5 ms·

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

by 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.
- mtrovo 6y ago
  > This beg the question of where is the money coming in the current situation, where all the major countries are following the same policies. But you have to keep in mind what percentage of your debt is kept by your own economy (be it citizens or local companies). Think about it this way, you have X moneys in circulation tied to your economy performance. If the next day you emit X more moneys, it doesn't mean your economy performance doubled, it just means your currency represents a smaller fraction of your economy (50% less in this case). This affects everybody that is holding bags of your money. If it's only citizens of your country holding to your money then you will have big inflation and everybody is going to lose a lot of purchase power. If you have this spread around the world (say with international commerce pegged to your currency, or external investors) you're basically spreading the inflation throughout everybody and the fraction that affect your citizens is not going to be that much. This is a good way for US to transfer a local crisis to global markets, having not that much bad consequences locally, it's almost a global wealth tax that benefits only the currency owner and their country citizens. > 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. They don't have faith in the economy itself, They have faith on the promise that they're going to be paid back no matter what. That's how you justify having the biggest spending on defense in the world by a big margin. I may be too cynical at this point but more and more the US economy seems like the biggest Ponzi scheme we ever created in this world.
woeirua 6y ago
If T-bills are in such low demand, and investors are so spooked by the prospect of the US not being able to pay back it's debts, why are yields so low across the board? Oh wait, it's because there is huge overwhelming demand for treasuries right now because everyone knows that the markets have been totally fubared by the central banks.
- fuoqi 6y ago
  This "overwhelming demand" is completely artificial, so I think we more or less agree with each other.

by fuoqi 6y ago

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.
mtrovo 6y ago
> This beg the question of where is the money coming in the current situation, where all the major countries are following the same policies. But you have to keep in mind what percentage of your debt is kept by your own economy (be it citizens or local companies). Think about it this way, you have X moneys in circulation tied to your economy performance. If the next day you emit X more moneys, it doesn't mean your economy performance doubled, it just means your currency represents a smaller fraction of your economy (50% less in this case). This affects everybody that is holding bags of your money. If it's only citizens of your country holding to your money then you will have big inflation and everybody is going to lose a lot of purchase power. If you have this spread around the world (say with international commerce pegged to your currency, or external investors) you're basically spreading the inflation throughout everybody and the fraction that affect your citizens is not going to be that much. This is a good way for US to transfer a local crisis to global markets, having not that much bad consequences locally, it's almost a global wealth tax that benefits only the currency owner and their country citizens. > 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. They don't have faith in the economy itself, They have faith on the promise that they're going to be paid back no matter what. That's how you justify having the biggest spending on defense in the world by a big margin. I may be too cynical at this point but more and more the US economy seems like the biggest Ponzi scheme we ever created in this world.

woeirua 6y ago

If T-bills are in such low demand, and investors are so spooked by the prospect of the US not being able to pay back it's debts, why are yields so low across the board? Oh wait, it's because there is huge overwhelming demand for treasuries right now because everyone knows that the markets have been totally fubared by the central banks.

fuoqi 6y ago
This "overwhelming demand" is completely artificial, so I think we more or less agree with each other.