Quantitative Easing in Reverse . . .

Creative Commons License photo credit: chez_sugi

Here is one example where “printing money” isn’t helping the economy.  From NPR, hat tip to Greg Mankiw.

On today’s Planet Money, we visit an underground vault that’s full of money nobody wants.

The money — bags and bags of dollar coins — is the result of a 2005 law that requires the U.S. Mint to print a series of coins bearing the likeness of each U.S. president.

The problem is, people don’t really like dollar coins. And there aren’t enough people who are fired up about, say, Rutherford B. Hayes, to make much of a difference.

So more than 1 billion dollar coins are now sitting, unwanted, in Federal Reserve vaults around the country. By the time the program wraps up in 2016, the Fed will be sitting on 2 billion unwanted coins, according to the Fed’s own estimates.

The total cost to manufacture those unwanted coins: $600 million.

Was Quantitative Easing A Plot to Save the Federal Budget?

I’ve never been satisfied with Ben Bernanke’s rationale for Quantitative Easing as a way to save the economy.  Did he totally forget the 1970’s where economists had to invent a new term for recessionary inflation now known as stagflation.  To me, Quantitative Easing is a recipe for stagflation.

Drawing from my GMU/public choice roots, I’ve had this hypothesis that Ben Bernanke was under political pressure to keep interest rates low no matter the costs.  In particular,with these unprecedentedly large budget deficits, the federal budget is becoming extremely sensitive to the interest rate.  The chart below, from the Mercatus Center, shows how the interest costs on the debt will absolutely explode if interest rates rise.

Chart of Federal Interests Costs Under Different Interest Rates

But, what is the direct transmittal mechanism for higher interest rates leading to higher interest payments?  That would ultimately be determined by the term schedule on federal bonds, i.e., how much debt is short-term needing to immediately rolled-over versus debt that is long-term with no immediate need for roll-over.  The shorter the term schedule, then the more at-risk is the federal budget to a higher interest rate.

Unfortunately, I did not know where to find the data on the term schedule for federal bonds.  So today I found over at No Money, No Worries a blog post with the term schedule of federal bonds.  And here we find the smoking gun.  Nearly 38 percent of the $9 trillion in marketable federal debt must be rolled-over this year and the next year (2011 and 2012)!  If interest rates were to spike over the next 18 months, it could make the Mercatus chart look downright rosy.

So for all the folks wondering if there will be a QE III they should not be looking at the health of economy.  Rather, they should be looking at factors that would otherwise force the Federal Reserve to raise interest rates . . . like a plummeting dollar for instance.  Ironically, failure to get a grip on the ballooning federal deficit is exactly the kind of event that could trigger a falling dollar . . . which would then spark QE III to lower interest rates to keep interest costs from further ballooning the federal deficit.  Does anyone see anyway off this hamster wheel?  Argh!