Trump, is that you?
Jokes aside, this is a bad idea.
We could try printing our way out of it, but people will swear up and down that would cause runaway inflation
That’s exactly what would happen. With more dollars on the market chasing the same amount of goods (e.g. oil) the price of everything denominated in dollars would shoot through the roof. As a simplified example, imagine I have a barrel of oil and someone offers me $50 for it. That’s pretty good and I might be inclined to accept. But, with the money printer going BRRR, someone else has a lot of cash to splash around and offers me $100 for that barrel. Well great, that $50 bid can go get fucked. But they really want my barrel, and the money printer go BRRR so now they have $150 to offer me. And this cycle keeps going, so long as the money printer is BRRing along. Eventually though, I get smart and realize that, no matter how many dollars I get for my barrel of oil, the value of those dollars is going to collapse faster than I can spend them. So I finally get smart and tell both bidders to put their dollars somewhere else and demand that I get paid in a more stable store of wealth (e.g. gold or a more stable currency).
And, in theory, wouldn’t that cause bond yields to go down?
Maybe for a very short period, but it would reverse very, very quickly. If investors want to make money (wealth really). If they start to realize that US Treasury yields either not making as much money or losing money due to the devaluation of the US Dollar, they are going to demand higher yields. This is why countries which are suffering crises have to pay much higher borrowing costs. The US has been a special snowflake here, specifically because the US Dollar is seen as exceptionally stable and the US economy is seen as a safe place to put money. If we go stupid and start heading the hyperinflation route, that will all collapse. Read up on the Turkish Economic Crisis for something.
If treasuries were essentially guaranteed investments (and weren’t they kind of seen that way for a very long time, up until recently?), yields would drop and the cost of borrowing for the Federal government would go down.
That is why US borrowing costs are currently so low and one of the reasons the US can run these sorts of deficits and not have investors fleeing for other countries. Despite Trump’s flailing about, the US Dollar is still seen as a safe investment. It’s relatively stable, easily convertible and easily transferable. Plus, it’s used to buy oil. Inflating the fuck out of it would not help any of these perceptions and may make some nations with lots of oil consider requiring other forms of currency. You want to see a major economic catastrophe in the US? Convince the world to stop trading oil in US Dollars. Granted, as the largest single producer of oil and natural gas, the US has a lot of pull against that. So maybe, the US Dollar would survive the Middle East de-Dollarizing. But, it’s not a gamble I would want to make for anything other than really, really, really good reasons.
With more dollars on the market chasing the same amount of goods (e.g. oil) the price of everything denominated in dollars would shoot through the roof.
Yeah, but that’s what I’ve never quite understood: how would it put more dollars on the market than there was always going to be anyway? I mean, the idea was always to pay back these bond holders. Weren’t the dollars that will be needed to pay back bond holders going to have to be created at some point regardless?
The total Federal debt is $39 trillion, but there’s only something like $20 trillion actually in existence, if I’m not mistaken. Even if we collected every single existing dollar out there through taxes, we’d still have a shortfall of almost $20 trillion.
how would it put more dollars on the market than there was always going to be anyway?
Specifically printing money (as you proposed, or more realistically, the Fed giving more money to the US Treasury) means increasing the Dollar supply. Something kinda like that happens all the time and, in a much more controlled fashion, and is probably a net good. But, the Fed could just add $39 Trillion to the US Treasury’s bank account, it’s just a database update command anyway, and that would increase the Dollar supply by $39 Trillion. Sure, no actual bills would be created, that isn’t really important. At the scale those investments operate at, no one is handling cash, it’s just numbers in a database. But, it’s numbers in a database which are very carefully tracked and those numbers mean something to people. If I move $100 from the database at my bank to the database at your bank, you will have the ability to obtain more goods and services based on those database transactions. The whole thing is absolutely a house of cards, but it’s a house of cards that most people trust because if anyone fucks with that house of cards the US Government will show up and start shooting them. People also trust it because the US Government (US Fed, really. But that’s a whole different can of worms) is very careful about how it grows the money supply.
If the US Fed started just adding large amounts of money to the US Treasury’s account, people would notice and people would freak out.
The total Federal debt is $39 trillion, but there’s only something like $20 trillion actually in existence, if I’m not mistaken. Even if we collected every single existing dollar out there through taxes, we’d still have a shortfall of almost $20 trillion.
Wikipedia puts the number in actual bills and coins around $2T. But ya, the number of physical Dollars is dwarfed by the US debt. And no one cares. Most money exists as numbers in databases. But, those digital Dollars are every bit as real as the physical ones in the sense that they can be used to obtain goods and services.
Trump, is that you?
Jokes aside, this is a bad idea.
That’s exactly what would happen. With more dollars on the market chasing the same amount of goods (e.g. oil) the price of everything denominated in dollars would shoot through the roof. As a simplified example, imagine I have a barrel of oil and someone offers me $50 for it. That’s pretty good and I might be inclined to accept. But, with the money printer going BRRR, someone else has a lot of cash to splash around and offers me $100 for that barrel. Well great, that $50 bid can go get fucked. But they really want my barrel, and the money printer go BRRR so now they have $150 to offer me. And this cycle keeps going, so long as the money printer is BRRing along. Eventually though, I get smart and realize that, no matter how many dollars I get for my barrel of oil, the value of those dollars is going to collapse faster than I can spend them. So I finally get smart and tell both bidders to put their dollars somewhere else and demand that I get paid in a more stable store of wealth (e.g. gold or a more stable currency).
Maybe for a very short period, but it would reverse very, very quickly. If investors want to make money (wealth really). If they start to realize that US Treasury yields either not making as much money or losing money due to the devaluation of the US Dollar, they are going to demand higher yields. This is why countries which are suffering crises have to pay much higher borrowing costs. The US has been a special snowflake here, specifically because the US Dollar is seen as exceptionally stable and the US economy is seen as a safe place to put money. If we go stupid and start heading the hyperinflation route, that will all collapse. Read up on the Turkish Economic Crisis for something.
That is why US borrowing costs are currently so low and one of the reasons the US can run these sorts of deficits and not have investors fleeing for other countries. Despite Trump’s flailing about, the US Dollar is still seen as a safe investment. It’s relatively stable, easily convertible and easily transferable. Plus, it’s used to buy oil. Inflating the fuck out of it would not help any of these perceptions and may make some nations with lots of oil consider requiring other forms of currency. You want to see a major economic catastrophe in the US? Convince the world to stop trading oil in US Dollars. Granted, as the largest single producer of oil and natural gas, the US has a lot of pull against that. So maybe, the US Dollar would survive the Middle East de-Dollarizing. But, it’s not a gamble I would want to make for anything other than really, really, really good reasons.
Yeah, but that’s what I’ve never quite understood: how would it put more dollars on the market than there was always going to be anyway? I mean, the idea was always to pay back these bond holders. Weren’t the dollars that will be needed to pay back bond holders going to have to be created at some point regardless?
The total Federal debt is $39 trillion, but there’s only something like $20 trillion actually in existence, if I’m not mistaken. Even if we collected every single existing dollar out there through taxes, we’d still have a shortfall of almost $20 trillion.
Specifically printing money (as you proposed, or more realistically, the Fed giving more money to the US Treasury) means increasing the Dollar supply. Something kinda like that happens all the time and, in a much more controlled fashion, and is probably a net good. But, the Fed could just add $39 Trillion to the US Treasury’s bank account, it’s just a database update command anyway, and that would increase the Dollar supply by $39 Trillion. Sure, no actual bills would be created, that isn’t really important. At the scale those investments operate at, no one is handling cash, it’s just numbers in a database. But, it’s numbers in a database which are very carefully tracked and those numbers mean something to people. If I move $100 from the database at my bank to the database at your bank, you will have the ability to obtain more goods and services based on those database transactions. The whole thing is absolutely a house of cards, but it’s a house of cards that most people trust because if anyone fucks with that house of cards the US Government will show up and start shooting them. People also trust it because the US Government (US Fed, really. But that’s a whole different can of worms) is very careful about how it grows the money supply.
If the US Fed started just adding large amounts of money to the US Treasury’s account, people would notice and people would freak out.
Wikipedia puts the number in actual bills and coins around $2T. But ya, the number of physical Dollars is dwarfed by the US debt. And no one cares. Most money exists as numbers in databases. But, those digital Dollars are every bit as real as the physical ones in the sense that they can be used to obtain goods and services.