Tuesday, May 24, 2011

POMO as an offset to the national debt

How do I reconcile my newfound optimism on the long-term US economic outlook with my previous mathematical calculation that the system will collapse in about 10 years? Well, I think that the Federal Reserve balance sheet assets, currently about $2.7 trillion, should be subtracted from the national debt. Most of this is invested in treasuries anyways.

I don't have time to do this right now, but if these assets are subtracted and the projections recalculated, it will be easy to show that the debt will be sustainable for at least 20 years, which is my worry event horizon.

Isn't this monetizing the debt? Yes it is and it is sustainable if done in moderation. Which means I have another worry about the Fed assets not increasing more than 7%/year, but maybe we can give them some leeway for a couple of years. (The Fed assets were about $2 trillion as of 1/1/2011, so year-to-date this number is up 35%).

Quantitative easing is a form of theft from everyone who holds dollars. But another way of putting it is that it is a tax on everyone who holds dollars. So this is a tax on the Chinese and on off-shore hedge funds, who should be paying some taxes.

So don't fear QE3. However, I think the Fed has done enough easing for the year and should wait until next year to do any more. (BTW, POMO stands for Permanent Open Market Operations).

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