Friday, 7 August 2009

US Fed buying up government bond issuance - old news

I have seen via the that there seems to be a little consternation building in the bloggernet about the US Federal Reserve buying up Treasuries (bonds) issued by the US Federal government. See the Dailykos for some sudden realisation.

Well, this is pretty old news. In fact not much news at all. This is what is known as "quantitative easing". Look, the Washingtion post was writing about this in March. I know my broadband is the fastest in the world, but I tend to get my news downloaded the week it is published.

And it is exactly what some of the fearful or outraged bloggers think it is. It is a monetisation of government debt, or printing of money, or whatever equivalent terms you wish to use to describe it. And the potential ramifications are indeed as suggested; much higher inflation, depreciation of US Dollar etc.

It is just that it isn't news. Look here, it is already in the data. Here is a chart of the money base, sometimes known as narrow or high powered money. In simplified terms, currency on issue. This shows the amount of new money being injected into both the UK and US economies as both the Fed and the Bank of England practice "quantitative easing".

What happens next is that "broad money", which includes deposits at banks, rises. Well, it does if the financial system is working properly. Of course it hasn't been, so it isn't just yet (plus there is always some lag). But Fed (and BoE) need to watch for when it does - it will do so because banks will start lending again and households and companies will start borrowing again. At that point interest rates will need to go up - and pretty quickly.


Fungus FitzJuggler III said...

Hi Gekko!
And the evidence that the banks will lend is?
No way. This is a depression. Risking bank assets as asset prices contract?

Geckko said...
This comment has been removed by the author.
Geckko said...

Well, I don't disagree that is what we have at the moment. But it will change, be it next year, in 5 years or 10 years. I don't pretend that I know.

Judging that and responding with appropriate monetary policy quickly enough will be challenging.