Comment of the Day: : Austerity, Recovery, and Macroeconomic Analysis: "Something else. You say that those who don't trust the power of financial repression can lock in low interest rates by borrowing long...
...Now consider the whole public sector--treasury plus central bank. The lock-in strategy means more long term debt held by private sector investors and less short term.
The effect of borrowing long to lock in low interest rates is the exact opposite of QE2. Here you seem to assume that issuing a lot of long term debt creates no problems. I agree. But that leads me to think that QE2 solved no problems (and would have solved no problems even if it had been open ended).
So which is it? Duration risk held by private investors is no big deal (a tiny deal) or is a big deal?
I guess you think duration risk matters some but its importance is dwarfed by the effects of fiscal stimulus.
I think that long term bonds are a good hedge for physical capital so duration risk should work like insurance so the more private investors bear the higher is NIPA investment. Note 'should' that means 'would if people were rational' which very nearly means 'won't'. I also think it has completely insignificant effects one war or the other.
(QE1 and QE3 involved public (Fed banks) ownership of mortgage-backed securities--the Fed system holding (or hiding) risk other than mere duration risk).)
