The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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June 03, 2009

Debt and money

If you are hunkered down on inflation watch, yesterday's news offered some soothing words. From Reuters:

"Chinese officials have expressed concern that heavy deficit spending and an ultra-loose monetary policy could spark inflation, eroding the value of China's U.S. bond holdings.

"But [U.S. Treasury Secretary Timothy] Geithner said: 'We have a strong, independent Fed and I am completely confident they have the ability to do their job under the law, which is to keep inflation stable and low over time, and that they will be able to—and certainly intend to—unwind these exceptional measures as soon as they have served their purpose.' "

And from Bloomberg:

"He said that there was 'no risk' of the U.S. monetizing its debt, a response to a question about whether the government would seek to finance the national debt by expanding the money supply and thus trigger a rise in inflation."

Concerns about such monetization arose in the wake of the FOMC's decision at its March meeting to purchase up to $300 billion of longer-term Treasury securities and that decision's coincidence with the very large fiscal deficits contemplated in President Obama's budget proposals. Those concerns have accelerated as longer-term Treasury yields have moved higher since.

There will, I trust, be plenty of opportunity to expand on these concerns as things develop, but for now I will offer just a little perspective in the form of the chart below, which shows the recent and (near-term) prospective shares of federal debt held by the Federal Reserve. The red line represents the share of debt that will be held by the Fed at the end of fiscal year 2009 if the $300 billion Treasury purchase program is completed and the federal deficit emerges as currently predicted by the Congressional Budget Office.


The financial crisis has, of course, borne witness to the shift in the Fed's balance sheet from Treasuries (which have been much in demand by the private sector) to a variety of loans and mortgage-backed securities. The consequence has been a sharp fall in the fraction of government debt held by the central bank, a fact that will be little changed under the current trajectory of Fed purchases and projected deficit spending.

A large decline in Fed holdings of Treasury bills—securities that mature in one year or less—drives much of the pattern seen in the chart above. The drop-off in share is not as large for Treasury notes—securities in the two- to ten-year maturity range, and some assumptions have to be made to get a picture of how the Fed's share might evolve over the near term. Without knowing how this evolution will occur, I developed two general assumptions for argument sake. If net new issues of Treasury debt follow historical averages, meaning just over half of net new debt is in the form of notes, and if the central bank applies the remainder of the $300 billion of longer-term Treasury purchases (about $170 billion at the end May) to notes, then the Fed would hold roughly 13 percent of the outstanding stock by the end of the year. If the Treasury were to issue nothing but bills or bonds, a $170 billion purchase of notes by the Fed would bring its share up to the neighborhood of 17 percent. Though these numbers are not as unusually low in historical context as is the case for total outstanding debt, neither would they jump off the page as an extreme aberration in the other direction.


Some might argue that "monetization" these days involves a whole lot more than government debt, but Chairman Bernanke has been pretty clear about his intentions regarding the overall size of the Fed's balance sheet. And, as I see it, so far allegations that extraordinary steps are being taken specifically to accommodate fiscal deficits are properly characterized as risk rather than fact.

By David Altig, senior vice president and research director at the Atlanta Fed

June 3, 2009 in Federal Debt and Deficits , Federal Reserve and Monetary Policy , Inflation | Permalink


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I think this is an oversimplification. large number of Treasuries in the past were being held as assets from banks not the result of Quantative Easing.

If you look at the fact the fed has been trading sercure T-bills for dubious assests and printing money to acquire treasuries.

I think their is a strong possibility that the Fed ia allowing positioning itself to absorb billions in write downs on the non-Treasury assets.

The end result will be another laundering of Toxic Assets for the banks. The Fed will have basically monetized the Bank Losses onto the American Taxpayer who will be stuck paying the Fed to moentize banks bad lending.

Posted by: Kevin | June 04, 2009 at 10:25 AM

I found this blog really good, this is a best way to share information to increase knowledge and learning capabilities. good work

Posted by: Research Paper Writing | June 05, 2009 at 02:46 AM

David - thanks. You "wouldn't believe" how widespread, prevalent, virulent and heartfelt this meme is; nor what damage it's doing about the finance/invest/econ/bizz communities AND the normal folk who don't walk like that. Here and in your day job it would be in your and your organization's interest to continue to pursue and explain the situation, mechanisms and ramifications.

The sound and fury signifying nothing is about 99% of the discussion; other than one Krugman column and this I can find little or nothing sensible.

Posted by: dblwyo | June 05, 2009 at 09:01 PM

Now all that said two strictly bloggish comments or questions that build on the concerns:
1) in charting TNX for the last several charts I see nothing aberrational about current rates; instead there's an aberrational price jump beginning around Sep08 or so. Gee, I wonder why that is ?

2) how do you guys estimate Velocity ? I tried a poor man's version using FRED II data on GDP (real,nominal), M2 (M3 and MZM were similar)and the GDP Deflator for MV=PQ by V = GDP/MZM. On that basis V has fallen ~21% since Q406 having risen ~9.2% from Q303 to Q306. That rise would seem reasonable for a slow recovery but that seems like a significant fall in a shorter timeframe ?

Posted by: dblwyo | June 05, 2009 at 09:20 PM

People who are concerned about "monetization" simply don't understand how our monetary system works. Reserves are one kind of deposit at the Fed; Treasuries are another kind of deposit. Other than interest rates (and with the Fed paying interest on reserves now, even that is a wash), there is no difference between them - they are both financial liabilities of the Federal government, not convertible into anything else. If the Treasury ceased to issue securities, all that would happen is that interest rates would drop to zero.

The monetization-phobes are stuck in a gold-standard way of thinking that is totally inapplicable to current floating exchange rate fiat money regimes.

Posted by: Jim Baird | June 08, 2009 at 09:02 AM

Great article thanks very much for sharing. thanks.

Posted by: wii24 | July 17, 2009 at 06:36 PM

Wonderfully informative blog. Great article-thanks for helping keep the masses informed!

Posted by: Grace | July 29, 2009 at 11:51 AM

Great post, i've already subscribed to your feed. thanks

Posted by: renda extra | August 01, 2009 at 08:44 AM

Thanks for the post. It's good to see that someone remembers how and why the "idea" of money works.

Posted by: Jons Debt News | August 05, 2009 at 10:14 PM

Great article. I just wish the sound bite news media would publish detailed facts like you. Keep up the good work.

Posted by: Ron Stone | August 12, 2009 at 04:07 PM

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