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NEW YORK – The nomination of Janet Yellen to replace Ben Bernanke as head of the Federal Reserve encourages international financial markets to assume Obama administration has no intention of stopping the printing of money anytime in the near future.
“The Fed will be looser for longer,” wrote Ambrose Evans-Prichard, the international business editor in London for the Telegraph on the prospect of Yellen’s nomination. “The FOMC (Federal Open Market Committee) will continue to print money until the U.S. economy creates enough jobs to reignite wage pressures and inflation, regardless of asset bubbles, or collateral damage along the way.”
The Federal Reserve’s balance sheet has grown from an asset base of less than $1 trillion prior to the recession to a current level of $3.6 trillion. the increase is largely due to the purchase of U.S. Treasury and U.S. agency debt, principally mortgage-backed securities in nature, in a debt-buying program known as “quantitative easing,” or QE.
Currently, the Fed holds more than $1.2 trillion in MBS and other federal agency debt and over $2 trillion in U.S. Treasury debt – the largest amount of federal debt the Federal Reserve has held since its founding in 1913.
Since September 2012, when the Fed announced its current round of quantitative easing, the Fed has been adding some $85 billion a month in U.S. Treasury and MBS debt, depressing interest rates with the aim of reducing the cost of borrowing generally and to the U.S. Treasury in particular.
Evans-Prichard expressed unease about Yellen taking over the Fed.
“We are surely past the point where we can keep using QE to pump up asset prices,” Evans-Prichard wrote. “My view is that emergency stimulus should henceforth be deployed only to inject money directly into the veins of the economy as an adjunct to the U.S. Treasury, by fiscal dominance, as deemed necessary.”
With this, Evans-Prichard is suggests the solution to U.S. economic woes may not be to continue printing money, as he fears Yellen will do, but to get fiscal policy under control, either by raising taxes or cutting federal spending, or perhaps even by doing both.
Critics characterize QE as “monetizing the debt,” a term that suggests inflation and a continued depreciation in the purchasing power of the dollar are inevitable consequences of having the Federal Reserve purchase trillions of dollars of U.S. debt.
Yet, progressive politicians and short-term Wall Street investor remain enthusiastic that aggressive QE policies will stimulate the economy, create jobs and keep stock market prices high.
On the eve of the Yellen nomination, Rep. Alan Grayson, D-Fla., has suggested the Federal Reserve should simply cancel all federal debt held on the Fed’s balance sheet since “the government owes this money to itself.”
Grayson believes that if the Fed were to cancel by a simple accounting adjustment the $3.6 trillion in federal debt on its balance sheet, the debt ceiling crisis would end. The Obama administration then could continue running annual deficits of $1 trillion or more without worry.
“While canceling the Treasury debt held on the Federal Reserve balance sheet might be considered unorthodox, it is no more unorthodox than the quantitative easing that has added much of this debt to the Fed’s balance sheet,” Grayson wrote.
He added that he has already written Bernanke asking him to cancel the federal debt on the Fed’s balance sheet before he leaves office.
Debt doubled under Bernanke
In December 2012, Bernanke reached a new milestone, doubling the magnitude of U.S. debt since the day he became Federal Reserve chairman in 2006
The numbers are as follows: On Feb. 1, 2006, U.S. national debt totaled $8.183 trillion; on Dec. 12, 2012, it was $16.366 billion.
On Dec. 12, 2012, the Federal Reserve officially announced the launch of Quantitative Easing 4, known among economists as “QE4.” It amounted to a fourth annual round in which the Federal Reserve buys U.S. debt, including both U.S. Treasuries and mortgage-backed securities bonds commonly issued by investment firms and commercial banks.
The Fed announced it would enter 2013 with a plan to purchase $45 billion a month of U.S. Treasury securities and $40 billion a month of mortgage-backed securities. The combined purchases total $85 billion a month as part of a continuing Fed plan to depress long-term interest rates and encourage, borrowing, spending and investing, as the Wall Street Journal reported.
With the December 2012 announcement, the Fed set specific targets, announcing an intention to keep short-term interest rates near zero into 2015, or until unemployment fell to 6.5 percent or lower, and as long as inflation forecasts remain near the Fed’s 3 percent target.
Significantly, the Fed is now actively running both monetary and fiscal policy, because it is in the business of funding nearly 100 percent of all the new government deficit spending in 2013, concluded Chris Martenson of Peak Prosperity.
“And it is pumping a bit more than $1 trillion of hot, thin-air money into the economy as it does so,” he said.
In the five years he has been in the White House, President Obama has increased the U.S. national debt by approximately 70 percent, from approximately $10 trillion when President George W. Bush left office, to nearly $17 trillion today.
The current U.S. government shutdown prompted by the determination of House Republicans to delay the full implementation of Obamacare, has pivoted into the debate over raising the federal debt limit. Democrats insist the federal government will run out of money to pay its bills by Oct. 17 unless Congress votes an increase to the current debt level.
On Wednesday, however, Moody’s Investor Services circulated a memo on Capitol Hill sharply disagreeing with President Obama’s recent argument that Republicans in Congress are holding the “full faith and credit” of the U.S. government as hostage by forcing a U.S. debt default if the debt ceiling is not raised prior to the deadline.
“We believe the government would continue to pay interest and principal on its debt even in the event that the debt limit is not raised, leaving its creditworthiness intact,” the Moody’s memo said.
“The debt limit restricts government expenditures to the amount of its incoming revenues; it does not prohibit the government from servicing its debt,” Moody’s said. “There is no direct connection between the debt limit (actually the exhaustion of the Treasury’s extraordinary measures to raise funds) and a default.”
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