Factoid: Federal Reserves acquisition of US Debt

The subject of the Federal Reserves purchase of US T-bills came up in my IPE class in Columbus, GA. I mentioned that the Federal Reserve had really gone to war in the Great Recession by purchasing US government debt (i.e., T-bills) and Mark Perry posted a graph illustrating this, The red line in the graph below (which corresponds to the red axis on the left) shows the securities held by the Federal Reserve from 2003 to 2014.

As you can see the Fed bought about $3,5 trillion insecurities (mainly treasury bonds or T-bills) since 2008. Since, according to Federal Reserve data, US federal debt increased by $8,3 trillion in the same period, this means that the Fed absorbed about 42% of the increase in federal debt.

In his post, Perry makes a big deal about this being a transfer of wealth from the private sector to the public sector, but I think that interpretation is colored by ideology and borders on rhetoric. That is to say, we are supposed to be outraged that a private-t- public transfer has occurred on general principle (in particular one of the general principles of libertarianism). Maybe this principle is right, but it needs more discussion.

To more fully evaluate the impact of the Fed's purchase of T-bills, we need to consider what occasioned the purchases and what would have happened if the Fed had not made them.  The recession put the government into deep deficit and it issued lots of debt to pay the bills. Had the Fed not purchased the T-bills it did, the whole debt would have been dumped on the private capital markets and would have forced up interest rates. This would have drawn private funds away from other investments and consumption, not to mention driving up the cost of servicing the debt.

Instead, the Fed used its "magic checkbook" (meaning, it just declares the dollars involved to be in existence) to buy the T-bills, thus keeping interest rates lower and flooding the market with more dollars. This is what they mean by "Quantitative Easing." Of course, the danger of "printing money " like this is that the dollar will lose its value and the society will experience inflation. However, as the FRED graph below shows, inflation has been kept under control and actually has been lower since the recession than in the years before it:

Of course, the above graph just shows that the Fed avoided the mistakes of the Weimar Republic, not that everything is rosy. By intervening in the markets, the Fed has kept interest rates low which has been to the detriment of the value of people's savings and investments. In many ways, Fed policy has amounted to an indirect tax on creditors that benefits debtors.

But then, that was the point. As demand in the economy crashed in 2009 (as can be seen by the drop in inflation to actual 2% deflation) the desire was to stimulate spending not savings in the society. By keeping interest rates low, they discouraged people from savings and encouraged spending. At the same time it facilitated deficit spending by the government so that it could keep paying benefits (claims for which naturally rise during a recession) without increasing taxes (the returns from which tends to go down during a recession). Again, this kept up spending in the society.

Of course, this sort of macroeconomic intervention is something that many libertarian economists think is ineffectual and undesirable. By talking about a transfer from the private to public sector, Perry is alluding to this though ideological code words, but this obscures the argument in play. To my mind, Perry needs to make the argument that it would have been better for the Fed to let interest rates rise in the recession and recovery than to intervene as they did.