"The Federal Reserve faces a “quandary” in ending its monetary stimulus programs because doing so may drive up the cost of borrowing for the U.S. government", he said.
“The question then is who is going to finance the U.S. government,” Stiglitz said.
We know who is going to fund the US government, US taxpayers. The real question is when. China is about fed up with US deficits. Congress cannot continue borrowing without the support of big banks to sell the paper. Obama won't raise taxes until he gets his programs. Foreign lenders are increasingly loaning on the short end of the curve to keep liquid.
But Treasury notes are valuable only because of CPI deflation, now running at 2% . With deflation of 2%, the real short term interest rates are 2% for short term notes. Inflation expectations for the five year TIPS seem to be about .6%. (From Baseline Scenario). The yield curve is not as steep as nominal rates would indicate.
Banks get printed money, then let it sit in reserve account while deflation is lowering the cost of retail goods. If banks find anything to spend the money on, they would be advised to wait until deflation goes away and they get everything cheaper, currently cheaper by 2% annually.
Why is this happening? Because Obama and the Keyensians have crowded the private sector out of the constrained good, oil. So the private sector deflates at the short end while the long end, which is mainly the government sector, is inflating. John Taylor is right, Keneysian multipliers are going to be less than one.
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