Don’t underestimate the power of printing money, part 2


Paul Kasriel thinks the Fed announcement that it is monetizing the U.S. Federal Government’s deficit is very important. He ends his article at Northern Trust with these words:

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In the coming months, the federal government is going to be increasing its debt issuance to finance its increased spending as a result of the recently-passed fiscal stimulus program. The Congressional Budget Office is forecasting a federal budget deficit for fiscal year 2009 of about $1.8 trillion. As mentioned above, the Fed is on course to create about $2.15 trillion of new credit in the months ahead. All else the same, the Fed’s monetization of debt through the purchase of mortgage-backed securities, Treasury securities or through the TALF program in conjunction with the federal government’s increased spending will generate stronger economic activity. If the increased federal spending were being funded with increased taxes, then those paying higher taxes would cut back on their spending as the federal government increased its spending. Net, net, there would not be much increase in total spending. The same would hold true if the federal government’s increased spending were being funded with increased Treasury debt purchased by the non-bank public and not offset by Fed purchases of some kind of debt. But if the Fed purchases some kind of debt in amounts equal to the federal government’s increased debt issuance, then the federal government can increase its spending without any one else having to cut back on his or her spending. In the short run, this will boost real economic activity. Of course, farther down the road, this will increase the rate at which prices rise – prices of goods, services and assets. Ben Bernanke’s “money-dropping” helicopter has been replaced by a C-5 Galaxy transport!

I agree with Paul here. The Fed’s announcement, the Geithner plan, the TALF and the stimulus will collectively be a huge boost to the economy. However, if the economy does recover, inflation will be a serious problem. We can see that already with the price of oil, which has broken out of a trading range from $32-$48 a barrel. Get ready.

Fed Monetization – Not What It Buys, but How Much of Anything It Buys (PDF) – The Econtrarian

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