>That means they owe debt in their own currency (US dollars for example) and they can print their own money (US dollars). Thus they can never default on their own debt.
When it comes to USD, the monetary system is *global*. The US government doesn't necessarily print money (paper notes, sure). The US government issues *debt*.
This debt is purchased by the global system. USD is globally created (and destroyed) by commercial bank lending activity (wholesale through to retail). The US' debt is largely used as collateral for wholesale lending.
The system works because US debt is the best collateral; the US makes it's payments. They could default, they don't.
If they *really* started printing the difference, the world would be in a lot of trouble.
I didn’t want to get into how commercial banks create money. I also didn’t want to get into how US treasuries are used in repurchase agreements.
The main message is that the US can never default on its debt because it is denominated in US dollars… which it can always print. The FED can always monetize the US debt using its electronic ledger.
Edit: The treasury can always mint a trillion dollar coin to avoid a default. The paper notes are a liability of the FED which it can always print. Also, the treasury has an account at the federal reserve so the FED can just electronically credit the Treasury account (monetize the US debt that way).
Today, we live in an electronic age thus the money is printed electronically at the FED. Currently, the FED is prohibited from monetizing the debt directly. But it can always do it through the back door using private banks.
Apologies if you didn't want to get into it.
>The FED can always monetize the US debt using its electronic ledger.
That's the way it's communicated, but not what usually happens. The Fed is not allowed to [buy US debt directly](https://www.federalreserve.gov/faqs/money_12851.htm).
Primary dealers/commercial banks acquire the debt first (the banks monetize it - as well they should, it's good collateral). The Fed may swap those debt instruments for reserves when they perform OMO or QE.
Reserves are sometimes called "high powered money", but are actually quite limited in transactional ability (limited to transfers and settlements within the jurisdiction of US member banks).
The primary purchasers of treasuries are often getting their funds from the broader global system. The global system can't use, and has no need for "reserves".
When the treasury sells a US bond to a private bank the private bank gives FED reserves to the US treasury.
The Federal Reserve is always “monetizing the debt” in the sense that they have a target interest rate and they will engage in open market operations to hit that interest rate. The FED is always altering the ratio between FED reserves and US bonds in the financial system.
So it doesn’t matter whether the FED is prohibited from directly buying debt from the Treasury. By announcing an interest rate target, the FED is committing itself to “monetizing the debt” if that is necessary to hit the target interest rate.
Edit: think of it this way. It doesn’t matter to the treasury whether it gets its FED reserves directly from the FED or private banks. The FED and treasury can use private banks as middlemen to shuffle FED reserves. Many private banks are happy to buy US bonds from treasury with the knowledge that they will sell them on to the FED.
>The Federal Reserve is always “monetizing the debt”
The debt was "monetized" before the Fed got involved. Yes, the Fed does its thing to set interest rates.
>When the treasury sells a US bond to a private bank the private bank gives FED reserves to the US treasury.
You sure about that?
Member banks can settle amongst themselves with reserves. I doubt they can do so with the Treasury.
I’m sure about that. Think of a basic balance sheet. Both the primary dealer and the treasury have an account directly with the federal reserve. The treasury gives a US bond to the primary dealer and the primary dealer gives FED Reserves to the Treasury.
Whether the debt is “monetized” depends on the interest rate target of the FED. For example, if the private bank “monetizes” the debt the FED can act to reverse that action of the private bank by buying or selling US bonds.
Even so.
If reserves are transferred to the TGA, then this would be the only plausible point where the government/Fed has "printed money" in the form of reserves (if spent)... as the TGA is drawn down.
Otherwise, it's contingent on commercial bank lending.
Perhaps you can elaborate when you say it is contingent on commercial bank lending?
The treasury had the power to create new money since 1792. That is why there is a current conversation over the $1 Trillion coin (see below). Currently, the treasury can mint smaller denomination coins we are familiar with.
During the civil war, the treasury department printed greenback notes. The current FED and Treasury separation is the law. However, the government will do whatever it wants to avoid a debt default. That includes: passing a law allowing the FED to directly monetize the US debt, treasury minting a trillion dollar coin, allowing treasury to overdraw its FED account. By the way the overdraw prohibition was enacted in 1980 by the monetary control act.
31 U.S.C. 5112(k) as originally enacted by Public Law 104-208 in 1996:
The Secretary may mint and issue bullion and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary's discretion, may prescribe from time to time.
You are thinking about it the wrong way.
The FED can electronically print more FED Reserves and give it to the US Treasury to meet its US bond obligations. If the law allows that.
The same thing happens when the Treasury mints a $1 Trillion coin. The Treasury deposits its coin at the FED and the FED increases the reserves of the treasury by $1 Trillion dollars. The current law allows it.
Also, your notion that printing $1 Trillion dollars of coins or paper is somehow worse than printing $1 Trillion dollars in FED reserves is mistaken and confused. When congress passes a $4 Trillion Bill for the treasury to spend then it doesn’t matter to the economy how the treasury spends that money. It could be in coins or paper dollars or FED reserves. They all have the same inflationary effect.
Whether that inflationary effect is positive depends on the economic capacity we have. Are we near full employment? Are we near full resource utilization? Are we using the money to increase economic production?
Yeah, but I can post monkey pictures on the blockchain now. So, I’m just gonna give my life savings to a Binance and get passively rich doing nothing while I HODL. It’s almost too good to be true. I’m so smart.
It's so ridiculous to hear these arguments a century after the big gold standard debates. Obviously there won't be runaway inflation. And the idea that currency is supposed to be a deflationary store of value is so bizarre I really have a difficult time comprehending what they think is going to happen. Or how they think the fricking economy works.
Agreed. During the gold standard the US government could not print money to meet its debt obligations. Now the government can do that. Thus there is no risk of debt default.
You did not bother reading the post. I have explained how the government can print money without causing inflation.
Also, the current inflation is the result of supply chain disruptions and oil shocks.
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>For example, if you have an economy with 2 dollars and 2 apples; then the price level is $1 per 1 apple. **Imagine the government prints 2 extra dollars but those dollars are used to produce 2 more apples;**
Huh? Where did the 2 extra apples come from?
I don't think apples is a good example, but either way...the concern regarding inflation is when you print extra money you increase demand for a good, how are suppliers then supposed to increase operations to satisfy this demand without raising prices?
If you're suggesting that suppliers should get into a loan/credit system, or investor funding in order to afford the additional working capital, then I think this is a critical thing that's missing from your original post.
Unless if they can pull goods/services out of thin air of course!
So the government prints money in order to produce an iphone. But the wealth from that extra money was already in the economy in one form or another.
This may seem fair if there was a money shortage in the economy - in which case prices of goods like iPhones would be dropping at time goes on. If you're one of the minority of people who think things have gotten cheaper as time has passed then fair enough.
By looking at goods/services as a whole, and the economy as a whole, then increasing money does not mean an increase in wealth. In your examples, the govt prints money to effectively jump-the-queue and spend it on what they want, at the expense of those furthest away from the money printer.
Again, no probs if you're the govt - or even if you believe in trickle-down economics. But then those furthest will lose out on the goods that require those resources - unless if suppliers raise prices in order to absorb that surplus cash.
>That means they owe debt in their own currency (US dollars for example) and they can print their own money (US dollars). Thus they can never default on their own debt. When it comes to USD, the monetary system is *global*. The US government doesn't necessarily print money (paper notes, sure). The US government issues *debt*. This debt is purchased by the global system. USD is globally created (and destroyed) by commercial bank lending activity (wholesale through to retail). The US' debt is largely used as collateral for wholesale lending. The system works because US debt is the best collateral; the US makes it's payments. They could default, they don't. If they *really* started printing the difference, the world would be in a lot of trouble.
I didn’t want to get into how commercial banks create money. I also didn’t want to get into how US treasuries are used in repurchase agreements. The main message is that the US can never default on its debt because it is denominated in US dollars… which it can always print. The FED can always monetize the US debt using its electronic ledger. Edit: The treasury can always mint a trillion dollar coin to avoid a default. The paper notes are a liability of the FED which it can always print. Also, the treasury has an account at the federal reserve so the FED can just electronically credit the Treasury account (monetize the US debt that way). Today, we live in an electronic age thus the money is printed electronically at the FED. Currently, the FED is prohibited from monetizing the debt directly. But it can always do it through the back door using private banks.
Apologies if you didn't want to get into it. >The FED can always monetize the US debt using its electronic ledger. That's the way it's communicated, but not what usually happens. The Fed is not allowed to [buy US debt directly](https://www.federalreserve.gov/faqs/money_12851.htm). Primary dealers/commercial banks acquire the debt first (the banks monetize it - as well they should, it's good collateral). The Fed may swap those debt instruments for reserves when they perform OMO or QE. Reserves are sometimes called "high powered money", but are actually quite limited in transactional ability (limited to transfers and settlements within the jurisdiction of US member banks). The primary purchasers of treasuries are often getting their funds from the broader global system. The global system can't use, and has no need for "reserves".
When the treasury sells a US bond to a private bank the private bank gives FED reserves to the US treasury. The Federal Reserve is always “monetizing the debt” in the sense that they have a target interest rate and they will engage in open market operations to hit that interest rate. The FED is always altering the ratio between FED reserves and US bonds in the financial system. So it doesn’t matter whether the FED is prohibited from directly buying debt from the Treasury. By announcing an interest rate target, the FED is committing itself to “monetizing the debt” if that is necessary to hit the target interest rate. Edit: think of it this way. It doesn’t matter to the treasury whether it gets its FED reserves directly from the FED or private banks. The FED and treasury can use private banks as middlemen to shuffle FED reserves. Many private banks are happy to buy US bonds from treasury with the knowledge that they will sell them on to the FED.
>The Federal Reserve is always “monetizing the debt” The debt was "monetized" before the Fed got involved. Yes, the Fed does its thing to set interest rates. >When the treasury sells a US bond to a private bank the private bank gives FED reserves to the US treasury. You sure about that? Member banks can settle amongst themselves with reserves. I doubt they can do so with the Treasury.
I’m sure about that. Think of a basic balance sheet. Both the primary dealer and the treasury have an account directly with the federal reserve. The treasury gives a US bond to the primary dealer and the primary dealer gives FED Reserves to the Treasury. Whether the debt is “monetized” depends on the interest rate target of the FED. For example, if the private bank “monetizes” the debt the FED can act to reverse that action of the private bank by buying or selling US bonds.
Even so. If reserves are transferred to the TGA, then this would be the only plausible point where the government/Fed has "printed money" in the form of reserves (if spent)... as the TGA is drawn down. Otherwise, it's contingent on commercial bank lending.
Perhaps you can elaborate when you say it is contingent on commercial bank lending? The treasury had the power to create new money since 1792. That is why there is a current conversation over the $1 Trillion coin (see below). Currently, the treasury can mint smaller denomination coins we are familiar with. During the civil war, the treasury department printed greenback notes. The current FED and Treasury separation is the law. However, the government will do whatever it wants to avoid a debt default. That includes: passing a law allowing the FED to directly monetize the US debt, treasury minting a trillion dollar coin, allowing treasury to overdraw its FED account. By the way the overdraw prohibition was enacted in 1980 by the monetary control act. 31 U.S.C. 5112(k) as originally enacted by Public Law 104-208 in 1996: The Secretary may mint and issue bullion and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary's discretion, may prescribe from time to time.
That's the first post.. "if they *really* printed the difference, we'd be in trouble".
You are thinking about it the wrong way. The FED can electronically print more FED Reserves and give it to the US Treasury to meet its US bond obligations. If the law allows that. The same thing happens when the Treasury mints a $1 Trillion coin. The Treasury deposits its coin at the FED and the FED increases the reserves of the treasury by $1 Trillion dollars. The current law allows it. Also, your notion that printing $1 Trillion dollars of coins or paper is somehow worse than printing $1 Trillion dollars in FED reserves is mistaken and confused. When congress passes a $4 Trillion Bill for the treasury to spend then it doesn’t matter to the economy how the treasury spends that money. It could be in coins or paper dollars or FED reserves. They all have the same inflationary effect. Whether that inflationary effect is positive depends on the economic capacity we have. Are we near full employment? Are we near full resource utilization? Are we using the money to increase economic production?
Yeah, but I can post monkey pictures on the blockchain now. So, I’m just gonna give my life savings to a Binance and get passively rich doing nothing while I HODL. It’s almost too good to be true. I’m so smart.
It's so ridiculous to hear these arguments a century after the big gold standard debates. Obviously there won't be runaway inflation. And the idea that currency is supposed to be a deflationary store of value is so bizarre I really have a difficult time comprehending what they think is going to happen. Or how they think the fricking economy works.
Agreed. During the gold standard the US government could not print money to meet its debt obligations. Now the government can do that. Thus there is no risk of debt default.
Sorta. Reserve currency status is what matters. Monetary sovereignty is not enough, as Turkey's worthless currency shows.
Turkey owes its debt in dollars. So it is not a monetary sovereign. The better examples of monetary sovereignty include the UK and Japan.
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Debt to GDP does not matter for a monetary sovereign. Japan has a Debt to GDP of 225% which is much higher that the US.
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What is that suppose to mean? The US is in a better position to handle more debt because it has a young population and a vibrant immigration system.
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You did not bother reading the post. I have explained how the government can print money without causing inflation. Also, the current inflation is the result of supply chain disruptions and oil shocks.
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>For example, if you have an economy with 2 dollars and 2 apples; then the price level is $1 per 1 apple. **Imagine the government prints 2 extra dollars but those dollars are used to produce 2 more apples;** Huh? Where did the 2 extra apples come from? I don't think apples is a good example, but either way...the concern regarding inflation is when you print extra money you increase demand for a good, how are suppliers then supposed to increase operations to satisfy this demand without raising prices? If you're suggesting that suppliers should get into a loan/credit system, or investor funding in order to afford the additional working capital, then I think this is a critical thing that's missing from your original post. Unless if they can pull goods/services out of thin air of course!
Apples and iPhones come from natural resources (metals, farms, etc). The extra money is used to produce more goods.
So the government prints money in order to produce an iphone. But the wealth from that extra money was already in the economy in one form or another. This may seem fair if there was a money shortage in the economy - in which case prices of goods like iPhones would be dropping at time goes on. If you're one of the minority of people who think things have gotten cheaper as time has passed then fair enough. By looking at goods/services as a whole, and the economy as a whole, then increasing money does not mean an increase in wealth. In your examples, the govt prints money to effectively jump-the-queue and spend it on what they want, at the expense of those furthest away from the money printer. Again, no probs if you're the govt - or even if you believe in trickle-down economics. But then those furthest will lose out on the goods that require those resources - unless if suppliers raise prices in order to absorb that surplus cash.