It won’t be inflation.
From today’s Transom, which I highly recommend. Key part bolded by me:
Francis Cianfrocca emails regarding this CNBC piece on the Fed funding the deficit. http://vlt.tc/hi5 “The point that the Fed is basically funding the federal deficit got my attention because this isn’t the first time I’ve heard it recently. Foreign central banks are buying up about half of our deficit (by way of the monetary obverse of trade flows), and the Fed is taking the rest, mostly as QE. Who’s not funding the deficit? U.S. individuals, businesses and banks—they’re not increasing their net holdings of debt assets… The government is literally printing money, and sterilizing it at the same time. Money appears in the bank accounts of the recipients of Federal spending, but there are no net new assets held by the public. The government has found a way to spend money without creating inflation. It has another practical effect: the term structure of Federal debt has in effect been shifted far to the left [Ed: he means on the yield curve]. It means that when a flicker of economic activity does come, it won’t balloon the federal deficit with huge amounts of new interest payments. Those payments will be due on paper, but they’ll be owed in large part to the Fed, which keeps them out of the real economy. Working together, the Fed and the federal government have found a way to enable arbitrary amounts of federal deficit spending with no discernible inflationary impact.” But there’s a problem: “As long as the most important and dynamic actor in our economy is government, we’re going to have a stagnant economy. Government doesn’t buy stuff that’s worth buying. They buy criminally-inefficient public-school teachers and they invest in companies like Solyndra. Their transfer payments to the elderly skew economic activity toward stuff that old people buy: low-end consumer goods, and healthcare. The fact that government has now found a mechanism to dominate real-world capital flows is a bubble that’s far bigger than the housing bubble.”