The WSJ reported yesterday that the Federal Reserve bought nearly 61% of all net Treasury issuance in 2011. Now, it’s no big secret that this is happening, think QE2, but I about fell out of my chair when I read this article. So, I have some questions about this rather unique exchange.
1. If the Fed buys Treasury bonds, and those Treasuries generate interest, does the Fed collect interest from the Treasury? When I buy a Treasury bond, I get semi-annual interest payments and then collect my principle when the note matures, assuming I didn’t’ sell it. Does the same transaction occur when the Fed buys Treasuries? So, is the government just paying itself interest? Seems dubious.
2. Is the Fed printing money? The Fed swears it isn’t printing money, but in essence, isn’t this what’s happening? The Fed credits electronically the dealers it buys the bonds from, so while it may not be mechanically printing green dollar bills, it’s creating money out of thin air in the form of electronic deposits, no?
3. How long can this continue? The article says this can’t continue forever but what or who can stop them? Who knows how large the Fed balance sheet is – and does it really matter, except when it comes time to unload all this stuff. How can the Fed unload trillions of Treasuries when US Treasury is also selling billions in treasuries? Are there enough buyers to mop all this debt up?
4. Isn’t the Fed simply financing the government’s own budget deficits? This seems so weird and wrong that a quasi-government agency can purchase debt from itself. How is this stuff even legal?
Perhaps the good Prof will jump in and answer some of these questions. He may need his own post to do that!
