David Angelo

Economics can be confusing.
Paul Krugman isn't helping. I make sense of his nonsense and refute his claims - one post at a time!

Response to: Misinformed Monetary Mitt

Well, this is interesting!

Apparently, Mitt Romney suggested in a Q+A session that The Federal Reserve is buying “like three-quarters of the debt that America issues.”  And, in true journalistic fashion, the meticulous researchers at Mother Jones have concluded that:

So Romney is, once again, plucking a scary number he seems to have heard from a tea party symposium somewhere and mindlessly regurgitating it to a receptive audience.

Krugman, wanting - perhaps - a more intellectual analysis of the data, posted his own series of Fed balance sheet graphs followed by the conclusion that:

[Romney] draws his stories about the economy from what he heard somewhere, apparently believing that if the right sort of person says something there’s no need to check it out.

Awesome.

Awesome!

Now, let’s be realistic for a second.  Is the Federal Reserve buying three-quarters of the Treasury’s debt?  Well, Krugman gives us a graph on that:

See, Krugman and Mother Jones are right!  The Fed isn’t buying 3/4 of the debt!  Krugman does concede that “there was a period when the Fed was buying a large fraction of federal debt issue — but it didn’t last long.”

See!  FACTS! These are the tools we use to find truth!  Romney is an idiot who believes stuff other drones tell him!  But we’re free thinkers! VICTORY! ACADEMIA TRIUMPHS!

….oh…

….but wait.

Maybe this isn’t the whole story?

After all, I’ve been to enough Occupy Wall Street meetings to know that, maybe - sometimes - banks can be tricky.  

Let’s remember a few things.

The Federal Reserve has been expanding its balance sheet with mostly mortgage-backed securities while lending money to member banks at 0% interest.

Member banks have been buying Treasury debt.

As a sample case study*, in 2007, Bank of America owned $759 million worth of U.S. government debt.  In 2011, they owned $42.86 billion worth of U.S. government debt.  

So does The Federal Reserve buy 3/4 of the debt the government issues?  No (not right now, anyway). Do they make it possible for their member banks to buy government debt at no cost? Yes. 

At the end of last year, did the Federal Reserve cut the cost of borrowing to European banks so it would be cheaper for them to invest in high-performing dollar-denominated assets like Treasury bonds? Yes.

Earlier this year, did the Treasury let the China’s central bank purchase debt directly for the first time in history, so the Chinese could more easily maintain their peg to the U.S. dollar? Yes. 

Is the 1.79% interest rate on a 10-year Treasury bond below the current core inflation rate of 1.9%? Yes.

Are legitimate private investors potentially buying U.S. Treasuries because they anticipate non-market forces will keep prices rising; as happened during the mortgage-backed security bubble?  Probably.  Did the Federal Reserve end up buying all those mortgage-backed securities in the end? Yes.

Is Treasury debt in a bubble?  Is our central bank being less-than-transparent about its role in government debt purchases?  Is Mitt Romney at least correct in assuming that our debt is unsustainable?  Could Krugman stand to be more thorough?  Are a lot of debt apologists mindlessly regurgitating the same points to a receptive audience?  

Well, you decide that for yourself.

I got all my money in Euros.

——-

*I’d do an exhaustive research study, but, let’s be honest - the 5 people who come to this website are mostly here because they incorrectly Googled something.

  1. sugashane reblogged this from dwangelo and added:
    Are the banks slowly buying America by buying out our debt?
  2. dwangelo posted this