6 ms·

The fed has pumped 2.3 trillion dollars into the economy in the past six weeks.... I don't see how the dollar won't crash eventually. Why would foreign countri

The fed has pumped 2.3 trillion dollars into the economy in the past six weeks.... I don't see how the dollar won't crash eventually. Why would foreign countries still buy US bonds?

jlmorton 6y ago
Because the dollars have not been permanently pumped into the economy, and the world has faith that the Fed will shrink its balance sheet. Printing money and lending it out, and then burning the money when it's repaid, is very different than printing money and using it to buy goods and services.
- KaoruAoiShiho 6y ago
  I think this thread needs an ELI5 for how the whole process works from the ground up as there seems to be a lot of popular misconceptions.
  - alexjray 6y ago
    That would be incredibly useful
  - gen3 6y ago
    This Planet money episode addresses the whole topic of where the Fed is getting all the money from, and how inflation fits into the picture. I found it pretty helpful. https://www.npr.org/transcripts/821787090 https://www.npr.org/transcripts/821787090
- alexjray 6y ago
  That's a best case scenario and feels overly optimistic. What are the chances it gets fully repaid?
  - lotsofpulp 6y ago
    Assuming society continues onward, it doesn't really need to be fully repaid. The value is in the organization and structure of society. However, war, environmental catastrophes, population decline, and loss of trust between citizens of a nation can cause a decrease in the predictability of actions and consequences in society, and that would be a problem for any debt issued with rosier assumptions.
  - Qasaur 6y ago
    It cannot be repaid, ever, because the interest exceeds the amount of money that is currently in existence, which means they will always have to borrow more money (which is created out of thin air) to service the debt.
    - deleted 6y ago
      [deleted]
    - comicjk 6y ago
      Interest on the national debt is $400-$600 billion per year depending on what you count (a lot of it is paid to the federal government itself). It's a lot of money, but it's a small fraction of the federal budget. It's also less than the amount of money in existence - M1 is $5.5 trillion and can easily be expanded, as mentioned. (It also wouldn't necessarily matter if the interest per year were greater than the total amount of money in existence. If the money supply were $20, that wouldn't make it impossible for me to pay you $21/year; I could pay it in 21 $1 payments.)
- deleted 6y ago
  [deleted]
des429 6y ago
Because what's the alternative to US treasuries? Everything else in the world is either more unstable or offering zero yield.
- alexjray 6y ago
  Gold?
  - farseer 6y ago
    For all you know the gold price can halve if there is an economic recovery sooner than expected. The same drastic movement (either way) is not going to happen to US bonds.
    - AnimalMuppet 6y ago
      If there's a big jump in inflation, the same drastic movement is exactly going to happen to US bonds.
- deleted 6y ago
  [deleted]
- david927 6y ago
  Gold Zero yield is golden for the next x number of years. A ship in the harbor isn't making you money but it's also not getting destroyed in the storm.
snarf21 6y ago
As long as we are the world's reserve currency we can do practically whatever we want.
- david927 6y ago
  I think what you're seeing is the end of that.
  - anm89 6y ago
    This is exactly right. People love to claim that we can print unlimited money because we are the reserve currency, yet the entire underlying collateral of the international trade system that preserves this is international us treasury repo markets (eurodollars), which becomes totally untenable as that becomes a negative carry position with real negative yields. The further we go down that line, the more attractive dedollarization becomes.
    - mrep 6y ago
      And go where? European central bank assets are at 53.1% of GDP, Bank of Japan assets are at 125.7% of GDP, and the US FED is at 34.4% of GDP [0]. But hey, you could go with the chinese yuan, they "only have a 36% assets to GDP ratio" if you trust them. [0]: https://www.yardeni.com/pub/peacockfedecbassets.pdf https://www.yardeni.com/pub/peacockfedecbassets.pdf
      - david927 6y ago
        That's been the story for a while, right? It was the reserve currency. Where else are you going to go? And what I'm saying is that I think you'll see in the coming year or two how it plays out.
        anm89 6y ago
        I personally see it being a slow death that drags out over a decade, not a big sudden event that happens in the next two years but I agree with your premise.
jariel 6y ago
Because everywhere else is a little worse. You can loose 2% in the US, but 10% in Italy. So what do you want to do? If this crisis were specific to the US, things would be different. Also, with seigneurage of the US dollar, it gives a lot of elasticity to the process. Put another way 'The USD is also a big international currency that everyone else depends on somewhat'.
- deleted 6y ago
  [deleted]
dahfizz 6y ago
You only think the situation in America is bad because that's all you hear about. The current Federal Reserve balance sheet is 7 Trillion dollars, or 35% of the US GDP[1]. The current Eurosystem Bank balance sheet is 7.9 Trillion dollars, or 43% of the EU GDP[2]. If you're worried about pumping money into the economy, then USD is a much safer investment than EUR for you. [1]https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren... [2] https://www.ecb.europa.eu/press/pr/wfs/2020/html/ecb.fst201013.en.html https://www.ecb.europa.eu/press/pr/wfs/2020/html/ecb.fst2010... EDIT: clarification for those unaware, the EUR/USD currency pair is the most traded currency pair by far (which is why I chose Europe as a comparison). The distant second place most traded currency is USD/JPY, but Japan famously has a national bank balance sheet even greater than its own GDP.
- kube-system 6y ago
  Japan's central bank's assets are 690 trillion yen... Their GDP is 505 trillion yen. 136% of GDP. Ouch.
cobookman 6y ago
because everyone else did similar printing. https://www.cnbc.com/2020/07/21/eu-leaders-reach-a-breakthrough-on-the-regions-recovery-fund.html https://www.cnbc.com/2020/07/21/eu-leaders-reach-a-breakthro...
farseer 6y ago
Because the alternatives are even worse. Anyone with money is still better off buying US bonds knowing that the euro or the renminbi or even physical assets like gold are even more volatile.
RobertoG 6y ago
Japan is the perfect example that a country with a sovereign currency doesn't need that nobody buy their bonds. They have been doing this for years and they don't have hyperinflation but the opposite. But logic alone should tell us that already. When foreign countries buy US bonds can only buy them with dollars. You can't buy US bonds with another currency. Where are those dollars coming from?

The fed has pumped 2.3 trillion dollars into the economy in the past six weeks.... I don't see how the dollar won't crash eventually. Why would foreign countries still buy US bonds?

jlmorton 6y ago

Because the dollars have not been permanently pumped into the economy, and the world has faith that the Fed will shrink its balance sheet. Printing money and lending it out, and then burning the money when it's repaid, is very different than printing money and using it to buy goods and services.

KaoruAoiShiho 6y ago
I think this thread needs an ELI5 for how the whole process works from the ground up as there seems to be a lot of popular misconceptions.
- alexjray 6y ago
  That would be incredibly useful
- gen3 6y ago
  This Planet money episode addresses the whole topic of where the Fed is getting all the money from, and how inflation fits into the picture. I found it pretty helpful. https://www.npr.org/transcripts/821787090 https://www.npr.org/transcripts/821787090
alexjray 6y ago
That's a best case scenario and feels overly optimistic. What are the chances it gets fully repaid?
- lotsofpulp 6y ago
  Assuming society continues onward, it doesn't really need to be fully repaid. The value is in the organization and structure of society. However, war, environmental catastrophes, population decline, and loss of trust between citizens of a nation can cause a decrease in the predictability of actions and consequences in society, and that would be a problem for any debt issued with rosier assumptions.
- Qasaur 6y ago
  It cannot be repaid, ever, because the interest exceeds the amount of money that is currently in existence, which means they will always have to borrow more money (which is created out of thin air) to service the debt.
  - deleted 6y ago
    [deleted]
  - comicjk 6y ago
    Interest on the national debt is $400-$600 billion per year depending on what you count (a lot of it is paid to the federal government itself). It's a lot of money, but it's a small fraction of the federal budget. It's also less than the amount of money in existence - M1 is $5.5 trillion and can easily be expanded, as mentioned. (It also wouldn't necessarily matter if the interest per year were greater than the total amount of money in existence. If the money supply were $20, that wouldn't make it impossible for me to pay you $21/year; I could pay it in 21 $1 payments.)
deleted 6y ago
[deleted]

des429 6y ago

Because what's the alternative to US treasuries? Everything else in the world is either more unstable or offering zero yield.

alexjray 6y ago
Gold?
- farseer 6y ago
  For all you know the gold price can halve if there is an economic recovery sooner than expected. The same drastic movement (either way) is not going to happen to US bonds.
  - AnimalMuppet 6y ago
    If there's a big jump in inflation, the same drastic movement is exactly going to happen to US bonds.
deleted 6y ago
[deleted]
david927 6y ago
Gold Zero yield is golden for the next x number of years. A ship in the harbor isn't making you money but it's also not getting destroyed in the storm.

snarf21 6y ago

As long as we are the world's reserve currency we can do practically whatever we want.

david927 6y ago
I think what you're seeing is the end of that.
- anm89 6y ago
  This is exactly right. People love to claim that we can print unlimited money because we are the reserve currency, yet the entire underlying collateral of the international trade system that preserves this is international us treasury repo markets (eurodollars), which becomes totally untenable as that becomes a negative carry position with real negative yields. The further we go down that line, the more attractive dedollarization becomes.
  - mrep 6y ago
    And go where? European central bank assets are at 53.1% of GDP, Bank of Japan assets are at 125.7% of GDP, and the US FED is at 34.4% of GDP [0]. But hey, you could go with the chinese yuan, they "only have a 36% assets to GDP ratio" if you trust them. [0]: https://www.yardeni.com/pub/peacockfedecbassets.pdf https://www.yardeni.com/pub/peacockfedecbassets.pdf
    - david927 6y ago
      That's been the story for a while, right? It was the reserve currency. Where else are you going to go? And what I'm saying is that I think you'll see in the coming year or two how it plays out.
      - anm89 6y ago
        I personally see it being a slow death that drags out over a decade, not a big sudden event that happens in the next two years but I agree with your premise.

jariel 6y ago

Because everywhere else is a little worse. You can loose 2% in the US, but 10% in Italy. So what do you want to do? If this crisis were specific to the US, things would be different. Also, with seigneurage of the US dollar, it gives a lot of elasticity to the process. Put another way 'The USD is also a big international currency that everyone else depends on somewhat'.

deleted 6y ago
[deleted]

dahfizz 6y ago

You only think the situation in America is bad because that's all you hear about. The current Federal Reserve balance sheet is 7 Trillion dollars, or 35% of the US GDP[1]. The current Eurosystem Bank balance sheet is 7.9 Trillion dollars, or 43% of the EU GDP[2]. If you're worried about pumping money into the economy, then USD is a much safer investment than EUR for you. [1]https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren... [2] https://www.ecb.europa.eu/press/pr/wfs/2020/html/ecb.fst201013.en.html https://www.ecb.europa.eu/press/pr/wfs/2020/html/ecb.fst2010... EDIT: clarification for those unaware, the EUR/USD currency pair is the most traded currency pair by far (which is why I chose Europe as a comparison). The distant second place most traded currency is USD/JPY, but Japan famously has a national bank balance sheet even greater than its own GDP.

kube-system 6y ago
Japan's central bank's assets are 690 trillion yen... Their GDP is 505 trillion yen. 136% of GDP. Ouch.

cobookman 6y ago

because everyone else did similar printing. https://www.cnbc.com/2020/07/21/eu-leaders-reach-a-breakthrough-on-the-regions-recovery-fund.html https://www.cnbc.com/2020/07/21/eu-leaders-reach-a-breakthro...

farseer 6y ago

Because the alternatives are even worse. Anyone with money is still better off buying US bonds knowing that the euro or the renminbi or even physical assets like gold are even more volatile.

RobertoG 6y ago

Japan is the perfect example that a country with a sovereign currency doesn't need that nobody buy their bonds. They have been doing this for years and they don't have hyperinflation but the opposite. But logic alone should tell us that already. When foreign countries buy US bonds can only buy them with dollars. You can't buy US bonds with another currency. Where are those dollars coming from?