Printing Money

One of the side-effects of a liquidity trap is that government can flood the zone with cash and not have inflation be a factor. However, all that extra cash is going to need to be extracted somewhere down the line.

The key downside here is that if the Fed is buying long-term debt at relatively high prices, thanks to low current rates, they will likely be selling them at a loss if inflation returns and the Fed needs to turn the expansionist dial off of 11. Given that the bonds are what back the value of the dollar, an inflationary cycle might kick in, since the bond-porfolio-backed-greenback will be worth less.

Thus, this announcement from the Fed is a bit scary, especially with the magnitude of the bond buy-

The US Federal Reserve has said it plans to keep interest rates at close to zero at least until the US unemployment rate falls below 6.5%.

The Fed previously had a date-driven target, rather than a data-driven one.

The Fed also said it will continue to buy $85bn (£53bn) a month of government bonds and mortgage-backed securities to try to boost the economy.

$85 billion a month; that's a smidge over a trillion a year ($83 and a third billion would get us a trillion on the nose). What's our deficit? Right about that; this site has FY2013 pegged at $901B.

Governments running big deficits have been accused of printing money; we're not that far from that given the Fed's policy. Yes, they'll be buying some stuff other than Treasuries, but they are coming darn close to monetizing the debt outright.

Comments

[NKR]

That's a lot of *mights* and *ifs* as far as inflation goes. The WSJ news and editorial pages whined and moaned about inflation and refused to acknowledge the existence of a liquidity trap for months and months after the crisis. Now most agree that inflation in a liquidity trap is very unlikely- prices won't rise when the enduring problem is low aggregate demand.

Getting down unemployment down below 6.5% isn't so bad, especially given the Fed's dual mandate to grow the economy and keep unemployment down.

The wiki article you link about monetizing debt has some upsides that match our current problems: "It is in essence a "tax" and a simultaneous redistribution to debtors as the overall value of creditors' fixed income assets drop (and as the debt burden to debtors correspondingly decreases). If the beneficiaries of this transfer are more likely to spend their gains (due to lower income and asset levels) this can stimulate demand and increase liquidity. It also decreases the value of the currency - potentially stimulating exports and decreasing imports - improving the balance of trade."

Hey, not so bad. Improving the balance of trade and acting as as stimulus.