That the US deficit is not going to be paid for by selling debt to people around the world, it is going to be paid for by the federal reserve creating money and giving it to the treasury.
The problem with this type of inflation is that it's lopsided. Assets inflate -- equities and real estate. That's great for asset owners. But wages haven't really increased, because most workers don't "need" to own equities, and most Americans already own a house, so they aren't affected by rising rents and home prices.
This is why rent can raise 10% in one year -- the largest expense for nearly everyone -- and you can have 1% inflation. Most people aren't renters. So they aren't paying more for their rent. In fact, when bond prices go down (from this manipulation), mortgages get cheaper, so most people are paying LESS for the same house / mortgage.
Equities go through the roof.
If you're a laborer / renter, this is like a double gut punch. If you're a capitalist aristocrat, it's like a double gift horse.
And, as far as inflation goes, at least the way the Fed measures it -- it doesn't have a huge effect.
Commodities are so globalized now, and the US isn't 50% of the global economy anymore -- more like 20%. So strong upward pressure on commodities here, doesn't have a huge impact on commodities prices.
Yeah effectively it's rich people deciding that enormous sums of money should be invented out of nowhere and given to rich people. And somehow everyone is ok with that
Actually I read that in period of high inflation, the factory workers tend to do OK. They are often unionised, have leverage by doing strikes, they typically manage to keep their wages in check with inflation. It is office workers that are going to be the most impacted.
Though that was from experience from times where there wasn’t this imbalance between supply and demand between blue collar (excess) and white collar (shortage).
Your comment has contradictions. For example, if "most Americans already owns a house", how are they at the same not affected by home prices increasing?
Like a lot of financial analysis I read, you seem to look at only one side of the transaction. For every renter, there's a rentee. For every buyer, a seller. For every borrower, a lender. Those people are abundant as well, and the exact opposite comment could be written about them.
Source? Most of my friends (outside of the tech echo chambers) are worried they'll never become buyers because of student loans, decades of wage stagnation, skyrocketing rent, real estate, college tuition, etc..
Aug 12, 2019: "U.S. consumer inflation outlook declined as Fed weighed rate cuts .... The Fed’s preferred inflation gauge, known as the core personal consumption expenditures price index, gained at an annualized 1.6% pace in June."
You don't "own" your own debt. The bank / other entity you are indebted to "owns" the debt, hence why they can sell it to a debt collector for pennies on the dollar. Instead of owning your debt, you are liable (or there's a better word than "liable") for your debt. Basically, you already "sold" your debt when you first became indebted.
It's not really a dumb question. I get why people might look at their debt as something they own, given the debt itself is tied to their identity and credit score until paid off.
It's important to note that the amount of money you accept for that paper need not be what's written on it. I.e., you could sell a bond saying you'll pay back $1000 + interest and get only $981 for it, say, or maybe $1017 dollars for it, or any other number.
If the bond sells for more than its nominal value, then the effective interest rate you pay to borrow will be lower than the nominal interest rate, and if the bond sells for less, then your effective interest rate will be higher than the nominal interest rate.
The face value of the bond is what you will receive at maturity. When the bond trades in the intermediate term, its price is determined by prevailing and expected interest rates.
What you do is invent the phrase “as good as gold”. Then you convince the world that your paper is more valuable than theirs, and they store it in their vaults instead of gold. That’s how you export inflation and sell your debt to suckers.
All money in modern economies is based on this kind of debt. Central banking is... confusing.
The immediate effect of the fed doing that isn't catastrophic, it's just devaluing the US Dollar, or put in another way, inflation.
Inflation at a certain level is thought of as a good thing, the fed and economists have inflation targets where they don't want it to be too high or too low. One of the thing that moderates inflation is how the fed creates money and lends it out.
The recipe for WWIII is runaway inflation where in order to keep things together, a central bank issues money at an exponentially increasing rate with a very small doubling period and the currency becomes worthless in trade with other currencies and to purchase goods.
The US is very far away from that. The increase in the deficit and debt is problematic and significant, but not anywhere near catastrophic.
Interestingly, deflation can also cause wars and lead to an economic downward spiral where everyone is worse off. Retaining the Gold Standard was a major contributor to both WW1 and the Great Depression. Japan’s deflation lost it a decade of economic growth more recently.
Incrementalism. As long as the U.S. does it on a relatively small scale (emphasis on relatively), no one will want to pay the costs involved in fighting against it, even if over longer periods of time it adds up.
To a large degree, they aren't accepting it. This is why around 2014 treasury holdings by rest of world stopped growing on net.
Many governments/central banks are trying to exit the $ and UST's and are buying gold instead of treasuries.
Ultimately, the US has quite a large amount of liabilities, and entitlement spending on retiring boomers coming due in the next few years. Currently, at the peak of the economic cycle, we are running $trillion deficits.
Imagine what happens if there is a recession? Even if there isn't, these fiscal deficits, along with our large trade deficit mean:
The rest of the world gives us real goods, we give them paper IOU's. The debt is not shrinking but is growing, and faster.
So, they are not tolerating it. Problem is, in the petrodollar system, the reason this whole ponzi could occur is dollars were needed to buy oil. Post-71 Nixon shock, the $ was as good as oil. Saudi and others only sold oil for dollars putting a floor on the value of dollar and incentivizing both oil exporters and rest of world to want to hold dollars, thus recycling their surpluses into treasury debt to both fund their export economies and fund our consumption.
This CANNOT continue because by definition it means rest of world works and produces for never ending, and ever growing, US consumption. Holding dollars, amidst a growing realization the Fed would have to monetize this debt and government would never pay it back in "real terms" has led many oil exporters to try to sell oil in other currencies, and countries generally to try to exit the dollar for trade.
Iraq[0], Libya, Iran, Russia, and Venezuela[1]. Do we see a pattern of what happens to nations that try to do this?
They either get regime-changed or become enemy number one for US government. Do you think it is a coincidence that Venezuela has the largest oil reserves in the world and just happens to be the next country US is involved in pushing regime change (them or Iran)?
To read about this system of petrodollar recycling, and how/when it was created in the early 70's because of collapse of Bretton Woods, check out an this excerpt[3] from excellent book "The Global Minotaur: America, Europe and the Future of the Global Economy" by Yanis Varoufakas former Greek minister of finance.
Good thread [3] covering a broad summary of trade, the dollar, and petrodollar warfare [4]
> entitlement spending on retiring boomers coming due in the next few years
This is a frequently overblown fact. 12.4% of the population was >65 in 2000, increasing to 15.2% in 2006. So this huge incremental wave of retiring boomers is... 3% of the population.
> The rest of the world gives us real goods, we give them paper IOU's.
This is fun to say but try paying for goods with a paper IOU. Chances are the store will prefer dollars, even though they're technically the same concept.
> Problem is, in the petrodollar system, the reason this whole ponzi could occur is dollars were needed to buy oil. Post-71 Nixon shock, the $ was as good as oil. Saudi and others only sold oil for dollars putting a floor on the value of dollar and incentivizing both oil exporters and rest of world to want to hold dollars, thus recycling their surpluses into treasury debt to both fund their export economies and fund our consumption.
People want dollars for various reasons. The dollar is stable relative to other currencies. They're harder for authoritarian governments to seize. There's inertia (It's already the reserve currency and working fine, so why change?). It's extremely liquid. All more valid reasons than this random oil conspiracy theory.
> This CANNOT continue because by definition it means rest of world works and produces for never ending, and ever growing, US consumption.
Not sure how this follows, at all.
> Holding dollars, amidst a growing realization the Fed would have to monetize this debt and government would never pay it back in "real terms" has led many oil exporters to try to sell oil in other currencies, and countries generally to try to exit the dollar for trade.
Nobody is exiting the dollar for trade. What're you gonna do, switch to euros? yuan?
HN and wacky economic conspiracy theories, name a more iconic duo.
You’ve been able to trade petroyuan in Shanghai since early 2018. The volume there is made up almost exactly with what a less conspiracy based hypothesis would expect: domestic Chinese firms, Russians avoiding sanctions & arbitraging actors.
There has not been a mass exodus to the yuan, quite the opposite China has been manipulating it up through that entire time.
Euro denominated oil is likely to come online in the next year or 2. The E.U. started a benchmark program this summer. Roseneft (a big Russian producer) switched to Euros a couple of weeks ago.
That doesn't seem like a convincing argument against the whole petrodollar "conspiracy". It seems like there is no assurance that trading in these alternative currencies can't increase dramatically among other countries.
I think the conspiracy theory is backwards. We didn’t use hegemony to make people us petrodollars. They used petrodollars because it made the most sense. By dramatically increasing our use of sanctions we’ve turned that on its head. And we are going to see petrodollars become less important.
We aren’t going to go to war with China, Russia or the Euro zone for switching off petrodollars. The opposite conclusion is ludicrous.
This is along the lines of how I was interpreting things. Its really scary. I would be happy to hear a convincing argument against this version of reality if such a thing is possible and if anyone is able to make one.
