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Fed Chair Wakes Up, Notices National Debt

Thursday November 30th, 2017   •   Posted by Craig Eyermann at 6:19am PST   •  

25149517 - grim reaper with a death book (or perhaps a ledger of the U.S. government's liabilities) Perhaps for the first time in living memory, if not ever, the outgoing Chair of the Federal Reserve Janet Yellen expressed concern about the size of the U.S. national debt. CNBC‘s Jeff Cox has the story:

With Congress wrestling over a tax reform plan that critics say would explode the government budget deficit, Federal Reserve Chair Janet Yellen said she also is concerned over the surging level of public debt….

“I would simply say that I am very worried about the sustainability of the U.S. debt trajectory,” Yellen said. “Our current debt-to-GDP ratio of about 75 percent is not frightening but it’s also not low.”

“It’s the type of thing that should keep people awake at night,” she added.

The Fed has critics of its own, though, who say that the central bank helped balloon the debt through low interest rates kept in place since the financial crisis. The Fed kept its benchmark rate anchored near-zero for seven years, from December 2008 through December 2015. During that time, the national debt grew 77 percent.

In her comments, Yellen is only referring to the publicly-held portion of the U.S. national debt. In reality, the total public debt outstanding has grown to exceed 106% of the U.S. economy’s GDP while she has been at the U.S. Federal Reserve.

Also while she has been at the U.S. Federal Reserve, the Fed has dramatically increased its holdings of debt securities issued by the U.S. Treasury Department and other federal government agencies. The following chart shows by how much since June 14, 2004, which coincides with Janet Yellen holding leadership positions at the U.S. Federal Reserve.

During the Fed’s various Quantitative Easing (QE) operations, where the Fed sought to either boost the U.S. economy or to keep it from falling back into deep recession by loaning large sums of money to the U.S. government, the Fed would often dominate the buying at U.S. Treasury auctions, crowding out other lenders and forcing down interest rates.

Today, a little under $1 out of every $8 dollars that the U.S. government has borrowed in its $20.5 trillion debt is owed to the U.S. Federal Reserve.

Curiously, Yellen’s concern about the size of the national debt has suddenly come as the U.S. Congress is considering implementing tax cuts that would increase the rate at which the total public debt outstanding of the U.S. government is growing to be about the same as what it was during the last four years of President Obama’s tenure in office, which coincidentally overlaps portions of Yellen’s tenures as the Number Two and Number One person at the Fed.

Perhaps Yellen was concerned about the growth of the national debt during those four years. If only she had expressed them during that time, the national debt might not be quite the scary thing that now causes her night terrors.

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November 2017