3 ms·

So many of these arguments assume that financial players will keep doing things the way they always have once the monetary playbook since Breton Woods gets thro

So many of these arguments assume that financial players will keep doing things the way they always have once the monetary playbook since Breton Woods gets thrown out the window. Why would actors continue to behave the same way given a massive change to the market and policy?

lmm 7y ago
What massive change are we talking about? Money in a federal reserve account is functionally equivalent to a floating-rate perpetuity, and any serious player knows that. Monetizing the debt wouldn't be a radical change, it would be a tidying up of the existing system that makes it clearer and easier for small-time players and private individuals.
- sailfast 7y ago
  > Money in a federal reserve account is functionally equivalent to a floating-rate perpetuity What assumptions allow serious players to assume this? Do those assumptions still hold if the instruments are actually converted to cash, or would "serious players" start to treat it differently? I'm not entirely sure as I admittedly don't 100% understand all of the fundamentals of treasuries, but if all of a sudden the idea that debt is not a thing to be paid back, but rather currency that seems to be a shift that might lead to some changes.
  - lmm 7y ago
    > What assumptions allow serious players to assume this? I mean that's what currency holdings are (at least, it's the only model I know of that makes sense). People who held pesos and people who held local-law bonds were in much the same position in the Venezuelan crisis and reacted much the same way. The weird part is the other side: the assumption that you can treat treasuries as a cash equivalent, which rests on the assumption that the federal government will keep consistently wanting debt and will keep targeting a stable rate of inflation, that there will always be a functional tri-party repo market, etc. Occasionally these assumptions are violated and some people lose money - see the "flash rally" for a fun recent example. I mean, the traditional model is that bonds are less liquid and less dependable. A government pays a bit more interest on them than they pay on cash deposits, but in return they get the flexibility to issue more or less when they want to. They're not inflationary to the same degree as cash, because everyone understands that bonds are not quite money, that a missed interest payment and a debt restructuring is not quite a currency crisis; people don't accept bonds in lieu of conventional payments. But US treasuries are well past that stage; if more are issued, that changes the de facto money supply, and the federal reserve watches that effect closely. If the US risked defaulting on treasury bonds, there would be massive panic. The government, i.e. the public, pays all the costs of issuing bonds instead of cash, but gets little in the way of benefit; they monitor their issuance so closely (to prevent things like the flash rally) that they might as well just issue cash instead.

lmm 7y ago

What massive change are we talking about? Money in a federal reserve account is functionally equivalent to a floating-rate perpetuity, and any serious player knows that. Monetizing the debt wouldn't be a radical change, it would be a tidying up of the existing system that makes it clearer and easier for small-time players and private individuals.

sailfast 7y ago
> Money in a federal reserve account is functionally equivalent to a floating-rate perpetuity What assumptions allow serious players to assume this? Do those assumptions still hold if the instruments are actually converted to cash, or would "serious players" start to treat it differently? I'm not entirely sure as I admittedly don't 100% understand all of the fundamentals of treasuries, but if all of a sudden the idea that debt is not a thing to be paid back, but rather currency that seems to be a shift that might lead to some changes.
- lmm 7y ago
  > What assumptions allow serious players to assume this? I mean that's what currency holdings are (at least, it's the only model I know of that makes sense). People who held pesos and people who held local-law bonds were in much the same position in the Venezuelan crisis and reacted much the same way. The weird part is the other side: the assumption that you can treat treasuries as a cash equivalent, which rests on the assumption that the federal government will keep consistently wanting debt and will keep targeting a stable rate of inflation, that there will always be a functional tri-party repo market, etc. Occasionally these assumptions are violated and some people lose money - see the "flash rally" for a fun recent example. I mean, the traditional model is that bonds are less liquid and less dependable. A government pays a bit more interest on them than they pay on cash deposits, but in return they get the flexibility to issue more or less when they want to. They're not inflationary to the same degree as cash, because everyone understands that bonds are not quite money, that a missed interest payment and a debt restructuring is not quite a currency crisis; people don't accept bonds in lieu of conventional payments. But US treasuries are well past that stage; if more are issued, that changes the de facto money supply, and the federal reserve watches that effect closely. If the US risked defaulting on treasury bonds, there would be massive panic. The government, i.e. the public, pays all the costs of issuing bonds instead of cash, but gets little in the way of benefit; they monitor their issuance so closely (to prevent things like the flash rally) that they might as well just issue cash instead.