5 ms·

>a glut of new bonds appeared on the market as the U.S. government sold some $78 billion of 10- and 30-year debt last week. But this isn't slowing down any tim

by PKop 7y ago

>a glut of new bonds appeared on the market as the U.S. government sold some $78 billion of 10- and 30-year debt last week. But this isn't slowing down any time soon, so the problem will keep recurring. Deficit's are rising, and foreign purchases of treasury debt has plateaued the past few years. This, some say, is the real problem: banks are forced to purchase this debt and so the funding needs of the US government are crowding out domestic banking sector. If continues, this means the Fed will effectively be monetizing US deficits. Luke Gromen has covered this in various podcast interviews[0] and on twitter: @LukeGromen. [0] https://www.macrovoices.com/podcasts-collection/macrovoices-all-stars-podcasts/673-all-stars-51-luke-gromen-usd-faces-day-of-reckoning-when-it-becomes-clear-fed-will-have-to-monetize-gov-t-deficits https://www.macrovoices.com/podcasts-collection/macrovoices-...

BurningFrog 7y ago
> If continues, this means the Fed will effectively be monetizing US deficits. You seem informed, and I want to be upset by this, but... What does "monetizing US deficits" mean here?
- colechristensen 7y ago
  That the US deficit is not going to be paid for by selling debt to people around the world, it is going to be paid for by the federal reserve creating money and giving it to the treasury.
  - ilaksh 7y ago
    Why would the global community tolerate this, especially when the United States consumes much more than most countries? Seems like a recipe for WWIII.
    - Mountain_Skies 7y ago
      Incrementalism. As long as the U.S. does it on a relatively small scale (emphasis on relatively), no one will want to pay the costs involved in fighting against it, even if over longer periods of time it adds up.
    - colechristensen 7y ago
      All money in modern economies is based on this kind of debt. Central banking is... confusing. The immediate effect of the fed doing that isn't catastrophic, it's just devaluing the US Dollar, or put in another way, inflation. Inflation at a certain level is thought of as a good thing, the fed and economists have inflation targets where they don't want it to be too high or too low. One of the thing that moderates inflation is how the fed creates money and lends it out. The recipe for WWIII is runaway inflation where in order to keep things together, a central bank issues money at an exponentially increasing rate with a very small doubling period and the currency becomes worthless in trade with other currencies and to purchase goods. The US is very far away from that. The increase in the deficit and debt is problematic and significant, but not anywhere near catastrophic.
      - parasubvert 7y ago
        Interestingly, deflation can also cause wars and lead to an economic downward spiral where everyone is worse off. Retaining the Gold Standard was a major contributor to both WW1 and the Great Depression. Japan’s deflation lost it a decade of economic growth more recently.
    - PKop 7y ago
      To a large degree, they aren't accepting it. This is why around 2014 treasury holdings by rest of world stopped growing on net. Many governments/central banks are trying to exit the $ and UST's and are buying gold instead of treasuries. Ultimately, the US has quite a large amount of liabilities, and entitlement spending on retiring boomers coming due in the next few years. Currently, at the peak of the economic cycle, we are running $trillion deficits. Imagine what happens if there is a recession? Even if there isn't, these fiscal deficits, along with our large trade deficit mean: The rest of the world gives us real goods, we give them paper IOU's. The debt is not shrinking but is growing, and faster. So, they are not tolerating it. Problem is, in the petrodollar system, the reason this whole ponzi could occur is dollars were needed to buy oil. Post-71 Nixon shock, the $ was as good as oil. Saudi and others only sold oil for dollars putting a floor on the value of dollar and incentivizing both oil exporters and rest of world to want to hold dollars, thus recycling their surpluses into treasury debt to both fund their export economies and fund our consumption. This CANNOT continue because by definition it means rest of world works and produces for never ending, and ever growing, US consumption. Holding dollars, amidst a growing realization the Fed would have to monetize this debt and government would never pay it back in "real terms" has led many oil exporters to try to sell oil in other currencies, and countries generally to try to exit the dollar for trade. Iraq[0], Libya, Iran, Russia, and Venezuela[1]. Do we see a pattern of what happens to nations that try to do this? They either get regime-changed or become enemy number one for US government. Do you think it is a coincidence that Venezuela has the largest oil reserves in the world and just happens to be the next country US is involved in pushing regime change (them or Iran)? To read about this system of petrodollar recycling, and how/when it was created in the early 70's because of collapse of Bretton Woods, check out an this excerpt[3] from excellent book "The Global Minotaur: America, Europe and the Future of the Global Economy" by Yanis Varoufakas former Greek minister of finance. Good thread [3] covering a broad summary of trade, the dollar, and petrodollar warfare [4] [0] http://www.thirdworldtraveler.com/Iraq/Iraq_dollar_vs_euro.html http://www.thirdworldtraveler.com/Iraq/Iraq_dollar_vs_euro.h... [1] https://www.mintpressnews.com/petrodollar-warfare-the-common-thread-linking-venezuela-and-iran/255123/ https://www.mintpressnews.com/petrodollar-warfare-the-common... [3] https://www.yanisvaroufakis.eu/2011/02/10/surplus-recycling-currency-unions-and-the-birth-of-the-global-minotaur/ https://www.yanisvaroufakis.eu/2011/02/10/surplus-recycling-... [3] https://twitter.com/TheSuperbubble/status/1099448820784599041 https://twitter.com/TheSuperbubble/status/109944882078459904... [4] https://en.wikipedia.org/wiki/Petrodollar_warfare https://en.wikipedia.org/wiki/Petrodollar_warfare
  - orvtech 7y ago
    So, inflation?
    - JMTQp8lwXL 7y ago
      Isn't that what the Fed wants? They've struggled to reach inflation targets for sometime.
      - zzleeper 7y ago
        Well we are getting slightly above the target no? And some say that once we overshoot and target expectations too high, taming them might be hard.
        adventured 7y ago
        We're not seeing any inflation threats yet. Aug 12, 2019: "U.S. consumer inflation outlook declined as Fed weighed rate cuts .... The Fed’s preferred inflation gauge, known as the core personal consumption expenditures price index, gained at an annualized 1.6% pace in June." https://www.reuters.com/article/us-usa-fed-inflation-survey/u-s-consumer-inflation-outlook-declined-as-fed-weighed-rate-cuts-survey-idUSKCN1V21HA https://www.reuters.com/article/us-usa-fed-inflation-survey/...
    - deleted 7y ago
      [deleted]
    - onlyrealcuzzo 7y ago
      The problem with this type of inflation is that it's lopsided. Assets inflate -- equities and real estate. That's great for asset owners. But wages haven't really increased, because most workers don't "need" to own equities, and most Americans already own a house, so they aren't affected by rising rents and home prices. This is why rent can raise 10% in one year -- the largest expense for nearly everyone -- and you can have 1% inflation. Most people aren't renters. So they aren't paying more for their rent. In fact, when bond prices go down (from this manipulation), mortgages get cheaper, so most people are paying LESS for the same house / mortgage. Equities go through the roof. If you're a laborer / renter, this is like a double gut punch. If you're a capitalist aristocrat, it's like a double gift horse. And, as far as inflation goes, at least the way the Fed measures it -- it doesn't have a huge effect. Commodities are so globalized now, and the US isn't 50% of the global economy anymore -- more like 20%. So strong upward pressure on commodities here, doesn't have a huge impact on commodities prices.
  - samstave 7y ago
    I’m probably going to ask the stupidest question you have ever been asked how do you actually sell debt Like can one sell their own debt?
    - elSidCampeador 7y ago
      You write your name on a piece of paper that says - "IOU so much money" and then you take money from anyone who's willing to give you money in exchange for that paper. Debt = that paper Selling = basically getting money for that paper
      - cryptonector 7y ago
        It's important to note that the amount of money you accept for that paper need not be what's written on it. I.e., you could sell a bond saying you'll pay back $1000 + interest and get only $981 for it, say, or maybe $1017 dollars for it, or any other number. If the bond sells for more than its nominal value, then the effective interest rate you pay to borrow will be lower than the nominal interest rate, and if the bond sells for less, then your effective interest rate will be higher than the nominal interest rate.
        navigatesol 7y ago
        Yes and no. The face value of the bond is what you will receive at maturity. When the bond trades in the intermediate term, its price is determined by prevailing and expected interest rates.
    - isoskeles 7y ago
      You don't "own" your own debt. The bank / other entity you are indebted to "owns" the debt, hence why they can sell it to a debt collector for pennies on the dollar. Instead of owning your debt, you are liable (or there's a better word than "liable") for your debt. Basically, you already "sold" your debt when you first became indebted. It's not really a dumb question. I get why people might look at their debt as something they own, given the debt itself is tied to their identity and credit score until paid off.

by PKop 7y ago

BurningFrog 7y ago

> If continues, this means the Fed will effectively be monetizing US deficits. You seem informed, and I want to be upset by this, but... What does "monetizing US deficits" mean here?

colechristensen 7y ago
That the US deficit is not going to be paid for by selling debt to people around the world, it is going to be paid for by the federal reserve creating money and giving it to the treasury.
- ilaksh 7y ago
  Why would the global community tolerate this, especially when the United States consumes much more than most countries? Seems like a recipe for WWIII.
  - Mountain_Skies 7y ago
    Incrementalism. As long as the U.S. does it on a relatively small scale (emphasis on relatively), no one will want to pay the costs involved in fighting against it, even if over longer periods of time it adds up.
  - colechristensen 7y ago
    All money in modern economies is based on this kind of debt. Central banking is... confusing. The immediate effect of the fed doing that isn't catastrophic, it's just devaluing the US Dollar, or put in another way, inflation. Inflation at a certain level is thought of as a good thing, the fed and economists have inflation targets where they don't want it to be too high or too low. One of the thing that moderates inflation is how the fed creates money and lends it out. The recipe for WWIII is runaway inflation where in order to keep things together, a central bank issues money at an exponentially increasing rate with a very small doubling period and the currency becomes worthless in trade with other currencies and to purchase goods. The US is very far away from that. The increase in the deficit and debt is problematic and significant, but not anywhere near catastrophic.
    - parasubvert 7y ago
      Interestingly, deflation can also cause wars and lead to an economic downward spiral where everyone is worse off. Retaining the Gold Standard was a major contributor to both WW1 and the Great Depression. Japan’s deflation lost it a decade of economic growth more recently.
  - PKop 7y ago
    To a large degree, they aren't accepting it. This is why around 2014 treasury holdings by rest of world stopped growing on net. Many governments/central banks are trying to exit the $ and UST's and are buying gold instead of treasuries. Ultimately, the US has quite a large amount of liabilities, and entitlement spending on retiring boomers coming due in the next few years. Currently, at the peak of the economic cycle, we are running $trillion deficits. Imagine what happens if there is a recession? Even if there isn't, these fiscal deficits, along with our large trade deficit mean: The rest of the world gives us real goods, we give them paper IOU's. The debt is not shrinking but is growing, and faster. So, they are not tolerating it. Problem is, in the petrodollar system, the reason this whole ponzi could occur is dollars were needed to buy oil. Post-71 Nixon shock, the $ was as good as oil. Saudi and others only sold oil for dollars putting a floor on the value of dollar and incentivizing both oil exporters and rest of world to want to hold dollars, thus recycling their surpluses into treasury debt to both fund their export economies and fund our consumption. This CANNOT continue because by definition it means rest of world works and produces for never ending, and ever growing, US consumption. Holding dollars, amidst a growing realization the Fed would have to monetize this debt and government would never pay it back in "real terms" has led many oil exporters to try to sell oil in other currencies, and countries generally to try to exit the dollar for trade. Iraq[0], Libya, Iran, Russia, and Venezuela[1]. Do we see a pattern of what happens to nations that try to do this? They either get regime-changed or become enemy number one for US government. Do you think it is a coincidence that Venezuela has the largest oil reserves in the world and just happens to be the next country US is involved in pushing regime change (them or Iran)? To read about this system of petrodollar recycling, and how/when it was created in the early 70's because of collapse of Bretton Woods, check out an this excerpt[3] from excellent book "The Global Minotaur: America, Europe and the Future of the Global Economy" by Yanis Varoufakas former Greek minister of finance. Good thread [3] covering a broad summary of trade, the dollar, and petrodollar warfare [4] [0] http://www.thirdworldtraveler.com/Iraq/Iraq_dollar_vs_euro.html http://www.thirdworldtraveler.com/Iraq/Iraq_dollar_vs_euro.h... [1] https://www.mintpressnews.com/petrodollar-warfare-the-common-thread-linking-venezuela-and-iran/255123/ https://www.mintpressnews.com/petrodollar-warfare-the-common... [3] https://www.yanisvaroufakis.eu/2011/02/10/surplus-recycling-currency-unions-and-the-birth-of-the-global-minotaur/ https://www.yanisvaroufakis.eu/2011/02/10/surplus-recycling-... [3] https://twitter.com/TheSuperbubble/status/1099448820784599041 https://twitter.com/TheSuperbubble/status/109944882078459904... [4] https://en.wikipedia.org/wiki/Petrodollar_warfare https://en.wikipedia.org/wiki/Petrodollar_warfare
- orvtech 7y ago
  So, inflation?
  - JMTQp8lwXL 7y ago
    Isn't that what the Fed wants? They've struggled to reach inflation targets for sometime.
    - zzleeper 7y ago
      Well we are getting slightly above the target no? And some say that once we overshoot and target expectations too high, taming them might be hard.
      - adventured 7y ago
        We're not seeing any inflation threats yet. Aug 12, 2019: "U.S. consumer inflation outlook declined as Fed weighed rate cuts .... The Fed’s preferred inflation gauge, known as the core personal consumption expenditures price index, gained at an annualized 1.6% pace in June." https://www.reuters.com/article/us-usa-fed-inflation-survey/u-s-consumer-inflation-outlook-declined-as-fed-weighed-rate-cuts-survey-idUSKCN1V21HA https://www.reuters.com/article/us-usa-fed-inflation-survey/...
  - deleted 7y ago
    [deleted]
  - onlyrealcuzzo 7y ago
    The problem with this type of inflation is that it's lopsided. Assets inflate -- equities and real estate. That's great for asset owners. But wages haven't really increased, because most workers don't "need" to own equities, and most Americans already own a house, so they aren't affected by rising rents and home prices. This is why rent can raise 10% in one year -- the largest expense for nearly everyone -- and you can have 1% inflation. Most people aren't renters. So they aren't paying more for their rent. In fact, when bond prices go down (from this manipulation), mortgages get cheaper, so most people are paying LESS for the same house / mortgage. Equities go through the roof. If you're a laborer / renter, this is like a double gut punch. If you're a capitalist aristocrat, it's like a double gift horse. And, as far as inflation goes, at least the way the Fed measures it -- it doesn't have a huge effect. Commodities are so globalized now, and the US isn't 50% of the global economy anymore -- more like 20%. So strong upward pressure on commodities here, doesn't have a huge impact on commodities prices.
- samstave 7y ago
  I’m probably going to ask the stupidest question you have ever been asked how do you actually sell debt Like can one sell their own debt?
  - elSidCampeador 7y ago
    You write your name on a piece of paper that says - "IOU so much money" and then you take money from anyone who's willing to give you money in exchange for that paper. Debt = that paper Selling = basically getting money for that paper
    - cryptonector 7y ago
      It's important to note that the amount of money you accept for that paper need not be what's written on it. I.e., you could sell a bond saying you'll pay back $1000 + interest and get only $981 for it, say, or maybe $1017 dollars for it, or any other number. If the bond sells for more than its nominal value, then the effective interest rate you pay to borrow will be lower than the nominal interest rate, and if the bond sells for less, then your effective interest rate will be higher than the nominal interest rate.
      - navigatesol 7y ago
        Yes and no. The face value of the bond is what you will receive at maturity. When the bond trades in the intermediate term, its price is determined by prevailing and expected interest rates.
  - isoskeles 7y ago
    You don't "own" your own debt. The bank / other entity you are indebted to "owns" the debt, hence why they can sell it to a debt collector for pennies on the dollar. Instead of owning your debt, you are liable (or there's a better word than "liable") for your debt. Basically, you already "sold" your debt when you first became indebted. It's not really a dumb question. I get why people might look at their debt as something they own, given the debt itself is tied to their identity and credit score until paid off.