hasn’t resulted in an inflationary surge (core inflation measured over 3 months just came in below 2%), so why not keep doing it? Aren’t these charts amazing? Rising Federal debt? No problem for Treasury markets Rising Fed balance sheet? No problem for inflation Percentof GDP ‘Yield, percent,30 day movingaverage Percentof GDP Percentchange, YoY BO 20% 40% cat - -" 40% 18% 5 55, 70% - 65%, 43% 16% 3.0% ; 10-year " [ = sat ¥ Wie yield 38% 14% 2.50 50% —- 3.3% 12% 2.0% 45% | Debtto GDP f 25% 10% 1.5% ove —_— 23% 8% malsticenbeet 4.0% 0%, ms he —_—_ 05% Sep-04 Feb-06 Jun-O7 Nov-08 Mar-10 Aug-11 Der-12 2004 2005 2006 200F 2008 2009 2010 2011 2012 Source: CBO, Bloomber. Assumes CBO Alternative Casefor estimates. Saurce: FadaralReseve Board Bureauof Labor Statistics They are amazing, but no one knows how long they can be sustained. Even Summers and DeLong concede that “even if it is granted that the stimulus can be both timely and temporary, the question of how large it can be while preserving these attributes remains for future research”. If one of these trends could not be sustained, my guess is that it would be fiscal constraints rather than monetary ones. While it’s great to see rising Federal debt not adversely affecting Treasury markets, the chart on the left reminds me of The Day of the Triffids. What is The Day of the Triffids? It’s a 1951 science fiction novel. There’s a meteor shower, and most people go outside to look at it. The next morning, everyone who looked at the meteor shower ends up blind, and Earth is taken over by giant man-eating venomous plants. The point: some amazing events which look benign have unforeseen consequences. Will a pact of going for growth pay the freight of higher Federal debt in the long run? Hard to say; there are not a lot of examples to draw from. Economic theories and their associated debt bubbles don’t always work out as planned [a]. After WWII, the US also faced a debt ratio of 80% of GDP. Austerity was not the answer back then