We’re seeing moderate but sustainable levels of default, dragged out over a few years. This is a “fair” way of destroying debt because it directly impacts only the creditor and the debtor, however if the rate of defaults rises too high then it can bring down the whole system. Meanwhile, NOTHING HAPPENS in the economy until the imbalance has cleared (and at this rate it will take a while).

Quick defaults = (a)
Slow defaults over a long period of time = (b)

The Fed is trying for (c), which is the best bet to destroy wealth quickly without bringing down the whole house of cards.

I have to disagree sharply with DeLong that the Fed’s actions made little difference. DeLong argues that because the 5 year is at 1.17, the Fed’s actions do not matter. I would argue instead that the 5 year was at 1.17 because the Fed was loudly announcing its plans to buy and everyone had front-run the Fed already. If the Fed suddenly changed course and refused to buy, interest rates would shoot upward.

“Brad DeLong says, the only way that QE is going to work is if it results in higher inflation expectations. ”

I agree with Brad. But I also think this will be self-fulfilling. How?

(1) The Fed buys bonds at very low rates with ‘new’ money. Check.
(2) The Fed holds these bonds long term (so far so good).
(3) Eventually, while inflation expectations raise interest rates rise, causing real, permanent losses on the part of the Fed.
(4) This Fed loss shows as a gain on balance sheets all over the world. This is brand-new money, that the Fed printed, spent, and that it will never recoup.

In fact the Fed has already injected brand new money into the real economy in the form of bond gains that have already been booked by many funds which sold to the Fed.

I am seeing the point of Ray Dalio at Bridgewater. He argues (my understanding) that we are in a ‘D-process’ where creditors must sustain losses because debtors can’t pay it all back. This can happen by (a) massive defaults and deflation (Great Depression) or (b) prolonged low returns on debt or (c) inflation, or some combination of the above.

The Fed is successfully avoiding (a). That much is very clear to me.

If the Fed’s history over the past 20 years is any indication, this is not going to end as planned.