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Marketplace Scratch Pad

I need to borrow a microscope

Scott Jagow Dec 15, 2009

Interest rates are so low, they should be put on a slide and shipped off to a lab. The yield on one-month Treasury bills is 0.000%. That means with transaction costs, people are paying the government to borrow their money.

Since when did “safe” become “generous?” It must be attractive to somebody, despite the dangers of the government’s borrowing habits. Before the end of the year, Congress will probably raise the debt ceiling above $12 trillion, so that the government can keep borrowing. That shouldn’t be all Congress does, says the LA Times:

As they vote to raise the debt limit, they can try to reassure voters — and, perhaps more important, the investors whose purchases of Treasury bills keep the government afloat — that they won’t let the deficits continue in perpetuity…

We’d rather see Congress follow the recommendation of the nonpartisan Peterson-Pew Commission on Budget Reform and pledge to stabilize the federal debt at no more than 60% of GDP by 2018. Congress has time to figure out how best to curb its deficit-spending habit. Repairing the country’s credibility as a borrower, however, can’t wait.

The Federal Reserve meets today and tomorrow on interest rates. The Fed’s likely to leave them in the microscopic category to prevent the economy’s slow recovery from grinding to a halt. While bonds and savings accounts and CDs will continue to yield nothing but stale air from the bank vault, the Fed might signal that the free-money days for banks are about over. More from the Financial Times:

As the crisis ebbs, the Fed is borrowing a page from the European Central Bank, which draws a sharp distinction between monetary policy and liquidity policy, through a so-called “separation principle”. Senior Fed officials thought this distinction problematic mid-crisis but now believe it has relevance to the exit process. With financial markets once again buoyant but the economy still burdened with high unemployment, normalising monetary policy and liquidity policy can proceed at a differing pace.

So, the liquidity programs that have fire-hosed money into the banks might end first, in early 2010, before the Fed considers raising interest rates. But the timing will be tricky. Producer prices shot up much more than expected in November. That could be a sign that inflation is the lion in the Wizard of Oz — ready to wake up and tell the Fed, Put ’em uuuup! Put ’em uuuup!

Mid-2010 could be a very interesting time.

Meanwhile, more on the Fed’s thinking tonight on Marketplace.

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