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Oops, IOR/FFR rate should have been written as 0.25% (the math above is the same).
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Remember, the Fed refunds to Tsy its net profits. So if the Fed buys $600 billion of debt averaging, say, 3% in debt service, that's $18 billion a year in debt service that's replaced by the 0.025% IOR rate ($1.5 billion a year). If the Fed just bought up up all publicly-held debt, .025% on $10 trillion is $25 billion a year (the Fed would still show a profit). Of course that $25 billion cost itself could be offset by interest earnings if federal funds markets were replaced by the discount window. There's really no reason not the lock in the IOR/FFR rate at 0.025%, the Fed can control inflation by increasing reserve requirements or the prime rate, though a Lerner-Colander Market Anti-inflation Market is definitely worth examining. On the downside, cutting net interest by more than 90% would make the CBO's projected debt scare charts look less scary.
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May 9, 2010