Paul Ryan was on CNBC this morning, giving a mostly agreeable interview about the poor state of the economy.
Mostly it was pretty standard stuff, but he does repeat one talking about that is a myth that is worth debunking, if only because it’s so widespread.
Ryan took issue with the Fed’s quantitative easing. Specifically he said:
“At the end of the day, all this easing, is simply, in my opinion trying to bail out bad fiscal policy.”
Now there is one reading of this where it might be true. If the Fed had stimulated more aggressively, there might not be as much of a need for Fed easing.
But that’s not what Ryan is talking about. When he talks about ‘bad fiscal policy’ he means large deficits, and so he’s saying that the Fed is enabling large deficits by buying US Treasuries.
And on a superficial level, we can see why he thinks that. The US Treasury is issuing a lot of bonds these days, and the Fed has bought quite a lot of bonds, and interest rates are very low. Furthermore, the ECB is buying bonds to reduce borrowing costs of peripheral governments.
But in reality, the Fed doesn’t buy bonds for the purpose of enabling spending or reducing borrowing costs.
First of all, let’s point out that although government borrowing is near record levels, borrowing costs are actually quite low.
Here’s Federal Government Interest Payments as a share of GDP. They’re very small. Debt is not creating cost pressure that the Fed needs to solve.
Well, you might think that interest rates are only so low because the Fed has intervened so much to depress rates.
But the data shows this is not what happened.
As this old chart from Jeff Gundlach (via @condoroptions) nicely shows, interest rates on the 10-year bond actually jumped after the start of QE1 and QE2.
Photo: DoubleLine Capital
But maybe you think that this is just a chart quirk, and that still the reason rates have gone so low is because of the Fed.
But the decline in government rates has been a global phenomenon.
Yields in Mexico, Japan, Australia, the UK, and Canada are all close to all-time low levels for the decade.
The fact of the matter is that what moves rates are inflation expectations, growth, and the desire for safe assets.
Growth has been very poor for the last few years, and the crisis in Europe has created a huge boom in demand for safe, government assets.
That’s why rates are so low.
And what Bernanke has tried to do (with limited sucess) is get out of the ZIRP trap, by trying to promote inflation and growth and actually send interest rates higher.
Here’s Ryan’s interview on CNBC. The stuff about the Fed bailing out the government starts at 5:19.
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