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Comment by whatshisface | Hacker News Reader

The interest rates on US debt are artificially low because their default risk is based on the willingness, not the ability, of the USG to repay them. That's because the ability is a given, since the government can print the currency the debt is denominated in. Corporate bonds are a bad analogy because their risk is mostly in defaulting, whereas if something goes sideways in America, Treasury bonds will fail by causing high inflation.

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This is wrong. The risk free rate is equal to the real risk free rate plus expected inflation. If there's a significant risk of excess inflation, then the yields on treasuries will rise correspondingly.

There's a difference. The govt doesn't have this ability to print money and pay debt. The Fed does.

Which means that the Fed has been keeping interest rates already artificially low by printing money.

It'll take one misstep or one recession for the debt requirements to be so high that the Fed will have to make a choice between keeping rates low, causing massive inflation vs high causing massive drop in gdp and jobs.

The govt will have to make a choice between cutting services vs paying the debt.

The government "prints money" when it sells treasuries on the public market.

The Fed creates most of the money, but it isn't the only mechanism.

The Fed might be independent in the law, but the govt makes the law.

The Fed can't directly influence real interest rates, only nominal. What exactly are you claiming interest rates are "artificially low" compared to?

The scenario you describe can't happen. If money is so easy that it's leading to high inflation above the target, then tightening money until no excess inflation happens won't cause a drop in employment. Think about it like this: either the extra money being printed is going to inflation and propping up prices, or it's enabling more jobs. If the marginal extra dollar is adding to inflation, then removing it won't hurt jobs.

The government can overrule the Fed, if it really wants to.

The Treasury can mint new money at the behest of the Executive.

The normal management of inflation by raising interest rates works by slowing economic growth. There's no reason to raise rates in a recession.

In a recession:

People lose jobs

Govt pays out more social security benefits

Govt earns lesser tax revenue

Govt interest payments on bonds are still at pre recession levels

So, govt has to issue more bonds

Nobody has the money to pay for those bonds

Thus, interest rates would naturally rise.

The fed could print money to buy bonds causing inflation or the fed could not print money causing rise in interest rates and furthering economic decline.

This is how the deficits have out the fed between a rock and a hard place.

True up to "nobody has the money to pay for those bonds": there's often a flight to safety in recessions of people moving money out of the stock market. Plus all the big international investors. Shortage of buyers is a risk but not one we've been close to so far.

One lesson of QE seems to be that the Fed can print money in a recession without causing inflation. Or at least only inflation of asset prices, not wage/consumer goods inflation.

> One lesson of QE seems to be that the Fed can print money in a recession without causing inflation. Or at least only inflation of asset prices, not wage/consumer goods inflation.

You nailed it. There was inflation with the last QE. We just changed what counts towards inflation.

Historically, recessions have not played out the way you describe. (Never, IIRC.) So I think your theory is flawed.

You need to look at other countries that have had inflation to see how this goes. US is not an island and economics works the same everywhere.

Economics works the same everywhere? Very well. It has never worked in the US the way you say it has. And if you say it works the same everywhere...

>The govt doesn't have this ability to print money and pay debt. The Fed does.

The Federal Reserve is part of the government. The Board of Governors is an independent government agency, with members appointed by the President. The individual banks are set up more like private corporations, but it's the Board of Governors that set the orders for new money being minted. Saying that it isn't the government that has the ability to print money and pay debt when this is the case is a little obtuse.

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