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The Fed’s Share of Public Debt: Worsening Withdrawal Symptoms?

Prominent writers and investors have described today’s economy as being addicted to loose monetary policy, especially the QE variety. There may be something…



Prominent writers and investors have described today’s economy as being addicted to loose monetary policy, especially the QE variety. There may be something to that analogy. After all, the Fed has barely commenced tapering, and some of the economy’s withdrawal symptoms are acute. Things are especially interesting, or troubling, when we look at how intertwined monetary and fiscal policy have become.



For example, the Fed’s current holdings of Treasuries are more than double their previous highs during World War II. The accompanying chart shows federal debt held by the public as a percent of GDP, split into debt held by the Federal Reserve and debt held by the non-Fed public, from 1940 to the most recent data. As the top line in the chart shows, total debt held by the public has risen sharply since 2001 and now exceeds 100% of GDP.

As for the Fed’s share, it exceeded 10% during World War II, yet in the post-WWII period, Fed holdings hovered between 5% and 6% every year up to 2010. Then, in a clean break from the trend, the second half of 2009 saw Quantitative Easing become utilized toward the direct purchase of medium- and long-term U.S. Treasuries. Consequently, as the chart shows, Fed holdings more than doubled in 2011 and have remained historically elevated above 10% of GDP for all years through 2019. In 2020, the Fed’s share more than doubled a second time. By the time of the most recent data available in 2021, the Fed’s share had reached 24.3% of GDP, far exceeding its peak of 10.4% during WWII.

The chart might even understate the magnitude of the Fed’s public debt holdings when looking more closely at medium- and long-term Treasuries. According to a May 2022 New York Federal Reserve report of open market operations, as of December 2021, the Fed owned 38% of 10-30 year bonds. From this point forward, there is a long way to go in winding-down to roughly pre-pandemic levels.

Some economists say that a ballooning Fed balance sheet is nothing to worry about, and the Fed itself has vowed to sterilize QE from affecting bank reserves. However, George Selgin, John Cochrane, James Dorn, and others have been arguing that very high Fed holdings of public debt compromise the central bank’s independence while risking inflation. Today’s inflation is caused partly by historic expansions of the money supply needed to finance Washington’s spending sprees. As St. Louis Fed economist Fernando M. Martin has shown (see figure Money and Deficits), since 2016 the growth rate of M2 closely tracks the growth rate of budget deficits. Even the floor system of paying interest on excess reserves (IOER) faces exposure. As Thomas Hogan argued recently on Econlib, during the Great Recession the Fed could have met its unemployment target by doing less QE, had it opted to lower IOER.

Now, after holding down interest rates for nearly a generation, the shift to quantitative tightening combined with rising yields will squeeze the federal budget. As we recently showed, net interest is projected to exceed 10% of the budget within the next five years. The financial pain of winding down from 24.3% of GDP might be too much to bear, prompting fiscal policymakers to again pressure the Fed. Can Congress quit the Fed’s easy money policy that has allowed them to push debt levels well above 100% of GDP, or will the addiction demand more QE to support Washington’s spending habit?


Peter Calcagno is a Professor of Economics at the College of Charleston and director of the Center for Public Choice & Market Process. A Public Choice and Public Policy Project Fellow with AIER. He is the Treasurer of the Public Choice Society, a Voting Member of AIER, a Board Member of the Classical Liberals in the Carolinas, and has served on the board of APEE. His areas of research are applied microeconomics, public choice, and political economy. He is the author of dozens of journal articles and book chapters, and the editor of Unleashing Capitalism: A Prescription for Economic Prosperity in South Carolina.

Edward J. Lopez is Professor of Economics, BB&T Distinguished Professor of Capitalism, and Founding Director, Center for the Study of Free Enterprise at Western Carolina University. He is the Executive Director and Past President of the Public Choice Society, Past President of the Association of Private Enterprise Education, and Associate Editor of the Journal of Entrepreneurship & Public Policy. In 2008-09 he was a Resident Scholar at Liberty Fund.


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Royal Caribbean Keeps One Covid Change Passengers May Not Like

Royal Caribbean cruise line has decided that one policy change made during the pandemic era will stay in place.



Royal Caribbean cruise line has decided that one policy change made during the pandemic era will stay in place.

The covid pandemic forced the cruise industry to make a lot of changes -- some superficial and others that altered long-term policies. 

Some of these changes, like making muster drills mostly virtual, delighted customers. Others, like improving air filtration, happened behind the scenes, benefiting cruise passengers even if they weren't aware that anything had happened.

Royal Caribbean International (RCL) - Get Royal Caribbean Group Report, Carnival Cruise Line (CCL) - Get Carnival Corporation Report, and Norwegian Cruise Line (NCLH) - Get Norwegian Cruise Line Holdings Ltd. Report all moved largely in lockstep during the pandemic. In July 2021, when all three cruise lines returned to service from U.S. ports, they had to deal with oversight from the Centers for Disease Control and Prevention.

Those rules mandated that all passengers age 12 and older had to be vaccinated, and all passengers had to provide negative covid tests. Mask rules varied a bit, but for much of the past year and a few months since the cruise lines were able to start sailing again, masks were required in a number of areas, including cruise terminals.

Now, the CDC has basically stopped regulating the cruise industry. It offers guidance but it no longer tracks covid on cruise ships, and most rules have gone away. 

And while Royal Caribbean, Carnival, and Norwegian have seen operations largely return to normal, not every pandemic-era change has gone away.

Image source: Dukas/Universal Images Group via Getty Images

Royal Caribbean Keeps a Change Passengers May Not Like

Royal Caribbean cruises have largely returned to the exact experiences they were before covid. Vaccinated passengers still have to provide proof they got their shots and unvaccinated cruisers must still show negative tests, but once you board, the experience has mostly returned to normal.

Royal Caribbean has decided, however, that it's not going roll back one change, which was first reported by Royal Caribbean Blog. The cruise line discussed the matter in an email to travel agents Sept. 27.

"As we continue to shape the future of cruising, a few experiences may look a bit different to some of your clients. With this, we will no longer be accepting prebookings for onboard entertainment. All guests who would like to attend our entertainment onboard must book these at the Box Office or on the App once onboard," the email said.

Some customers may be angry about this because it creates a sort of rush to book theater shows, Aqua Theater performances, the comedy club, and other onboard entertainment as customers board. 

This could mean people book a cruise and end up unable to see a show they really wanted to see.

In reality, many people don't show up for their reservations, so not getting one generally means that you can line up on a standby basis and still get in.

Royal Caribbean Has Turned a Covid Corner

Royal Caribbean, like Carnival and Norwegian, has struggled to get back to its precovid levels of business. The company has returned its entire fleet to service and has slowly built back to sailing its ships at full capacity. 

Chief Executive Jason Liberty outlined some financial information on the company during its second-quarter-earnings call.

"Another major milestone for the group this past quarter was that our business turned operating cash flow and Ebitda positive," he said. 

"...This achievement further strengthened our liquidity position and positions us well to continue methodically and proactively improving the balance sheet and refinancing near-term maturities as we seek to return to 2019 metrics and beyond swiftly."

Liberty made clear that he expected the company to fully recover.

"This outperformance in Q2 versus our expectations was driven by continued strength in our onboard revenue and accelerating load factors, which hit nearly 90% in June and delivered 82% for the quarter," he said. 

"This combination led us to achieving higher total revenue per guest versus 2019 levels."


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Spread & Containment

How bonds work and why everyone is talking about them right now: a finance expert explains

Investor confidence in the UK is at a low, and the bond market has reacted dramatically.



The Bank of England is buying bonds again. Just as it was about to start selling the debt it had accumulated as part of its last effort to support the economy during the COVID-19 pandemic, the central bank has been forced to announce a new scheme to shore up investor confidence.

The bank’s £65 billion short-term spree aims to address the slump in bond prices caused by investors rushing to sell after the government’s recent mini-budget. This led to a surge in bond yields that hiked borrowing costs for the government and spread to pensions, housing and the general economy. So far, it has had a limited initial impact on the markets.

We asked an expert in finance to explain what’s going on in bond markets.

What is a bond and what is the difference between bond prices and yields?

A bond is essentially a tradeable IOU. It’s a loan that investors make to issuers such as companies or governments (UK government bonds are often called gilts). A bond has a price at which it can be sold and a yield, which is an annual amount the investor receives for holding the bond, a bit like interest on a savings account, and is expressed as a percentage of the current price.

When the price of a bond falls, it signals less demand for the bond because fewer investors want to own it. At the same time, the yield rises, which represents a higher cost of borrowing for companies or governments that issued the bond because this is what they have to pay to investors.

In the days since the government’s mini-budget, yields on 10-year Treasury bonds – which are issued by the UK government – increased from approximately 3.5% to 4.52% – the highest since the 2007-2008 global financial crisis. The expectation of continued increases prompted the recent intervention by the Bank of England.

UK government 10-year bond yields

United Kingdom 10-year bond yield. / Tradingview

What causes bond yields to move?

To understand this, it is important to bear in mind that, while people often talk about the interest rate, there are actually a number of rates. This includes the rate at which the central bank lends to commercial banks (the base rate), the rate that banks lend to each other (the interbank rate), the rate that the government borrows at (Treasury yields) and the rate at which households and firms borrow (commercial loans and mortgages).

When the Bank of England changes the base rate, this cascades through all these rates. As such, the Bank of England carefully considers the state of the economy – that is, growth and inflation – when deciding on the base rate.

When an economy is growing, interest rates and bond yields tend to rise. The occurs for several reasons. Investors sell bonds to buy riskier assets with better returns. Firms and households also look to borrow more money in a growing economy, for example, to invest in new machinery or to move home. More demand for borrowing means lenders can charge higher interest on their loans.

Higher inflation often accompanies economic growth because of the increase in demand for goods and services. This tightens supply and causes prices to rise (including wages for labour). The Bank of England, which is mandated by the government to try to keep inflation as close to 2% as possible, will respond to higher inflation by raising base rates, which, as noted, feeds through to the different rates.

Investors will often anticipate the increase in base rates and look to act before it goes up by selling Treasury bonds and buying alternative, higher return, assets. This causes bond yields to rise further. As a result, the Treasury bond yield is often seen as a predictor of future Bank of England base rate changes.

So, if yields are rising, does this mean that investors are expecting future economic growth in the UK?

No, not at the moment. When the government raises money by issuing bonds, it does so over a range of time periods (called maturities), from one day to 30 years. When an economy is expected to grow, the yield on longer-term bonds will be higher than the yield on shorter-term bonds.

This relationship between yields across different maturities is referred to as the term structure or yield curve. An upward sloping yield curve implies a growing economy. At the moment, the UK yield curve is flat, or even downward-sloping across some maturities. My research shows that a falling yield curve is a good predictor of a coming recession.

Yield curve for UK government bonds

Line graph showing downward-sloping yield curve for UK gilts
UK gilts 40-year yield curve. *The curve on the day of the previous MPC meeting is provided as reference point. Bloomberg Finance L.P., Tradeweb and Bank of England calculations

It’s important to remember that these different yields act as a benchmark for commercial lending rates of equivalent lengths. The approximate jump to 4.5% in 2-year and 5-year yields has been reflected in mortgage rates, which is why some lenders have pulled available mortgage deals recently while they reassess the lending rates charged to households.

Read more: Is the UK in a recession? How central banks decide and why it's so hard to call it

But if the UK economy is not expected to perform well, why have bond yields been rising after the chancellor’s mini-budget announcement?

The rising bond yields we are seeing relate to an additional factor: the amount of government debt. The mini-budget introduced tax cuts and increased spending and investors know the government will need to increase borrowing to meet these commitments. Some estimates put potential government borrowing at £190 billion due to this plan.

An increase in the amount a homeowner borrows versus the value of their home (called the loan-to-value) causes the mortgage rate charged to the borrower to rise. Similarly, an increase in the amount of bonds that the government will be looking to sell (the amount it wants to borrow) will push down the price of existing bonds, increasing yields. More importantly, more debt without growth raises the risk level of the UK economy.

Anticipating this, investors triggered a large-scale bond sell-off after the government’s mini-budget announcement. This contributed to the fall in the value of the pound as investors selling UK Treasury bonds bought US bonds instead, essentially swapping pounds for dollars.

So will the Bank of England’s plan work?

The intervention will have a short-term positive impact, which started as soon as it was announced. But the bank is really only buying time. Any ultimate success depends on the government restoring investor confidence in its economic plans.

Unfortunately, rising yields and borrowing costs for the UK economy is the price we are now paying for the government’s recent fiscal announcement.

David McMillan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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Yom Kippur is coming soon – what does Judaism actually say about forgiveness?

Many religions value forgiveness, but the details of their teachings differ. A psychologist of religion explains how Christian and Jewish attitudes co…




Two women embrace before a Yom Kippur service held outdoors during the COVID-19 pandemic in Los Angeles. Al Seib/Los Angeles Times via Getty Images

The Jewish High Holidays are fast approaching: Rosh Hashana and Yom Kippur. While the first really commemorates the creation of the world, Jews view both holidays as a chance to reflect on our shortcomings, make amends and seek forgiveness, both from other people and from the Almighty.

Jews pray and fast on Yom Kippur to demonstrate their remorse and to focus on reconciliation. According to Jewish tradition, it is at the end of this solemn period that God seals his decision about each person’s fate for the coming year. Congregations recite a prayer called the “Unetanah Tokef,” which recalls God’s power to decide “who shall live and who shall die, who shall reach the ends of his days and who shall not” – an ancient text that Leonard Cohen popularized with his song “Who by Fire.”

Forgiveness and related concepts, such as compassion, are central virtues in many religions. What’s more, research has shown that it is psychologically beneficial.

But each religious tradition has its own particular views about forgiveness, as well, including Judaism. As a psychologist of religion, I have done research on these similarities and differences when it comes to forgiveness.

Person to person

Several specific attitudes about forgiveness are reflected in the liturgy of the Jewish High Holidays, so those who go to services are likely to be aware of them – even if they skip out for a snack.

In Jewish theology, only the victim has the right to forgive an offense against another person, and an offender should repent toward the victim before forgiveness can take place. Someone who has hurt another person must sincerely apologize three times. If the victim still withholds forgiveness, the offender is considered forgiven, and the victim now shares the blame.

The 10-day period known as the “Days of Awe” – Rosh Hashana, Yom Kippur and the days between – is a popular time for forgiveness. Observant Jews reach out to friends and family they have wronged over the past year so that they can enter Yom Kippur services with a clean conscience and hope they have done all they can to mitigate God’s judgment.

The teaching that only a victim can forgive someone implies that God cannot forgive offenses between people until the relevant people have forgiven each other. It also means that some offenses, such as the Holocaust, can never be forgiven, because those martyred are dead and unable to forgive.

Many people dressed in black and white stand in a courtyard between ancient walls.
Thousands of Jewish pilgrims attend penitential prayers at the Western Wall in Jerusalem ahead of the Jewish High Holiday of Rosh Hashana. Menahem Kahana/AFP via Getty Images

To forgive or not to forgive?

In psychological research, I have found that most Jewish and Christian participants endorse the views of forgiveness espoused by their religions.

As in Judaism, most Christian teachings encourage people to ask and give forgiveness for harms done to one another. But they tend to teach that more sins should be forgiven – and can be, by God, because Jesus’ death atoned vicariously for people’s sins.

Even in Christianity, not all offenses are forgivable. The New Testament describes blaspheming against the Holy Spirit as an unforgivable sin. And Catholicism teaches that there is a category called “mortal sins,” which cut off sinners from God’s grace unless they repent.

One of my research papers, consisting of three studies, shows that a majority of Jewish participants believe that some offenses are too severe to forgive; that it doesn’t make sense to ask someone other than the victim about forgiveness; and that forgiveness is not offered unconditionally, but after the offender has tried to make things right.

Take this specific example: In one of my research studies I asked Jewish and Christian participants if they thought a Jew should forgive a dying Nazi soldier who requested forgiveness for killing Jews. This scenario is described in “The Sunflower” by Simon Wiesenthal, a writer and Holocaust survivor famous for his efforts to prosecute German war criminals.

A color photograph of an older, balding man in a blue shirt and striped tie.
Simon Wiesenthal at the White House during the Reagan administration. Diana Walker/The Chronicle Collection via Getty Images

Jewish participants often didn’t think the question made sense: How could someone else – someone living – forgive the murder of another person? The Christian participants, on the other hand, who were all Protestants, usually said to forgive. They agreed more often with statements like “Mr. Wiesenthal should have forgiven the SS soldier” and “Mr. Wiesenthal would have done the virtuous thing if he forgave the soldier.”

It’s not just about the Holocaust. We also asked about a more everyday scenario – imagining that a student plagiarized a paper that participants’ friends had written, and then asked the participants for forgiveness – and saw similar results.

Jewish people have a wide variety of opinions on these topics, though, as they do in all things. “Two Jews, three opinions!” as the old saying goes. In other studies with my co-researchers, we showed that Holocaust survivors, as well as Jewish American college students born well after the Holocaust, vary widely in how tolerant they are of German people and products. Some are perfectly fine with traveling to Germany and having German friends, and others are unwilling to even listen to Beethoven.

In these studies, the key variable that seems to distinguish Jewish people who are OK with Germans and Germany from those who are not is to what extent they associate all Germans with Nazism. Among the Holocaust survivors, for example, survivors who had been born in Germany – and would have known German people before the war – were more tolerant than those whose first, perhaps only, exposure to Germans had been in the camps.

Forgiveness is good for you – or is it?

American society – where about 7 in 10 people identify as Christian – generally views forgiveness as a positive virtue. What’s more, research has found there are emotional and physical benefits to letting go of grudges.

But does this mean forgiveness is always the answer? To me, it’s an open question.

For example, future research could explore whether forgiveness is always psychologically beneficial, or only when it aligns with the would-be forgiver’s religious views.

If you are observing Yom Kippur, remember that – as with every topic – Judaism has a wide and, well, forgiving view of what is acceptable when it comes to forgiveness.

Adam B. Cohen does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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