This is a tale of two printing presses.
It is the best of times, the worst of times. The U.S. government will continue spending more money than it is taking in from taxes, despite a warning from the president’s budget commission that the situation is unsustainable and risks a blow-out in the market for U.S. IOUs. The worst of times. So the first printing press well be put to work printing Treasury bonds, or IOUs, promises to repay the loans at some future date, and interest until then.
Meanwhile, the Federal Reserve Board’s monetary policy committee will activate the second press, and not for the first time. It will print $600 billion with which to buy the next eight-months’ output of the Treasury’s presses, and that doesn’t count the $300 billion from expiring mortgages that it will reinvest in additional Treasury securities. That will keep the price the Treasury has to pay investors — the interest rate — low, and drag down other interest rates as well.
Which makes investors look for a better return on their money. Buy shares. Not much of a risk since the chairman of the Fed, Ben Bernanke, has announced that since share prices add to wealth, added wealth results in added spending, and added spending creates jobs, he will support share prices — the so-called Bernanke “put.” The best of times….