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An oversupply of shovels

| Saturday, Oct. 20, 2012, 9:22 p.m.
CMU economist Allan Meltzer with his book on the early history of the Federal Reserve. WLL-Meltzer14

Allan H. Meltzer, a professor of political economy at Carnegie Mellon University, is widely recognized as an international expert on monetary policy and the Federal Reserve. Meltzer spoke to the Trib regarding the domestic and global ramifications of the Fed's third round of its “stimulus” program, also known as quantitative easing.

Q: What do you think of this Fed policy?

A: I think the policy is a mistake.

Q: Why?

A: Because it isn't going to do very much here. The reason I say that is there is $1.5 trillion worth of excess reserves in the banking system, the banks can make any additional loan that the Fed is going to be able to make.

It isn't going to do very much because the last time they did this, they added $600 billion worth of reserves, $500 billion went into domestic excess reserves. That is, it just sat idle. So nothing much is going to happen.

Q: Does the Fed have any other realistic alternative than to do what it's doing now?

A: Yes. It could try to (convince the government) to concentrate on the larger problems of the United States. We do not have a monetary problem. There isn't much the Fed can do to solve our problems because they are not monetary problems, they are real problems — fiscal problems, uncertainly about future tax rates, uncertainty about the fiscal cliff, uncertainty about health care costs. Those are real problems, and they have nothing to do with the Fed.

Q: Brazil and China have voiced concerns that the policy could threaten emerging economies. Are those concerns valid?

A: Countries that trade with us, countries from whom we buy, have a choice as to whether they want to let their currency appreciate to prevent inflation at home or whether they want to continue their exports. So, those are the choices that they have. China and Brazil and, in practice, many others, don't like that choice.

Q: There also are concerns domestically that what the Fed is doing now could lead to an increase in inflation. Could it?

A: For sure. Not immediately but eventually. But we face some (other) huge problems along the way.

Q: Such as?

A: As we (eventually) raise interest rates, the costs of refinancing (our) debt is going to go up. How much are they going to go up? Well, $100 billion to $150 billion over a period of years in a budget that the government has difficulty cutting.

It means we have to pay that out, more than half of it, to foreigners. Those foreigners are going to have to take more dollars. Those are big, big problems, and they are going to get bigger as interest rates rise and more of the debt comes due to be retired.

Eric Heyl is a staff writer for Trib Total Media. He can be reached at 412-320-7857 or eheyl@tribweb.com.

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