Here’s what the editors of the Wall Street Journal have to say about the challenge that Federal Reserve Chairman Jerome Powell faces now that the Biden Administration has passed its COVID-19 “relief bill”:
The sheer magnitude of the deficits to be financed is a rare experiment in U.S. fiscal history. Even before the $1.9 trillion spending bill passed, the Congressional Budget Office estimated the deficit as a share of GDP would be 10.3% in fiscal 2021. With the Pelosi-Schumer-Biden blowout, the deficit this fiscal year will now be in the neighborhood of 18% of GDP. That’s the highest by far since the four wartime years of 1942-1945.
That’s also a lot of Treasury bills, notes and bonds to sell. U.S. investors have historically been able to finance about 4%-5% of GDP. The appetite of foreign buyers will depend on relative interest rates, currency values and confidence in the U.S. economy. Treasury’s Feb. 25 auction of seven-year notes was a warning sign as low demand almost led to failure.
Treasury auctions since have been more robust, but there’s little doubt that the Fed will be a bulk purchaser of U.S. debt for years to come. The Fed is currently buying $120 billion a month of Treasurys and mortgage securities, and (unlike in Europe) there is no limit on the amount it can buy.
plus this
The Biden Treasury and Powell Fed are joined at the policy hip.
concluding:
Good luck to Chairman Powell and the FOMC in this brave new world in which politicians believe they can spend as much as they want without policy consequences. Mr. Powell won’t be able to say he warned us.
The real challenge is that we’ve never run such large deficits other than in wartime and there’s no obvious escape plan. We’ve started an enormous realworld test of Modern Monetary Theory. If it succeeds it will be a new world in policy-making. If it fails, as most economists including those aligned with the Biden Administration have predicted, it will be painful in the extreme. As usual the poorest will be hurt the most.
“Treasury auctions since have been more robust, but there’s little doubt that the Fed will be a bulk purchaser of U.S. debt for years to come.”
There’s something deeply wrong, deeply fake about one government agency buying another’s debt. It’s some sort of magician’s trick. Something for nothing.
It’s actually more than a little scary. I think we’ve crossed some sort of line.
That’s what I’ve been complaining about when I talk about perpetual motion schemes.