In this post I explained why I thought that the fight over the debt ceiling acted like a monetary contraction (as well as, ironically for the Tea Party, acting like a wealth tax). The argument, made by others too, is just that it reduces the usefulness of Treasuries as a means to park your wealth where it can be quickly turned into something else, as and when you want, and at a price you can predict. It occurs to me that at the same time as this was going on, the fight also enhances the strength of unconventional monetary policy. QE is argued by some to be a weak instrument because it involves swapping one zero interest, default risk free, money-like asset (reserves) for another (Treasuries). So it leaves private sector balance sheets little different from before. However, the debt-ceiling fight clearly made reserves and Treasuries less close substitutes. Treasuries became less default-risk free and less money-like. At the same time as more monetary easing is needed, to make up for the money destruction, the liquidity-injecting properties of future monetary policy are enhanced. Of course, the Tea Party wouldn’t like that either, because they are against the Fed interfering with monetary policy too.
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