expectations? Surely, if the Fed were truly monetizing the debt we
would be seeing a 1970s-repeat in the bond market, but we are not. And this
is happening, in part, because the Fed is not that big of a treasury
purchaser. Consider the figure below. It shows the Fed’s stock of
treasuries by remaining maturity compared to the total stock of marketable
treasuries as of the end of October, 2012. Though the Fed’s share of
treasuries increases by remaining maturity, at most it hits 32% of the total
for 10-30 years category. That means that after many months of Operation
Twist that roughly 68% of long-term treasuries are still held outside the
Fed. Overall, the Fed holds about 15% of marketable treasuries as seen in the
“All Years” category. It is hard to square these numbers with the
allegations that the Fed is monetizing the debt.
Leaving aside the questions of whether:
- the Fed’s share of the Treasury market
will remain as low as it is now if other investors start heading for the
hills;
- the central bank’s current intentions
with respect to their securities holdings will remain the same if the
economic, financial, political, or social landscape changes for the
worse; or,
- we can really know for sure that the debt has
been monetized until after the fact;
the notion that current benign market conditions are a
reason for optimism sums up just how out of touch with reality most academic economists
(and other alleged experts, including journalists-cum-forecasters who parrot
this nonsense) are.
By this sort of logic:
- Mid-2005 was the right time to be optimistic on
housing
- January-2007 was the right time to be
optimistic on the banking sector
- The spring of 2007 was the right time to be
optimistic on credit markets
- The fall of 2007 was the right time to be
optimistic on global equity markets
- Mid-2008 was the right time to be optimistic on
commodities
- This past September was the right time to be
optimistic on technology stocks
Of course, we know how those all worked out (hint:
not well).
(Note: for those who are interested, this is a taste
of what I touch upon in today’s podcast, “Simple
Minds.”)
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