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Fiscal Question Redux

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March 11, 2013 – Comments (2) | RELATED TICKERS: D , E , BT

Last month I wrote a blog regarding any exit strategy by Fed from its buying spree here:

http://caps.fool.com/Blogs/a-simple-fiscal-question/794874

My main argument was that the Fed doesn't really need to do anything since all these assets are self amortizing.  It might take 30+ years before all these assets are convereted back into cash at the Fed but so what.  I was listening to Bloomberg radio and heard that Ben Bernanke has now said the exact thing, that the Fed could just let all this paper mature over time.

The biggest concern is inflation but the Fed doesn't necessarily need to dump its paper, they could just raise interest rates.  Yes that would impact the book value of bonds still held but again so what. You can still hold to maturity  The only cost was the money spent printing them to begin with.

As for inflation so far things are tame, except as to the middle class which constantly gets squeezed.  But until we see serious wage growth for the Average Joe, inflation is stuck staying low because of eventual demand destruction. Aside from in the energy field I just don't see that wage growth catalyst.  With GDP being 70% spending, absent that growth in spending GDP will just chug along.

Again just my 2 cents, but now Ben Bernanke reads my posts ;p

2 Comments – Post Your Own

#1) On March 11, 2013 at 12:46 PM, binve (< 20) wrote:

awallejr, good post and completely agreed. The bonds simply mature (and the average duration that the Fed currently holds is something like 7 years last I checked). And since the Fed pays IOER, that is the new de facto FFR. So if it wanted to raise rates, it just has to name it's new target, adjust IOER accordingly and let the T-bonds just sit there in its portfolio: http://caps.fool.com/Blogs/will-the-fed-end-up-losing-a/799860

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#2) On March 11, 2013 at 5:30 PM, awallejr (81.41) wrote:

Thanks Binve.  While you and I tended to disagree regarding TA, I did find your fiscal/monetary blogs excellent reads.

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