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Feds. Monetizing All the Debt, All the Time

November 4, 2010

Chronic, trillion dollar deficits don’t matter because the Fed is financing them for free.

The oracles at Goldman say that $750 billion of QE2 (Quantitative Easing) is priced in to the market, and possibly $1 trillion — a frightful prospect that was hardly diminished by today’s lost jobs report. On top of that, there’s $300 billion to $400 billion in annual GSE run-off that needs replenishment under QE1.5. So Brian Sack, the monetary apothecary who operates the New York Fed’s drive-thru window, is going to be giving Wall Street a lot of POMO. Call it $100 billion per month of Permanent Open Market Operations, and be done.

There’s also $100 billion per month of new Treasury paper. The two-year, cumulative red ink under current law (FY 2011-2012) will total $1.7 trillion. Like all other experiments in printing press finance, its main impact will be to give a destructively erroneous signal to fiscal policymakers on both ends of Pennsylvania Avenue: Namely, that chronic, trillion-dollar deficits don’t matter because the Fed is financing them for free.

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