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Home Publications Blogs Beat the Press The New York Times Has not Heard About the Budget Deficit

The New York Times Has not Heard About the Budget Deficit

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Sunday, 24 April 2011 05:18

This is one of the things that readers of an article discussing the impact of the Fed's quantitative easing policy might conclude. The article indicates that the second round of quantitative easing (QE2) has had little effect in boosting economic growth.

While this is likely true -- it had a limited effect in keeping interest rates at already low levels -- the policy of quantitative easing has had a substantial impact on the deficit. As a result of the fact that the Fed holds a large amount of assets, interest that otherwise would have been paid out to the general public is instead paid to the Fed. This money is then refunded to the Treasury.

Last year the Treasury refunded almost $80 billion to the Treasury, an amount that is approximately twice the size of the deficit reduction in the agreement reached earlier this month between President Obama and Congress on a continuing resolution. If the Fed were to continue to hold around $3 trillion in assets it would reduce the deficit by close to $1.5 trillion over the course of the next decade. (It can offset the inflationary impact of the increased reserves in the financial system by raising reserve requirements.) Given the obsession of the media with the budget deficit, it is remarkable that the NYT did not mention this implication of quantitative easing.

This article also wrongly referred to the downturn as a financial crisis. The main reason why the economy is suffering from high unemployment and weak growth is the collapse of the housing bubble. Large firms can now borrow money in financial markets at historically low real interest rates. Few small firms cite credit availability as a major problem in their business. It is difficult to see how the economy would be any different right now if the financial crisis had not occurred.

Comments (3)Add Comment
Bad Principals Crowd Out Good Principles
written by izzatzo, April 24, 2011 7:14
As a result of the fact that the Fed holds a large amount of assets, interest that otherwise would have been paid out to the general public is instead paid to the Fed.


It's about the principal, not the principle - of interest rates that is - the principle of the Fed holding toxic principal until it becomes untoxic to be sold on the market as a matter of principle ... which crowds out even less toxic principal.

Moral hazard principle: If the Fed keeps demanding toxic debt then more of it will be produced under Says Law of supply and demand that requires principles to equal principals as a matter of zero sum accounting principles.

Once should never trade one's principles for one's principals.
...
written by urban legend, April 24, 2011 5:58
Dean's been saying for some time that the downturn is not the result of the financial crisis, but was caused by the "collapse of the housing bubble." But isn't that a contradiction in terms? If decent growth before the housing collapse was caused by a bubble -- if that was the only way we could even begin to approximate full employment -- then inherently there was something more fundamental going on to depress economic activity. Isn't saying it was the collapse of the bubble -- and clearly it came before the financial crisis and was the the main component of the financial crisis -- emphasising the proximate cause rather than the real, fundamental cause?
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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