I would bet that five years from now the size of the Fed balance sheet will be at least 85 percent of what it is now. I would make the same bet for ten years from now, but it is easier to hold me accountable in five years. Unlike Bryan Caplan, I prefer non-money bets.
My view is that “monetary policy” is just a ruse. If you want to understand government’s role in financial markets, focus on credit allocation. From that perspective, I do not think that the Fed will want to reallocate credit away from government debt and mortgage securities any time soon. . .or, in fact, any time.
Arnold,
When you say you prefer non-money bets, what do you mean? Do you mean bets without any actual payment, even if not money? Or do you mean bets where the payment is, say, a meal?
A bottle of fine alcohol. It is the true gentleman’s bet.
Too lazy to look it up… Has the FED ever lowered its balance sheet by any significant amount over any significant time period? I realize they may say there was never any need to do so… but it seems that lowering its balance sheet would be a very unpopular plan at any time . I can’t even imagine anyone at the FED would seriously believe they would ever try to reduce it by 15% from where it is now.
Well, I can’t see evidence that there is any serious credit allocation going on by the Fed either. The Fed balance sheet is small relative to mortgages and to the public debt. With respect to the public debt there remains a large market with a large appetite for public debt. With respect to the balance sheet in 5 years, I don’t see how it matters at all.
I second this comment. Also, note that the Fed is required by law to concern itself with inflation and employment, which is already one goal too many. If it is seriously engaged in credit allocation, it is violating its legal responsibility.