Fed’s announced plan is lunacy

By From page A12 | September 13, 2013

Consider these facts: The Fed will print approximately a trillion dollars in 2013 and inject it into the U.S. economy via purchases of mortgage-backed securities and treasury securities. GDP growth this same year will be about 2 percent, or $320 billion. This “growth” is not taking into account the “free” money coming from the Fed.

The Fed is now talking about tapering its purchases of U.S. in the near future, and completely halting purchases by mid-2014. So, let’s take a ballpark guess that if it sticks to its game plan, the Fed will purchase $250 billion of mortgage-backed securities and treasuries in 2014. So, it is removing about $700 billion-plus in “support or stimulus” from the economy from one year to the next. This same Fed is predicting that GDP growth in the next two years will rise to about 4 percent.

Now, think about this. The Fed has purchased the vast majority of U.S. treasuries in the past few years. This domination of the securities market by this single entity has pushed interest rates on these securities to all-time lows, and the values of held securities has risen dramatically. This has made the borrowing costs for the U.S. government incredibly cheap, about 2.2 percent in 2012.

So, the U.S. government paid only $360 billion in interest that same year. Sounds great, right? But, now the Fed is saying it is going to step out as buyers. Holders of securities are being warned their value is going to decrease. So, they will sell. This forces rates up. The Fed stops buying in a market where it is dominating purchases. This forces rates up big time. Now, the government borrowing costs soar.

Let’s put the new interest rate the government pays around some recent historical average (pre-financial crisis), and say it now pays $600 billion interest on the debt. So, the Fed is claiming it can withdraw $700 billion-plus in support, borrowing costs can go up $200 billion-plus, and the economy can beat its current growth rate by $300 billion-plus.

It would take a “real” growth in the economy of about $1.3 trillion (8 percent) to realize these predictions. What are they smoking?

Greg Johnson

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