Courtesy of Mish.
Earlier today, in Bernanke Begs Congress to Address “Fiscal Cliff”, Pledges to Hold Interest Rates Near Zero Through Mid-2015 Even If Economy Picks Up I commented on the Bernanke’s self-serving responses to his own questions.
In this post I want to focus on another disingenuous part of his speech that I did not comment on previously. Specifically …
With monetary policy being so accommodative now, though, it is not unreasonable to ask whether we are sowing the seeds of future inflation. A related question I sometimes hear–which bears also on the relationship between monetary and fiscal policy, is this: By buying securities, are you “monetizing the debt”–printing money for the government to use–and will that inevitably lead to higher inflation? No, that’s not what is happening, and that will not happen. Monetizing the debt means using money creation as a permanent source of financing for government spending. In contrast, we are acquiring Treasury securities on the open market and only on a temporary basis, with the goal of supporting the economic recovery through lower interest rates. At the appropriate time, the Federal Reserve will gradually sell these securities or let them mature, as needed, to return its balance sheet to a more normal size. Moreover, the way the Fed finances its securities purchases is by creating reserves in the banking system. Increased bank reserves held at the Fed don’t necessarily translate into more money or cash in circulation, and, indeed, broad measures of the supply of money have not grown especially quickly, on balance, over the past few years.
Bernanke knows damn well that the Fed will never “gradually sell these securities”. Rather, the only way the Fed would be willing to sell securities is at break-even or a profit.
Yet, if Bernanke honors his pledge to hold those securities until after a recovery is well underway, interest rates will be higher and the Fed will have losses.
Thus, it is the clear intent of the Fed to hold asset it buys now, from now until maturity (perhaps a decade from now, which or all practical purposes is “permanent”). At that point in the distant future, the Fed may even roll the securities over.
Who Benefits From This?
As I did note previously …
Bernanke’s policies have destroyed those on fixed income (a claim he tries but fails to address in his five questions). More importantly, those with first access to money (primarily banks and the wealthy) are the biggest beneficiaries of monetary printing exercises.
Those wondering how the 1% got so wealthy need only look at the Fed for the answer.