Why not just monetize the debt?

[DomoArigato]

The Treasury prints money and then sells it the Fed at manufacturing cost.

How much would it cost the Treasury to print a $1.6 trillion bill? About 3 cents? So the Treasury prints a $1.6 trillion bill and instead of selling it to the Fed for 3 cents, it trades that $1.6 trillion dollar bill for the $1.6 trillion in debt that the Fed owns. That debt is then retired.

Instantly, the federal debt goes down by 10%. What’s the downside? If the U.S. has a ‘debt crisis’, isn’t this the easiest way to solve it?

[briansd1]

Well, Treasury (Bureau of Engraving) prints the physical notes, but the Federal Reserve is the one who can create (print) unlimited money out of thin air.

[briansd1]

[quote=DomoArigato]
Instantly, the federal debt goes down by 10%. What’s the downside? If the U.S. has a ‘debt crisis’, isn’t this the easiest way to solve it?[/quote]

The debt doesn’t go down. The central bank owns it.

The Fed periodically already intervenes and buys US treasuries as it sees fit.

[Rich Toscano]

[quote=Fearful][quote=DomoArigato]So we’d get some inflation which would cause the value of any remaining debt to go down, further alleviating any ‘debt crisis’. Additionally, the value of the dollar would likely go down, no? This would increase the competitiveness of American exports and likely lead to higher employment.

What are the bad things that would happen, if any? Would we just be trading fear of invisible bond vigilantes with fear of the inflation boogeyman? Maybe the only thing we have to fear is fear itself?[/quote]
It is strange to hear someone being blase about rising prices. If the value of the dollar falls, imports become more expensive. Imports include food. When food prices rise, people complain loudly.

Rising prices act like a consumption tax. Therefore they are regressive: The poorest people spend the largest portion of their incomes on consumption, so they feel the effect the most. The other group affected by inflation is conservative investors. Equity (that is, risk tolerant) investors are more able to survive a bout of inflation. So inflation hits poor people and old people. Not exactly where you want the effects to be felt.

The other, large problem with inflation and deflation is they are subject to positive feedback. If inflation is expected, people are more inclined to spend money sooner – before prices go up. Spending money sooner rather than later is itself inflationary. The opposite but also positive feedback mechanism works for deflation. Thus the central bank has to maintain an unstable equilibrium, with positive feedback mechanisms in both directions.[/quote]

Yes, this is a good description, Fearful. I’d also add that high inflation reduces economic growth and productivity, because prices (which usually function as a signal for how to allocate resources) become distorted.

High inflation (and most notably the move from lower inflation to higher inflation) is highly disruptive and very negative for general economic well being, as one can verify by studying past episodes of inflation in our country and elsewhere.

This thread (the OP anyway) is a good example of the extreme complacency about inflation that seems to be the norm these days.

[SD Realtor]

Not enough of us oldtimers on this site who experienced what life was like is the lat 70s and early 80s.

It pretty much sucked.

[DomoArigato]

[quote=SD Realtor]Not enough of us oldtimers on this site who experienced what life was like is the lat 70s and early 80s.

It pretty much sucked.[/quote]

Yes, life is so much better today with core inflation below 3% and U6 at 16%. Yesterday’s problems are not necessarily today’s problems.

[UCGal]

[quote=DomoArigato][quote=SD Realtor]Not enough of us oldtimers on this site who experienced what life was like is the lat 70s and early 80s.

It pretty much sucked.[/quote]

Yes, life is so much better today with core inflation below 3% and U6 at 16%. Yesterday’s problems are not necessarily today’s problems.[/quote]
I could be wrong – but I remember fairly high unemployment in the late 70’s and early 80’s. I wasn’t in the job market in the 70’s (I was in high school), but I remember friends having parents lose their jobs. The early 80’s (82ish) were terrible for kids getting out of college. Over 10% unemployment.

http://online.wsj.com/public/resources/documents/JOBSHISTORY09.html

[SD Realtor]

I can remember lots of unemployment and those double digit interest rates were fantastic! Lots of fun indeed.

It can’t happen now though. Everything is different this time. I think every homeowner should do follow the same example. Just print your own money, use that money to payoff your mortgage, and then forgive your own debt.

Then we can use all those dollars to buy all kinds of things like oil and food. Sounds like a plan to me. I am sure lots of countries will want to buy our bonds then.

[DomoArigato]

Do any of the believers in the Inflation Boogeyman care to make a prediction on when core inflation will rise above 5%? Or even better, on the event that would cause such a rise in inflation?

Keep in mind that Ron Paul has been predicting inflationary doom-and-gloom through his newsletters since 1992 and that many economists have been predicting doom-and-gloom for Japan (which has twice the debt-to-GDP ratio as the U.S.) since the mid ’90s.

[markmax33]

[quote=DomoArigato]Do any of the believers in the Inflation Boogeyman care to make a prediction on when core inflation will rise above 5%? Or even better, on the event that would cause such a rise in inflation?

Keep in mind that Ron Paul has been predicting inflationary doom-and-gloom through his newsletters since 1992 and that many economists have been predicting doom-and-gloom for Japan (which has twice the debt-to-GDP ratio as the U.S.) since the mid ’90s.[/quote]
Domo – The core inflation is WELL ABOVE 5%:
http://www.shadowstats.com/

Why do you take the GOV’s “measure” of core inflation when it doesn’t include healthcare, food, fuel etc?

[Fearful]

[quote=Rich Toscano]
Yes, this is a good description, Fearful. I’d also add that high inflation reduces economic growth and productivity, because prices (which usually function as a signal for how to allocate resources) become distorted.

High inflation (and most notably the move from lower inflation to higher inflation) is highly disruptive and very negative for general economic well being, as one can verify by studying past episodes of inflation in our country and elsewhere.

This thread (the OP anyway) is a good example of the extreme complacency about inflation that seems to be the norm these days.[/quote]
I suspect the near zero overall inflation of 2007-2008 got people thinking “it can’t happen here”. But wasn’t there a brief period in which inflation was suddenly destabilized? I remember food and commodity price rises.

I also suspect that the low interest rates (“liquidity trap”) has gotten people thinking, again, that inflation will not happen any time soon.

I think technically that high inflation could be tolerated if it were stable. The economy could plan for it. However, I think it would be almost impossible to stabilize inflation expectations at some high level such as 10-20%.

Jeez – a little uptick in interest rates, the Fed’s inventory of securities is worth less, so the Fed can’t sell them without making the quantitative easing permanent … it is a precarious position.

Doesn’t complacency about inflation make its existence that much more likely?

[paranoid]

Let every American print as much dollars as he wants, so that everybody can be a zillionaire! Just like every citizen of zinbabwe. Why go to work every day? Why care about unemployment? Let’s just print!
Let’s be rich!

[jstoesz]

[quote=DomoArigato][quote=Fearful]
It is strange to hear someone being blase about rising prices. If the value of the dollar falls, imports become more expensive. Imports include food. When food prices rise, people complain loudly.
[/quote]

I would like to see the Government implement programs that would allow for any hungry person in America to be able to buy food. This may increase the deficit, but I would rather the U.S. take on more debt than allow people within its borders to starve.

How about you? Are you in favor of strengthening the social safety net?[/quote]

Who is hungry in America? Seems to me no one is starving in the streets…

I would love to see even one anecdotal story. I think you’d argument is pure illusion.

[SD Realtor]

Yeah food prices have not gone up at all in the past 2 years. Neither has the price of water… nor has the rate of kw hours from SDGE…. and of course there is no hunger in America…. nor are there any people living paycheck to paycheck.

I guess all those billions that the govt is providing in food stamps, (more then any other time in history) must be going to luxury items like caviar.

This thread is reading like a cartoon.

[Fearful]

It’s so weird that the same people that talk about the plight of the poor and middle class talk also about the beneficial effects of just a wee touch of inflation – or at least the absence of any harmful effects.

I suppose they are assuming that wages and welfare would both be indexed to inflation. Thus the people that immediately suffer from the inflation are the savers, and, less directly, the great majority who do not see the beneficial effects of greater economic growth in the absence of inflation.

Really, it’s the middle that pays the most. The rich have inflation-indexed investments and the poor have inflation-indexed income.

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