The FOMC today announced plans to buy $300B in treasuries and up to $750B in mortgage-backed securities, effectively agreeing to print a trillion dollars.
Well, we knew the money had to come from somewhere. When the federal government wants money, there are four places they can get it:
1) Take from other parts of the budget (Social security and military spending are the two big ticket items.)
Quite simply not going to happen. Both of the above are sacrosanct.
2) Increase taxes
Seems unlikely. This year’s budget included tax cuts for the middle class. The increased taxes for the rich seem unlikely to even make up the difference, since entrepreneurs are unlikely to be active in this economic climate, bonuses are way down, and big earners still have a variety of ways to shield their income. Raising taxes on an economy you’re trying to stimulate also sounds a lot like one step forward, one step back.
3) Borrowing money by selling treasuries
We’ve been doing this. But nobody in the world has the liquidity right now to support our enormous stimulus apparatus.
Printing money causes inflation, which nobody likes. Inflation can be looked at as a tax on savings, which doesn’t sound good. It’s also a tax on debt securities, which is even worse. Our foreign and domestic creditors, who have already funded quite a bit of our enormous bailout, are going to be understandably upset.
But the fact of the matter is, all of the other options are exhausted. If we’re going with a Keynesian solution, which the Obama administration as well as the plurality of academia seem committed to, then the cash has to come from somewhere. Overall, I think today’s news is frustrating, but inevitable.
At least the leprauchans won.
