5 ms·

No, I believe it has almost nothing to do with foreign investment. (Incidentally, foreigners have awesome faith in the US government, as evidenced by the fact t

No, I believe it has almost nothing to do with foreign investment. (Incidentally, foreigners have awesome faith in the US government, as evidenced by the fact that interest rates are as low as they have ever been, and -- frighteningly -- perhaps as low as they can be.) No, the government buying its own debt is a very famous accounting trick designed to create more money in the economy. This act is the basis of the fractional reserve system, which in turn is the basis of all modern money. The Federal Reserve bank buys bonds from bondholders (either newly issued bonds from the government or bonds from my safe deposit box). And in return it puts money in a bank account. Where does the money come from? It is just numbers in a database. The Fed just edits the database. Only the central government, which controls the currency, has the power to create money out of thin air in this way, but that power is very important. (In other times, when the economy is really hot and inflation is soaring and we need to cool down, the Fed does the opposite: It raises interest rates, which causes people to want to buy bonds to get more interest, which causes people to spend their cash for those bonds. And, as each bond is bought, the Fed just erases the cash from bank accounts. The money vanishes! Remember, money is just a score in a game, the game of "keeping the economy working so that people can eat". It's not made of metal or anything. That was the old way, the way that didn't work.) You can't get the same effect by selling bonds to England, because then England will pay for the bonds in dollars, and England can't create dollars. They have to buy dollars with pounds. So the total supply of dollars in the world would remain constant, which is not the point of this exercise. (Now if I really understood econ we could go on to talk about why this little exercise might not work this time, about the "liquidity trap" and the "zero lower bound". But my time is up.)

yummyfajitas 16y ago
(Incidentally, foreigners have awesome faith in the US government,... This could also reflect a lack of faith in other governments rather than faith in the US government. If assorted European debt became 10x more risky but US debt only became 5x more risky, that would cause a flight into US debt.
- jeromec 16y ago
  Exactly correct. The U.S. can have economic problems, but as long we are still at the top, we remain at the top. One of the more interesting reactions to the FOMC’s gloomy appraisal of the economic state of affairs is the surge of strength into the dollar and the corresponding tumble in the euro. The U.S. dollar index — which is heavily weighted to the euro — is up 1.8%. The euro is down against the buck to the tune of 2.1%, a giant move in the forex markets. http://blogs.wsj.com/marketbeat/2010/08/11/oh-man-not-europe-again/ http://blogs.wsj.com/marketbeat/2010/08/11/oh-man-not-europe...
  - startuprules 16y ago
    "but as long we are still at the top, we remain at the top." Said the captain of the titanic.
    - jeromec 16y ago
      Don't get me wrong. I'm the last person to suggest we're unsinkable. I'm only pointing out that our troubles become the troubles of everyone else, just as our success has influenced global economic success.
- mechanical_fish 16y ago
  True, but when you find a Martian index fund that pays better than anything you can find on Earth, be sure to give me a call. It would actually be a good sign at this point if investors lost interest in buying government debt (from the US or from other governments). Because then they would find something else to invest in... like maybe something that promised some gain, something that would put people to work and make use of idle capacity. The fact that everyone is anxious to hoard cash or cash equivalents, even at miserable interest rates, is an ominous sign: When deflation comes, hoarding cash for as long as you can is a paying proposition, and the economy spirals to a halt as everyone tries to wait through as much deflation as possible before buying anything.
jeromec 16y ago
This is a great explanation. Correct me if I'm wrong, but there is an important detail to note, which is the money supply is not being expanded significantly more in this action by the Fed any more than the normal course unless there is newly issued bonds/govt. debt. The problem is the govt. is reluctant to take on more debt, even though stimulus would be welcomed, because deficit worries persist. This Fed move will really seek to push down interest rates a bit more, by creating more demand for existing bonds. Unfortunately, these record low interest rates are not speeding economic recovery, and the money supply is not expanding (inflationary) as we would like, because banks are still hesitant to lend.
anamax 16y ago
> Incidentally, foreigners have awesome faith in the US government, as evidenced by the fact that interest rates are as low as they have ever been, and -- frighteningly -- perhaps as low as they can be. Interest rates reflect relative opportunities, not absolute value. The fact that the US is seen as a better investment than, say, China, does not tell you that the US is a good investment. > "zero lower bound". 0 is not a lower bound for interest rates. You can loan someone $100 today in return for $90 in ten years. If you're trying to get folks to do something with the money that they borrowed, there are other levers. Or, you could just loan it to different people.
- cynicalkane 16y ago
  0 is a lower bound for interest rates because almost nobody would make that loan. The "rational actor" theory has some flaws, but it's a safe economic assumption that actors are rational enough to not throw away money like that.
  - mechanical_fish 16y ago
    Though, in fact, the US government can loan people $100 in exchange for $90 in ten years. Or, equivalently, they can print $10 bills and hand them out to people. Simpler that way. In practice, of course, it is preferable to give people jobs to do in exchange for their $10 bills, like fixing our broken roads or sewers, or building nice public infrastructure. That way we keep our workers and factories in practice, and we don't waste productive capacity, and we distribute the money according to fair rules, and we get some nicely paved streets. But when you have to stimulate the economy and you're desperate you could literally "fire up the helicopter" (as the metaphor goes) and start dropping dollar bills from the sky. Unfortunately, the Federal Reserve may not be able to do this. Deficit spending takes an act of Congress, and for various terrifying structural and political reasons the US Congress has punted on the problem of managing the economy.
- MaysonL 16y ago
  Interestingly, recently 2 year Treasury TIPS (Inflation Protected Securities) were yielding -0.02%. see: http://krugman.blogs.nytimes.com/2010/08/11/why-we-need-an-inflation-target/ http://krugman.blogs.nytimes.com/2010/08/11/why-we-need-an-i...

yummyfajitas 16y ago

(Incidentally, foreigners have awesome faith in the US government,... This could also reflect a lack of faith in other governments rather than faith in the US government. If assorted European debt became 10x more risky but US debt only became 5x more risky, that would cause a flight into US debt.

jeromec 16y ago
Exactly correct. The U.S. can have economic problems, but as long we are still at the top, we remain at the top. One of the more interesting reactions to the FOMC’s gloomy appraisal of the economic state of affairs is the surge of strength into the dollar and the corresponding tumble in the euro. The U.S. dollar index — which is heavily weighted to the euro — is up 1.8%. The euro is down against the buck to the tune of 2.1%, a giant move in the forex markets. http://blogs.wsj.com/marketbeat/2010/08/11/oh-man-not-europe-again/ http://blogs.wsj.com/marketbeat/2010/08/11/oh-man-not-europe...
- startuprules 16y ago
  "but as long we are still at the top, we remain at the top." Said the captain of the titanic.
  - jeromec 16y ago
    Don't get me wrong. I'm the last person to suggest we're unsinkable. I'm only pointing out that our troubles become the troubles of everyone else, just as our success has influenced global economic success.
mechanical_fish 16y ago
True, but when you find a Martian index fund that pays better than anything you can find on Earth, be sure to give me a call. It would actually be a good sign at this point if investors lost interest in buying government debt (from the US or from other governments). Because then they would find something else to invest in... like maybe something that promised some gain, something that would put people to work and make use of idle capacity. The fact that everyone is anxious to hoard cash or cash equivalents, even at miserable interest rates, is an ominous sign: When deflation comes, hoarding cash for as long as you can is a paying proposition, and the economy spirals to a halt as everyone tries to wait through as much deflation as possible before buying anything.

jeromec 16y ago

This is a great explanation. Correct me if I'm wrong, but there is an important detail to note, which is the money supply is not being expanded significantly more in this action by the Fed any more than the normal course unless there is newly issued bonds/govt. debt. The problem is the govt. is reluctant to take on more debt, even though stimulus would be welcomed, because deficit worries persist. This Fed move will really seek to push down interest rates a bit more, by creating more demand for existing bonds. Unfortunately, these record low interest rates are not speeding economic recovery, and the money supply is not expanding (inflationary) as we would like, because banks are still hesitant to lend.

anamax 16y ago

> Incidentally, foreigners have awesome faith in the US government, as evidenced by the fact that interest rates are as low as they have ever been, and -- frighteningly -- perhaps as low as they can be. Interest rates reflect relative opportunities, not absolute value. The fact that the US is seen as a better investment than, say, China, does not tell you that the US is a good investment. > "zero lower bound". 0 is not a lower bound for interest rates. You can loan someone $100 today in return for $90 in ten years. If you're trying to get folks to do something with the money that they borrowed, there are other levers. Or, you could just loan it to different people.

cynicalkane 16y ago
0 is a lower bound for interest rates because almost nobody would make that loan. The "rational actor" theory has some flaws, but it's a safe economic assumption that actors are rational enough to not throw away money like that.
- mechanical_fish 16y ago
  Though, in fact, the US government can loan people $100 in exchange for $90 in ten years. Or, equivalently, they can print $10 bills and hand them out to people. Simpler that way. In practice, of course, it is preferable to give people jobs to do in exchange for their $10 bills, like fixing our broken roads or sewers, or building nice public infrastructure. That way we keep our workers and factories in practice, and we don't waste productive capacity, and we distribute the money according to fair rules, and we get some nicely paved streets. But when you have to stimulate the economy and you're desperate you could literally "fire up the helicopter" (as the metaphor goes) and start dropping dollar bills from the sky. Unfortunately, the Federal Reserve may not be able to do this. Deficit spending takes an act of Congress, and for various terrifying structural and political reasons the US Congress has punted on the problem of managing the economy.
MaysonL 16y ago
Interestingly, recently 2 year Treasury TIPS (Inflation Protected Securities) were yielding -0.02%. see: http://krugman.blogs.nytimes.com/2010/08/11/why-we-need-an-inflation-target/ http://krugman.blogs.nytimes.com/2010/08/11/why-we-need-an-i...