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> 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
gammateam 8y ago
They would be introducing money into the economy. The people that had their bonds purchased by the Fed would be holding money that didnt previously exist. This dilutes the value of an individual dollar. Just like dilution of any asset. In the context of currencies this is called inflation. Typically the whole point is for private persons to invest into the real economy, even though it is riskier, because these other new ventures are going to try to put it to productive use, instead of any party just parking the money in a bank account since now it is clear it will lose value just parked.
jganetsk 8y ago
This is a common misconception: that treasuries somehow don't lead to inflation but reserves (aka electronic cash) somehow do. Why? Both are extremely liquid, but treasuries pay more interest than reserves (yes, reserves do pay interest [1]). The only difference between treasuries and reserves is, in fact, the interest rate an the fact that we call one "debt" and the other "money". But they are both US federal gov't liabilities denominated in USD. [2] The bulk of the impact on inflation already happened... when the treasuries were issued in the first place. They aren't waiting to be exchanged for reserves to suddenly cause inflation. [3] So, if anything, the Federal Reserve swapping one gov't liability for another paying lower interest could lead to less inflation, not more. [4] [1] https://fred.stlouisfed.org/series/IOER https://fred.stlouisfed.org/series/IOER [2] http://bilbo.economicoutlook.net/blog/?p=31715 http://bilbo.economicoutlook.net/blog/?p=31715 [3] http://www.cfeps.org/pubs/wp-pdf/WP37-MoslerForstater.pdf http://www.cfeps.org/pubs/wp-pdf/WP37-MoslerForstater.pdf [4] https://www.stlouisfed.org/publications/regional-economist/july-2016/neo-fisherism-a-radical-idea-or-the-most-obvious-solution-to-the-low-inflation-problem https://www.stlouisfed.org/publications/regional-economist/j...
TangoTrotFox 8y ago
The one big gotcha in international finance is the petrodollar. Going back to the 70s we made an incredibly prescient deal with Saudi Arabia. They agree to sell their oil only in USD and then to invest annual surpluses back into US securities. In exchange we agree to ensure protection of their kingdom and guarantee weapon sells. This arrangement continues to this day in grand fashion. For instance even though Saudi Arabia only has some 30 million people, it's the third largest defense spender in the world spending some $70 billion a year on weapons, with most of that going straight [back] to us. Our influence in turn led to the expansion of the petrodollar beyond just Saudi Arabia to nearly all oil sales. This doesn't seem like a particularly big deal, until you realize what it does. Imagine the US pumps a bunch of funny money (I'm using a sardonic term just to clearly distinguish between organic/'real' growth) into our economy. This would naturally cause inflation. But here's where the fun kicks in. Oil is still by far the most in demand resource in the world. And now when countries go to buy oil they need to accumulate USD. But now due to inflation a country that wants to buy the same amount of oil needs to keep an even larger reserve of USD on hand. And that's exactly what happens. The USD becomes worth less and countries are obligated to hoover up more USD to ensure access to oil. As that USD starts getting removed from circulation, the effects of the inflation start to abate. Like magic, we can 'print' (not how many is made, but that's another topic) a practically unlimited amount of funny money with minimal economic consequences. This also explains much of otherwise inexplicable actions in the Mideast and related places. We don't want their oil, we want them to sell their oil in USD only. This [1] is an article from Time in 2000: "Europe's dream of promoting the euro as a competitor to the U.S. dollar may get a boost from SADDAM HUSSEIN. Iraq says that from now on, it wants payments for its oil in euros, despite the fact that the battered European currency unit, which used to be worth quite a bit more than $1, has dropped to about 82[cents]. Iraq says it will no longer accept dollars for oil because it does not want to deal "in the currency of the enemy."" By 2003 we had destroyed the Iraq government and killed Saddam in a kangaroo court. Similarly with Libya, Gaddafi was aiming to create a gold backed 'Afro-currency' which is what he wanted to start selling his oil in. Two other nations which have moved against the petrodollar are Iran and Venezuela. On the other side of things, this also explains Saudi Arabia. One of the most backwards and repressive nations in existence today, we're still BFF since they act like a loyal lapdog when it comes to the petrodollar. In exchange we let them do just about anything. The CIA has recently stated that Khashoggi's murder was likely ordered all the way from the top. I can tell you how this story will end. Do you remember in 2015 when Saudi Prince Majed Abdulaziz Al Saud had a rape and assault filled 'party' at a rented mansion in Beverley Hills? The 'party' was only stopped once a neighbor called the police after seeing a bleeding woman screaming for help as she tried to scale the fence of his mansion to get away. He was arrested and that's where most media reporting ended. The epilogue is that he was rapidly granted bail, got on a plane and simply flew back to Saudi Arabia with no consequences whatsoever. --------- This is already getting long enough, but something very important now a days is that the petrodollar is dying. It's a mixture of a perfect storm of a large number different of factors, but it's definitely a dead system walking. And this has major implications for the future of the US economy. To date we've had 'economy armor' on. In the not so distant future, that armor is coming off and our economy will stand or fall under its own weight. And this is when being massively in debt suddenly does start to matter because if you just try to print your way out of it, you would not be able to rely on the petrodollar to protect the economy anymore. [1] - https://content.time.com/time/magazine/article/0,9171,998512,00.html https://content.time.com/time/magazine/article/0,9171,998512... [2] - https://www.cbsnews.com/news/saudi-prince-majed-abdulaziz-al-saud-forced-oral-sex-beverly-glen-california/ https://www.cbsnews.com/news/saudi-prince-majed-abdulaziz-al...

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

gammateam 8y ago

They would be introducing money into the economy. The people that had their bonds purchased by the Fed would be holding money that didnt previously exist. This dilutes the value of an individual dollar. Just like dilution of any asset. In the context of currencies this is called inflation. Typically the whole point is for private persons to invest into the real economy, even though it is riskier, because these other new ventures are going to try to put it to productive use, instead of any party just parking the money in a bank account since now it is clear it will lose value just parked.

jganetsk 8y ago

This is a common misconception: that treasuries somehow don't lead to inflation but reserves (aka electronic cash) somehow do. Why? Both are extremely liquid, but treasuries pay more interest than reserves (yes, reserves do pay interest [1]). The only difference between treasuries and reserves is, in fact, the interest rate an the fact that we call one "debt" and the other "money". But they are both US federal gov't liabilities denominated in USD. [2] The bulk of the impact on inflation already happened... when the treasuries were issued in the first place. They aren't waiting to be exchanged for reserves to suddenly cause inflation. [3] So, if anything, the Federal Reserve swapping one gov't liability for another paying lower interest could lead to less inflation, not more. [4] [1] https://fred.stlouisfed.org/series/IOER https://fred.stlouisfed.org/series/IOER [2] http://bilbo.economicoutlook.net/blog/?p=31715 http://bilbo.economicoutlook.net/blog/?p=31715 [3] http://www.cfeps.org/pubs/wp-pdf/WP37-MoslerForstater.pdf http://www.cfeps.org/pubs/wp-pdf/WP37-MoslerForstater.pdf [4] https://www.stlouisfed.org/publications/regional-economist/july-2016/neo-fisherism-a-radical-idea-or-the-most-obvious-solution-to-the-low-inflation-problem https://www.stlouisfed.org/publications/regional-economist/j...

TangoTrotFox 8y ago

The one big gotcha in international finance is the petrodollar. Going back to the 70s we made an incredibly prescient deal with Saudi Arabia. They agree to sell their oil only in USD and then to invest annual surpluses back into US securities. In exchange we agree to ensure protection of their kingdom and guarantee weapon sells. This arrangement continues to this day in grand fashion. For instance even though Saudi Arabia only has some 30 million people, it's the third largest defense spender in the world spending some $70 billion a year on weapons, with most of that going straight [back] to us. Our influence in turn led to the expansion of the petrodollar beyond just Saudi Arabia to nearly all oil sales. This doesn't seem like a particularly big deal, until you realize what it does. Imagine the US pumps a bunch of funny money (I'm using a sardonic term just to clearly distinguish between organic/'real' growth) into our economy. This would naturally cause inflation. But here's where the fun kicks in. Oil is still by far the most in demand resource in the world. And now when countries go to buy oil they need to accumulate USD. But now due to inflation a country that wants to buy the same amount of oil needs to keep an even larger reserve of USD on hand. And that's exactly what happens. The USD becomes worth less and countries are obligated to hoover up more USD to ensure access to oil. As that USD starts getting removed from circulation, the effects of the inflation start to abate. Like magic, we can 'print' (not how many is made, but that's another topic) a practically unlimited amount of funny money with minimal economic consequences. This also explains much of otherwise inexplicable actions in the Mideast and related places. We don't want their oil, we want them to sell their oil in USD only. This [1] is an article from Time in 2000: "Europe's dream of promoting the euro as a competitor to the U.S. dollar may get a boost from SADDAM HUSSEIN. Iraq says that from now on, it wants payments for its oil in euros, despite the fact that the battered European currency unit, which used to be worth quite a bit more than $1, has dropped to about 82[cents]. Iraq says it will no longer accept dollars for oil because it does not want to deal "in the currency of the enemy."" By 2003 we had destroyed the Iraq government and killed Saddam in a kangaroo court. Similarly with Libya, Gaddafi was aiming to create a gold backed 'Afro-currency' which is what he wanted to start selling his oil in. Two other nations which have moved against the petrodollar are Iran and Venezuela. On the other side of things, this also explains Saudi Arabia. One of the most backwards and repressive nations in existence today, we're still BFF since they act like a loyal lapdog when it comes to the petrodollar. In exchange we let them do just about anything. The CIA has recently stated that Khashoggi's murder was likely ordered all the way from the top. I can tell you how this story will end. Do you remember in 2015 when Saudi Prince Majed Abdulaziz Al Saud had a rape and assault filled 'party' at a rented mansion in Beverley Hills? The 'party' was only stopped once a neighbor called the police after seeing a bleeding woman screaming for help as she tried to scale the fence of his mansion to get away. He was arrested and that's where most media reporting ended. The epilogue is that he was rapidly granted bail, got on a plane and simply flew back to Saudi Arabia with no consequences whatsoever. --------- This is already getting long enough, but something very important now a days is that the petrodollar is dying. It's a mixture of a perfect storm of a large number different of factors, but it's definitely a dead system walking. And this has major implications for the future of the US economy. To date we've had 'economy armor' on. In the not so distant future, that armor is coming off and our economy will stand or fall under its own weight. And this is when being massively in debt suddenly does start to matter because if you just try to print your way out of it, you would not be able to rely on the petrodollar to protect the economy anymore. [1] - https://content.time.com/time/magazine/article/0,9171,998512,00.html https://content.time.com/time/magazine/article/0,9171,998512... [2] - https://www.cbsnews.com/news/saudi-prince-majed-abdulaziz-al-saud-forced-oral-sex-beverly-glen-california/ https://www.cbsnews.com/news/saudi-prince-majed-abdulaziz-al...