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> Within 10 years the majority of the US federal budget will go to paying INTEREST on our debt All the Federal Reserve has to do is buy US treasures on the ope

> Within 10 years the majority of the US federal budget will go to paying INTEREST on our debt All the Federal Reserve has to do is buy US treasures on the open market at higher and higher prices. A premium on a bond pushes the yield lower. Yields at 0% means that the US will not be paying interest on its [new] debt. Yields at negative means that investors will be paying the US. People and entities buying US treasury bonds is why they yield 2-ish percent right now at all, instead of say 5%. Regarding 0% rates, the Bank of Japan has already done this with Japanese government treasuries, for a very long time Regarding negative rates, the European Central Bank has already done this with its constituent country's government bonds, for several years. Primarily German bonds. The US can do this with more efficacy than those economies, whenever it chooses to do so. Right now, the US Central Bank chooses to raise rates and the US Treasury continues to issue more debt at the higher rates for reasons unrelated to its budget, to be honest just because the market can bear it. The Federal Reserve chooses to have less dubious assets on its balance sheet. Everything is done in a form of moderation, but the US has a lot of tools to deal with its debt.

narrator 8y ago
We could go China style and just get rid of the fed and have the government print its own money. That would be way too easy though. Edit: The difference is when China bails out its banks it doesn't loan the money into existence to do it. The U.S government must borrow the money from the fed and the interest rate is paid back by the taxpayers. Yes, the interest paid back to the fed goes back to the government, minus expenses. However, those with very large amounts of money, trillions in aggregate, can piggyback on this system and earn enormous risk free returns where they would otherwise have to carefully invest in non-risk free instruments. These risk free assets are unavailable to chinese investors forcing these large savings into various productive (or non-productive based on their investing skill) investments in the economy. They can't go into T-Bills either because of strict currency controls. In the U.S the risk-free trillions invested are guaranteed by the power of taxation of the rest of the productive economy. This austerity to pay the bondholders and ensuing liquidation is what trashes the rest of the economy on a regular basis in Western economies. This doesn't happen in China because the banks get bailed out with printed money and they keep on lending without putting the government in debt or requiring taxes to be raised or austerity. That China has not had a Japanese style prolonged credit bust even though it has been predicted by "The Economist" and other supposedly learned publications on a regular basis for the last 30 years is a sublime mystery that defines explanation because there is a stubborn refusal to objectively understand and analyze the Chinese financial system. I'd say it's a new paradigm in human organization that really defies western understanding because our financial system is so enormously politically protected by all that trillions in passive capital that gets risk free returns.
- mandelbrotwurst 8y ago
  The Federal Reserve is part of the government.
  - brokensegue 8y ago
    and the federal reserve doesn't (literally) print the money...
    - gammateam 8y ago
      At their discretion they can buy an asset and the person they bought from now has money that didnt previously exist This is what is being referred to as printing, but yes its just an unlimited asset issuance function in the currency class of a program
      - labster 8y ago
        Yes, but every bank can create money through lending, you don't need a to be a government agency to do that. The Fed just has less limits because it can just add arbitrary amounts of currency to its balance sheets.
        taysic 8y ago
        Banks in theory have consequences for lending more than is reasonably available to them. The Fed really can create money out of thin air. That's a big difference.
        deleted 8y ago
        [deleted]
        brianpgordon 8y ago
        As long as they satisfy their capital requirements, banks can lend as they please. They tend not to make really bad loans because directors are legally beholden to shareholders to ensure management is appropriately managing risk. The Fed doesn't tend to print trillions of dollars for no particular reason because it is legally beholden to its dual mandate. It's not that different. Yes the Fed can create "reserve currency" and banks can only create "commercial currency" but the distinction is a technical one and doesn't have a whole lot of macroeconomic impact.
prostoalex 8y ago
> All the Federal Reserve has to do is buy US treasures on the open market at higher and higher prices. Doesn't that lead to inflation?
- lisper 8y ago
  Potentially. One way to think of the U.S. national debt is as a measure of the future money supply. There are two ways to retire the debt: pay it off through increased productivity (i.e. GDP growth) or print dollars. Debt doesn't cause inflation directly, but it's a potential time bomb if the debt comes due and you can't pay it through productivity growth (or higher taxes).
  - afarrell 8y ago
    Does it have to be future US productivity? Or because dollars are the global reserve currency, can it be future productivity of a nation that buys US treasuries?
    - lisper 8y ago
      Pretty much, because that's the only productivity that the U.S. government can effectively tax.
- mikekchar 8y ago
  I can't quite wrap my head around if inflation is terribly bad in this situation. Certainly the Japanese government has been trying to introduce inflation, but the yen has stubbornly stayed pretty high. However, personal debt here in Japan is in a completely different situation than in the US. I wonder if the US is kind of caught between a rock and a hard place. I'd love to hear from someone who understands this stuff...
  - SenHeng 8y ago
    That Japan doesn’t suffer from inflation is purely an illusion. Rent has been going up, fuel prices have gone up, the volume of stuff you can purchase inside a container had actually declined. Drinks in tetrapaks, foods in packages, etc have all decreased in volume. We’re paying the same amount but getting less as the years have gone by. It’s cutely termed shrinkflation. https://togetter.com/li/1190012 https://togetter.com/li/1190012
kamaal 8y ago
>>Yields at 0% means that the US will not be paying interest on its [new] debt. Yields at negative means that investors will be paying the US. How does this work? Why should/will anybody give money to anybody for free?
- jjeaff 8y ago
  If you had a billion dollars you wanted to keep safe, what would you do with it? If you think the markets are going to do poorly, you might not want to invest it there. You could just put it into a bank account, but what if that bank goes under? You are only insured by the FDIC up to $250k. You could put it into 4,000 different banks (essentially every bank in America) each with an account of $250k. But imagine the overhead of opening and keeping track of those. How many accountants will you need to have on staff full time? And lots of banks charge a monthly fee if you aren't making transactions every month. So are you going to take it in cash? If so, where will you put it? You'll need storage, security, insurance... what if the insurance company goes bust and can't pay out? All those options are very expensive. But you have the option to put that money into a US government bond, the safest place in the world, and it won't cost you a dime. Free storage. In Europe, there were actually cases of negative interest rates. So people were paying a little bit of money to loan to the government because it was still the safest and cheapest way to protect their enormous sums.
  - sschueller 8y ago
    For example, Switzerland currently has the highest negative interest rate in the world. [1][2] [1] https://www.reuters.com/article/us-snb-results-banks/swiss-banks-paid-1-billion-in-negative-interest-rates-in-first-half-idUSKBN1AG0P9 https://www.reuters.com/article/us-snb-results-banks/swiss-b... [2] https://www.ft.com/content/bcc092fc-7743-11e6-a0c6-39e2633162d5 https://www.ft.com/content/bcc092fc-7743-11e6-a0c6-39e263316...
  - thaumasiotes 8y ago
    > And lots of banks charge a monthly fee if you aren't making transactions every month. This is never going to apply to people with $250,000 deposited with the bank. Lots of banks charge a monthly fee if you aren't making transactions and also don't have any money. Make a large interest-free loan to the bank, and they won't charge you fees for the privilege of making it.
Arnt 8y ago
You're confusing the yield at market rates with the interest paid by the borrower. If the US were to buy treasuries at above the nominal rate, the market yield would be lowered, because the market yield is the sum to be repaid on the due date minus the purchase price, converted to percent. Neither the due date or the sum to be repaid would be affected. I'm impressed by how high these rates are. The US 10-year bonds pay 2.9%, according to the top post in this thread. Remarkable. According to Bloomberg, the US pays interest rates like Italy, nearly ten times as high as those of Germany. https://www.bloomberg.com/quote/GBTPGR10:IND https://www.bloomberg.com/quote/GBTPGR10:IND https://www.bloomberg.com/quote/GDBR10:IND https://www.bloomberg.com/quote/GDBR10:IND https://www.bloomberg.com/quote/USGG10YR:IND https://www.bloomberg.com/quote/USGG10YR:IND
- csense 8y ago
  > You're confusing the yield at market rates with the interest paid by the borrower This is true when you're talking about trading a bond in the secondary market. But for primary sales (i.e. Treasury auctions for brand-new bonds that didn't exist before), the debtor (Treasury's) effective IR is a function of the sale price.
- krageon 8y ago
  I don't understand why this is surprising. To my understanding it is the case that countries that are bad with money give you a better interest because they're a higher risk to give money to. Germany is good with money, the US is not. Therefore the US gives higher interest than Germany. Is there a profound insight I am missing that makes this state more unusual than it seems to me right now?
  - Arnt 8y ago
    No, just a discrepancy between numbers and attitude. The US of A is indebted almost like Italy and pays a risk premium almost like Italy, and the Americans seem to act as if it isn't a problem.
    - Tsubasachan 8y ago
netcan 8y ago
Lots of tools, but everything has a potentially undesirable or at least unpredictable side effect. Over the last while, central bankers have been trying to increase inflation rates by keeping rates low, but the market has not been responding as they expected. ..at least inflation didn't go where they wanted it to. Asset prices went up (inflated). It's half based on magic, macroeconomics.
- RobertoG 8y ago
  That's because monetary tools are the wrong tool to generate growth and inflation. The correct tool is fiscal policy, but that's politically impossible at the moment in the USA and the Euro-area.
  - drjesusphd 8y ago
    I would argue it's only "impossible" for the EU. The US could implement sound fiscal policy, but chooses not to. Whereas the eurozone states suffer a tragedy of the commons unless the fiscal structure of the EU changes.
  - netcan 8y ago
    This has become a popular opinion recently because the old proper tools stopped working. The problem is that the institution responsible for inflation doesn't control the state budget, just central bank lending and banking rules. ...and I don't think you can say with any kind of certainty that "new macro," corbynomics or any of the other current ideas will work, are safe, or don't come with other side effects. Personally, I'm not sure there's a constantly true answer. ATM, businesses don't have ways of absorbing more money. You can Google, FB, msft, Amazon or Apple $100m... it probably wouldn't affect what they choose to to in any way. They already have money piling up. Tesla might use the money. They have factories to build, but Tesla's are a rarity. In that market, to get stimulus/inflation, governments need to spend it themselves. In 5 years, it could be different. The problem, imo, with those types of ideas is that public spending is very hard to put in reverse. Even if the value for money sucks, you tend to get trapped spending it.

narrator 8y ago

We could go China style and just get rid of the fed and have the government print its own money. That would be way too easy though. Edit: The difference is when China bails out its banks it doesn't loan the money into existence to do it. The U.S government must borrow the money from the fed and the interest rate is paid back by the taxpayers. Yes, the interest paid back to the fed goes back to the government, minus expenses. However, those with very large amounts of money, trillions in aggregate, can piggyback on this system and earn enormous risk free returns where they would otherwise have to carefully invest in non-risk free instruments. These risk free assets are unavailable to chinese investors forcing these large savings into various productive (or non-productive based on their investing skill) investments in the economy. They can't go into T-Bills either because of strict currency controls. In the U.S the risk-free trillions invested are guaranteed by the power of taxation of the rest of the productive economy. This austerity to pay the bondholders and ensuing liquidation is what trashes the rest of the economy on a regular basis in Western economies. This doesn't happen in China because the banks get bailed out with printed money and they keep on lending without putting the government in debt or requiring taxes to be raised or austerity. That China has not had a Japanese style prolonged credit bust even though it has been predicted by "The Economist" and other supposedly learned publications on a regular basis for the last 30 years is a sublime mystery that defines explanation because there is a stubborn refusal to objectively understand and analyze the Chinese financial system. I'd say it's a new paradigm in human organization that really defies western understanding because our financial system is so enormously politically protected by all that trillions in passive capital that gets risk free returns.

mandelbrotwurst 8y ago
The Federal Reserve is part of the government.
- brokensegue 8y ago
  and the federal reserve doesn't (literally) print the money...
  - gammateam 8y ago
    At their discretion they can buy an asset and the person they bought from now has money that didnt previously exist This is what is being referred to as printing, but yes its just an unlimited asset issuance function in the currency class of a program
    - labster 8y ago
      Yes, but every bank can create money through lending, you don't need a to be a government agency to do that. The Fed just has less limits because it can just add arbitrary amounts of currency to its balance sheets.
      - taysic 8y ago
        Banks in theory have consequences for lending more than is reasonably available to them. The Fed really can create money out of thin air. That's a big difference.
        deleted 8y ago
        [deleted]
        brianpgordon 8y ago
        As long as they satisfy their capital requirements, banks can lend as they please. They tend not to make really bad loans because directors are legally beholden to shareholders to ensure management is appropriately managing risk. The Fed doesn't tend to print trillions of dollars for no particular reason because it is legally beholden to its dual mandate. It's not that different. Yes the Fed can create "reserve currency" and banks can only create "commercial currency" but the distinction is a technical one and doesn't have a whole lot of macroeconomic impact.

prostoalex 8y ago

> All the Federal Reserve has to do is buy US treasures on the open market at higher and higher prices. Doesn't that lead to inflation?

lisper 8y ago
Potentially. One way to think of the U.S. national debt is as a measure of the future money supply. There are two ways to retire the debt: pay it off through increased productivity (i.e. GDP growth) or print dollars. Debt doesn't cause inflation directly, but it's a potential time bomb if the debt comes due and you can't pay it through productivity growth (or higher taxes).
- afarrell 8y ago
  Does it have to be future US productivity? Or because dollars are the global reserve currency, can it be future productivity of a nation that buys US treasuries?
  - lisper 8y ago
    Pretty much, because that's the only productivity that the U.S. government can effectively tax.
mikekchar 8y ago
I can't quite wrap my head around if inflation is terribly bad in this situation. Certainly the Japanese government has been trying to introduce inflation, but the yen has stubbornly stayed pretty high. However, personal debt here in Japan is in a completely different situation than in the US. I wonder if the US is kind of caught between a rock and a hard place. I'd love to hear from someone who understands this stuff...
- SenHeng 8y ago
  That Japan doesn’t suffer from inflation is purely an illusion. Rent has been going up, fuel prices have gone up, the volume of stuff you can purchase inside a container had actually declined. Drinks in tetrapaks, foods in packages, etc have all decreased in volume. We’re paying the same amount but getting less as the years have gone by. It’s cutely termed shrinkflation. https://togetter.com/li/1190012 https://togetter.com/li/1190012

kamaal 8y ago

>>Yields at 0% means that the US will not be paying interest on its [new] debt. Yields at negative means that investors will be paying the US. How does this work? Why should/will anybody give money to anybody for free?

jjeaff 8y ago
If you had a billion dollars you wanted to keep safe, what would you do with it? If you think the markets are going to do poorly, you might not want to invest it there. You could just put it into a bank account, but what if that bank goes under? You are only insured by the FDIC up to $250k. You could put it into 4,000 different banks (essentially every bank in America) each with an account of $250k. But imagine the overhead of opening and keeping track of those. How many accountants will you need to have on staff full time? And lots of banks charge a monthly fee if you aren't making transactions every month. So are you going to take it in cash? If so, where will you put it? You'll need storage, security, insurance... what if the insurance company goes bust and can't pay out? All those options are very expensive. But you have the option to put that money into a US government bond, the safest place in the world, and it won't cost you a dime. Free storage. In Europe, there were actually cases of negative interest rates. So people were paying a little bit of money to loan to the government because it was still the safest and cheapest way to protect their enormous sums.
- sschueller 8y ago
  For example, Switzerland currently has the highest negative interest rate in the world. [1][2] [1] https://www.reuters.com/article/us-snb-results-banks/swiss-banks-paid-1-billion-in-negative-interest-rates-in-first-half-idUSKBN1AG0P9 https://www.reuters.com/article/us-snb-results-banks/swiss-b... [2] https://www.ft.com/content/bcc092fc-7743-11e6-a0c6-39e2633162d5 https://www.ft.com/content/bcc092fc-7743-11e6-a0c6-39e263316...
- thaumasiotes 8y ago
  > And lots of banks charge a monthly fee if you aren't making transactions every month. This is never going to apply to people with $250,000 deposited with the bank. Lots of banks charge a monthly fee if you aren't making transactions and also don't have any money. Make a large interest-free loan to the bank, and they won't charge you fees for the privilege of making it.

Arnt 8y ago

You're confusing the yield at market rates with the interest paid by the borrower. If the US were to buy treasuries at above the nominal rate, the market yield would be lowered, because the market yield is the sum to be repaid on the due date minus the purchase price, converted to percent. Neither the due date or the sum to be repaid would be affected. I'm impressed by how high these rates are. The US 10-year bonds pay 2.9%, according to the top post in this thread. Remarkable. According to Bloomberg, the US pays interest rates like Italy, nearly ten times as high as those of Germany. https://www.bloomberg.com/quote/GBTPGR10:IND https://www.bloomberg.com/quote/GBTPGR10:IND https://www.bloomberg.com/quote/GDBR10:IND https://www.bloomberg.com/quote/GDBR10:IND https://www.bloomberg.com/quote/USGG10YR:IND https://www.bloomberg.com/quote/USGG10YR:IND

csense 8y ago
> You're confusing the yield at market rates with the interest paid by the borrower This is true when you're talking about trading a bond in the secondary market. But for primary sales (i.e. Treasury auctions for brand-new bonds that didn't exist before), the debtor (Treasury's) effective IR is a function of the sale price.
krageon 8y ago
I don't understand why this is surprising. To my understanding it is the case that countries that are bad with money give you a better interest because they're a higher risk to give money to. Germany is good with money, the US is not. Therefore the US gives higher interest than Germany. Is there a profound insight I am missing that makes this state more unusual than it seems to me right now?
- Arnt 8y ago
  No, just a discrepancy between numbers and attitude. The US of A is indebted almost like Italy and pays a risk premium almost like Italy, and the Americans seem to act as if it isn't a problem.
  - Tsubasachan 8y ago

netcan 8y ago

Lots of tools, but everything has a potentially undesirable or at least unpredictable side effect. Over the last while, central bankers have been trying to increase inflation rates by keeping rates low, but the market has not been responding as they expected. ..at least inflation didn't go where they wanted it to. Asset prices went up (inflated). It's half based on magic, macroeconomics.

RobertoG 8y ago
That's because monetary tools are the wrong tool to generate growth and inflation. The correct tool is fiscal policy, but that's politically impossible at the moment in the USA and the Euro-area.
- drjesusphd 8y ago
  I would argue it's only "impossible" for the EU. The US could implement sound fiscal policy, but chooses not to. Whereas the eurozone states suffer a tragedy of the commons unless the fiscal structure of the EU changes.
- netcan 8y ago
  This has become a popular opinion recently because the old proper tools stopped working. The problem is that the institution responsible for inflation doesn't control the state budget, just central bank lending and banking rules. ...and I don't think you can say with any kind of certainty that "new macro," corbynomics or any of the other current ideas will work, are safe, or don't come with other side effects. Personally, I'm not sure there's a constantly true answer. ATM, businesses don't have ways of absorbing more money. You can Google, FB, msft, Amazon or Apple $100m... it probably wouldn't affect what they choose to to in any way. They already have money piling up. Tesla might use the money. They have factories to build, but Tesla's are a rarity. In that market, to get stimulus/inflation, governments need to spend it themselves. In 5 years, it could be different. The problem, imo, with those types of ideas is that public spending is very hard to put in reverse. Even if the value for money sucks, you tend to get trapped spending it.