PIMCO urges Fed to monetize treasury debt. Truly amazing IMHO. If they go this route, the buck will REALLY get trashed and gold will SOAR.
Friday, January 31, 2003
Fed urged to buy Treasury debt
Doing so could cut risk of deflation, Pimco's Paul McCulley says.
Bloomberg News
NEWPORT BEACH – The Federal Reserve should buy Treasury debt as a way to pump more money into the
banking system and help reduce the risk of deflation, said Paul McCulley, who oversees about $90 billion at
Pacific Investment Management Co.
The U.S. economy is "sitting on the dock of the deflationary cliff,"
McCulley wrote in a comment, published on the firm's Web site.
To defend against that threat, he recommended that the central
bank leave interest rates unchanged as Congress cuts taxes
and increases spending.
Economic growth and stability "can be achieved through larger
budget deficits, explicitly accommodated by the Fed," McCulley
said in an interview. "With the war against inflation having been
won over the last two years, Congress" and the president
shouldn't fear the Fed, he said.
McCulley's concern stems from a decline of some prices.
Excluding food and energy, the Consumer Price Index rose 1.9
percent in 2002, down from a 2.7 percent rise in 2001.
The central bank can buy the Treasury debt needed to finance
the higher spending, boosting money supply and reflating the
economy, he wrote. If needed, the Fed may expand its
bond-purchasing program to include corporate bonds,
effectively giving "an explicit reflationary promise beneath private sector debtors heavy wings," McCulley wrote.
An increase in the amount of cash in circulation is inflationary because it raises the amount of available currency
and credit beyond the amount of goods it can purchase.
"Increased growth in money and credit can reduce deflationary risk and would be appropriate," he said.
The central bank left its target interest rate unchanged Wednesday at 1.25 percent, the lowest since July 1961.
The Fed slashed 5.25 percentage points off the so-called federal funds rate since January 2001 in an effort to
boost economic growth.
President George W. Bush proposed tax cuts of about $670 billion over the next 10 years to help stimulate
economic growth.
Congress may begin debate on the budget and Bush's fiscal stimulus package next month. |
