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 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:
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.”)