Per the FOMC announcement:

To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature.

Here, we see an attempt by the Federal Reserve to prevent price deflation. Whether or not you believe price deflation will occur (I would wager that the readers of this website tend to view price inflation as the likely outcome), this particular move is inflationary as the Federal Reserve has not committed to reducing the size of its balance sheet.

Many intelligent people (e.g., Mish) are forecasting that price deflation will occur in the short-term. I tend to agree with Mish (in regards to the short-term). As noted in one of the Mises Daily articles for today:

After the crisis arrives and the depression begins, various secondary developments often occur. In particular, for reasons that will be discussed further below, the crisis is often marked not only by a halt to credit expansion, but by an actual deflation — a contraction in the supply of money. The deflation causes a further decline in prices. Any increase in the demand for money will speed up adjustment to the lower prices. Furthermore, when deflation takes place first on the loan market, i.e., as credit contraction by the banks — and this is almost always the case — this will have the beneficial effect of speeding up the depression-adjustment process.

The above quotation is courtesy of Murray Rothbard's book: Man, Economy, & State.

Ludwig von Mises once wrote: "Economics, as a branch of the more general theory of human action, deals with all human action, i.e., with man's purposive aiming at the attainment of ends chosen, whatever these ends may be."

Essentially, market participants act in their self-interest. For this reason, I find it hard to believe that the Federal Reserve actually thought the assets it purchased and stored in Maiden Lane would remain investment-grade. After all, if the assets were so valuable, JPMorgan Chase and Co. (JPM) would have kept them for themselves. The fact that JPM was not interested in the assets should have sent a clear message to the Federal Reserve that the assets were not worthwhile.

Instead, as this Bloomberg article points out, the "Fed Made Taxpayers Unwitting Junk-Bonds." According to Bloomberg, "more than 88 percent of Maiden Lane’s CDO [collateralized debt obligation] bonds and 78 percent of its non-agency residential mortgage-backed debt are now speculative grade... as of Jan. 29."

Recently, I stumbled across an article entitled, "BABs saves issuers $12 billion, Treasury says." According to the Treasury, "state and local governments will save $12.3 billion in borrowing costs by issuing federally subsidized taxable bonds, called Build America Bonds, during the first year of the program." Up until now, I had never heard of BABs, and as it turns out, they were part of the American Recovery and Reinvestment Act of 2009.

But, what exactly is a Build America Bond (BAB)? Build America Bonds are taxable municipal bonds with special tax credits and subsidies. There are two types of BABs: tax credit and direct payment. The former carries a federal subsidy that gives the bondholder a refundable tax credit. The latter carries a federal subsidy of 35% of the interest being paid to the issuer.

In the case of direct payment BABs, according to The Wall Street Journal, "the interest rates paid to investors are higher. But the U.S. government pays 35% of the interest, bringing the amount that" the state or local government pays to less than what "it would have paid with tax-exempt bonds." For example, consider the "$1.3-billion Build America Bond issued in October to rebuild the San Francisco-Oakland Bay Bridge and make it earthquake-resistant ... the amount that the Bay Area Toll Authority [paid] ... [was] 4.07% over 40 years compared with 5.5%."

In my last article, I showed that the government is often borrowing more money in a given timeframe than it appears to be. This is because past debts incurred by the government become payable each year, and oftentimes, the government opts to delay payment by issuing additional Treasury securities (i.e., rolling the debt over). If you did not read the original article, I recommend you start there.

An important question to ask is whether or not the amount of debt being rolled over in one year has ever been this great. I would rather not compute the amount of debt rolled over every year since the numbers were first recorded (the process is somewhat tedious), but I think examining the public debt in dollar terms and as a percentage of GDP will enable me to select a few years for comparison. Please see these two graphs below.