4 ms·

There's a lot of misunderstanding about what is currency and what is debt. All modern currency is debt. All of it. The amount of debt created and the amount of

There's a lot of misunderstanding about what is currency and what is debt. All modern currency is debt. All of it. The amount of debt created and the amount of new money created is equal, because x=x for all x. It's just that simple - there isn't a difference. There are the printed bills (that everyone has access to), there's the digital base money printed by the Fed that you keep hearing about, it's the liabilities side of their balance sheet (that only select large financial institutions have access to), then there are govt bonds and govt-guaranteed bonds (Mortgage-backed securities) (which again everyone has access to, but they're impractical for day-to-day conduct of business; they're extremely liquid though, you can convert them by the hundreds of millions to bills/base money by a single phone call). But all of this is money, just different types / quality of money. Operations such as QE are just a means of conversion between the types of money. For example since 2008 we have continuous conversion of high quality bonds (govt and govt-guaranteed) into base money (the top quality money). All of it is still a government liability, since the Fed is a part of the government. Similarly, the Social Security buying Treasury bonds is just an internal government operation. Pension liabilities are just like government bonds (it's a promise to deliver money at a later point in time), if you fund a pension liability with tbonds you're just doing some internal reshuffling within the federal government books. No actual funding takes place, i.e. no one is delaying their personal (or corporate or nonprofit) consumption in exchange for a future payoff. If you don't believe me then please try to explain why hasn't Japan experienced a double or triple digit inflation. They are so much more advanced in the "central bank money magic". PS. I'm using "quality" to refer to types money to simplify a bit, the more accurate first order approximation term would be "duration". Then there are further technicalities such as coupon structures, whether or not the coupons depend on the CPI (TIPS), whether or not they exist at all and maybe you just get a lump base money sum at the end, etc. PS2. I've skipped the (actually larger) private credit. Yes, bank credit and the bond market also create money, though definitely lower quality than anything discussed above. Private credit is allowed to disappear at any given point in time. The Fed is currently not allowed to touch private credit whatsoever (this might change if the Congress decides so), they very briefly violated their own rules in March of 2020 by doing a weird type of deal with the Treasury (which is allowed to deal in the private credit, as the Treasury is allowed to spend; buying a bond that later defaults is effectively spending). And by the way: their announcement of an intervention in the non-govt guaranteed credit markets was the exact bottom of the covid market panic.

fuoqi 5y ago
>If you don't believe me then please try to explain why hasn't Japan experienced a double or triple digit inflation. It's important to note that Japan should not be viewed as a template for the US. Both countries are quite different in many regards. The former is one of biggest creditor nations with private sector deleveraging for almost 2 decades thus compensating for significant part of the government leveraging, meanwhile the latter is the world's biggest debtor nation with both private and government sectors becoming more and more leveraged (see [0] for a more thorough comparison). The ultimate question is: for how long the US will be able to maintain USD as the main reserve currency. We already can see that foreign governments and investors do not wish to buy more T-bonds and even tend to sell them. [0]: https://www.lynalden.com/economic-japanification/ https://www.lynalden.com/economic-japanification/
- anthony_r 5y ago
  True. I think that looking for example at the NIIP (US claims on foreign assets - foreign claims on US assets) or the trade deficit (how much the foreigners lend to the entire country [govt+private]) are much more important long term than any of the govt internal accounting numbers, such as the size of the Fed balance sheet.
jollybean 5y ago
I see what you are trying to say ... but it's a bit misleading and actually technically wrong. "x=x for all x" - this is true if you mean to say everything on the Fed's balance sheet is 'Debt' ... but that's wrong - it's referred to as 'Assets'. The currency itself is the 'Liability'. A Central Bank issues currencies for assets, in which case the 'currency' is 'backed by' those assets. Ostensibly, one could trade the currency back for those assets. That's not generally what we think of as 'debt'. Now, much of the 'Assets' are actually US TBills, which is 'debt' - but - not all of the Fed's Balance sheet is TBills. So 'x' does not equal 'x'. The US Fed Balance sheet [1] ECB Balance Sheet [2] Historically the asset would be gold - and that still makes up part of the Fed's balance sheet. Since 2008, the US Fed has issued currency based on mortgage securities, essentially, it owns homes. Otherwise, the Fed owns TBills, i.e. US Government debt, as assets, which is part of the basis of this article: The US Fed is one of the 'major owners' of TBills. Yes, it's legit to point out that 'Internal Operations' are relevant and partly why Japan is not having major inflation, but your denotation of 'Internal' as being 'Government Agencies' is not quite right: by 'Internal' what we really would mean is 'internal to the Japanese economy'. So Japanese debt is held by Japanese individuals and institutions of all kinds, public, private etc.. So 'Internal' means anything in their entire economy. For a breakdown of a Central Banks Balance Sheet have a look here [3] which breaks down ECB balance sheet growth over the last while. [1] https://www.investopedia.com/articles/economics/10/understanding-the-fed-balance-sheet.asp https://www.investopedia.com/articles/economics/10/understan... [2] https://www.ecb.europa.eu/pub/pdf/other/ecb.eurosystembalancesheet2020~0da47a656b.en.pdf https://www.ecb.europa.eu/pub/pdf/other/ecb.eurosystembalanc... [3] https://gaeeuk.org/blog/jcc77k9fbhfymchj94edzbahjd5zbe https://gaeeuk.org/blog/jcc77k9fbhfymchj94edzbahjd5zbe

fuoqi 5y ago

>If you don't believe me then please try to explain why hasn't Japan experienced a double or triple digit inflation. It's important to note that Japan should not be viewed as a template for the US. Both countries are quite different in many regards. The former is one of biggest creditor nations with private sector deleveraging for almost 2 decades thus compensating for significant part of the government leveraging, meanwhile the latter is the world's biggest debtor nation with both private and government sectors becoming more and more leveraged (see [0] for a more thorough comparison). The ultimate question is: for how long the US will be able to maintain USD as the main reserve currency. We already can see that foreign governments and investors do not wish to buy more T-bonds and even tend to sell them. [0]: https://www.lynalden.com/economic-japanification/ https://www.lynalden.com/economic-japanification/

anthony_r 5y ago
True. I think that looking for example at the NIIP (US claims on foreign assets - foreign claims on US assets) or the trade deficit (how much the foreigners lend to the entire country [govt+private]) are much more important long term than any of the govt internal accounting numbers, such as the size of the Fed balance sheet.

jollybean 5y ago

I see what you are trying to say ... but it's a bit misleading and actually technically wrong. "x=x for all x" - this is true if you mean to say everything on the Fed's balance sheet is 'Debt' ... but that's wrong - it's referred to as 'Assets'. The currency itself is the 'Liability'. A Central Bank issues currencies for assets, in which case the 'currency' is 'backed by' those assets. Ostensibly, one could trade the currency back for those assets. That's not generally what we think of as 'debt'. Now, much of the 'Assets' are actually US TBills, which is 'debt' - but - not all of the Fed's Balance sheet is TBills. So 'x' does not equal 'x'. The US Fed Balance sheet [1] ECB Balance Sheet [2] Historically the asset would be gold - and that still makes up part of the Fed's balance sheet. Since 2008, the US Fed has issued currency based on mortgage securities, essentially, it owns homes. Otherwise, the Fed owns TBills, i.e. US Government debt, as assets, which is part of the basis of this article: The US Fed is one of the 'major owners' of TBills. Yes, it's legit to point out that 'Internal Operations' are relevant and partly why Japan is not having major inflation, but your denotation of 'Internal' as being 'Government Agencies' is not quite right: by 'Internal' what we really would mean is 'internal to the Japanese economy'. So Japanese debt is held by Japanese individuals and institutions of all kinds, public, private etc.. So 'Internal' means anything in their entire economy. For a breakdown of a Central Banks Balance Sheet have a look here [3] which breaks down ECB balance sheet growth over the last while. [1] https://www.investopedia.com/articles/economics/10/understanding-the-fed-balance-sheet.asp https://www.investopedia.com/articles/economics/10/understan... [2] https://www.ecb.europa.eu/pub/pdf/other/ecb.eurosystembalancesheet2020~0da47a656b.en.pdf https://www.ecb.europa.eu/pub/pdf/other/ecb.eurosystembalanc... [3] https://gaeeuk.org/blog/jcc77k9fbhfymchj94edzbahjd5zbe https://gaeeuk.org/blog/jcc77k9fbhfymchj94edzbahjd5zbe