11.30.2010 0

Fed bond purchases rattles nerves

  • On: 12/09/2010 09:29:21
  • In: Monetary Policy
  • ALG Editor’s Note: In the following featured column from the Pittsburgh Tribune-Review, Jack Markowitz lays out his case against the Fed’s additional $600 billion of treasuries purchases, including ALG’s take on the issue:


    By Jack Markowitz

    The Federal Reserve is making lots of people nervous.

    Using “printed” money — it’s suddenly there when the Fed wants it — our central bank announced Nov. 3 it will buy $600 billion more of U.S. debt.

    The government is wallowing $1 trillion deeper in debt this year — like last year — like every year going forward. So somebody’s got to buy the Treasury’s IOUs.

    Fed Chairman Ben Bernanke conceded that all the dollars due to course into the world’s veins in the big bond buys will indeed spur inflation. But this time that’s okay. A little inflation could get households spending and employers hiring again. If it gets out of hand, the Fed will shut the spigot — just believe.

    Well, a growing chorus doesn’t.

    China, Germany and other holders of U.S. paper didn’t take long to yelp. They hate dollar inflation. It cheapens the greenbacks we’ve sent them, and it discounts the exports we ship them as their exports to us grow costlier. In short, a dirty trick in global trade. It could set off retaliations.

    Americans, by the way, feel just as sure the Chinese keep their currency artificially cheap, thus eating our lunch in sales, jobs and manufacturing prowess.

    Two dozen prestigious Republicans, money managers and economists urged Bernanke by public letter the other day to quit all this so-called “quantitative easing.” We’re risking the worst of both worlds, they said: dollar “debasement” and no compensating jump in the job market, which is just made more nervous by all the policy switchbacks.

    “We disagree that inflation needs to be pushed higher,” said the missive signed by ex-Congressional Budget Office director Douglas Holtz-Eakin, hedge fund manager Cliff Asness, Stanford professor John Taylor, and author Amity Shlaes.

    Another big round of Treasury bond-buys to keep interest rates low — while they’re still practically zero in a recovery more than a year old — will “distort financial markets,” the protesters said. They’re trying “to stop a bad idea,” said Columbia Professor Charles Calomiris, a signer.

    Separately, China’s top credit rating agency took a downward notch in its rating on America’s bonds — imagine that. It said the Federal Reserve is “entirely encroaching on the interests of creditors.” Americans for Limited Government, a conservative policy group, says the world is beginning to see us as a nation trying to “paper over” our debt, in effect making the re-payment money cheaper.

    Richard Fisher is a dissenting member of the Fed’s Open Market Committee, which sets interest rates, and president of the Federal Reserve Bank of Dallas. He said in a speech carried on C-Span that America is in danger of being perceived as “embarking on the slippery slope of debt monetization.”

    So a national deadbeat blot hovers way up in the airy realm of Federal Reserve monetary policy at this point. But eventually it could victimize every saver of dollars, our own thrifty citizenry. And it traces right back to wild government spending that requires IOUs. It’s got to stop if we’re to prosper and trust our own money again, much less get foreigners to trust it. Red lights are flashing over the dollar.

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