I don’t really understand if this is a good idea or not, but I am sure that its implementation would benefit PIMCO’s business!
If our interest rates were reduced to zero, who would buy Treasuries? Who would invest in CDs? Who would bother saving?
They do make a good point about the effect of rising interest rates on the account deficit. The interest rate on 12-month Treasuries increased from 1% to 4% in the last 2 years. We have increased by 30% the interest payments on the national debt, to $270 billion! This year it is estimated to be $370 billion! Does anyone else see this as a problem?
Instead of printing money, the government is increasing the money supply by auctioning off huge amounts of Treasuries, which cost us $370 billion to service. There is a huge cost to inflating the money supply.
I also want to note that the Fed doesn’t seem to understand the difference between monetary and price inflation. Adding to the money supply by auctioning off Treasuries causes monetary inflation. Increasing commodity prices cause price inflation. The Fed sees the cost of higher oil working through to prices and raises the interest rates to control inflation. But, higher prices already act to temper spending. Now the consumer is hit with a double whammy: he already cut back on spending because gas is higher, and goods made with copper/gold/oil are more expensive, and then the Fed comes along and raises interest rates to slow capital spending and increase the cost of servicing consumer debt, so he gets a double whammy. Raising interest rates to lessen the effect of rising gas prices is the wrong thing to do. Why doesn’t the Fed distinuish between these 2 types of inflation?
Next, I wonder how the Fed could possibly stop raising rates, when any anticipation of a stop in further hikes is decreasing the value of the dollar already.
