Ask HN: Is inflation just the cost of government borrowing?

[ozb]

Given:

- ~Most of the Fed's balance sheet is government debt

- ~Most government debt is held by the Fed

- The Fed executes monetary policy by buying and selling (mostly) government debt; expansionary policy consists of buying Treasury debt, thereby raising its price / lowering yields; this effect seems more direct than the effect on the Federal funds rate

Mathematically, I'd expect:

Nominal Yields on Treasury debt = (future dollar value of debt) / (current dollar value of debt)

= ((future dollar value of debt) / (future value of debt, measured against basket of goods)) * (future value of debt, measured against basket of goods) / (current value of debt, measured against basket of goods )) * ((current value of debt, measured against basket of goods )/(current dollar value of debt))

= (future CPI) * (real yields on Treasury debt) / (current CPI)

Or, rearranging:

Inflation=(future CPI)/(current CPI)=(nominal yield on Treasury debt)/(real yield on Treasury debt)

In particular, I'd expect the "real" yield here to denote the "natural" yield you'd expect if the Fed was not buying debt for much more money.

So, the narrative becomes:

Government spends a lot of money, and market doesn't believe it's a good investment (in terms of effect on future taxable revenue base), therefore Treasury borrowing costs should go up; but Fed forces Treasury yields to stay around 0, so inflation goes up instead.

Does any of this make sense, or am I missing something obvious?

Is there a source that formulates the issue in this way?

[garbagecoder]

No. And right now it’s evident that it’s just plain old supply and demand for some of the things in the basket.

Look at a decent intro macro book from college. Money supply can be connected with inflation but it’s not “just” that.

[8bitsrule → garbagecoder]

Prices can go up for other reasons. Let's say everybody in town got a raise. The guy at the store thinks: I want a raise too. So he adds 50 cents of profit to the cost of AB&C. People have more money, so they shrug and keep buying just as much AB&C. A manufacturer (sneakier) could put slightly less stuff in a slightly bigger box with brighter colors.

[ozb → garbagecoder]

I do have an econ education from a reputable university, so I have some idea of the traditional narrative. But inflation in particular always seemed a bit poorly explained to me (obvious printing-money cases aside), as evidenced also by the fact that people are always arguing about whether it is even occuring. Where specifically is my analysis wrong?

[garbagecoder → ozb]

Again, prices can go up for reasons unrelated to government activity or the money supply.

[ozb → garbagecoder]

My analysis can also account for eg supply chain failures: if the overall supply of goods and services in the economy is reduced, that translates to the expected government revenues as well, and therefore yields on government debt.

Obviously there are various effects at play; but given the structure of the monetary system, I posit that all these effects are in fact mediated by the Fed's balance sheet and Treasury debt.

[PaulHoule]

https://www.atb.com/wealth/good-advice/markets/impact-of-gov... https://voxeu.org/article/inflation-and-fiscal-dominance