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.
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!