Toro
Diamond Member
- Sep 29, 2005
- 112,313
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The effects of deflation that would derive from the dissolved of debt created by the QE2's purchasing of Treasury bills would be far outweighed by the immediate positive impact of reducing national debt by over $1 trillion dollars.
The effects of the inflation specifically created by the QE2 program had a much more profound effect, adding to the already growing inflation, and devaluing of the dollar.
But you are overlooking to fact that the law stipulates that the FED only keep enough revenue collected on maturing Treasury bills as to off set operating costs, returning the vast percentage of those interest payments to the Treasury. The Treasury receives 90% of the tax money used to pay those T-bills.
Dissolving that debt would not have the profound negative impact that you are suggesting. There is a fundamental difference between the Federal Reserve's QE2 T Bills and the T bills held by foreign countries and Americans alike, in that only the FED returns the profits directly back to the Treasury and only the FED has the ability to fabricate money at will.
The QE program itself resulted in much more devaluing that this action would take.
If QE was inflationary - as I believe it was - then the dissolution of QE is deflationary. It also has the affect of raising interest rates. Deflation when there is 9% unemployment is not good for the economy. Raising interest rates during a recession is extremely bad policy. There is no reason at all to believe that this would be positive for the economy. It would lead to tight monetary conditions and deflation, and cause investors to lose even more confidence in the dollar.