One way of looking at this is to consider analogous exit plans.
For conventional QE exit, the Fed must sell bonds into the market.
For platinum QE exit, the Fed must sell platinum back to Treasury.
The implication of this is that Treasury must refund its original platinum funding with bonds – in order to pay back the Fed from its TGA account.
Thus, both CQE and PQE exits require the sale of bonds into the market – existing bonds and new bonds respectively.
It’s the same exit requirement from a monetary standpoint.
Returning to original QE “entrance”, it is a FACT that analytically one can achieve the same funding result for the cumulative deficit under either conventional or platinum easing. (Mike and I have both summarized this in separate posts). That funding result is expressed as a mix of reserves, currency, and bills/bonds.
However, analytically, it is important not to confuse ex post and ex ante cumulative deficit comparisons in the illustration of this equivalence:
The issue that motivates consideration of PQE is the risk of debt ceiling impasse. That risk threatens to shut down the government – because it imposes an obstruction to already approved spending by shutting down the normal bond channel for deficit financing. PQE is a considered response to the dysfunctional shutdown of spending that Congress has already approved.
Therefore, in comparing the technique of PQE with CQE, one must consider the ex ante scenario of continued deficit spending – as that is the situation that PQE is designed to address.
In this regard, deficit spending can proceed in conjunction with the implementation of either form of QE. In that scenario, the result of CQE and PQE is the same in terms of ultimate funding mix for the cumulative deficit.
CQE takes bonds out of the market in parallel with Treasury issuing them.
PQE holds market bonds constant in parallel with Treasury not issuing them.
I think there’s been some analytical confusion in cases where an attempt has been made to compare PQE with CQE, while holding the cumulative deficit constant – i.e. prior to the deficit spending that PQE is designed to enable. That won’t work – and it doesn’t need to – because PQE is by design a potential antidote for the obstruction of ex ante deficit spending by a debt ceiling impasse.
And the reason the analysis won’t work – and doesn’t need to – is that PQE is designed to inject Treasury balances prior to spending and actual deficit creation – so one needs to work through that scenario in which the objective of facilitating further spending is accomodated in order to compare properly the cases of CQE and PQE .
Now, an interesting point has been made (by commenter James) about the quality of the asset held by the Fed in each case.
In this regard, asset quality depends on fiat capacity in the case of either bonds or platinum.
CQE assumes a capacity to sell bonds from Fed inventory on exit. PQE assumes a capacity to issue new bonds from Treasury on exit. Both assume an original capacity to have sold bonds into the market prior to the assumed event of either form of QE.
These are all fiat based capacities.
There are two minimal type arguments for fiat power:
First, you can always credit bank reserves (operationally) to pay off a bond – that’s a liquidity argument.
Second, you can always tax to adjust and/or pay down the cumulative budget deficit – that’s an equity/capital/solvency argument.
Similarly, the capacity for Treasury to deposit /sell platinum to the Fed is a fiat capacity within the internal institutional organization of government.
Putting that all together, its fiat, fiat, fiat.
Thus, there is really no difference in the fiat underpinning of CQE or PQE.
Finally, regarding policy:
Love it or hate it, CQE is a response to unusual economic stress at the zero bound.
PQE responds to operational stress due to debt ceiling dysfunction, which becomes a further risk for economic stress.
So the ultimate risk management motivation is the same.
Arguably, PQE requires more operational coordination between Treasury and the Fed.
But that does not threaten the existing framework of Fed policy independence – because that characteristic is a function of the Fed’s role in setting the Fed funds target, and using unconventional techniques as necessary at the zero bound – techniques that may be necessary for macro risk management under economic stress.
Therefore, given the demonstrated technical compatibility of the two easing modes – CQE and PQE – it follows that risk to the integrity of institutional responsibilities and to the robustness of the monetary policy framework ultimately is not an issue.
One last technical point – PQE leverages up already completed CQE due to operational risk associated with debt ceiling inflexibility. It may therefore leverage up overall QE to a degree not otherwise intended under CQE. If that happens, there is a policy adjustment available to accomodate that. That is – the Fed can issue term deposits to match the term structure that might otherwise have been associated with bond issuance. The only difference is that PQE will capture that protective term structure via banking system intermediation – as opposed to largely non-bank absorption under bond issuance.
Finally – once again on this issue of Treasury/Fed operational coordination in the context of Fed policy independence – there is an intriguing precedent of sorts here:
In the early stages of the financial crisis, the Fed undertook “credit easing”, in which it effectively swapped government bonds it held for financial claims on the private sector. It began to run low on bond inventory as a result. When this happened, it started to create excess reserves beyond the desired level – which was a problem because the authority to pay interest on reserves was not yet in place. That resulted in some loss of effectiveness in the interest rate control function. So, prior to getting that authorization to pay interest on reserves, the Fed requested that Treasury issue a special tranche of treasury bills – in order to drain reserves- which it did, parking the money in its TGA account at the Fed. That reserve drain had the desired effect on rates (or at least helped to improve the situation). In other words, Bernanke asked Geithner for help in coordinating monetary policy implementation. But nothing was sacrificed in terms of the actual independence of policy formulation itself.
See the comparison?
This time, it would be Geithner asking Bernanke for help, but without necessarily sacrificing the integrity of the existing differentiation of policy responsibilities between Treasury and the Fed, given the technical tools available for operational coordination.
This whole thing is becoming less far fetched using rational analysis of consistent policy and technical feasibility.
But of course its unlikely to happen.