Whether You Call It QE or Not the Fed Is Monetizing the US Debt
Last October, the Federal Reserve relaunched quantitative easing. Of course, Fed Chairman Jerome Powell insists it’s not quantitative easing. But as Peter Schiff pointed out in a recent tweet, that debate is really just semantics.
The argument over whether the current Fed balance sheet expansion constitutes QE is pointless. QE was always just a euphemism for debt monetization. The Fed monetized debt in the past, its monetizing more debt in the present, and it will monetize even more debt in the future!”
A close look at what is going on at the Treasury Department and the Fed makes it pretty clear the central bank is, in fact, monetizing the debt.
Daniel Amerman is a CFA who closely follows on Treasury and Fed operations. In an article by economist Doug French at the Mises Wire, Amerman points out the link between the Fed and the Treasury crystal clear.
In just the last four months, the US government has spent $457 billion—almost half a trillion dollars—more than it has taken in. In that same time and using monetary creation, the Federal Reserve has created and put $457 billion in new cash into the financial system, either buying US Treasuries or funding the ownership of those Treasuries by others.
This looks a whole lot like debt monetization.
Here’s a little historical perspective.
In the early days of the Great Recession, Ben Bernanke assured Congress that the Fed was not monetizing debt. He said the difference between debt monetization and the Fed’s policy was that the central bank was not providing a permanent source of financing. He said the Treasurys would only remain on the Fed’s balance sheet temporarily. He assured Congress that once the crisis was over, the Federal Reserve would sell the bonds it bought during the emergency.
Of course, it never happened. It quickly aborted the hiking cycle and cute rates three times last year. Balance sheet reduction was on “autopilot” in 2018, but that reversed in 2019 as well.
At the time Bernanke promised the Fed policy would unwind, Peter said it wasn’t true.
Now, whether Ben Bernanke knew it wasn’t true and was lying, or if he was just mistaken, nobody but Ben Bernanke knows. But at the time, I said, ‘That’s not true.’ I said there is no way the Fed is going to be able to sell off these securities — that this is indeed debt monetization. Well, now we know for a fact.”
And now it looks like debt monetization has become a permanent fixture of the US economic system. Amerman summed it up.
The Federal Reserve is doing what no responsible central bank is supposed to do, and effectively funding the growth in the debt at well below free-market interest rates via monetary creation on a massive scale—without admitting that it is doing so … This is all about funding the fast growing national debt at lower rates than what rational investors would accept in a free market, and the repo crisis was a symptom of that problem, not the cause.”
Amerman said that, in effect, the Fed is doing the same thing it did in 2008 — it’s backstopping the financial system and the US economy by effectively printing money out of thin air.
After almost 11 years of comparative calm and without repo market interventions, the Federal Reserve stopped the crisis in 2019 much as it had stopped the last major crisis in 2008, by creating new money on a massive scale and lending it to the banks and other financial entities that were at risk. In the process—the Federal Reserve effectively funded the growth in the United States national debt that week.”
French pointed out that a lot of Americans “believe this economy is rockin’ and rollin’. Look at the stock market. Look at the real estate market. Interest rates are low; unemployment is low. What’s not to like?”
Wall Street and Washington, DC, want to be happy, so the economists at the Eccles Building, while decreasing total repo loans, have doubled the total funding of the national debt. ‘It is the Fed’s purchase of Treasury obligations that is now that dominant source of cumulative deficit financing,’ writes Amerman. Retirees, receiving scant interest on their savings, are banking on living off the proceeds of selling financial assets. Amerman concludes, ‘The rapid growth of the national debt is also likely to become one of the biggest future threats to standards of living in retirement.'”