Is qualitative easing a partial default?

The Fed is going to buy some government bonds.

Now, if they fund this buy printing money – doesn’t this effectively imply that they are shifting the burden of their recession from taxpayers to bond holders? If so, isn’t this equivalent to a partial default on debt.

I don’t think other countries would be allowed to do this.

What am I missing?

Update: CPW points out why I’m wrong – effectively I’m presuming that the Fed won’t stick to a future inflation target anymore, which is not really a fair assumption.  He pointed me to this very good post as Econbrowser, and I also really enjoyed this post on Greg Mankiw’s blog.  I’m nervous about the Fed’s willingness to pull back the QE/lift rates in the future – but this is no different to the usual concern I hold during the whole economic cycle.  The introduction of QE hasn’t actually changed this issue.

22 replies
  1. Stephen Kirchner
    Stephen Kirchner says:

    Buyers of bonds can simply demand a higher yield to compensate for higher expected future inflation. Governments can’t inflate away debt unless interest rates rate are regulated or they can engineer a surprise inflation. Since these measures have been publicly announced, the latter seems unlikely. Given all the angst about QE causing inflation, it seems unlikely this isn’t priced in already.

    Note that the Fed is probably more limited in the range of assets it can buy compared to other central banks.

  2. Andrew
    Andrew says:

    Actually, Japan has been engaging in large-scale bond purchases as well, so other countries can get away with it, too. I don’t know how far down the economic food chain one can go before this trick falls apart, though.

    And current bondholders win from this move, don’t they? The price of Treasuries is forced up by the extra demand, so holders of bonds realize a capital gain.

    Abstracting from inflation, the people who lose are those who are supporting themselves on fixed income producs and savers in general, who earn less interest. The winners are those who borrow.

    If the move results in higher inflation, then there’s the costs of that.

  3. Matt Nolan
    Matt Nolan says:

    @Stephen Kirchner

    Agreed – I think these measures were pretty heavily pre-announced, and as a result this would have already been priced in.

    In this way describing the move today is a red herring – I should have discussed it when QE was announced.

  4. Matt Nolan
    Matt Nolan says:


    Very true very true.

    As I said to Stephen Kirchner I’ve been naughty and used the wrong reference period – I should have looked at when they actually announced the possibility of QE.

    Also you are suggesting that maybe the actual movement to QE increased confidence in a US recover – a factor that is consistent with rising bond prices and a falling US dollar. I think you are right, and that interpretation is definitely consistent with today’s facts.

  5. Matt Nolan
    Matt Nolan says:


    Indeed, Japan and potentially Europe can also get away with this jazz. I’m just jealous because little countries like NZ can’t 😛

    Also agree about the rising bond prices – that was the sticky point for my statement as CPW pointed out.

    I want to see what has happened to bond prices since the QE was announced and what will happen to bond prices before I admit that I’m completely off track 😉

  6. Miguel Sanchez
    Miguel Sanchez says:

    If you think of default as simply not delivering the returns that were promised, then you could consider the fall in the US dollar since 2002 as the biggest debt default in history, since it massively eroded the foreign-currency returns on US Treasuries. New Zealand can certainly pull the same trick, and has done before.

  7. Matt Nolan
    Matt Nolan says:

    @Miguel Sanchez

    Good point. If the devaluation is meant to be permanent, and outside the bounds of “reasonableness” I think you can term it as a partial default. The NZ dollar is volatile, but the average US$ is being pushed down – that smells more like a “default” than what we are doing

  8. CPW
    CPW says:

    You can tell from the market reaction that the extent of the Fed’s move was unanticipated. But the breakeven inflation rate on the US 10-year bond only rose about 12 basis points, so the impact on expected inflation was relatively minor compared to the impact on the 10-year yield (40 basis points). The normal caveats about breakevens not being as meaningful at the moment apply though.

  9. Matt Nolan
    Matt Nolan says:


    Where do you think the burden of the increase in the money stock will go? If bond holders are experiencing a relative capital gain and the taxpayer gets a liability off their back that only leaves people who are holding currency – so surely the value of the dollar must take a bit of a beating?

  10. CPW
    CPW says:

    Well the $US did fall, although I think the fall in real interest rates not the rise in expected inflation was the significant factor. But personally, I think this is a free lunch: the worst thing that can happen is the cash is hoarded, the best is that the money is spent on employing spare resources. I don’t think you can get a large increase in inflation without also getting an output response. With long-term inflation expectations at about 1.3%, inflation is currently the least of their problems.

  11. Matt Nolan
    Matt Nolan says:

    But, unless we think that there is a permanent shift in velocity, or that the Fed will mop up this money in a timely manner when velocity recovers, the printing of money must lead to some future inflation.

    The fact that the US is pushing for deflation implies that there is some cost that must be realised in their economy – inflating their way out implies that they are shifting that burden onto the people they’ve borrowed off (assuming of course that nominal interest rates don’t also adjust – because if they did then this entire exercise would be pointless).

    I don’t believe that the utilization of spare capacity will “make up the entire gap” – but I agree with you that it does imply that this solution is probably Kaldor-Hicks efficient. However, it still implies a transfer between the US and their debtors doesn’t it?

  12. CPW
    CPW says:

    In the short-term I think V will fall a little, and P and Q will rise a little. Specific enough? 🙂

    But yes, I assume that this move is seen as consistent with the Fed’s inflation mandate, and that target hasn’t changed, so if required, the money will be mopped up at a later date.

    With inflation still well below the minimum Fed inflation target(about 2%), I can’t see how moves that shift inflation slightly closer to that target are really unfair. People who hold nominal $US assets just lost their bet against the Fed’s credibility.

  13. Matt Nolan
    Matt Nolan says:


    I guess it depends on how you feel about future Fed action – I just can’t see them mopping things up quickly enough. I guess I just don’t think that the Fed will do what is required and I just believe that future inflation will be stronger than should be required.

    Of course, I hope that my random, cynical, value judgments don’t come to pass.

  14. Miguel Sanchez
    Miguel Sanchez says:

    Agreed Matt, I worry that the Fed will repeat their mistake from the first half of the decade, that is, patting themselves on the back for maintaining low goods price inflation, even as asset prices spiralled ever higher. Not to mention the massive disinflationary force that came from Chinese imports, which implied that a little CPI deflation might have actually been appropriate.

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