Former IMF head doubts US Federal Reserve bond buying program

US, WASHINGTON (ORDO NEWS) — The massive purchase of bonds by the Federal Reserve System (FRS) to stabilize financial markets after the coronavirus pandemic does not change the fact that the United States still has to deal with huge amounts of debt, warned former IMF chief economist Ken Rogoff, writes MarketWatch.

Noting that the Fed’s willingness to expand its balance sheet convinced market participants to continue to buy US treasury bonds as the budget deficit grew, Rogoff said central bank purchases did not change the total amount of government debt.

“This is an absolute eye-opener. There’s almost no difference with the Fed buying long-term treasury bills and the Treasury issuing short-term bonds,” Rogoff said in an interview. “I think people forget that the Fed obeys the treasury.”

He argued that the balance sheets of the Fed and the ministry of finance should be combined. In fact, if the Fed bought government bonds and received interest-bearing bank deposits, bonds should still be considered government debt.

The Congressional Budget Office has estimated that this fiscal year the budget deficit will increase to $ 3.7 trillion, or about 18% of GDP. Public debt held by the population also increases to more than 100% of gross domestic product from about 80% at the end of the last fiscal year.

The Federal Reserve’s balance rose to a record $ 6.98 trillion for the week ending May 13, compared with $ 6.72 trillion the previous week.

According to Rogoff, bond market analysts believe that investors are unlikely to demand significantly higher returns in order to absorb the US multi-million dollar financial deficit this year. Although this is now the case, the situation cannot be eternal.

“Debt is not a free lunch. The question is what happens to real interest rates. The market believes that rates will never rise again, and I think this is a bit naive,” added Rogoff.

Rogoff questioned the belief that swelling U.S. government debt would not be a problem in the face of the growing popularity of modern monetary theory, which claims that developed countries that borrow in their own currency have a higher ability to budget deficit than previously thought.

He acknowledged that the United States is in a unique position, but other countries do not have the same favorable structure.

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