He's looking at you, William Poole, David Warsh, Allan Meltzer, Arnold Kling, John Taylor, Michael Panzner, Mickey Levy, and others…
Macro and Other Market Musings: The Fed, The Budget Deficit, and The Facts: My last post generated some heated push back from the hard-money types. That post showed the Fed sill has about the same share of treasuries, 15%, as it did before the crisis. Thus, the large run up in public debt over the past four years has been funded mostly by individuals, their financial intermediaries, and foreigners. The Fed has not been the great enabler of the government deficits as claimed by the hard-money types. This fact seems to have been very uncomfortable for them because they largely ignored it. Instead, they quibbled with my definition of debt monetization and resorted to ad-hominen attacks.
Given these responses, it is probably too much to hope for further meaningful engagement with them.
But in the event some are still listening, here are some additional points…. [S]afe asset yields across the globe have been falling for the past four years… in… Canada, Germany, Japan, the United States, and the United Kingdom. U.S. monetary policy cannot explain this worldwide phenomenon…. The Fed only holds about 32% of long-term treasuries and the long decline began well before Operation Twist. The similar decline among all these different long-term government interest rates only further undermines the view that Fed is enabling the low U.S. treasury yields. A much simpler explanation for the low interest rates is the ongoing economic slump that keeps the demand for safe assets elevated…. [E]ven if the Fed were responsible for the low yields it has failed to generate upward inflationary pressures. For four years hard-money types have been warning about inflation exploding. This has not happened and indicates that treasury yields are not being held below their natural rate level…. [S]hould the Fed preemptively raise interest rates, as some have suggested, it would not spark a recovery but choke the already weak economy.
Fourth, the hard-money types have overlooked the safe asset shortage problem that has emerged over the past few decades and its implication for U.S. treasuries. Over this time the global economy has grown much faster than its ability to produce safe assets…. This means the demand for U.S. debt is higher than would otherwise be the case. It also means for the world financial system to operate smoothly it needs the U.S. government to run budget deficits. A failure to do so will only drive safe asset yields lower and intensify the the problems associated with low interest rates….
[D]ebt monetization… occurs when monetary policy causes the stock of money assets to unexpectedly exceed the real demand… inflation will [then] be higher than anticipated and erode the real burden of the public debt…. [F]or there to be debt monetization it is not enough to say the Fed is purchasing treasury assets…. For all these reasons, I find it hard to stomach the claims of folks who say the Fed is enabling the large budget deficits….
I agree we need a conversation on what the Fed should be doing, but before we can even do that we need to have our facts right. Here is hoping this post is a push in that direction.