Debt Fight Unleashes QE3 by Stealth: Economist

Congress unwittingly unleashed a third wave of quantitative easing (QE3) by stealth by refusing to raise the US Treasury’s debt ceiling, according to Paul Ashworth, US economist at Capital Economics.

Tim Graham | The Image Bank | Getty Images

“Given the criticism of QE2 when it was introduced, it is rather ironic that Congress has unwittingly unleashed what amounts to QE3,” Ashworth said.

“The Federal government is getting uncomfortably close to reaching the current debt ceiling. The Treasury has said that, unless Congress votes to raise the limit, the debt ceiling of $14,294 billion will be reached sometime between April 5 and May 31,” Ashworth said.

Ashworth warns that while the Treasury can perform a few accounting tricks to buy itself time once the debt ceiling is reached “it would be legally barred from issuing new debt, even to repay the holders of maturing Treasury bills and bonds.”

Congress voted to prevent a complete shutdown of the Federal government, but the debt ceiling remains a contentious issue.

“The Republican majority in the House would like to link any increase to the implementation of spending cuts. The chances of an early agreement being reached look pretty slim,” Ashworth said.

“As the Treasury has gotten closer to the debt ceiling, it has been forced to start running down its cash reserves," he noted.

"From around $300 billion a month ago, the Treasury only had $100 billion in cash left at the end of last week. The critical point is that the Treasury keeps that cash on deposit with the Federal Reserve”

Those funds get deposited into the banking system and show up as excess reserves, he said.

“The 200 billion dollar decline in the size of Treasury deposits has led to a corresponding increase in the size of reserve balances.”

“Admittedly, this is a bit geeky, but that expansion of reserve balances is effectively a quantitative easing," Ashworth said.

"Along with currency in circulation, those reserve balances form the bulk of the monetary base which, in turn, is used by commercial banks to expand the broader money supply.”