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"That policy will work for as long as the rest of the world continues to accept US dollars as something other than pieces of funny green paper…" What a nonsens

"That policy will work for as long as the rest of the world continues to accept US dollars as something other than pieces of funny green paper…" What a nonsense. Like if the USA is the only one doing it. Everybody is doing it and at the same time. I hope this help some people to dispel this myths about the "public debt" and living to the grandchildren expense. What markets are covering this public debt when everybody is doing it at the same time? If something, this situation show how strong the modern economy is. Think about it, a big part of the economy just stopped and the supermarkets are full and there are not supply problems. People are suffering because they are not payed, not because there is not food available. Compared that to what would happen in other times in history if a relevant percentage of the population stopped working globally.

tclancy 6y ago
I think you missed the point. If the current administration, or possibly some other dumb one in the future, undermines US credibility where other countries unpeg from the dollar, we are going to turn into a shithole country pretty quickly.
- RobertoG 6y ago
  "other countries unpeg from the dollar.." I don't know what that means. In the current international arrangements all the important currencies are floating against each other all the time. The value of the dollar (respect other currencies) comes from being the currency of one of the most valuable economies in the world.
  - fuoqi 6y ago
    I think you severely underestimate the power of positive feedback. Some economists argue that around of third of US GDP can be attributed to the unique position of the dollar. If for some reason foreign investors and governments will lose their faith in dollar (even today gov. bonds already have negative inflation-adjusted profits, imagine if inflation will be 10%-20%), then they will start to dump bonds and assets nominated in $ (and don't forget about even potential targeted economic attacks, e.g. from China). This will mean that not only the third of GDP will effectively disappear, but also that all inflation which was exported into the outer world until now will come back at once. This will launch a crisis an order of magnitude bigger than 08, which can be QEd anymore, because no one outside and probably inside US will buy gov bonds anymore (it's effectively already true today, but for now it's compensated by a low money velocity due to the pandemic). Without cheap money US business will lose a lot of its competitive advantage. And don't forget that capital today is much more mobile compared to the beginning of the 20th century and thus positive feedback forces are that much stronger. This will mean that "one of the most valuable economies in the world" is in a very shaky position. I really-really hope that this scenario will not end in a nuclear war... P.S.: Japan is in a different position, IIRC most of its debt kept inside the country. Plus it's a creditor nation, while US is a massively debtor one.
    - RobertoG 6y ago
      So, if I understand it properly, your model of the world is that the USA needs to borrow in dollars (its own currency) in order to finance itself. In the case that there were not enough buyers for their bonds, the interest rate of the bonds should go up because offer and demand. This beg the question of where is the money coming in the current situation, where all the major countries are following the same policies. At the same time, you are saying that "foreign investors" and "governments" are buying bonds with negative inflation-adjusted profits because they have "faith" in the US economy. So, in the last years, at the same time the deficit and the public debt went up, the "faith" has gone up as show by the interest rate. Here is an alternative view: the markets are powerless to determine the interest rate against the central bank. An example, Italy and the crisis of debt of 2011. They had a debt crisis until the ECB decided there will be not more crisis. The markets dance to the song that the Fed sing. I don't know what more have to happens for people to start accepting it. The federal government don't need the markets, the markets need the bonds.
      - fuoqi 6y ago
        The interest rate is low because, as you correctly say, Fed uses infinite money from printing press to make it so. In other words, foreign and domestic actors already don't want to buy those bonds at the current rate, which is precisely the early stages of the process I've tried to describe in the previous message. It's just that they haven't started actively selling assets nominated in $. Yet. (Well, apart from Russia, which has significantly reduced amount of US bonds in its reserves) Normally, printing money in such fashion (I hope we agree that Fed + government does essentially that today? MMT proponents just propose to make this process honest and transparent) would increase inflation, but in 08 this inflation got mostly "exported" into foreign countries and today, as I've said, it's compensated by low money velocity (see the Fisher equation). Money velocity was steadily dropping for many years and it's another serious indicator of structural problems of modern economy (one can view it as one of the consequences of the rising wealth inequality). But the main problem in my opinion is that I doubt that Fed will be able to drain liquidity fast enough when velocity starts to rise, which may launch all the described positive feedback forces, thus making situation geometrically worse. A free lunch can not be infinite, one day you will have to pay. The scenario which I've described is just one possibility of how the current system may crumble.
  - tclancy 6y ago
    Sorry, "unpeg" was the wrong word entirely and muddied what I meant to say. If US dollars stop being the de facto accepted exchange currency we are in trouble.
    - yardie 6y ago
      Some US politicians would love nothing more than for the US dollar to not being used for international exchange. Other countries enjoy the right to devalue their currency for trade and debt. The US has no relief valve mechanism. $1 is worth exactly $1 everywhere in the world. We can't sell cheaper goods to China, for example, without making the products physically cheaper. China can always sell cheaper goods to the US by manipulating the RMB relative to USD.
      - RobertoG 6y ago
        How could possible China manipulate the RMB relative to the USD but the USD be worth exactly the same everywhere in the world?
- luckylion 6y ago
  "Credibility" as in "military credibility", I hope you mean. It's really not about "we're cool, really", it's about "we can annihilate any target on earth within the hour".
- yardie 6y ago
  No one is forced to buy US treasury bonds. And as soon as the Treasury issues new ones they always find buyers. There are a lot of finance managers sitting on billion dollar funds. They have instructions to invest it. It's a sure investment because tax payers always pay their debts. Other countries, specifically China, have been trying for years to come up with an equivalent. They see it as an alternative to the instability of the US dollar. Problem is the dollar has been stable and the alternative provides almost no advantage to other countries who aren't China, or US embargoed.
- munificent 6y ago
  > we are going to turn into a shithole country pretty quickly. We have piles of rich natural resources, an educated populace, good infrastructure, and high mobility. Sure, some of those aren't where they were decades ago, but we still have an incredibly strong foundation to build on. America is much more than just the USD.
  - tclancy 6y ago
    Sure.
raducu 6y ago
You make some very good arguments, and I've carried this line of thought myself -- surely its a new reality, because there's no blood in the streets and people can still put food on their plates. What is the endgame though? Can the governments keep adding new debt at the rate they have been adding in the past 12 years? Can they just keep going into negative rate teritory? For how long? Will we eventually see -1000% interest rates so that the government/public debt can be maintained? edit: actually, the government does not need -1000% interest rates to service an infinite amount of debt, it just needs real 0% interest rates and the ability to issue more debt.

tclancy 6y ago

I think you missed the point. If the current administration, or possibly some other dumb one in the future, undermines US credibility where other countries unpeg from the dollar, we are going to turn into a shithole country pretty quickly.

RobertoG 6y ago
"other countries unpeg from the dollar.." I don't know what that means. In the current international arrangements all the important currencies are floating against each other all the time. The value of the dollar (respect other currencies) comes from being the currency of one of the most valuable economies in the world.
- fuoqi 6y ago
  I think you severely underestimate the power of positive feedback. Some economists argue that around of third of US GDP can be attributed to the unique position of the dollar. If for some reason foreign investors and governments will lose their faith in dollar (even today gov. bonds already have negative inflation-adjusted profits, imagine if inflation will be 10%-20%), then they will start to dump bonds and assets nominated in $ (and don't forget about even potential targeted economic attacks, e.g. from China). This will mean that not only the third of GDP will effectively disappear, but also that all inflation which was exported into the outer world until now will come back at once. This will launch a crisis an order of magnitude bigger than 08, which can be QEd anymore, because no one outside and probably inside US will buy gov bonds anymore (it's effectively already true today, but for now it's compensated by a low money velocity due to the pandemic). Without cheap money US business will lose a lot of its competitive advantage. And don't forget that capital today is much more mobile compared to the beginning of the 20th century and thus positive feedback forces are that much stronger. This will mean that "one of the most valuable economies in the world" is in a very shaky position. I really-really hope that this scenario will not end in a nuclear war... P.S.: Japan is in a different position, IIRC most of its debt kept inside the country. Plus it's a creditor nation, while US is a massively debtor one.
  - RobertoG 6y ago
    So, if I understand it properly, your model of the world is that the USA needs to borrow in dollars (its own currency) in order to finance itself. In the case that there were not enough buyers for their bonds, the interest rate of the bonds should go up because offer and demand. This beg the question of where is the money coming in the current situation, where all the major countries are following the same policies. At the same time, you are saying that "foreign investors" and "governments" are buying bonds with negative inflation-adjusted profits because they have "faith" in the US economy. So, in the last years, at the same time the deficit and the public debt went up, the "faith" has gone up as show by the interest rate. Here is an alternative view: the markets are powerless to determine the interest rate against the central bank. An example, Italy and the crisis of debt of 2011. They had a debt crisis until the ECB decided there will be not more crisis. The markets dance to the song that the Fed sing. I don't know what more have to happens for people to start accepting it. The federal government don't need the markets, the markets need the bonds.
    - fuoqi 6y ago
      The interest rate is low because, as you correctly say, Fed uses infinite money from printing press to make it so. In other words, foreign and domestic actors already don't want to buy those bonds at the current rate, which is precisely the early stages of the process I've tried to describe in the previous message. It's just that they haven't started actively selling assets nominated in $. Yet. (Well, apart from Russia, which has significantly reduced amount of US bonds in its reserves) Normally, printing money in such fashion (I hope we agree that Fed + government does essentially that today? MMT proponents just propose to make this process honest and transparent) would increase inflation, but in 08 this inflation got mostly "exported" into foreign countries and today, as I've said, it's compensated by low money velocity (see the Fisher equation). Money velocity was steadily dropping for many years and it's another serious indicator of structural problems of modern economy (one can view it as one of the consequences of the rising wealth inequality). But the main problem in my opinion is that I doubt that Fed will be able to drain liquidity fast enough when velocity starts to rise, which may launch all the described positive feedback forces, thus making situation geometrically worse. A free lunch can not be infinite, one day you will have to pay. The scenario which I've described is just one possibility of how the current system may crumble.
- tclancy 6y ago
  Sorry, "unpeg" was the wrong word entirely and muddied what I meant to say. If US dollars stop being the de facto accepted exchange currency we are in trouble.
  - yardie 6y ago
    Some US politicians would love nothing more than for the US dollar to not being used for international exchange. Other countries enjoy the right to devalue their currency for trade and debt. The US has no relief valve mechanism. $1 is worth exactly $1 everywhere in the world. We can't sell cheaper goods to China, for example, without making the products physically cheaper. China can always sell cheaper goods to the US by manipulating the RMB relative to USD.
    - RobertoG 6y ago
      How could possible China manipulate the RMB relative to the USD but the USD be worth exactly the same everywhere in the world?
luckylion 6y ago
"Credibility" as in "military credibility", I hope you mean. It's really not about "we're cool, really", it's about "we can annihilate any target on earth within the hour".
yardie 6y ago
No one is forced to buy US treasury bonds. And as soon as the Treasury issues new ones they always find buyers. There are a lot of finance managers sitting on billion dollar funds. They have instructions to invest it. It's a sure investment because tax payers always pay their debts. Other countries, specifically China, have been trying for years to come up with an equivalent. They see it as an alternative to the instability of the US dollar. Problem is the dollar has been stable and the alternative provides almost no advantage to other countries who aren't China, or US embargoed.
munificent 6y ago
> we are going to turn into a shithole country pretty quickly. We have piles of rich natural resources, an educated populace, good infrastructure, and high mobility. Sure, some of those aren't where they were decades ago, but we still have an incredibly strong foundation to build on. America is much more than just the USD.
- tclancy 6y ago
  Sure.

raducu 6y ago

You make some very good arguments, and I've carried this line of thought myself -- surely its a new reality, because there's no blood in the streets and people can still put food on their plates. What is the endgame though? Can the governments keep adding new debt at the rate they have been adding in the past 12 years? Can they just keep going into negative rate teritory? For how long? Will we eventually see -1000% interest rates so that the government/public debt can be maintained? edit: actually, the government does not need -1000% interest rates to service an infinite amount of debt, it just needs real 0% interest rates and the ability to issue more debt.