The debt hawks are to economics as the creationists are to biology. They, who do not understand monetary sovereignty, do not understand economics.
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Here’s how it works; you be the judge.
The first question is, if the Fed is buying, who is selling? Answer: The banks and the public. If the banks exchange their T-bonds for cash, will that stimulate the economy? Will that make banks more likely to lend? Are banks short of lending cash? The answers are, “No, no and no.”
Banks are not lending primarily because they can lend to the government, risk free, and make an easy 2% on their money. They are not short of lending funds. They don’t want the hassle of credit checking, defaults, collections, etc. Just borrow from the government at 0% and lend back at 2%. What could be easier?
The other reason banks haven’t lent is because business isn’t borrowing. Congress has made sure business has no idea what will happen, tomorrow. Taxes? Who knows? Interest rates? Unsure. A recovery? When? Expand my operations? Are you kidding? So with lenders and borrowers both unmotivated, lending is unlikely.
Well, what about the public? Do Fed bond purchases from the public stimulate the economy? When the Fed trades cash for T-bonds, this is tantamount to advancing the maturity date on those T-bonds. So what will the holder of T-bonds do when the government gives him cash for his bonds? He likes T-bonds, so if he can get a good price, he probably will buy more bonds – right back where he started.
But let’s say some people decide to invest those dollars in something other than T-bonds. Is that stimulative? Yes, but there is another problem. When the Fed buys bonds, the future interest on those bonds is not paid into the economy. The Fed’s purchase reduces future government interest payments, and that is anti-stimulative.
So my take on the $600 billion purchase is that it might have a very small and very temporary stimulative effect. Far better, and far more stimulative would be if the federal government cut taxes by $600 billion. But since our politicians don’t understand monetary sovereignty, that is unlikely to happen.
Rodger Malcolm Mitchell
http://www.rodgermitchell.com
No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”
#Monetary Sovereignty - Mitchell 
Roger the equity markets have rallied hard on qe 2. If no economic benefit comes we are setting the stage for reversal of rally. Your thoughts thanks
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The equity markets follow economics over the long term but not in the short term. There are many reasons for a rally. Perhaps the markets were too low to begin with, and are now just coming up to par.
In the future, we will see many rallies and many declines, and we will scratch our heads wondering why.
Rodger Malcolm Mitchell
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I don’t understand something. All the reports I’ve read say that the Fed is buying $600B in NEW long-term Treasuries. Doesn’t that mean that, since they are new, that the Treasury Department is selling them, not banks?
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When the Treasury creates and sells new T-securities (i.e. “borrows money”), no new dollars enter the economy, and this accomplishes nothing. The creation and sale of T-securities could end today, and the economy would not change. Only via government spending does money enter the economy.
So why does the Treasury “borrow.” The process is a relic of the gold standard days, when borrowing and taxing were necessary to fund the government. Today, there is a law that requires the Treasury to “borrow” an amount equal to the deficit.
In short, you are correct. The creation and sale of new T-securities to the Fed adds no money to the economy, thus accomplishing nothing. The Fed’s purchase of existing T-securities adds temporary liquidity, since dollars are more liquid than T-securities.
I say “temporary,” because those T-securities eventually would mature at which time they would become dollars anyway.
Rodger Malcolm Mitchell
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