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Printing Our Way Out of Debt

12:00 AM, Dec 15, 2012 • By IRWIN M. STELZER
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Bernanke is not the only central banker expanding his balance sheet. The Fed will add $1 trillion to its balance sheet next year, and other central banks an additional $10 trillion, leaving the world awash in fiat money. Central bankers are reacting to a long period of recession and slow growth, and in Bernanke’s case to what he calls the “enormous waste of human and economic potential” reflected in the high unemployment rate and the decline in the labor force participation rate. This dramatic change in targeting—using an economic indicator rather than a date to determine when the Fed’s work is done—announces a dramatically new monetary policy, one that elevates the goal of full employment far above the Fed’s other goal of stable prices.

To be fair to Bernanke, it is not clear that he has got it wrong. First, it is arguable that his launch of QE1 and QE2 created vehicles that could and did throw life savers to financial institutions that were drowning in flawed debt instruments, and that QE3 boosted post-recession sluggish growth. To mix my metaphors, another dose of an efficacious medicine might just be in the patient’s interest. Second, a new QE that dare not speak its name—make no mistake, the new policy is QE4—might well be needed if fiscal policy tightens when taxes go up and spending comes down, as both will in 2013 no matter how the fiscal cliff is resolved, or even if no deal is made.

Finally, Bernanke believes that the economy will grow at the unsatisfactory rate of 1.7-1.8 percent this year, and 2.7 percent next year (the central point of the predicted range), in part because uncertainty over the governability of the nation is driving down consumer confidence and stifling business investment.

There you have it. The Fed has been buying $40 billion of mortgage-backed securities and $45 billion of long-term treasuries every month. But until now it has also been selling $45 billion in short-term government securities. Those sales have stopped, so net purchases will go from $40 billion per month to $85 billion. Do that for a few months, and you have to print a lot of money. Do that until 2017 and you just might have a currency so debased that paying off the national debt will be a snap. So unless you are sitting on a batch of Uncle Sam’s IOUs, as are the Chinese, don’t worry, be happy. We will print our way out of our debt

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