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.
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."
https://www.reuters.com/article/us-usa-fed-inflation-survey/...
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.
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).
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.
> Most people aren't renters
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..
how do you actually sell debt
Like can one sell their own debt?
"IOU so much money"
and then you take money from anyone who's willing to give you money in exchange for that paper.
Debt = that paper
Selling = basically getting money for that paper
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.
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.
Seems like a recipe for WWIII.
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.
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]
[0] http://www.thirdworldtraveler.com/Iraq/Iraq_dollar_vs_euro.h...
[1] https://www.mintpressnews.com/petrodollar-warfare-the-common...
[3] https://www.yanisvaroufakis.eu/2011/02/10/surplus-recycling-...
[3] https://twitter.com/TheSuperbubble/status/109944882078459904...
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.
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.
We aren’t going to go to war with China, Russia or the Euro zone for switching off petrodollars. The opposite conclusion is ludicrous.