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Federal Reserve quantitative easing works in two ways: its fiercely debated near-term economic effects and a longer-term impact on government debt that Chairman Ben Bernanke isn't eager to discuss.
In some ways, the latter is easier to quantify. By year-end, Fed purchases of more than $2 trillion in Treasury and mortgage-related securities will have shaved about $400 billion from the rising public debt load, an IBD analysis finds.
About half of the debt savings comes from interest earned — handed over to the Treasury — on the Fed's extraordinary government bond and mortgage buys since the end of 2008, New York Fed reporting suggests.
The other half stems from interest expense avoided, using estimates from the Bank for International Settlements that QE1 and QE2 lowered Treasury yields by 30 basis points and 20 basis points, respectively.
While this side benefit, which might be called quantitative deleting, pales compared to $5 trillion in federal debt piled up over just four years, it's enough to cover half the cost of the $800 billion stimulus.
But it's much harder to pin down to what extent QE is encouraging Congress to run bigger deficits than it otherwise would.
Still, there's no escaping an eventual payback for the government's borrowing binge made easier by the Fed. A return to normal Treasury yields — and a normal Fed balance sheet — would dramatically increase the costs of servicing public debt.
The Fed wrapped up a two-day meeting on Wednesday sounding modestly more upbeat and with no plans to undertake further rounds of asset purchases. But Bernanke said at a news conference, "Those tools remain very much on the table and we will not hesitate to use them should the economy require additional support."
The stated rationale for quantitative easing is that central bank buying of Treasuries and government-backed mortgage securities bids up the prices (and lowers the yields) of such safe assets, making risky assets look relatively attractive.
Thus the Fed can make borrowing cheaper for homebuyers and corporations, while underpinning stock prices and stimulating consumption through a wealth effect.
Lessons From Tokyo
But policymakers are surely mindful about QE's impact in lightening the load of government debt.
Ben Bernanke, in a 2003 speech in Tokyo before being elevated to Fed chairman, argued for "cooperation between the monetary and fiscal authorities in Japan."
"Consider for example a tax cut for households and businesses that is explicitly coupled with incremental (Bank of Japan) purchases of government debt — so that the tax cut is in effect financed by money creation," he said.
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