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If China dumped bonds, why would anyone buy debt from the USG when they can get it cheap on the open market that has just had 1 trillion dumped in it. The fed s

If China dumped bonds, why would anyone buy debt from the USG when they can get it cheap on the open market that has just had 1 trillion dumped in it. The fed steps in, mops up all excess demand so Uncle Sam can keep on spending beyond its tax revenue. Very quickly, no one is going to accept USD in trade as the value plummets. The USD being world reserve currency has been printed far beyond the needs for internal domestic trade. The US had to do this to lubricate world trade, however when the music stops all those dollars held in foreign banks will try and make their way home in order to obtain some value. A flood of dollars will then start bidding for goods and services from the US economy. Instant hyperinflation. The US haven't defaulted on their debt because the roll over their debt with more USD.

bsaul 13y ago
My point was exactly what your last sentence said : they are already printing so much money and it doesn't provide inflation. Your point i guess is that china has 1 trillion in USD, which is such a huge amount that emitting this on the market will create inflation. I just checked the numbers, and in 2011 the second quantitative easing (aka "printing money") was 600 billions, and the third is 40 billions every month. And it doesn't have any impact on inflation (which remains a bit of a mystery to me, unless this money is instantly used by the banks just to balance banks internal debts and taken out of the economy).
- fennecfoxen 13y ago
  Yeah, the Fed buys crazy lots of bonds, and it's pretty impressive that it hasn't caused inflation yet. A big bond dump by China may be enough to actually trigger a substantial piece of inflation - heck, maybe you'd see an instant jump in prices of a few percent overnight, and the US would have to make some painful choices about spending and debt... But it wouldn't in and of itself cause catastrophic hyperinflation. Not on an ongoing basis, anyway. Continuing inflation requires continuing increases in the monetary base (or monetary velocity).
  - Amezarak 13y ago
    It's not pretty impressive that it hasn't caused inflation. It's exactly what we would expect based on the predictions of mainstream economic theory in our current situation. Indeed, if the Fed had to print an additional $1 trillion to cover these dumped bonds I am doubtful the inflation would tick up more than half a percent at best. The whole thing is kind of moot since China would be committing economic suicide by doing this.
    - wintersFright 13y ago
      Yes, the Fed will quickly buy up all the bonds necessary to feed the USGovt appetite, allowing the USGovt to outbid any citizen for goods and services. This situation does not lead to a nice and cool inflation of 2%. Meanwhile will the rest of the world be willing to ship real goods and services in return for promises of ever more paper IOUs from the USG, and when those paper IOUs are due, the promise of even more paper IOUs? If this all sounds sustainable, I have a deal for you. I want to borrow $100 off you and I'll pay you $105 next year. Don't worry, I'm good for it. I'm also lending myself $200 and will pay myself back $210 next year. So how about it? Clearly the 5% interest rate is what has been set by the market (me) so you are getting a good deal. Next year comes around and I hand you some paper IOUs for $110 the next year. Meanwhile, I'll borrow another $100 off you. I've been living it large and need a bit more sugar. Don't worry, I'm good for it - I'll lend myself another $200 too!
jcalvinowens 13y ago
> If China dumped bonds, why would anyone buy debt from the USG when they can get it cheap on the open market that has just had 1 trillion dumped in it. The member banks of the federal reserve are required to buy government debt if nobody else will.

bsaul 13y ago

My point was exactly what your last sentence said : they are already printing so much money and it doesn't provide inflation. Your point i guess is that china has 1 trillion in USD, which is such a huge amount that emitting this on the market will create inflation. I just checked the numbers, and in 2011 the second quantitative easing (aka "printing money") was 600 billions, and the third is 40 billions every month. And it doesn't have any impact on inflation (which remains a bit of a mystery to me, unless this money is instantly used by the banks just to balance banks internal debts and taken out of the economy).

fennecfoxen 13y ago
Yeah, the Fed buys crazy lots of bonds, and it's pretty impressive that it hasn't caused inflation yet. A big bond dump by China may be enough to actually trigger a substantial piece of inflation - heck, maybe you'd see an instant jump in prices of a few percent overnight, and the US would have to make some painful choices about spending and debt... But it wouldn't in and of itself cause catastrophic hyperinflation. Not on an ongoing basis, anyway. Continuing inflation requires continuing increases in the monetary base (or monetary velocity).
- Amezarak 13y ago
  It's not pretty impressive that it hasn't caused inflation. It's exactly what we would expect based on the predictions of mainstream economic theory in our current situation. Indeed, if the Fed had to print an additional $1 trillion to cover these dumped bonds I am doubtful the inflation would tick up more than half a percent at best. The whole thing is kind of moot since China would be committing economic suicide by doing this.
  - wintersFright 13y ago
    Yes, the Fed will quickly buy up all the bonds necessary to feed the USGovt appetite, allowing the USGovt to outbid any citizen for goods and services. This situation does not lead to a nice and cool inflation of 2%. Meanwhile will the rest of the world be willing to ship real goods and services in return for promises of ever more paper IOUs from the USG, and when those paper IOUs are due, the promise of even more paper IOUs? If this all sounds sustainable, I have a deal for you. I want to borrow $100 off you and I'll pay you $105 next year. Don't worry, I'm good for it. I'm also lending myself $200 and will pay myself back $210 next year. So how about it? Clearly the 5% interest rate is what has been set by the market (me) so you are getting a good deal. Next year comes around and I hand you some paper IOUs for $110 the next year. Meanwhile, I'll borrow another $100 off you. I've been living it large and need a bit more sugar. Don't worry, I'm good for it - I'll lend myself another $200 too!

jcalvinowens 13y ago

> If China dumped bonds, why would anyone buy debt from the USG when they can get it cheap on the open market that has just had 1 trillion dumped in it. The member banks of the federal reserve are required to buy government debt if nobody else will.