David Beckworth and the permanency of monetary expansion

The Federal Reserve's Dirty Little Secret - David Beckworth

The Committee intends to reduce the Federal Reserve’s securities holdings in a gradual and predictable manner...The Committee intends that the Federal Reserve will, in the longer run, hold no more securities than necessary to implement monetary policy efficiently and effectively.

David Beckworth and other have the opinion that if the Fed held these securities over some long period, that convinces the bond market that we will have a permanent increase in the monetary base.

The permanency arises because these bonds come with an interest payment for which is rebated back to Congress. So that is a net interest stream that is not sent to the bond market, government grants the general taxpayer some relief,  from printed cash. They are bonds, after all, loans made by the central bank to Congress, which does indeed keep the net earnings from the fiat banker. Dave then shows us the plans the Fed has to sell these bonds, in the chart to the left.  That chart shows the Fed plan to sell off much of its holdings.

How will the sale of government holdings reduce the money base? Any net profit is returned to Congress, and its rate subsidy is simply converted to a one time re-imbursement at market rates.  The money printed by the Fed to make the purchase is restored. Is the Fed likely to make a profit? Here is what happened when they were purchased:

The red line is the ten year interest rate, that is the typical rate that Congress pays for money. The blue line are the treasuries bought, it is rising when the fed is purchasing. We see that rates jump about a point when the Fed buys.  So the Fed has bought these bonds at a cheap price, and likely turns a profit when it sells, a profit taken from the bond market and remitted to Congress. It is not the Fed who is restoring the printed money, it is Treasury who sees the gains and wants its interest rate subsidy returned in a lump sum. 

The standard practice in Congress is to roll over debt, so all debt it converted into a permanent stream from the taxpayer to the bond market. The permanency of money must be tested against that background. The actions of the Fed and Treasury during the QE purchases, in a constrained market, likely caused a one point permanent increase in interest rates for all bonds not bought by the Fed during the QE expansion. So the net shift in money was less than meets the eye.  Even if the Fed keeps its bonds, then Congress continues paying higher than free market rates for its market purchases made during the period.  In other words, the Fed QE purchases were neutralized the day the Fed made the purchases. It never was permanent and always was neutral, the New York banks made sure of that from day one.

There really is no such thing as permanent money released by the Fed, but there are net gains and losses, and losses are free unencumbered money released to the market, gains are free unencumbered money take back by the Fed. Except gains are returned to Congress, thus making the flow asymmetrical.  That is the problem, the bond market knows the game is rigged, and they hedge the Fed operations from the start. To work properly, the fiat banker must always move toward the no arbitrage situation, the situation where there is no clear winner or loser.