No one knows how much the government can borrow | Hacker News Reader

No one knows how much the government can borrow

noahpinion.substack.com

248 pointsjger15318 comments

Ray Dailo has been thinking about this idea for most of his life. He has had the resources and status to access any scholar on the topic he would like. Smart and motivated to understand the answer, he has written a book about this topic that is coming out soon, but is also available in full on-line for free[1]. I'm half-way through and it is very good so far.

[1]https://www.principles.com/the-changing-world-order/#introdu...

> He has had the resources and status to access any scholar on the topic he would like.

So did Bill Gross of PIMCO, one of the largest fixed-income (bond) management firms in the world (AUM: $1.9T):

* https://en.wikipedia.org/wiki/PIMCO

He bet that interest rates would rise in 2011 after QE(2). Keynesian macroeconomists like Krugman said they wouldn't. Krugam was right:

* https://www.businessinsider.com/this-was-the-bill-gross-blun...

* https://www.salon.com/2014/10/03/paul_krugman_schools_the_de...

* https://delong.typepad.com/delong_long_form/2014/10/pimco-ho...

Be careful about experts in one field trying to expound in an unrelated field. (I have found Dalio's writing to be interesting though.)

A fixed income fund manager is a domain expert in this area, even though he was wrong about this prediction.

Their full time job is largely to understand and anticipate Central Bank policy.

My time in finance has led me to believe that traders and investors are far more prone to groupthink than they’re willing to admit to. “Hedge fund manager predicted inflation after QE and was wrong” is very low on my list of things that surprise me.

So very much this, all the way down.

The Robinhood impact on the US market makes me incredibly nervous, as it should others. That Cathie Wood can mention CRISPR in a YouTube video and gene therapy stocks rocket that same afternoon should be a fairly sizeable red flag I would have thought.

Yeah, they have an incentive to appear overconfident since their job is also largely a sales role, in order to prevent redemptions and encourage new fund inflows.

They are still the number one domain experts insofar as Central Bank policy goes, as that's one of their primary preoccupations. Perhaps aside from economists that actually work at the Fed.

They’re not the number one domain experts though. As you said, those who work at the Fed are probably number one. I’d put academic economists at number two. That leaves the relevant traders/hedge fund managers in third at best.

Fundamentally, trading an instrument doesn’t necessarily make you an expert in all aspects of it, only in those aspects related to making a buck on it. Exactly how much a trader ends up knowing seems to vary. While a bond trader might understand how bonds work very well, chances are that a grain trader would make a pretty bad farmer.

It seems in passing that fixed income traders have a moderate level of expertise on how government debt works, with their long, loud, and so far wrong predictions about catastrophic inflation undermining any claim they have towards total expertise.

I put them above most academic economists. Economics is a broad discipline and even macro specialists are most often not experts on monetary policy. Their research focus is likely distinct and tangential, and their understanding of central banks is theoretical and abstract with little understanding of the actual goings-on in the real Fed right now(1). Fixed income managers are experts on it since they need to understand the yield curve, to which Central Bank policy is one of the most important variables. Most importantly they are practical experts and know the minutae of the actual decision making variables being considered right now by the current Fed.

Yes there's some fixed income trades (in the short term quant space) that don't require such expertise, that's Taleb's Green Lumber problem, but that doesn't apply to PIMCO. Especially if we're talking about the lead at PIMCO. It's harder to get that job than it is to be a staff economist even at the Fed, so I would put him as close to number one in terms of expertise in understanding and especially predicting monetary policy.

(1) I've published papers with academic economists. I have to say, they really don't know the practical details of central bank policymaking, and nor do they have to in order to publish more papers. That's not their job.

Yeah, especially when a very common scenario is fund manager predicts the same thing every day for twenty years, is right once per market cycle, attracts attention and profits when his broken clock is correct, and is largely ignored the rest of the time.

Everybody in the industry is making predictions (with 0 dollars on the line) constantly, so cherry-picking different credentialed people to support a narrative is pointless. Especially in the field of macroeconomics where a few individuals are making decisions behind closed doors that can radically alter the economy.

I do tend to put more weight on the predictions of people who statistically understand markets. By that, I mean people who beat the market in the long term without exceptional drawdown. Ray Dalio is one of those people, whose mastery of macro trading is on display across a number of different projects in his career, often with relatively low measured risk and volatility [0][1]. Paul Krugman is not. Unfortunately, many of the loudest voices in the field of economics wouldn't have made it in a career in which compensation is directly tied to understanding of markets.

[0] https://portfolioslab.com/portfolio/ray-dalio-all-weather [1] https://atticcapital.com/bridgewater-associates-average-retu....

I know who Dalio is. I've read his Principles. He's a smart cookie. I think he's wrong.

The inflationists have been squawking about since QE started under Ben Bernanke way back in 2010:

> We believe the Federal Reserve's large-scale asset purchase plan (so-called "quantitative easing") should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment.

* https://economics21.org/html/open-letter-ben-bernanke-287.ht...

Krugman has been saying we don't have to worry about it for just as long since we're in the zero-lower bound territory:

* https://en.wikipedia.org/wiki/Liquidity_trap

Krugman has been writing about this since 1998 as Japan enter this territory a couple of decades before the rest of us:

* https://www.brookings.edu/bpea-articles/its-baaack-japans-sl...

Can you point me to the theory(-ies) that Dalio uses in his predictions for inflation? He may end up being right, but unless he can explain why, then he's just throwing darts. Show me the math you base your predictions on: at least with Krugman/Keynes, if they are wrong, models can be examined and improved on (like they were with stagflation in the 1970s).

As for Dalio's All Weather portfolio, Meh:

* https://canadiancouchpotato.com/2015/07/06/raining-on-the-al...

I agree. Dalio’s mission is to make more money for Bridgewater. Taking advice from an interested party whose interests you don’t understand is never a good idea.

I would want to understand how influencing thinking on the topic benefits Dalio. Then evaluate in that context.

While Dalio has publicly anticipated cash and bonds being poor investments in 2020, I'm making a blanket statement regarding appeals to authority (similar to you). But when authorities are to be invoked, economists are generally just sideline-experts with no skin in the game, who are unable to translate their understanding of markets into alpha. This is in response to you stating in your first post that economists are the true experts (intuitive, but I think incorrect. It's like interviewing a sports commentator (who wasn't formerly a coach or player) instead of an actual coach).

While I don't know Dalio's full position or rationale, I have another comment on this post that explains when and why I personally expect inflation. I am curious though -- can you expand on what you believe Krugman's position to be here, and why it makes sense? He doesn't seem to worry about inflation from open market operations because it works until it doesn't. There has been inflation since 2008, but most of it went to wealthy people who hold the majority of their net worth in equities and real estate. These asset classes are severely under-represented in the CPI. Because these are mostly unrealized gains enjoyed by so few, there aren't that many more people competing to buy milk and eggs, which would actually affect CPI.

Many progressive economists don't seem to realize their policies contribute to massive wealth inequality just as much as America's poor attempt at graduated tax brackets. Granted, Krugman has his moments, and for all his faults his recommendations don't seem to be purely ideologically motivated.

> While Dalio has publicly anticipated cash and bonds being poor investments in 2020, I'm making a blanket statement regarding appeals to authority (similar to you).

Sure. But my appeal-to-authority has peer-reviewed models behind him. Does yours? [citation needed] :)

> I am curious though -- can you expand on what you believe Krugman's position to be here, and why it makes sense? He doesn't seem to worry about inflation from open market operations because it works until it doesn't.

I've heard the explanation (probably more than once), and it made sense to me when I heard it, but it was not important enough to me to bother retaining. I think this is a decent blurb on it:

> Under these circumstances, normal monetary policy, which takes the form of open-market operations in which the central bank buys short-term debt with money it creates out of thin air, have no effect. Why?

> Well, the reason open-market operations usually work is that people are making a tradeoff between yield and liquidity – they hold money, which offers no interest, for the liquidity but limit their holdings because they pay a price in lost earnings. So if the central bank puts more money out there, people are holding more than they want, try to offload it, and drive rates down in the process.

> But if rates are zero, there is no cost to liquidity, and people are basically saturated with it; at the margin, they’re holding money simply as a store of value, essentially equivalent to short-term debt. And a central bank operation that swaps money for debt basically changes nothing. Ordinary monetary policy is ineffective.

> The flip side of this, by the way, is that all those fears about how “printing money” in this slump would lead to runaway inflation were predictably wrong. If you paid attention to the Japanese story from the last decade, you knew that simply expanding the central bank’s balance sheet did little, and certainly wasn’t inflationary:

* https://krugman.blogs.nytimes.com/2013/04/11/monetary-policy...

So as long as rates are at/near zero, 'printing money' won't be a problem. If, however, rates are in a 'normal' range, then yes, increasing money supply can lead to inflation at that time.

Krugman first wrote about this in 1998 when Japan first experienced what the rest of us are now seeing (it asks for registration, but you can skip it):

* https://www.brookings.edu/bpea-articles/its-baaack-japans-sl...

Generally speaking, if you want to research this yourself, look at these concepts:

* https://en.wikipedia.org/wiki/Zero_lower_bound

* https://en.wikipedia.org/wiki/Liquidity_trap

Perhaps see "The IS-LM Model and the Liquidity Trap Concept":

* https://www.semanticscholar.org/paper/The-IS-LM-Model-and-th...

* https://doi.org/10.1215/00182702-36-Suppl_1-92

> These asset classes are severely under-represented in the CPI. Because these are mostly unrealized gains enjoyed by so few, there aren't that many more people competing to buy milk and eggs, which would actually affect CPI.

It has not been "under-represented in the CPI". It is not the purpose of CPI to look at asset prices, but rather (roughly) cost of living via a basket of goods. For home, the CPI generally includes either rent or mortgage carrying costs.

To home prices, Michael Batnick and Ben Carlson discuss this in light of Ben's weblog post:

* https://www.youtube.com/watch?v=d3dO8BW9RHg&t=3m26s

* https://awealthofcommonsense.com/2021/01/inflation-truthers/

* Discussed here: https://news.ycombinator.com/item?id=25644580

> Many progressive economists don't seem to realize their policies contribute to massive wealth inequality just as much as America's poor attempt at graduated tax brackets.

Want to reduce wealth inequality? Increase taxation/redistribution. Top marginal tax rates are half of what they were during Eisenhower's administration and the (adjusted) minimum wage is below what it was during Nixon. While you may need an economist to get the "right" / "optimal" number, you don't need one to know that they're probably too low.

You should read my other post to get the full context. Surely you don't believe the Fed could buy $100 quadrillion worth of low interest government bonds tomorrow without consequence (although that distortion would peg the interest rate to whatever low rate they bought at). While Krugman is technically right that the CPI does not increase, it is for the wrong reasons, and he does not seem to be aware or care that other assets inflate as a direct consequence. Take a look at the increase in GDP adjusted equities and population adjusted real estate indices over the last two decades [0][1].

The point is that we have been experiencing inflated asset prices from these operations, another form of inflation. Because these benefit a relatively small proportion of the US population, it doesn't spill into staples as much as if it were helicopter dropped. Whereas when the Fed prints money for a stimulus check, it is more directly inflationary. We will see that with the $2000 stimulus checks, although that will be a drop in the bucket compared to Social Security once it becomes insolvent, assuming the Fed starts printing money to fund it.

> Want to reduce wealth inequality? Increase taxation/redistribution.

It seems we are in agreement if you read the last part of the sentence you quoted. Long term capital gains on 20 billion dollars of realized income is less than the effective rate paid by a doctor or engineer who made $400k. However, just because tax brackets are a problem, doesn't mean Fed market interventions aren't also creating problems.

From your "inflation truthers" link, it seems to be shut down pretty effectively in the discussion you also linked. If you want to understand why in a more quantitative way than Carlson's ramblings against a straw man, see this graph: https://fred.stlouisfed.org/graph/?graph_id=532320&rn=290#0. This is the approximate percentage of household paper wealth tied up in equities. Monetary policy has changed substantially since record keeping began, but we can see that higher highs and higher lows are being sustained over time as the Fed becomes more trigger happy with open market operations and low interest rates.

[0] https://fred.stlouisfed.org/graph/?g=kYEb [1] https://fred.stlouisfed.org/graph/?g=oCZ

While it’s true that the maximum tax rates in Eisenhower’s time were much higher compared with our own, they also only phased in at almost 10X more income - to hit the max tax bracket back then you needed to have an inflation adjusted income of over four million a year versus the $518,401 for today.

Moreover, such taxes seem terribly unfair for a person who works hard to get a single payout one time, versus a steady high income for many years - someone who makes ten million one time and then nothing else for nine years gets FAR more taken from them that a person who earns a million a year for ten years, despite the same total earnings.

Why should the first person have to pay so much more than the second?

We’re basing the prediction of inflation on the notion that there’s more money “sloshing around out there”.

I’m not convinced that more of it is sloshing. Wage growth has been largely absent for many people in the 12 years since the crisis, and as a result those people haven’t had more money to spend.

The money clearly exists of course given that it’s been printed, but there’s a good chance it just isn’t finding it’s way into people’s pockets.

Just because many people haven’t seen wage growth, doesn’t mean money isn’t sloshing around out there.

Remember 20% of Americans own ~80% of all the wealth in the US. So if your looking for sloshing money you should look at what they’re doing, not what “most” people are doing.

I think it’s fair to say that those a big chunk of those 20% probably have more money than they know what to do with, which probably means money is sloshing somewhere.

20% is 1 of 5, hardly easy to miss. A lot of that money goes toward expenses in HCOL areas, where more people live, and the salaries are higher. A lot goes into consumer goods. People buy stuff, a lot of it. A lot of the rest is in the stock market in retirement accounts because nobody has pensions anymore. Americans don’t save a lot of money, and are not particularly fiscally responsible, that money is not hiding in slosh it’s being spent. Now start talking the top 1-2% and the story changes dramatically. A few of those people are wage slaves who spend a lot, but the majority are not, and really do live different lives.

> Now start talking the top 1-2% and the story changes dramatically.

Probably the top 5-6%. The numbers are lower but the behavior is similar. You’d be surprised how soon you hit the “More money than I know what to do with” line.

Make 150 to 200k/year (not uncommon on HN) and what are you gonna do, buy a new car every year? Rent is paid, food is paid, clothes are good, 1 or 2 vacations per year, go out to eat whenever you want, one-off nice purchases aren’t a big concern ... it’s cushy. Not enough to buy real estate cash or anything like that, but def more slosh than you need.

My ex...liked to spend money. We made 300k combined in 2019 in a MCOL area, and I still have no idea where it all went. Mortgage, nice cars, eating out, a couple vacations - all gone! I’ve heard of people making 7 figures and can barely afford their lifestyle. Rule of thumb, people spend what they make. Some spend on saving/investing. I think that’s what sets apart the top percentage with a few exceptions, they make money work for them, not the other way around.

Most people just ramp up their lifestyle when they make more money.

I've been petty conservative about doing that and living below my means since the start of my career. In the beginning I was saving 80% of my income. That dropped over time as I got married and had to accept ramping up my expenses, but I've saved enough over the years to be about halfway to financial independence by my mid thirties. I strongly recommend intensely saving as the only fiscally responsible way to live. I don't think it's affected my happiness negatively at all. I couldn't buy everything I wanted, but having that safety net was well worth it in exchange.

The trouble with this approach (although rational for an individual) is that if everyone who can does this, we end up with even more of a global savings glut than we already have, and interest rates go even more negative.

As an aside, it's very odd to me that we have so much money sloshing around, and yet we're not spending it on infrastructure that would help us get off the fossil fuel treadmill and towards a more sustainable system.

Eh it’s not really odd. You are mistakenly believing that your goals (and mine here are the same) align with others and that it is an obvious course of action. For most Americans “drive my SUV down the 10 lane highway” is normal and ideal. They don’t give a shit about anything else. Sorry to say.

The biggest predictor of future economic growth is the amount of savings the people have. Not a huge surprise there. So I don't think it's bad even at a societal level.

The top percentage have no idea how to manage money or budget, they have people that do it for them.

You'd be amazed how easy it is to spend $10m a year.

Real-estate, private jets, yachts, trophy cars, trophy alimony payments, security, art collections, horse breeding, interior design, fashion, private islands, expensive educations for the kids, bequests, public philanthropy, legal fees covering both public and personal disputes, investment management fees, political sponsorship and activism...

I'm not suggesting anyone needs this level of spending - just pointing out that the people who operate in that bracket wouldn't necessarily consider themselves completely secure and comfortable, even though they're spending sums that are unimaginably huge for most of the population.

Oh for sure. But there’s this wide spot in the mid 6-figure range where you can’t afford any of that and have way more than you can spend. Typical middle class trappings aren’t a concern, upper class trappings are inaccessible.

So what do you do? Personally I’m dumping it into index funds and business ideas. Maybe thinking about buying a house soonish.

All the art of your fursona you could ever want.

Kids are expensive, especially if going the private school route.

A Bay Area house that isn’t total trash is easily 3M on the peninsula.

Elsewhere, yeah - you’d be fine if you don’t spend stupidly.

For an example: https://www.redfin.com/CA/Palo-Alto/3785-Park-Blvd-94306/hom...

Boy, I don't understand this scenario at all. At 150-200k/year, a lot of people are just going to try and save like crazy. CAPE is high, financial planners are saying that "safe withdrawal rates" are no longer 4% or even 3.25%, but below even 2.5% - even if you're not in the very HCOL areas, you're looking at needing to save more than three million dollars to retire, which can take a very long time when expecting muted market returns in the future.

> a lot of people are just going to try and save like crazy

Exactly. You save the money you don’t know how to meaningfully use right now.

I can see using a lower withdrawal rate (approximating the yield on 10-year treasury bonds) if one is investing mostly in bonds. But two caveats:

(1) Adding stocks to one's portfolio makes it easier to succeed with a 4% withdrawal rate in very low interest-rate environments: https://thepoorswiss.com/updated-trinity-study/

(2) Life expectancy. People who retire at a young age, should use a lower withdrawal rate. But a person age 75, expecting to die before age 100, could have a withdrawal rate of roughly 4% (reciprocal of 100-75) in a zero-interest-rate environment.

Personally, my issue with the term "sloshing" is that it implies the money is floating around in liquid form ready to tick up inflation. It's not.

There are a lot of places where this money has gone that are illiquid though. One would be American property; for most households a good chunk of their wealth is their house. In high-COL, high-property areas the main thing preventing a fall in house price is the lack of supply.

Another part of it is China and other countries with large amounts of USD. China has tight capital controls though so none of that money is about to leave suddenly any time soon. but if a big chunk left at once it would probably make the 1998 Asian capital flight look like child's play. Some countries like Saudi Arabia are trying to figure out how to spend it; Vision Fund literally created (and destroyed) very big companies in very short order. When Japan had this problem the hangover lasted for a decade, and depending on your view may even be continuing to this day.

Of course, the market can stay irrational longer than you can stay solvent, so these things are mostly theoretical until they're not. But no use holding your breath trying to wait for it.

Exactly all of this.

A lot of people (myself included) are just kind of nervously waiting for the other shoe to drop. That the money exists but isn’t moving through the economy means that we’re essentially building more pressure in a system that is already at 0% interest rates. This should be concerning to everyone.

The absence of velocity will encourage central banks to print more money in the belief that it will encourage spending when it clearly hasn’t done that.

If in the future we start exiting our homes and going on vacations again the velocity could shoot up sharply - at which point a lot more money is moving into the system all at once. By then, there’s a good chance the horse has bolted for capping inflation.

> That the money exists but isn’t moving through the economy means that we’re essentially building more pressure in a system that is already at 0% interest rates.

You're not wrong, but it's a problem I'd "like" to have: too much economic activity. I'd rather worry about inflation and things running hot, with low unemployment (or high participation rate), than the opposite.

Remember late 2019, when the US unemployment rate was 3.5%?

* https://fred.stlouisfed.org/series/UNRATE

> The absence of velocity will encourage central banks to print more money in the belief that it will encourage spending when it clearly hasn’t done that.

When the central bank's rate is zero, they're flooding the market with liquidity, and bond yields are zero (or negative), then that's a signal for governments to open the taps:

> I would summarize the Keynesian view in terms of four points:

> 1. Economies sometimes produce much less than they could, and employ many fewer workers than they should, because there just isn’t enough spending. Such episodes can happen for a variety of reasons; the question is how to respond.

> 2. There are normally forces that tend to push the economy back toward full employment. But they work slowly; a hands-off policy toward depressed economies means accepting a long, unnecessary period of pain.

> 3. It is often possible to drastically shorten this period of pain and greatly reduce the human and financial losses by “printing money”, using the central bank’s power of currency creation to push interest rates down.

> 4. Sometimes, however, monetary policy loses its effectiveness, especially when rates are close to zero. In that case temporary deficit spending can provide a useful boost. And conversely, fiscal austerity in a depressed economy imposes large economic losses.

* https://krugman.blogs.nytimes.com/2015/09/15/keynesianism-ex...

When rates are non-zero and bond yields are high(er), then it is dangerous to print money, and government spending could 'crowd out' private economic activity.

> That the money exists but isn’t moving through the economy means that we’re essentially building more pressure in a system that is already at 0% interest rates. This should be concerning to everyone.

I use a carbon / global warming metaphor instead of pressure, but same intuition. You're taking actions today that will play out in the future.

Assuming most excess money supply has gone into (a) stocks, pushing valuations up, & (b) real estate, pushing valuations up, what would cause a freeing of that money? Because until it's liquified, it's not impacting inflation.

The only way substantial amounts of money move out of stocks is if the Fed raises rates and bond yields improve. It has to go somewhere, and that's the only sink big enough to swallow the flow.

Real estate is trickier. There's only so much volume that the (at least in the US) inefficient process can handle, which means there's a fundamental process against a flash liquidation.

At one point China had aspirations to turn CNY into a reserve currency, which would almost certainly necessitate releasing their capital controls. But now I think they've gone back to the viewpoint that there's no safe way to do that (even a trickle of dollars from China would be a deluge elsewhere due to sheer numbers) and that being a reserve currency is more trouble than it's worth.

Heck, I'm sure if they could Switzerland and Japan would like to cease being a safe haven currency overnight; the role comes with a lot of things that have lots of downside and no upside domestically.

---

The other thing might be an increase in housing supply. Housing supply increases are now firmly out of the realm of wonky think-tank policy with real advocacy happening at a grassroots level. Already Minneapolis has removed exclusive single family zoning. But this would probably take the better part of a decade or two to start showing real progress.

The Fed can increase its overnight rate to 20% or 200% in one meeting. There is no situation ever where inflation of the sort you're talking about can't be instantly and completely killed.

Supply shock inflation (oil embargo) is a different matter.

That's trusting an inherently conservative body to take unprecedented steps.

Ultimately, it's trust. As long as the market and economic suppliers believe the Fed might do that, it wouldn't be a problem.

Hence why the Fed does most of its important work through telegraphing rather than policy changes

It's not totally unprecedented, it's the Volcker playbook.

Granted he never hiked above 20% but that was still extremely high.

By the time he was confirmed as chairman in 1979, inflation was already high.

https://data.bls.gov/timeseries/CUUR0000SA0?output_view=pct_... (see: 1969 - 1985)

The Fed had twiddled it's thumbs with half measures to let it get that way. So while not hyperinflation, I'd say it supports the Fed usually being cautious.

I mean, they were cautious before the first time they ever hiked rates that high, which would make sense; very few people are going to put their neck on the line for novel policy.

Now that we have pretty much direct cause and effect of what such a rate hike in the US would do, we probably wouldn't spend a decade and a half waffling on it.

Is the distribution of the money supply similar to the distribution of all types of wealth?

It’s pretty easy to find the 20%. You look at the neighborhoods with new construction in suburban areas for 35-45 year olds with kids. Or the urban neighborhoods with new property and 25-40 DINKs or same sex couples. That’s the cohort that’s prospering.

Problem is the wealth is mostly house. Once you hit the groove, house value keeps you going. Those folks get derailed by layoffs at the wrong time or divorce.

> I’m not convinced that more of it is sloshing.

A lot of the 'inflationistas' only look at the quantity/supply of money (M1/2), and don't bother examining what it is doing. The velocity of money is an important component:

> This view can also be represented by the so-called “quantity theory of money,” which relates the general price level, the total goods and services produced in a given period, the total money supply and the speed (velocity) at which money circulates in the economy in facilitating transactions in the following equation:

* https://www.stlouisfed.org/on-the-economy/2014/september/wha...

* https://en.wikipedia.org/wiki/Velocity_of_money

As you said, if it's just sitting around, it's not going to effect CPI:

* https://en.wikipedia.org/wiki/Money_supply#Link_with_inflati...

Yep, people keep conflating growth of the money supply should lead to rising CPI inflation. But money isn't neutral, you need to pay attention to the Cantillion Effect.

When money enters into the economy through the wealthy, they buy stocks and it gets trapped. You can track this trapped money by looking at the velocity. When you increase the money supply by dropping interest rates, its essentially given according to whom is already wealthy. So if interest rates drop, you should expect the money supply to rise, velocity to drop, and assets to rise, but CPI should barely be touched. Therefore the more wealth inequality you have, the less that money supply increases through interest rates affects the CPI.

The CPI tracks how the common person spends their money. On the other hand if you were to institute a UBI, this would barely touch the money supply, but the CPI would sky-rocket. Disentangle the two concepts.

I've built up an intuition that the money supply should match changes in productivity, and that if it doesn't it will eventually lead to problems. But it's also notable that the trend is extremely important. If you do match, everything should be fine and this can last forever. If the money supply rises faster than productivity, you see what we've seen these past 50 years since we've been off the gold standard, a huge surge in asset prices. And if productivity rises faster than the money supply, people flee assets and into money. This is called a Deflationary Spiral. But the opposite state is basically an Inflationary Spiral, with people unwilling to spend their assets.

Dalio in his "Explaining the Economic Machine" video talks about a "Beautiful Deleveraging". My thought currently is that such a thing isn't possible. If you wait for the debt to get so bad that you have to do something, you can't match productivity anymore. Therefore the only thing you are left to do is grow the money supply less than productivity. And that changes everything. Suddenly the trend is to money. And once the money managers work that out, they all rush out of assets and into cash. This triggers a crash. So it's the trend that dominates, and there is no way to balance the deleveraging.

I just wanted to say that this was a great, well-thought comment and thank you foe your time and writing it. I’d love to hear other, similar comments.

Thank you.

The 1960's is a fascinating decade to me for the economy because everything turned out backward to what was expected and it seems that nobody learned anything from it.

Check the statistics in the 1960s. Inflation was out of control. And yet curiously, the stock market was down. How can everything be rising in price except stocks?

Why was this? Well take a look at my previous comment. The 60s were under the era of the gold standard. That means that the money supply was roughly constant. Back in the 60s we had 5% productivity growth. So money was growing slower than productivity. Now we see the picture, cash was the bottleneck so it was the treasured asset. Governments used this cash for welfare starting with the new deal and continued to spend, and so people had money to spend. The economy was vibrant, the companies were actually flourishing. And so companies earnings were higher than ever, but their price was down which caused their PE to drop by a lot. This PE drop is a result of deflationary spiral.

So in 1971 we flipped the script. Money supply grows, and for a decent amount of time we were cautious and grew the money supply slowly. This cautiousness ended up being that balance I mentioned. But as we grew the money supply, the fears that inflation would come back never appeared. But that is because we grew the money supply in a completely different way this time. Not through government debt but though interest rates.

We keep growing the money supply, and as wealth inequality grows, we notice we can keep growing the money supply further. Drop those interest rates! All the while productivity is dropping like a rock as money managers are out-competing entrepreneurs for capital. But there's a problem. And that's today. Interest rates are at 0%. We've run out of runway.

Suddenly we have to rise the money supply not by lowering interest rates, but directly though government debt. And so this is the argument that you are hearing right now between economists and in the linked article. "Well, we've increased the M2 by 4000% since 1971, so I guess that means the government can borrow just as much". They are conflating. That are assuming the perfectly spherical cow of neutral money is the system. You. Need. To. Track. Who. Gets. The. Money. Money flows.

What happens when the government starts spending? Exactly what happened in the 1960s. CPI Inflation rises because people are spending it. What's happening to the money supply? Well, it's getting bigger because the government is spending, but it's getting bigger at a slower rate than we are used to and it might even match productivity. That slower growth might cause some growth stocks to take a hit, but the economy should be fine. It's possible that we slow the growth of the money supply to match our 1% productivity, and that the beautiful deleveraging occurs.

But what is the FED thinking of this? They are terrified. Oh no! The inflation is back. They are thinking through the neutral money state, so they know what they have to do. To stop inflation, we rise interest rates. This is exactly what they did in the 60s. And so what we have is an economy where the money supply is shrinking, but the CPI keeps rising until the government stops spending. But the stock market is dropping, which only causes the government to spend more! The trend has reversed, the stock market crashes, interest rates spike back to 20%, and homes are going for 10% of the current prices so people are underwater, which cases them to default, and deleveraging has decimated the money supply. But due to the welfare, happiness is up. People are doing just fine.

What should have happened? Well, the money supply should match productivity. This means that interest rates should not determine the money supply, the money supply should determine interest rates. If productivity is rising at 1% and the money supply is rising at 5%, well, interest rates should rise until the amount of new debt created is back down to 1%. If productivity is rising at 5% and the money supply grew at 1%, we should lower interest rates until the cheap money stimulates people to take out loans. What rate will that be? Only the economy at the time can discover it based on their biases and fears.

So how much should the government borrow? People see comparison between Capitalism vs Communism as a scale, but it's just as important to track Centralized vs Decentralized. The government has a freedom to think big and long-term, but that makes them less efficient at the small stuff. People need to care about the small stuff and are punished if they do so poorly. If you have wealth inequality, you end up with a Centralized system no different than Communism, but power is granted through wealth not politics. This is what limits how much debt the government should take out.

Really good video explanation of the difference (and the importance therein) between the monetary supply and the velocity of money:

https://www.youtube.com/watch?v=l0mh7cCjwDU

At least the first ten minutes of that (hour-long) video should be mandatory viewing before someone is allowed to post about inflation on the Internet (or write a op-ed in some big name newspaper).

I think this is going be a go-to video for me to post when anyone says "printing money" or "money supply". Thanks.

Yeah, Mark is a PhD and teaches the CFA which is obviously no-bullshit. His channel is fantastic, and half of the time it really is him talking about CFA prep.

Hard to find a purer source of financial information than analysis from someone who makes analysts. He sometimes talks about markets and how he's positioned and that's a gold mine as well.

I find this omission to be super weird.

Also:

Advocates of empowering local communities talk about increasing the number of times a dollar is used within the community. Just to make up an example: Before WalMart a dollar is used 10 times before leaving, after WalMart a dollar is used 2 times.

What's that measure called?

And that's microeconomics, right? If it's important for microeconomics, why isn't it important for macro too?

Also:

Big money has to chase big investments. Probably because of transaction costs and limited attention.

So while there's innumerable small opportunities, they remain uncapitalized.

How do we (society) get these things done? Find a way to scale up. Empower more people to make more investments. So instead of a billion dollar fund looking at 10 large investments, we have 1,000 million dollar funds looking at 10,000 modest investments.

It’s all going into the housing market. Try getting a loan for anything else and you need a pound of flesh as collateral.

Consider also that the value of the stock market is approximately 5x what it was 12 years ago:

SPY on 2/23/09: 73.93 SPY on 1/22/21: 382.99

>Wage growth has been largely absent for many people in the 12 years since the crisis,

Median real household income [1] since the bottom of the crisis has risen over 20%.

Median real personal income [2] is up over 15% over the same time (a younger demographic).

If you dig more you find similar income gains across every quintile and breakdown. The vast majority of groups from what I can find have seen decent wage growth.

Which group and how large is it that has largely absent wage growth? Citation?

[1] https://fred.stlouisfed.org/series/MEHOINUSA672N

[2] https://fred.stlouisfed.org/series/MEPAINUSA672N

Economists as a whole don't have a great track record of predictions here, either. You know the saying, right? Economists have successfully predicted 9 of the last 6 recessions.

> You know the saying, right? Economists have successfully predicted 9 of the last 6 recessions.

You know that the person who said/wrote that was Paul Samuelson, one of the most important economists in the 20th Century, right?

> To prove that Wall Street is an early omen of movements still to come in GNP, commentators quote economic studies alleging that market downturns predicted four out of the last five recessions. That is an understatement. Wall Street indexes predicted nine out of the last five recessions! And its mistakes were beauties.[20]

* https://en.wikipedia.org/wiki/Paul_Samuelson#Aphorisms_and_q...

He literally wrote the (text)book on economics:

* https://en.wikipedia.org/wiki/Economics_(textbook)

Krugman recently came out and said almost all of his advice about globalism was wrong. The man can't be trusted.

Citation, please? Krugman has been laudably willing to confess error; I wasn't aware he'd done so on this point.

Here's one:

> And so during the 1990s a number of economists, myself included (Krugman 1995), tried to assess the role of Stolper-Samuelson-type effects in rising inequality. Inevitably given the standard framework, such analyses did in fact find some depressing effect of growing trade on the wages of less-educated workers in advanced countries. As a quantitative matter, however, they generally suggested that the effect was relatively modest, and not the central factor in the widening income gap.

> Meanwhile, the political salience of globalization seemed to decline as other issues came to the fore. So academic interest in the possible adverse effects of trade, while it never went away, waned.

> In the past few years, however, worries about globalization have shot back to the top of the agenda, partly due to new research, partly due to the political shocks of Brexit and Trump. And as one of the people who helped shape the 90s consensus – that the income distribution effects of rising trade were real but modest – it seems appropriate to ask now what we missed. What aspects of rising trade did we either fail to see at the time or fail to anticipate?

* https://www.gc.cuny.edu/cuny_gc/media/liscenter/pkrugman/pk_...

One hour talk by him from 2019:

* https://www.youtube.com/watch?v=rWQ3jCURzy0

* https://fbe.unimelb.edu.au/newsroom/paul-krugman-globalisati...

Thanks, but these citations don't at all support the GP's sweeping assertion that "Krugman recently came out and said almost all of his advice about globalism was wrong. The man can't be trusted."

Krugman's cited gc.cuny.edu paper is titled, "Globalization: What Did We Miss?" It concludes, not that economists were wrong per se, but that they didn't adequately take into account the pace of globalization: "Basically, the big problem with surging globalization wasn’t so much changing demand for broadly defined factors of production as the disruption caused by rapid change. And that rapid change appears to be largely behind us ...." (Emphasis added.)

The summary in the University of Melbourne piece (the third cite) is to basically the same effect.

(I don't have time to watch a one-hour YouTube video, but thanks for the link.)

> Thanks, but these citations don't at all support the GP's sweeping assertion that

Agreed, it was hyperbolic. But it was a correction nonetheless, and IMHO it should be noted as form of intellectual honesty.

"wrong per se", do you really want to bicker over the meaning of wrong. It was his advice/predictions/theory (call it what you want), that when followed turned out vastly different than predicted, that is wrong in my opinion. Look how many years it took him to come out and say "the pace" was not adequately (incorrectly) taken into account. He was even awarded the 2008 Nobel Prize in Economics and 1.4 million dollars for this theory that played a large part in tearing apart the middle class.

My comment was indeed too hyperbolic but basically true. A mistake that affected our country so negatively cannot be forgotten or forgiven.

> A mistake that affected our country so negatively cannot be forgotten or forgiven.

Sounds like 20-20 hindsight to me. Predicting the future is hard; making important societal policy choices based on those predictions, likewise.

As opposed to the people who are wrong and don't admit it:

* https://economics21.org/html/open-letter-ben-bernanke-287.ht...

As Paul Samuelson, an important 20C economist, said:

> Well when events change, I change my mind. What do you do?

* https://quoteinvestigator.com/2011/07/22/keynes-change-mind/

Those who admit they are wrong are more trustworthy than those that don't.

Probably an interesting read.

But, as always, predicting the future is not possible, even when looking at the past.

But we can, to some extent, predict the outcome of things that are already happening. Not too hard if someone jumped out of a plane without parachute, and even then you'll need an error margin.

https://en.m.wikipedia.org/wiki/Vesna_Vulovi%C4%87

Just because he's been thinking about it doesn't mean he's right.

His funds posted record losses (-20%) in 2020.

https://www.bloomberg.com/news/articles/2020-11-06/bridgewat...

Nobody was right about 2020.

Don’t be so sure about that.

Rokos is up 44% - they are much smaller in terms of capital but probably trade similar strategies (global macro).

https://www.bloomberg.com/news/articles/2021-01-11/chris-rok...

As long as much of the world’s trade is settled in US dollars, there is a demand for them, and some demand for US treasuries.

The merry-go-round of the Fed increasing the money supply and buying US government debt with the newly created money can keep going for a while, but it will lead to a steady decline in the value of the dollar vs other currencies and some official inflation over time, as the cost of imported goods rises. And there is already high inflation in other areas not measured in official inflation. The other component of inflation is increasing wages, but I don’t see that happening soon.

In terms of government debt - while the nominal value of US government debt rises, some of it is also somewhat eroded as the real value of the dollar decreases. So it looks like the plan is to monetise the debt, at least somewhat. I am not sure if paying the government debt back over time through increased taxes is on the agenda - I doubt it.

There is a trend of increasing de-dollarisation of world trade, which can already be seen in trade between countries like Russia and China moving to using their own currencies and the euro for a larger portion of trade.

I think in the future more world trade will be settled with some type of bancor type basket of currencies where USD is one component, rather than the only component.

Folks like to talk about what really keeps the world at peace (relatively speaking compared to pre-ww2), and while I think nukes are a large part of it, another huge part is dollar based settlement and the absolute devestating sanctoning power the US derives from it. That isn't to say sanctions are morally pure: they exact a huge cost on the regular people who live in the countries subject to them. However, they're still probably better than being bombed.

The more things that are not settled in dollars means the reduced effectiveness of sanctions and the higher likelyhood conflicts will escalate into hot wars.

On the other hand, the US not being able to dictate to everyone else is probably a good thing itself, so I'm not sure on net what the best outcome is.

Pax Americana is the term you're looking for.

Absolutely, the result of de-dollarisation of world trade will be a shift in the world’s power dynamics. I think it’s pretty inevitable by now. I hope we have learned enough about history to be able to have economic competition/conflict without military conflict.

As a silver lining for some parts of America - a weaker dollar together with onshoring of some industries probably means some jobs will return to the US.

I do wonder what will really end up as the alternative though. The yuan and euro both have major structural issues of their own.

A synthetic basket of the top currencies. Such a product exists (SDR aka Special Drawing Rights), but it’s niche. When you consider securities indices (SPY, for example), it’s not that outlandish.

https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/14...

> Such a product exists (SDR aka Special Drawing Rights), but it’s niche

The primary reason that SDRs are niche is that only governments are allowed to hold them. If the IMF allowed them to be bought and sold by private investors they might see more use.

Agreed, but I'm unaware if there is any regulatory constraint preventing commercial financial entities from offering a similar product. The IMF doesn't need to provide approval if there is no regulation preventing financial institutions from providing the same currency mix to retail and institutional as a product (with the provider managing the abstraction between individual currencies and the basket).

One problem is that the IMF adjusts the currencies in the SDR basket over time. It would be feasible for a private issuer to offer something based on the current SDR basket. But next time the IMF reweighs the basket, they will have a problem. The reweighing operation is designed to not the change the value, but a private issuer that wanted to follow the SDR basket as it changes would have to move quickly in the market to reweigh its assets, and there would be a risk they would lose out in the process. (Maybe they could hedge against that risk, but that would incur an added cost.)

I think the biggest reason why this product isn't offered, is there is no great demand for it. Anyone can do the same thing themselves just by buying the underlying currencies. But, investors probably would take more interest in genuine SDRs issued by the IMF than in some private company's simulation of them. Real SDRs would have far less counterparty risk and operating expenses than such a simulated SDR would have.

The world's power dynamics will certainly shift. I wonder if there's any fictional thriller novel written about such a future shift and how nation states deal

> As long as much of the world’s trade is settled in US dollars, there is a demand for them, and some demand for US treasuries.

Which is also why the US tends to have a trade deficit:

> The Triffin dilemma or Triffin paradox is the conflict of economic interests that arises between short-term domestic and long-term international objectives for countries whose currencies serve as global reserve currencies. This dilemma was identified in the 1960s by Belgian-American economist Robert Triffin,[1] who pointed out that the country whose currency, being the global reserve currency, foreign nations wish to hold, must be willing to supply the world with an extra supply of its currency to fulfill world demand for these foreign exchange reserves, thus leading to a trade deficit.

* https://en.wikipedia.org/wiki/Triffin_dilemma

Printing dollars to buy treasuries won't work forever. China has already started tilting away from treasuries and holds almost a trillion dollars less than they did a few years ago.

Now there is talk of the Fed issuing notes with durations longer than 30 years...

There will be consequences eventually

The counterpoint is Japan, which has 280% debt-to-GDP ratios (about double the US), and is still selling government bonds at 0% interest rates.

I'm not saying demand is infinite, but it very well could be significantly higher than the current supply. In particular older demographics tend to heavily favor low interest rates and high money supplies. Old people tend to have high savings, and are risk-averse enough that they'll park it in liquid sovereign bonds even at negative real yields. And the continuing aging of American and world demographics isn't changing for the next century.

The bank of Japan literally to hold half of that.

It's just printing cash with extra steps.

Exactly. Once you factor in "who owns that debt" the picture changes. See 'external debt by country'

https://en.m.wikipedia.org/wiki/List_of_countries_by_externa...

> but it will lead to a steady decline in the value of the dollar vs other currencies.

That would be true if the other currencies weren't printed like crazy also. Have a look at past year's increase in M2 circulating supply of the EUR or GBP. They're very similar to the one of the USD (percentage wise). That might be the reason why the dollar didn't collapse compared to them. The dollar (and the other currencies) collapsed though, when compared to assets that didn't increased in quantity at the same pace: real estate, stocks, gold and bitcoin. None of which is part of the CPI, hence the low reported inflation in the developed world economies.

I can't help feeling that the question is ill-posed. It's not "how much", but "why" that matters.

Think about it: Would you borrow $10,000 to a friend who opens a dentist with a solid business plan? Probably yes.

Would you borrow $1000 to a friend to cover an existing debt? Probably not, or, if you are very generous, you would gift them the money.

If a government can demonstrate that it borrows money to invest in the economy and increase future taxes -- e.g., by building infrastructure, educating the population, researching top-notch tech -- by all means, borrow more!

However, if all the government does is increase social welfare that it already struggles to afford or satisfy the luxury of a dictator, then stop borrowing now!

government does both, but you cannot specify what your loan pays for

If someone loans you money to start a business and you blow it gambling, you're going to have a hard time getting them to give you another loan.

The government can say it's taking on debt responsibly, but if there are no subsequent economic improvements eventually their credit rating will fall.

You don’t have to be faster than the bear, just faster than your slowest friend. The entire first world is headed towards Japanification.

That analogy only works if lenders can only stop giving loans to one nation at a time. In reality, rates can be raised for any combination of nations simultaneously. It's not like the DRC looks like a good investment just because its not as bad as Venezuela.

This.

Economists may not studied hyperinflations much, they've spent a lot of time looking at inflation, the one economic variable public policy designed by mainstream economists is very good at predicting and influencing. They know it's the result of the amounts people are willing to spend on stuff (including labour) rising faster than the amount of stuff available. They know that government spending more money into the economy can does increase the amount people are willing to spend on stuff (but seldom 1:1) and that it can also increase (or decrease) the amount of stuff available. They know this relationship depends on how the money is spent and also on the structure of the economy and this varies over the economic cycle as well as between countries. They know people look forward with inflation expectations when setting contract prices and wage demands.

There really isn't much reason to assume inflation, a rate of change, has a stable relationship with the absolute size of the debt. It seems like the article was inspired by Rogoff and Reinhart's similar argument that a particular debt/GDP ratio was an inflection point leading to a drop in economic growth. But that paper's arguments for there being a specific amount of debt that was the problem were empirical rather than theoretical, and more importantly, were wrong (infamously the paper's main result was shown to be the result of a coding error accidentally excluding countries from their calculation)

Recently the Fed hasn't been good at getting inflation to 2% (their published target) and economists haven't been good at predicting whether the Fed will succeed, or modeling why the Fed has failed.

Noah (article) doesn't emphasize this but he does refer to it. We don't really understand ordinary inflation much less hyper-inflation. Even the cause of the famous period of inflation in the 1970s is still very much debated.

The Fed faces exactly the opposite challenge to hyperinflation though (and there's no shortage of literature about zero lower bounds and liquidity traps, and no real surprise economies find themselves [back] in one)

But my point isn't that we know everything about inflation, it's that we know some spending is more likely to trigger it than others and so asking 'how much' the government can borrow before triggering hyperinflation is asking the wrong question, not least because expectations are known to have a large impact on inflation and so Goodhart's Law applies. And whether the current macroeconomic policy emphasis on stabilising inflation is excessive[1] or not, we definitely do know ways to get inflation down

[1]a more usual line of criticism than arguing economists don't study inflation enough!

> If a government can demonstrate that it borrows money to invest in the economy and increase future taxes -- e.g., by building infrastructure, educating the population, researching top-notch tech -- by all means, borrow more!

That's remarkably shortsighted. You're missing whole swaths of knock-on effects of borrowing. What if I told you that the government only borrows money on the backs of the working class, who pay for it in increased prices that the economist class doesn't measure because they have lost touch (compare the increase in price of a quarter pounder vs cpi)... Then would it be worth it unlimitedly borrow?

> What if I told you that the government only borrows money on the backs of the working class, who pay for it in increased prices that the economist class doesn't measure ....

"Objection, your honor — assumes facts not in evidence."

Stop with the bogeyman conspiracy. The working class prefers low unemployment and high salaries over losing a few percent on a checking account. Inflation is generally good for workers and bad for owners of unproductive capital. Yeah, sure, owners of productive capital benefit, but only by employing workers which is a net loss compared to getting free money without productive investments.

> if all the government does is increase social welfare that it already struggles to afford or satisfy the luxury of a dictator

Or prioritizes surveillance of its citizens and invasion of foreign countries on flimsy pretext over human health and wellbeing at home and abroad

Directly related is "Modern Monetary Theory" or MMT. Here's a 24 minute explainer from NPR, Planet Money.

https://www.npr.org/2021/01/20/958854717/modern-monetary-the...

And a brief explainer from The Conversation

https://theconversation.com/modern-monetary-theory-the-rise-...

Also known by its detractors as "Magic Money Tree." One of those detractors is of course the Adam Smith Institute.

https://www.adamsmith.org/research/the-magic-money-tree-the-...

I thought I remembered Freakonomics doing a fairly in-depth discussion on this, but I can't find it. Maybe I mis-remember.

It's not really an economic question, it's one of politics, intimidation, and a global empire.

The "magic money tree" is backed by the full force of the United States. Heads of state who have suggested alternatives found themselves confronted with a sweeping range of responses, starting with bribes, then coercion, sanctions, and if those fail, hiding in a hole from US forces.

There's nothing magic, nor mysterious about it. We're the only ones (right now) with the system in place to hold the rest of the world hostage. When those in charge press their luck too far, or if by accident they let an idiot run the place for 4 years, that grip on things could loosen, and eventually our position could collapse.

When that happens, we'll be forced to use money from someone else's "magic money tree". Having to export hard currency instead of magic money, would cause prices on all things imported to double or worse in a few years or less.

The only real question is how many % of the value of the dollar when spent as an export is real, and how much is the "global reserve currency" status. I suspect it used to be %20 real, and lately it's more like 50% as our leaders fumble the ball too much for the rest of the world's liking.

Does MMT work if you're not the reserve currency? (Honest question; I don't know enough about the theory to say.)

But it is really an economic question. What will be the results if you run your economy this way? What will be the results if you do so as the reserve currency, and what will be the results if you do so when you're not?

MMT works so long as you've got the ability to conjure your own money. (Eg, not on the Euro, or a currency pegged to another currency.)

The idea is that you create money to pay for things, and then pull back excess money through taxes. (As opposed to pulling in money through taxes, using it to pay for things, and whining that you don't have enough.) So it 'works' as long as you have your own independent national currency.

Another mind flip: the scarce resource isn't money - it can always be generated - but labor. Inflation starts when there's a labor shortage, because up to that point you can just employ more people to meet demands.

Another mind flip: the scarce resource isn't labor - but energy.

Edit: A gallon of oil is equivalent to roughly 400 hours of human labor. Manual work is nothing compared to the energy contained in fossil fuels (or external energy sources in general). An argument could be made that the economy is in decline due to this, that the sources of fossil fuels are getting more expensive. Most of the cheap sources have been used up already. There is still a lot of oil left, but it's a lot more expensive (offshore, fracking) to extract than it used to, and it's getting worse.

Mark Blyth on MMT:

https://youtu.be/2ONGvkAoOI0?t=1550

- it only applies to the US

- depends on having a hegemonic currency (i.e. everyone else earns in your currency and has to convert it, so that you can run a deficit and others supply the capital to fill it)

- contingent on control of the house, senate, and presidency, for about 3 terms in a row, to do all the things you want to do (in the MMT program)

- though sure, we could spend more on stuff we care about; we're not at "capacity" yet.

- you've already got a bond market in the US... why do do we need to re-invent everything in the world when the bond market allows you to already do it?

- hardly any other country actually sets their own monetary policy because the dollar is so dominant. When the fed goes up or down, it's effect is global.

- since every country has to import, if you print a lot of money, you'll get inflation through exchange rates & the import channel

Haven't listened to this one yet: https://youtu.be/NfKiW0Gfn04

What do you mean by "economy is in decline" ? And, on what basis do you claim fossil fuel is getting more expensive ? The oil price hasn't gone up significantly over the past decades. The cost of electricity, adjusted for inflation, hasn't gone up.

There are many ways GDP is being "padded" (by excluding certain liabilities for example), things like unemployment numbers as well. The "true" economy has been stagnating or in a downward trend for at least a decade already.

And the actual cost (EROI) of extracting fossil fuels isn't necessarily (directly) tied to consumer prices.

Renewable energy is cheaper, so cheap that some people on HN sarcastically suggested to use renewable energy to extract oil from tar sands.

> you create money to pay for things

only your own citizens would accept this money, and if the citizenry cannot "create things" (for example, the country does not have the capital investment to have created machinary/automation or infrastructure), this printing of money is meaningless. MMT is crackpot theory that is lacking imho.

Well, you've basically just argued against fiat currency, not MMT specifically. So, shrug emoji?

MMT doesn't even really work when you are the reserve currency. It's psuedoscience. It absolutely doesn't work when you aren't the reserve currency.

It's supposed to work for any monetary sovereign, not just the reserve currency.

> What will be the results if you run your economy this way?

The old Daily Show (with Craig Kilborn) used to have a bit where they would announce weekly box office totals denominated in Turkish lira. The numbers were absurdly large.

MMT has nothing to do with any kind reserve currency status. The primary mistake most people make with MMT (and one which is continually enforced by both sides of the political media), is that they think it is a policy choice, or a "kind of thing a government does".

If nothing else, please takeaway that MMT is a _framework for economic analysis_. You can apply it to any economy, you can use it to look at any policy decision, and you can work with this tool if you're a conservative or progressive. I find a lot of value in using it to understand China, Japan, emerging markets, economic history, etc.

With relation to the original topic, the answer through an MMT lens is very simple. Nominally, there's no limit.

A cornerstone idea of MMT is that a currency issuer can always purchase anything for sale in the currency that it has a monopoly over. Examples of these monetary sovereigns include the US, the UK, Japan, Australia, China. It does not include the EU, or most emerging markets (who effectively use another government's currency).

The implication of this is that a monetary sovereign government has no binding constraints on the amount of debt it can issue (it can of course issue debt to itself if no-one else is around to buy it, i.e. Treasury -> Central Bank).

Now that's not to say that government borrowing has no real limits. The most useful constraints to look at are real resource constraints (possible supply of goods and services), and external constraints (do you need to pay something in a currency you can't control?). If the government is purchasing more goods or services than the resource constraints are available to supply, you'll see an appreciation of prices (inflation).

Simply creating more dollars doesn't lead to inflation. Fiat currencies are just units of account (think score points), not some kind of commodity. Japan's money supply has quintupled since 1990 to 2020 (from memory), while the consumer price index has been roughly flat, and the USD/JPY exchange rate has been roughly rangebound (wide range, but not a monotonic increase like one would expect if using intuition )

Rushed for time, but happy to discuss/debate points of contention.

I've been deep diving on MMT lately (per Rohan Gray, Stephanie Kelton, and L. Randall Wray); while I'm not entirely convinced, one thing that's surprised me is that it's less prescriptive than is oft assumed from its elevator pitch, and is much more focused on accurately describing what states do already. The claim is not that we can starting printing money willy-nilly without consequences; it's that we do that already, and we can be smarter about it if we're honest about that fact.

A couple other interesting outgrowths from that premise:

- the Federal Jobs Guarantee concept, which in addition to any positive externalities of putting the under-employed to work, also pegs the value of the dollar to labor (@$15/hr, $1=4min), while also providing a negotiating BATNA for the working class with their private employers.

- Because money is printed into existence, rather than an empty ritual of collecting revenue before spending it, taxation exists only for money to exit the system, reducing inflation and creating demand for dollars; tax payments aren't used to pay for anything, and are effectively burned. Kelton also makes an interesting point: rather than taxes being a "necessary evil" policy to pay for some other good, they can actually be reconstrued as positive goods in and of themselves: to price externalities (pollution tax) or discourage behavior (sin tax), etc.

The strongest argument against MMT, regardless of its theoretical merits, is simply the practical one: that Congress already perpetrates vast quantities of graft and fiscal short-sightedness, and it's unwise to trust such a transparently corrupt and dysfunctional institution with additional leeway for limitless spending.

> rather than taxes being a "necessary evil" policy to pay for some other good, they can actually be reconstrued as positive goods in and of themselves: to price externalities (pollution tax) or discourage behavior (sin tax), etc.

You can think of the very high marginal income taxes prior to Reagan, even higher prior to JFK as 'sin taxes'. People opposed to high marginal tax rates like to point out that those high taxes didn't produce more revenue. But MMT thoery would tell you revenue was never the point. The point was to discourage people with the power to divert money into their own pockets from doing so.

This misconception needs to die. The government doesn't borrow money. The government doesn't need your money.

The government prints money. They could stop accepting taxes tomorrow and still be able to keep spending. They print the money.

Treasuries exist as an accounting fantasy for people to believe the government needs to borrow, they don't. Any treasuries outstanding today basically just represent dollars to be printed in the future.

What matters is amount of dollars in circulation and velocity of money. Inflation.

Your point is accurate that true borrowing isn't really an apt description since they just alter the effective supply of money but technically they do need to borrow because they don't have complete control of the Federal Reserve. Granted congress could change that if they wanted to if the Fed angers them enough. But exactly how such a drama would play out is complicated.

Another misconception that has to die is that governments can get away with printing money indefinitely. The concept itself is not new: Roman Empire also did the same, shortly before its fall. Soviet block countries did that before 1989. Venezuela and Zimbabwe also did it. See the common theme here?

The difference between the smaller countries and the USA is, the dollar is basically the world's currency now. The world can afford to let Venezuela fail, but if the USA fails, the whole world goes down with it, so IMO they'll happily "lend" the USA more money.

With the Roman Empire, I'm guessing other problems caused it to fall; it didn't fall because of money printing, but it was printing money because it was falling.

But printing dollars like they're toilet paper might lead to the US no longer being the reserve currency. That isn't a divine right. It isn't a once-and-forever thing. We can lose it.

There would have to a perfect storm of events that stains the US as unstable. A Pandemic or mortgage crisis is not enough.

We’d need devastated cities, war on our soil, or a string of insane natural disasters (Yellowstone erupting).

The only other realistic event? China brings a billion people into mostly lower middle class, and dwarfs the notion of American consumerism through sheer scale.

The U.S. share of world GDP has already shrunk from over 40% after WWII to under 25% today. This was the reason Nixon had to take the dollar off the gold standard and make deals with Saudia Arabia and OPEC to ensure oil was priced in dollars, otherwise many countries would have used other currencies for their trade. Since then we have been importing consumer goods, first from Japan and more recently China, to the detriment of American workers. The rest of the worlds growing share of GDP needs more and more dollars, and we can't satisfy that demand without continuing to debase our currency and causing problems at home. More and more countries are making deals outside the dollar system, countries that are too big for us to blow up easily.

This is what ended the British pound as the worlds reserve currency, and the Dutch gilder before that. Their share of world GDP shrunk rendering their position untenable.

I can't do this topic justice, but I thought this was a really good write-up, https://www.lynalden.com/fraying-petrodollar-system/

> The world can afford to let Venezuela fail, but if the USA fails, the whole world goes down with it

Hypothetically if the riots at the Capitol had gotten really bad and America fell even close to Civil War a couple of weeks ago, I'm quite certain the rest of the Developed World would have quickly switched to using the Euro or the Yen or the Yuan or some combination of those and more.

I seriously doubt it would take more than a few days before the rest of the world moved on without the US.

There's no real Euro safe asset equivalent to Treasuries. Until that changes, the dollar is here to stay.

I'm not an expert in this area, but I doubt the world changing their debt to a different currency is that simplistic... and I doubt you're an expert either.

For one thing everyone wanting to get rid of their USD and buying EUR would cause the USD to crash and EUR to spike, so, well, there's their economic crisis (because suddenly your 10000 USD debt would turn from a ca. 8200 EUR debt to something like a 20000 EUR one).

My understanding is that, while government debt is in some ways a fiction, it serves an important purpose in setting the risk-free rate of return in the economy. Yes, the debt could be eliminated and replaced with constant money printing, but this would eliminate that important market signal.

By pinning rates low as the Fed has done, that signal has been disrupted, and that is probably why we've seen repeated financial bubbles and panics. Also, it runs the risk of money being diverted to projects that only make sense because the risk-free rate of return is so low that extremely risky ventures seem "worth it."

> Also, it runs the risk of money being diverted to projects that only make sense because the risk-free rate of return is so low that extremely risky ventures seem "worth it."

This makes it sound like low interest rates encourage high-risk high-reward ventures. However, they also very much lead to unprofitable businesses surviving, where the possibility of high reward is simply not there; zombie companies. This allows badly managed companies to coexist along with well managed ones, increasing market inefficiencies and lowering productivity of an economy by not letting markets eliminate rotten apples and allowing better business models to take over.

printing money is essentially a wealth tax on everyone that owns the money. It's a flat tax. However, it also can cause prices to rise, and then... what will they do?

Inflation isn’t evenly distributed, because new money isn’t evenly distributed. Those who get the new money earlier experience less inflation. This phenomena is known as the Cantillon effect.

The government creating money is the country borrowing money from itself. At some point, a good portion of that money needs to be paid back, in the form of destroying said printed money.

Simply not true, especially if wealth grows and people hold onto money as savings.

The money supply needs to increase to account for how people are using it. When there's not enough money, it's far far worse than inflation.

Wrong. You don't have any clue what you're talking about. Fractional reserve banking exists to create money regardless of how much money is being printed. Inflation is the measure if price increases overtime. Velocity does not equal inflation, it indicates greater consumer demand for goods and thus can signal rising prices.

The government does borrow money. It borrows it from a central bank by selling it bonds. Bonds for which the public owes the future payments. Thus the government borrows from the public.

Put down the Marx and new monetary theory bullshit. Money has value, money has meaning, money is real. Your understanding is flawed.

The only time people care is when they care. And you can't predict when that will happen. It's like a flock of birds flying in the air, you can't figure out which individual bird caused the first change in direction, but it quickly spreads across the entire flock.

The other fallacy is that inflation is here, it's just not being measured by the Federal Reserve properly. There is crazy inflation in things like house prices and assets like stocks. Look at the vast income inequality that has occurred in the last 15 years. Whoever is invested in stocks and housing market has made money. Everyone else is basically forgotten or left by the wayside.

> The other fallacy is that inflation is here, it's just not being measured by the Federal Reserve properly.

Another theory is a 0% inflation rate doesn't mean 0% inflation. It means inflation is close to the rate that goods/services are getting cheaper naturally as technology & market organisation improves.

That assumes that goods and services are getting cheaper, which isn't the case for several key necessities. In particular, housing, education, and medical care have risen far faster than inflation for the past 40+ years.

Are house prices inflation or appreciation? It may be unfounded but is an increase in value always inflation? (Serious question, not disagreeing with your statement.)

Given that a large part of the increase is due to the availability of low-interest mortgages, the description as inflation seems reasonable.

What's "appreciation"??

Modern days, the word "inflation" tend to refer to how government measures price increases based on a basket of core consumer goods. And in that case, appreciation and inflation are completely different things.

But when talking about housing/asset prices in aggregate, a 10% appreciation means you need 10% more money to buy the same asset, thus losing 10% purchasing power. Whether you call that appreciation or inflation doesn't make a difference.

Housing is a debt market. Houses don't cost 10% more just because prices have increased 10%. Manipulatedd interest rates have made debt service 15% cheaper. It's not that simple. Sure, you need 10% more for the down payment - I'll give you that.

The other specific thing about mortgages and other debt is that banks are a source of new money when they create loans. Banks do not even have to have a fractional reserve on hand any more, and have far more flexibility to create money as long as they can survive the stress tests. Which means that banks are far more in charge of the money supply than most acknowledge.

Which can cause a huge amount of inflation in housing, if there's not enough of it to go around for extended periods of time.

Inflation is intended to measure middle class distress. If gas/food/rent goes up people making under 50k can fall into poverty and bankruptcy. If GME goes up to $2000 the middle class isn't hurt much at all. Just a few hundred or few thousand people get rich.

Inflation has many measures. Household inflation is one of them, but there are many others, and using one measure (e.g. CPI) for measuring all inflation is problematic.

Inflation is the amount that prices rise without an increase in real value. And if there is no increase in real value, then you haven’t actually made any money.

Conversely, if people are making money on assets in real terms, then that is appreciation, not inflation.

Income inequality is a difference in real income. It’s growing because the economy is differentially allocating real value, not because of inflation.

> There is crazy inflation in things like house prices and assets like stocks.

but these items are not required for somebody to live - so they are not used in the inflation calculation.

Stocks, no. But houses are generally considered essential. Or at least I home they will be. With the way that my community has accepted mass homelessness without any concern fir allowing new housing to be built, I fear that we may regress from the 20th century position of housing being a human right.

The cost of housing is the rent cost (which is the imputed rent cost of your own home, if you owned the house - not the interest cost of a mortgage).

This really is one of the most interesting and consequential economic questions of our time. And I do imagine we will get an answer, because there is no political will to cut spending anymore.

The reason that all this stimulus hasn't affected measured inflation all that much is because the mechanism of monetary policy tends to be top-heavy, creating low interest rates which obviously benefits the rich more than the poor (people with high credit who tend to borrow larger sums more frequently). The rich channel this wealth into assets like real estate and equities, which are underrepresented in the CPI, in my opinion. There should be more of a "Volume Weighted" approach to balancing where large sums of the global economic market cap are sitting.

And since the rich can apparently just hold wealth in index funds indefinitely and cash out what they need for expenses (don't worry, if a pandemic freezes the economy, the Fed will rescue your position and create a new bull market!), few of those dollars creep into the economy. The "buy, hold, and never sell the entire market" philosophy creates economic distortion that enables this type of policy, and is incentivized by lower long term capital gains tax rates.

So by using this regressive, but fast acting, method of money printing, we can stave off hyperinflation and prolonged bear markets at the expense of increased income inequality. A more progressive, but slower acting way to finance government spending is to print a universal stimulus check, tax it, and spend the tax. We do both, but lean heavier toward the open market operations approach.

The hidden variable, not mentioned in this post: social security. Social security, which is due to become insolvent sometime in the next two decades, will have consequences like the progressive stimulus checks, but on a much greater scale, if the Fed starts printing money to finance it. This is where the "everything bubble" will convert into plain old inflation, when millions of everyday people are getting and spending cash that was printed out of thin air, assuming there isn't some sort of reckoning before that.

You are correct that QE printed money while keeping inflation in check by using financial institutions as conduits of the new money. The new money mostly ended up inflating assets which aren't necessary to survive. (Rents inflated some, but house prices more.)

However the recent stimulus payments have been more like direct payments to people. We are already seeing this shift from asset inflation to staples inflation, but yes when SS exhausts its savings the Fed will top up the difference with new money and we will see monetary inflation of staples.

> print a universal stimulus check, tax it, and spend the tax

why go thru the trouble of printing money to give to people, only to tax it back by a bit? The money is created out of thin air in this case - the size of the pie hasn't changed yet, so it is a cause for inflation if it isn't met by a corresponding increase in productivity.

Because if they just print the money and add "money printed" to the Treasury's balance sheet, they are no longer pretending that the dollar is bound by some rules of legitimate currencies, which would surely send shockwaves through the financial system.

Yes, there is deadweight loss and time wasted this way, but it prolongs the game of trying to appear to be a fiscally legitimate government, and it ensures that everyone gets something, not just the beneficiaries of existing government works.

The answer is you can borrow unlimited debt if you pin interest rates at 0% (though eventually you will lose control at the back end of the yield curve without heavy govt intervention). What happens to your currency in that process is debasement/hyperinflation.

> What happens to your currency in that process is debasement/hyperinflation.

Not if the vast majority of population lives paycheck to paycheck and food and basic necessities production are not disrupted.

In that/our case, you simply get the inflation of the assets the "elites" who have disposable income choose to spend that disposable income("investing" in real-estate, bitcoin).

That’s only accurate if paychecks and food adjust at the same rate. You’re pretty screwed if your wage is set at the beginning of the year but bread is ticking up every week.

The savings rate is a whole other issue. Strictly on the value proposition of the dollar and discussing economics, the savings of common folks in any amount cannot be invested into production assets meaningfully with real yields as prices rise = they are worthless. Meanwhile homes, auto, healthcare, education, all rise and what you are holding has less purchasing power. Inflation is very real even if the price of specific items like your socks are not rising substantially. Also CPI is a basket created by the fed to sell bonds, it has no other purpose.

How are homes having less purchasing power? The rise in real estate prices in western democracies has been a global phenomenon, and everywhere it's happened the problem is exactly because the value of homes is rising disproportionate to everything else - that's not inflation! If you own a house, you are materially increasing your wealth by a lot because if you could liquidate that asset (and a bunch of people can because they have two or more) then the amount of raw stuff you can buy with the proceeds has gone up and up.

Maybe not disrupted in their everyday lives, but it certainly leads to more concentration of wealth by the elites.

It absolutely does.

There were some responses on Twitter to this post that basically said every historical case of hyperinflation was due to behavior and governmental instability rather than pure economics of the supply of currency. I'm not sure how true that is, but it does seem odd that we don't really have a model for hyperinflation if it results directly from sovereign debt and money creation.

> What happens to your currency in that process is debasement/hyperinflation.

Japan may disagree with that assessment:

* Interest rate: https://fred.stlouisfed.org/series/INTDSRJPM193N

* Inflation: https://fred.stlouisfed.org/series/FPCPITOTLZGJPN

* YEN-USD: https://fred.stlouisfed.org/series/EXJPUS

Japan is in a category of its own. They have a declining population which followed a massive asset bubble that popped 30 years ago. https://fred.stlouisfed.org/series/POPTOTJPA647NWDB

> Dean Baker goes after people who claim that Japan has suffered terribly from its debt burden, arguing that Japan has actually done pretty well. But he's wrong: Japan has done better than he says

> Dean looks at GDP per capita. But Japan's aging population means that you really want to look at GDP per working-age adult. And by that measure Japan's growth has been essentially the same as America's

[…]

> The truth is that these days Japan looks less like a cautionary tale than like a role model. Its performance only looks bad if you assume that the debt is a terrible problem, when all the evidence says that it isn't

* https://twitter.com/paulkrugman/status/1215628645869420545

25 years of <1% rates, huge 'money printing', and yet no inflation or currency debasement, and respectable per-worker GDP growth.

Where's the problem?

I have to admit Japan is an interesting case and brings up good counter points. Really wages need to go up to spark inflation on the ground floor for common items.

Krugman has a 1998 paper on Japan that's probably still relevant today, especially since more places are hitting zero rates:

* https://www.brookings.edu/bpea-articles/its-baaack-japans-sl...

* https://www.princeton.edu/~pkrugman/japans_trap.pdf

Giving these a read, thanks.

You can't just ignore all the people who aren't working though? One of Japan's specific problems (which will also hit much of the West in a decade or two) is that society is aging fast and the ratio of retirees to working people is increasingly unsustainable.

Exactly. Just reading those quotes (haven't read the linked article) leads me to think that you can't ignore the huge liabilities comprised of education, medical care and pensions.

> ratio of retirees to working people is increasingly unsustainable.

I'd like to see the economic models that were used to calculate at what (estimated) point this becomes "unsustainable". Do you have a citation?

What percentage of the population has to be "elderly" or taking their pension? What is the minimum percentage of the population that needs to be in 'working age' years before it becomes a problem?

Unless there are models people are just throwing darts in making these statements. Show me that the math exists (even though I may not understand it as a layman). Pontificating is cheap.

Krugman in 1998:

> The purpose of this paper is to show that the liquidity trap is a real issue-that in a model that dots its microeconomic i's and crosses its intertemporal t's something that is very much like the Hicksian liquidity trap can indeed arise. Moreover, the conditions under which that trap emerges correspond, in at least a rough way, to some features of the real Japanese economy. To preview the conclusions briefly: in a country with poor long-run growth prospects—for example, because of unfavorable demographic trends […]

> In the model of sections 1-3, a liquidity trap will arise only if future productive capacity is actually lower than current capacity. Before loosening that constraint, we can ask why one might expect Japan's future capacity to be relatively low compared with today's. And the obvious answer is demography: Japan's combination of declining birth rate and lack of immigration apparently means a shrinking rather than growing labor force over the next several decades.

[…]

> Moving outside the formal model, the prospects for a liquidity trap also depend on investment demand. Here demography again comes into play: the prospective decline in the labor force reduces the expected return on investments.

* https://www.princeton.edu/~pkrugman/japans_trap.pdf

Do you really think a rich country of 100M hasn't done its homework on this? I'm personally partial to Matsutani's Shrinking-Population Economics:

https://www.amazon.com/Shrinking-population-Economics-Lesson...

From a review: " The parlous state of Japan's pension system is well known, but Matsutani reviews the projections: by 2030, contributions will cover only 44% of expenditure, leaving a projected yearly deficit of ¥‎57 trillion by 2030 and a cumulative debt load of ¥‎1,240 trillion, roughly equal to the sum of all household wealth in Japan today. Getting back to balance would entail either more than doubling contributions from 15% to 34%, or cutting benefits by 56%."

> Do you really think a rich country of 100M hasn't done its homework on this?

I'm sure they have. But we're all a bunch of randos on the Internet to each other, which is why I'm asking for citations: I'd like to hear the sources which people's thoughts come from so I can better assess them.

Otherwise the person on the other end of the screen is just another crazy from /r/wallstreetbets. :)

An aging society would suffer from inflation because there is a lot of wealth but not enough workers to service all the demand.

Turkeys think they have a great life right up until Thanksgiving.

While I’ll readily concede that Japan has surprised everyone, at some point in time the sheer magnitude will overcome the lenders’ belief. Their ability to repay, and then it all goes downhill very fast.

That’s the thing - hyperinflation happens fast. You usually don’t see inflation, high inflation, higher inflation, and then hyperinflation. Instead you see slow deterioration and then a huge jump in a short period of time. It’s like falling off a cliff in its suddenness.

As Noah says in the article. The question he's addressing is how to know when we are approaching the cliff. We all agree it is out there but we can have a much better society if we know how far. If we fall off the cliff of course that is bad. Conversely if we cripple our opportunities because we are afraid, but the cliff is really many many trillions of dollars further away, that is also bad.

That seems akin to predicting the stock mocket... If you, as a lender, could predict before everyone else when the cliff was approaching, then you would stop lending sooner.

If everyone does that, then the cliff moves closer, and your algorithm loses all predictive power.

UK debt-GDP has hit 250% during the Napoleonic Wars and 240% after WW2:

* https://en.wikipedia.org/wiki/File:UK_GDP.png

* https://en.wikipedia.org/wiki/United_Kingdom_national_debt#H...

The UK is still rolling forward that debt:

* https://www.theguardian.com/business/2014/oct/31/uk-first-wo...

Japan peaked at 180%.

The US can always revert the Trump tax cuts (for the rich), as they didn't seem to do anything useful and get some extra revenue. That should help.

Japan has been well above 180% for years. [0]

[0] - https://www.statista.com/statistics/267226/japans-national-d...

> sheer magnitude will overcome the lenders’ belief

Japan lends to itself. The BoJ owns so much of the government bond market that there are days where the benchmark bond simply doesn't trade [1]. Under absolutely no circumstance will Japan have any issue repaying Yen denominated debt when they have a monopoly on the Yen. They're theoretically not far away from just retiring the whole bond market and just running an overdraft at the BoJ for all government borrowing requirements.

Can you provide evidence to your point on hyperinflation happening all of a sudden too? I think all instances in history (except maybe Zimbabwe, but I've lost the details) involve external obligations that are unable to be met (War repatriations payable in gold for Germany, extreme dependance on imports for Venezuela since the economy was so misbalanced, high USD denominated debt burdens for Argentina ... etc). I

[1]: https://www.wsj.com/articles/nobodys-trading-10-year-japanes...

Take a look at this page on Investopedia. [0]. All the examples are less than 24 months. Also, WEForum has some stats from 2019, where Venezuela has been in hyperinflation for a longer period of time. [1] and of course, Lebanon is probably the most current example. [2]

I’ve saved the best for last, though. Nicholas Kraus is probably the leading expert on hyperinflation, and has a great list here. [3]

[0] - https://www.investopedia.com/articles/personal-finance/12291...

[1] - https://www.weforum.org/agenda/2019/08/inflation-deflation-v...

[2] - https://www.reuters.com/article/us-emerging-inflation-graphi...

[3] - https://www.cato.org/sites/cato.org/files/pubs/pdf/hanke-kru...

> Japan lends to itself

I meant to address this point separately. What you say is technically true, but if they just retired the debt, Japan would simultaneously become a much poorer country.

Remember, the owner of the debt gets to mark it as an asset, so while the debt would be canceled out, the assets would drop in an equal amount [0].

[0] the Accounting equation is Assets = owners equity + liabilities, so a reduction in liabilities must cause a corresponding reduction in assets. And yes, it’s that insidious, but it is spun by people who have an interest in people not understanding this.

Small tangent: I tend to borrow all the money that is offered to me at 0% effective rate, e.g., when buying a new mobile phone. I would even go as far as to borrow all money that is offered to me at sub-inflation rates.

Is this rational?

Yes this is rational behavior unless the payback schedule gets you in trouble or the rates shift.

Yes it's totally rational. I do the same thing. I had a school loan that was at a 0.1% interest rate. I could have paid it off with my savings, but my savings interest was more than that, so it made more sense not to pay it off. I was sad when it was finally paid off, because it meant I was no longer arbitraging the interest.

When it comes to cars, what's often offered is 0% financing or some kind of cash back. It may actually be better to go with the cash back.

Preet Banerjee made a 10 minute video laying out the math on why not going with 0% financing may be better:

* https://www.youtube.com/watch?v=KGPu0jPryfU

> When it comes to cars, what's often offered is 0% financing or some kind of cash back.

Well, that just means the financing is not 0%.

That video was good, but I'm disappointed he didn't point out that it's usually better to rent a depreciating asset, ie. get a lease. Of course there are a lot of other factors, like how long you typically keep your car for. But if you're the kind of person who like a new car every 3-4 years, it's almost always better to just lease the car than to buy it. Especially if you have a schedule C business that you can write some of it off against.

> That video was good, but I'm disappointed he didn't point out that it's usually better to rent a depreciating asset

He has lots of video on personal finance. I'm sure it's covered in one of them (he has a rent versus buy-house comparison for example: IIRC he used to own, but now rents).

Yes, if it's the same cost.

Take my car insurance, for instance. I can pay it all in one chunk, up front, for $X, or I can pay two payments of $Y. But (IIRC) X < 2Y. It's not the same cost. (This is one of the ways that it's more expensive to be poor - if you don't have the money to pay for car insurance up front, it costs more.)

You just need to be careful because usually these offers have fine print along the lines "if you don't pay this back fast enough, you will have to pay very high interest even on the debt you already paid off."

Yes!! I did one of those 0% TV purchases. They purposely made it so you couldn't set up automatic payments, so you had to do it manually every month. One month I was a day late, so they changed the interest to 19%, and charged me interest for all the past payments too.

Luckily I was able to get them to reverse it and then I just paid it off, but had I not noticed, I would have owed them a ridiculous amount of money.

It is rational if you think you can meet your debt obligations e.g. through a job.

However, the problem with this approach is that your bank account no longer offers "resistance" to spending. It is easy to get into debt that you can never repay. This shouldn't be an issue if you do proper accounting but many people don't do that.

The term hyperinflation needs to fall out of the lexicon. In every casual economic discussion it's the favorite apocalypse goto word for people, and every one seems to think it's right around the corner.

It's not going to happen.

Why not? Is there something that makes the US immune?

Also, people fixate on the "hyper" part and assume the US is going to go full Zimbabwe/Venezuela where an egg costs a trillion dollars, but even sustained non-hyper inflation of 10% or 20%/year would wreak havoc on most people's retirement funds or mortgages.

The highest rate of inflation the US ever hit was in the 1980 (https://www.usinflationcalculator.com/inflation/historical-i...) at 13%.

The world did not end, and the rate was not sustained. This time period corresponds to high interest rates because it has to, but the value of loans was depreciating rapidly.

Since then the Federal reserve has had a target inflation rate of 2% over time and if you look at the data they've hit it.

So yes, the US has substantial protections against uncontrolled changes in the inflation rate - that's the Federal Reserves mission statement.

The rate was not sustained because the books have been cooked. How the US measures has been periodically tweaked to keep the 2% story going. Using the early 1980's metric of inflation we've been at roughly 10% annually since the turn of the millennium: http://www.shadowstats.com/alternate_data/inflation-charts

Wouldn't it be "good" for people's mortgages, especially if they've got a long term fixed rate?

Inflation only happens if the production cannot keep up with demand. I believe that the US's productive capacity is very high, and have a huge slack (due to heavy mechanisation and automation). If demand grows, production can keep up - and thus, no inflation.

Countries that import most of their supply (like in venezuela) cannot have slack in their production, and thus you see high inflation in times of high demand and low supply.

You can consider "hyperinflation" as a consensus that the government is lying about the value of its currency. How does a consensus develop that someone is lying? It's a complex process, and doesn't have a neatly aggregatable answer.

This is incidentally why Sargent considers the end of hyperinflation to be coincident with a regime change - a liar cannot become credible nearly as easily as he can be replaced.

There's persuasive evidence that high levels of government and private sector borrowing tend to precede Bad Stuff™.

The World Bank published a detailed report about precisely this topic on December 2019, right before the pandemic, at https://www.worldbank.org/en/research/publication/waves-of-d... -- here's the first paragraph of that report, summarizing the findings:

"The global economy has experienced four waves of debt accumulation over the past fifty years. The first three debt waves ended with financial crises in many emerging and developing economies. The latest, since 2010, has already witnessed the largest, fastest and most broad-based increase in debt in these economies. Their total debt has risen by 54 percentage points of GDP to a historic peak of almost 170 percent of GDP in 2018."

That was written right before the pandemic. Since then, governments and businesses have borrowed aggressively. It's safe to say that globally, we are in uncharted territory. As to what happens next, your guess is as good as mine.

Democrats massively deficit spend to save the economy because Republican policy tends to lead to economic peril, but Republicans oppose it, except when they are in power, during which they massively deficit spend not as a necessary evil but to cut taxes for the wealthy. It’s head spinning.

Some counter perspective laid out by Peter Schiff, while I do not agree with everything said, I find it valuable and entertaining: https://www.youtube.com/watch?v=M6k0QEnYpSQ

The same Peter Schiff calling for runaway inflation in 2008-2009?

> He has that exactly right: the central dispute is between those who see depressions as the result of inadequate demand, implying that inflation will fall and that printing money does nothing unless it boosts employment, and those who see depressions as the result of maladapation of resources or something — anyway, something on the supply side — who predict that running the printing presses will lead to runaway inflation.

> How could you test those rival views? Why, how about having a huge slump, to which central banks respond with aggressive monetary expansion? And that is, of course, the test we’ve just run. And everywhere you look, inflation is low, verging on deflation.

> So we’ve just run the Schiff test — and his brand of economics, by his own criteria, loses with flying colors. And that goes for just about all anti-Keynesian doctrines: we ran as close to a clean experiment as you’re ever going to get, and the answer is no.

* https://krugman.blogs.nytimes.com/2014/11/22/the-wisdom-of-p...

He predicted the financial crisis. And predicting is hard, especially, if you have a "creative" government. The underlying problem was postponed, not fixed, and it got bigger in the mean time. I do not agree with him on everything, but he has many apt observations and convincing explanations. And at least he looks at fundamental mechanisms, which I like to interpret as a hard reality. I believe we now live in a soft reality, where the sweet falsehoods are preached to and believed by masses.

The technical explanation why, when rates are zero, and you 'print money', inflation does not (or at least in all our current experiences has not) appear(ed):

* https://en.wikipedia.org/wiki/Liquidity_trap

It's what Keynesians (like Krugman) generally follow, and they've been right to date. Krugman for one has been writing about this since (at least) 1998 when Japan entered this situation:

* https://www.brookings.edu/bpea-articles/its-baaack-japans-sl...

* Same paper: https://www.princeton.edu/~pkrugman/japans_trap.pdf

The paper is probably still relevant today, especially since more places are hitting zero. Krugman has made better predictions than some trillion dollar asset managers:

* https://www.businessinsider.com/this-was-the-bill-gross-blun...

* https://www.salon.com/2014/10/03/paul_krugman_schools_the_de...

* https://delong.typepad.com/delong_long_form/2014/10/pimco-ho...

I started reading Krugman's weblog around 2009, and AFAICT, everyone who bet/predicted against Keynesian economics in the intervening years has generally been wrong (or at least more-wrong, even if K hasn't been spot-on).

The money printed to finance the government debt is not backed by a production of value. It just increases the money supply, while not increasing the amount of goods that one can buy with that money, hence by nature it is inflationary, ie it makes money less valuable. The market is complex and the effects may be postponed in time by years, but the fundamental mechanisms persist. The consequences are negative and sooner or later we will see them, or it is likely that we are already deeply affected.

> The consequences are negative and sooner or later we will see them, or it is likely that we are already deeply affected.

This was published ten years ago (November 2010):

* https://economics21.org/html/open-letter-ben-bernanke-287.ht...

Still waiting for said debasement and inflation. Any time now. Real soon.

There is the CPI, but it does not represent all prices. House prices and stock went up a lot, in many cases to irrational levels. The young people without a house feel the pain. They will inherit the national debt as well. Now the commodity prices steadily increase. Add to it increasing wages and more expensive imports and we will see rising costs of production and in consequence the CPI.

The CPI takes into account housing, specifically the carrying costs (which is 'rent equivalent'). Housing itself, like stocks, is considered an asset and is not part of inflation.

> [Young people] will inherit the national debt as well.

You know who else will inherit the national debt? Their children, and grand children, and great grand children, and great-great grand children. Not too long ago the UK rolled forward debt from the South Sea Bubble (1700s), Napoleonic Wars (early 1800s), Crimean War (late 1800s), and WW1 (1910s):

* https://www.theguardian.com/business/2014/oct/31/uk-first-wo...

As long as economic growth is higher than the interest rate of the debt, it's generally not a problem. And interest rates have been, with some gyrations, dropping for over 700 years:

* https://www.visualcapitalist.com/700-year-decline-of-interes...

> Housing itself, like stocks, is considered an asset and is not part of inflation.

The CPI is an arbitrary indicator set and counted by the government in secrecy, the same entity that has the incentive to keep its value low. Even if someone trusts the government, it does not mean they should trust it completely.

* https://www.forbes.com/sites/perianneboring/2014/02/03/if-yo...

* https://www.forbes.com/sites/greatspeculations/2020/08/31/is...

As I mentioned before printing money not backed by the creation of value diminishes the value of money. Otherwise why bother working. The government could print money for all of us and we could party all the time. The printing press was invented quite a while ago, I wonder why no one come up with this solution earlier!

The debt is a burden and increasing it, increases the burden. You can argue of utility of increasing the debt in bad times, but then it should be decreased in good times. If it is not happening then there is something fundamentally wrong.

CPI is peer-reviewed and a form of it is used in most countries:

* https://en.wikipedia.org/wiki/Consumer_price_index

* https://en.wikipedia.org/wiki/Price_index

It's is reproducible by non-government people:

* https://en.wikipedia.org/wiki/MIT_Billion_Prices_project

If you think that inflation is higher than the reported GDP growth:

* https://www.youtube.com/watch?v=d3dO8BW9RHg

* https://awealthofcommonsense.com/2021/01/inflation-truthers/

* Discussed: https://news.ycombinator.com/item?id=25644580

CPI measures a basket of goods and these will differ from country to country. But, let's assume the US government does a good job on estimating the increase in the consumer prices for an average citizen. Still it does not address the problem I mentioned about printing money, which is dissolving the value of money. If that was not true, as I mentioned earlier, we could just print the money and have eternal vacations.

The question is why we do not see the negative effects in the reported CPI. One explanation is a deflationary force that mitigates the inflationary moves. The long term stable deflationary force is an increase in productivity by technological advancements. But I do not think it can keep up with the printing press.

Krugman said that Trump, if elected, would bring global a recession. [0] Oops.

Point being, he tends to let politics cloud his judgement—especially in the last 10 years or so.

[0] https://www.politico.com/story/2016/11/krugman-trump-global-...

And he quickly (2-3 days) retracted that call once he recovered from the initial despair of the 2016 election results:

> But will the extent of the disaster become apparent right away? It’s natural and, one must admit, tempting to predict a quick comeuppance — and I myself gave in to that temptation, briefly, on that horrible election night, suggesting that a global recession was imminent. But I quickly retracted that call. Trumpism will have dire effects, but they will take time to become manifest.

> In fact, don’t be surprised if economic growth actually accelerates for a couple of years.

* https://www.nytimes.com/2016/11/14/opinion/trump-slump-comin...

* http://krugman.blogs.nytimes.com/2016/11/11/the-long-haul/

We all make mistakes: the important things is to own up to them and learn from them.

Have any of the people who said Bernanke's QE would cause (hyper)inflation and currency debasement publicly recanted?

It’s quite simple: Anyone can borrow as much as someone is willing to lend.

That said, the government doesn’t borrow money. They create it.

They _can_ create it. But they mostly borrow (via bonds like treasury bonds), rather than create. Only those countries' gov't who can't borrow at a low enough rate would create - such as venezuela.

Treasury bonds are bought with USD. Where does USD come? The government prints it. Borrowing doesn’t fund the government, the printing press does.

At the bottom of the tower of USD is printing money. ~80% of treasuries are held domestically, and the foreign buyers purchase it with USD that came from the treasury.

They could opt to pay for it out of tax revenues. Or they can issue new bonds to repay old bonds. They can print money, but the optics are bad.

The loss of confidence in the value of the dollar is as much a cause of hyperinflation as the actual money supply. Loss of confidence in the value of the dollar can rapidly increase the velocity of money, which means that less money supply is needed. This causes more inflation, which further weakens confidence, increasing the velocity further, causing prices to spiral out of control.

It’s all printed money. Taxes are paid in USD. USD comes from... the government creating it from nothing.

Tax revenue is old printed money. Bonds are future printed money. All government revenue is money they created.

What I mean is that they don’t need to necessarily print more money, or at least print 100% of the debt.

I think you are right. They can borrow as much as creditors are willing to provide. Also, borrowing money and creating it are the same thing! Indeed, when money is borrowed, money is created:

DR Loan 100 CR deposit 100

To nitpick, I think it’s more accurate to say what government does isn’t borrowing. And fractional reserve banking isn’t lending, it’s accounting fraud.

Wow! Accounting fraud? You do realise that if you kept personal accounts and you lent money to me, you would post exactly the same journals as the bank because you are carrying out exactly the same operation. The only difference between you and the bank is that the bank’s IOU is widely accepted and yours isn’t.

I used to be an advocate of Austrian economics until I worked as a bank auditor and really got to understand operationally how they work. Now, I feel the Austrian economist movement has done the world a great disservice and it’s a crying shame because there’s nothing wrong or insidious about banking.

I'm aware of how accounting and banking works. Borrowing does not create money in FRB, since all loans are deposits. Unless of course, the bank creates more certificates than deposits (but don't call it fraud!), which the Fed did prior to 1971, as did many private banks prior to the Fed.

FRB always ended in bankruptcy and bank runs. A central bank was created to bail them out. And what happened? The central bank went bankrupt doing the same thing. In 1971 the US couldn't honor its foreign gold obligations – which is exactly what happens when you promise to deliver something you don't have. The US defaulted on their obligations.

Can you cite your sources? There's a lot to unpack in your post but let's just focus on a couple of things. Firstly, borrowing _does_ create money - it's how most money comes into existence. Straight from the horse's mouth:

> Most of the money in the economy is created, not by printing presses at the central bank, but by banks when they provide loans. [0]

You said:

> Borrowing does not create money in FRB, since all loans are deposits

Loans are not deposits. Loans sit on the asset side of the balance sheet and represent an IOU from the borrower to the bank. Deposits sit on the liability side of the balance sheet and represent an IOU from the bank to the deposit holder - the borrower in this case. Banks are literally in the business of swapping IOUs... Our IOUs which are not widely accepted for their IOUs which are widely accepted.

Furthermore, commercial banks make absolutely zero promises to redeem their IOUs for base money or central bank issued money, or anything else for that matter. Read the terms and conditions of your bank account to see for yourself! If the bank creates too many bad loans, then the value of their IOUs fall to take this into account.

Lastly, Central banks were not created to bail out commercial banks. The first central bank (the Bank of England) was created by the Government at the time to fund the on-going war with France. The government gave the Bank of England monopoly rights over currency issue in return for financing the war - i.e. giving them a whole bunch of IOUs on the Bank of England to pay soldiers and factories because the credit risk of the government at the time was considered quite poor.

[0] https://www.bankofengland.co.uk/knowledgebank/how-is-money-c...

Seems like they can easily borrow 100 billion in one shot.

                     Tendered          Accepted
  Primary Dealer      $77,850,000,000  $10,790,550,000
  Direct Bidder        $6,350,000,000   $2,009,150,000
  Indirect Bidder     $20,935,350,000  $12,193,340,000
  Total Competitive  $105,135,350,000  $24,993,040,000

https://www.treasurydirect.gov/instit/annceresult/press/prea...

Because institutions like pension funds are mandated to buy them.

For a hilarious and sharp rap-battle comparison of Keynes vs. Hayek (which... is basically the framework for all competing conversations on this topic) check out:

Just a reminder - this is a rap-battle music video about economic policy. This is why the internet is amazing:

Fear the Boom and Bust: Keynes vs. Hayek - The Original Economics Rap Battle!(Youtube)[0]

[0]: https://www.youtube.com/watch?v=d0nERTFo-Sk

I try to post this everywhere people want to start yelling about federal debt (which correlates much more closely to the thing the government wants to borrow for than the actual size of the debt):

Interest as Percent of Gross Domestic Product (essentially: how much money do we need to pay for our spending habits):

https://fred.stlouisfed.org/series/FYOIGDA188S

We are nowhere near the peaks that we saw in the 80's and early 90's. All those 30-year bonds issued at the start of the Reagan revolution matured and were paid off, no one seemed to notice, and none of the rhetoric seems to have changed at all.

This just isn't a problem in the modern economy. Interest rates have been sitting at or very near GDP growth for four decades now, which means that money is as close to "free" as it is possible to get (that is, if the US borrows $4 and spends it, it sees a $4 increase in GDP).

That doesn't mean that serious argument about sustainable spending can't be made in good faith, but it does mean that almost all arguments of the form "we can't afford it" are not. This is triply so if the argument includes a credit card metaphor.

Buddy, the interest as a percent of gdp matches the 80's and 90's because rates are near 0%. Real yields are negative in europe. Its not even close to the same situation.

"Interest rates have been sitting at or very near GDP growth for four decades now" thats short-sighted and not really true: https://fred.stlouisfed.org/series/fedfunds

Theres no free lunch, you don't get to just print unlimited money and have no consequences.

> Theres no free lunch, you don't get to just print unlimited money and have no consequences.

I think you're arguing the opposite. We are printing money, yet inflation stays stubbornly low. We borrow money, but don't have to offer any interest; in fact, in some circumstances people pay us to loan us money. That's the definition of a free lunch.

Inflation is not low, have you checked stock market lately? Have you seen home prices up 15% yoy? Education costs rising, auto, etc. There is a left and right tail of the inflation bell curve. High impact items are increasing in price rapidly while things like flat screen tv's stay low from certain market dynamics. Also because wages are not rising, inflation is rising faster than people understand even on left tail items.

Please see the article "Inflation Truthers"

* https://awealthofcommonsense.com/2021/01/inflation-truthers/

* https://news.ycombinator.com/item?id=25644580

Inflation is low.

Asset price increases and inflation are entirely different things. The former represents growth, the latter is a dilution (sort of "good" vs. "bad", but not really, economics is complicated, yada yada).

Education costs are indeed part of inflation, as are car prices. And yes, those are rising, but they're being offset on balance by other things (phones, say) getting cheaper.

Look, inflation indexes are complicated and there's room for argument about exactly how you want it computed. But statements like "inflation is not low" don't really capture the truth.

Yes my underwear is going to offset the rising prices of homes, education, healthcare, etc. Also even your example is incorrect, the iphone price keeps rising at a healthy clip. They can now be $1300.

> the iphone price keeps rising at a healthy clip. They can now be $1300.

The iPhone (1) was introduced in 2007 and cost US$ 600 for the 8 GB model. What were its capabilities in 2007?

* https://en.wikipedia.org/wiki/IPhone_(1st_generation)

What, for $600, can you get now? And what are the capabilities of a $600 smartphone in 2021?

An iPhone 12 mini is $700 [1], an iPhone 11 [2] 64 GB is $600, and a 128 GB for $650.

The same number of dollars gets you much more in regards to technology in the past. That's not nothing.

[1] https://www.apple.com/shop/buy-iphone/iphone-12

[2] https://www.apple.com/shop/buy-iphone/iphone-11

You have to comare with a $600 smartphone from 2007 and $600 one from 2021 and see how far apple is actually ahead

> see how far apple is actually ahead

Or any smartphone really. Or computers generally.

It's not that there are no consequences, it's a question of the trade off of those vs if you don't borrow/print money. The experience from the recovery of the great resession have moved the consensus largely over to the print more money camp.

> Theres no free lunch, you don't get to just print unlimited money and have no consequences.

Japan enters the chat

* M1: https://fred.stlouisfed.org/series/MYAGM1JPM189N

* Debt: https://fred.stlouisfed.org/series/DEBTTLJPA188A

* Interest rate: https://fred.stlouisfed.org/series/INTDSRJPM193N

* CPI: https://fred.stlouisfed.org/series/FPCPITOTLZGJPN

The technical explanation why, when rates are zero, increasing the money supply doesn't do anything to inflation:

* https://en.wikipedia.org/wiki/Liquidity_trap

For US to have problems with borrowing will require a decade long downturn at least.

The best proof is the fact that Tbills keep flying like hot cookies during major downturns, which means people buying them at least plan for time spans exceeding them.

I think that this is a strange and anachronistic way to think of the problem. It's not "how much can government borrow without heading into a "Danger Zone"". It's "what are the effects of government debt?". We can't even agree on that (probably because, as the article mentions, it hasn't been studied much).

>it hasn't been studied much

This isn't true. There's quite a lot of literature on it; even my basic macro textbook in university noted a correlation between government debt above a certain level and reduced GDP growth.

https://www.mercatus.org/publications/government-spending/de... describes it: "A large majority of studies on the debt-growth relationship find a threshold somewhere between 75 and 100 percent of GDP. More importantly, every study except two finds a negative relationship between high levels of government debt and economic growth. This is true even for studies that find no common threshold. The empirical evidence overwhelmingly supports the view that a large amount of government debt has a negative impact on economic growth potential, and in many cases that impact gets more pronounced as debt increases."

Since the US government can print money to purchase treasury bills, and since treasury bills are bought and sold and traded, and since these treasury bills are in such high demand that interest rates have been negative for an entire year, I don't think "debt" is the right term for this.

Our "debt" is actually the money supply of the world. It's people's savings, and nations put their savings into treasury bills so that they can easily trade with the US.

So the government really doesn't have debt, it's just money supply. When we buy a bunch of stuff in the world, and when more countries want to buy our stuff, we want more T-bills out there so that it's easier for us to transact. T-bills are dollar bills that have the side effect of setting interest rates foe banks. We should just call it M4 or something, or maybe bring back the M3 category for money supply and include T-bills in it.

We have fiat currency, so we should govern like we do, instead of pretending we don't. When we label part of the money supply as "debt", we misunderstand it because it's not debt as any other entity, such as a business, understands it.

One thing is that I wish that this article would at least better examine demand-pull versus cost-push inflation. Very very different situations, very different causes and fixes for the same phenomenon. Too much "debt" could result in demand-pull inflation, but not cost push inflation.

Title somewhat misleading as the actual question asked in the post was 'safely borrow.'

The more abstract question of 'how much' is of course infinite when there exists a compliant central bank that will 'buy' the debt and issue currency in return. The real world value of that currency would be expected to approach zero, in the limit. TANSTAAFL

the US dollar has been losing value relative to other currencies though since covid happened on the order of about 20% so far.

I believe the inflation that the 2008 crisis was supposed to bring was curtailed by the promise that the Feds QE would be temporary. However 12 years later, it has turned out to be untrue. Also, China was a big buyer of treasuries in 2008 as opposed to now..

Today, The fed essentially is buying its own debt through Blackrock (which I didn’t see the article mention)

Bottom line is the idea of how much a gov can borrow is hand wavy and arcane because ultimately the currency is backed by pure faith. the US Dollar will cease to have value when people stop taking it.

Maybe it’s not studied more because It’s better to stop the things that will lead to that devastating point before it happens and things like buying up your own debt and handing out checks that don’t cause any economic production cause that faith to be pushed further and further to that limit.

I would suggest reading This Time Is Different: Eight Centuries of Financial Folly by Carmen M. Reinhart and Kenneth Rogoff. It is quite academic, but it comes the closest to answering this question that I have ever seen.

Do you mean the authors who found their purported relationship due to errors in their Excel spreadsheets?

That being said, even if I have issues with their policy prescriptions, I've heard good things about the book.

Of course we do. We can borrow as much as people want to save in the currency of issue.

Because the two are identical by accounting identity

And there is no need at all to pay people to do that. They will do it naturally for lots of reasons, insurance, status or just good old fashioned mercantilism.

States borrow in the same way your bank borrows when you pay money into your checking account. It's a function of the way the accounting works, not a statement of moral virtue.

We don't actually know what would happen if I went and cursed my boss out on monday morning and asked for a raise. The data simply isn't there!

Therefor we should conclude this is a reasonable course of action.

Do we know every specific outcome in the complex system of our world and economy from elevating debt to 200 or 500 or 1000% of GDP? Of course not.

That doesn't mean we cannot predict most of the core mechanics of what will play out.

We will see Money Velocity when global lockdown (semi-lockdown) will ends. Until then I guess there is not much risk of inflation.

After 4 years, we are hearing about debt again.

Anyone would think there was a Democratic president in the WH or something!

If anyone’s interested, I recently explored this theme in my essay “How money works” https://invertedpassion.com/how-money-works/

I had a read of your essay. You should read “what is money?” by Alfred Mitchell-Innes. Some key things:

The “double coincidence of wants” stylised by Adam smith is most likely nonsense. Do we really believe that people didn’t trade if they didn’t have what each other wanted? What would really happen is that one would be in debt to the other and that debt would be repaid at some point in the future.

It was only until recent times eg 1900s US that Gold and silver became a “medium of exchange”. That experiment has of course ended because it didn’t work particularly well -> deflation. In the past governments set some amount of precious metal as the unit of account but the issued coins were usually made of something else and were of different weights and sizes even for the same denomination of coin. The coins had a nominal value which was always greater then the intrinsic value of the coin (otherwise if the nominal value was the same or less than intrinsic value then people would melt the coins into bullion). These coins were an acknowledgement of indebtedness of the government. They held value because people needed to use them to pay taxes.

Banks did not evolve from “gold warehouses”. Instead banks always have been and continue to be market makers for IOUs or debt/credit.

Is it probable that inflation doesn't occur in spite of mass QE because the inflations are exported, mainly to manufacturing exporting countries like Southeast and East Asia? You get cheap electronics and products in return.

We're in the midst of inflation right now. The inflation's just concentrated in financial markets: Stocks, bonds, and (some) real estate markets.

Nobody knows, but we’re about to find out..

A democracy can only function if people believe that they have shared interests with the majority of the people in the society. A democracy that can deficit spend can only function if they believe not only that, but that they have shared interests with the majority of the future members of the society. I don’t think either assumption holds for the United States right now.

Without a debt ceiling I presume it’s until no one will loan it any further money.

If you look at other countries (or individuals) that get into trouble with debt this doesn’t usually happen until it’s much too late.

When you own the money printing press like the US does, you don't have to get other people to loan you money.

It's a quirk that we use "debt" in the form of T-bills instead of printing more dollars. The t-bills get used and exchanged like money anyway. They do let the US have some control over the interest rates used in the rest of the economy, so it's not a useless quirk, but it's important to understand that US debt is nothing at all like personal debt, and it's probably defective to use the same word.

Future is infinite so there is no limit on borrowing from the future....

> Remember that some people thought that government borrowing ... facilitated by quantitative easing (Fed bond-buying) ... was going to lead to substantial inflation. But it didn’t.

Every time someone says "but where's the inflation" I sigh. Look at literally any financial asset, SP500, stocks, real estate, even bond values (the inverse of interest rates). There is your inflation.

Maybe we like asset inflation, maybe we don't, but that's where it is. When the author claimed to be unable to find it, I stopped reading.

"Official" inflation is based on the CPI, consumer price index, which is based on a basket of goods, not including CoL things like housing.

edit:

I stand corrected. It does include housing, but this "Owners' equivalent rent of residences" counts the cost of a Mortgage, which of course is majorly impacted by interest rates. It doesn't include the value of the housing market directly, though.

Does anyone actually think that the housing market is counted correctly? It is clearly outpacing inflation by a lot:

https://dqydj.com/historical-home-prices/

CPI is a convenient basket for the fed to sell bonds ideally at a positive yield. Thats why things are left out.

> for the fed to sell bonds

The Fed does not sell bonds, the US government (through the Department of Treasury) does. They are independent of each other.

(Then-President) Trump got lots of flack for going after US Fed Chairman Powell due to the desire to keep this independence as clear-cut as possible:

* https://thehill.com/policy/finance/450283-powell-asserts-fed...

You are correct, I typed that too fast.

This is untrue. Housing is part of the CPI, and you can see everything that's included here:

https://www.bls.gov/cpi/tables/relative-importance/2019.txt

> not including CoL things like housing.

CPI includes both actual rents and imputed rents for home ownership. It doesn't include asset costs because it's a consumption price index, and doesn't measure additional costs to acquire non-consumption assets.

You probably need another correction: CPI does not count the cost of a mortgage, nor interest payments in any direct way.

What the CPI estimates is the price of shelter, by surveying renters how much rent they pay, and house owners how much rent they think their house would rent for.

It's a bit frustrating that there are so many misunderstandings around this topic, while the BLS has clear and extensive explanations on their website.

https://www.bls.gov/opub/hom/cpi/

https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-an...

it's more that people have an innate desire to own (their residence). When they see prices of houses grow, they feel disenfranchised. They blame it on inflation - because to them, the house hasn't changed when its price grew.

How can you have inflation while most of the services and commodities people are using are not increasing in price? Sure, you have equities rising, but that’s about it. Inflation because call options are flooding the market? Bonds are going down, real estate market is stagnant.

Commodities prices might not be increasing right now, but that's not the point. The point is, Jeff Bezos's wealth is approaching $200B, Elon Musk is not far behind. Quantitive Easing and similar policies seem to be designed to increase wealth inequality - one more decade of such policy, one more big crisis, and all wealth will be concentrated in the hands of 0.01% richest men. Meanwhile middle class businesses are being drawn to banktruptcy by COVID-related lockdowns. We are slipping back in feudalism - soon most people will be at mercy of government, and small elite of billionaires.

Wages are stagnant which means they dont need to raise the price of goods on the other side, theres your uptick in inflation.

I don't get it. If wages are stagnant and prices are stagnant, isn't that by definition zero inflation?

Prices are not stagnant. You can see that quite clearly from the average price of a big mac over the years.

You have to do quite a bit of statistical gymnastics to come to the conclusion that wages are stagnant. Wages are almost always increasing. The stagnation observations come up when you account for inflation (a statistic called real wages). Until recently, real wages had peaked in 1973, so if you only had two points of data, February 1973 and March 2019, they would make a perfectly flat line on a graph. That’s where you get your “stagnation”. In reality, they steadily trended downwards between the early 70s and mid 90s, and have since then been steadily trending upwards between the mid 90s and today. I’m sure COVID is going to confound this to a non-trivial extent, but in 2019 they were at the highest level recorded.

A McDonalds double cheeseburger meal costs $8.

I remember when that was 3.99 not too long ago. Somehow I doubt that price difference is captured by the official 1 - 2% inflation rate.

Prices vary. While the price of a McD's meal may have doubled over some period of time (or space -- compare your neighborhood McD vs the one at OHare airport), MIT's billion prices project shows pretty conclusively that prices on average have been going up very slowly (< 2%/year) since the 2008 Great Recession.

> A McDonalds double cheeseburger meal costs $8.

> I remember when that was 3.99 not too long ago. Somehow I doubt that price difference is captured by the official 1 - 2% inflation rate.

Probably not exactly (and maybe not even approximately), because while restaurant meals are included in the CPI, the CPI is a somewhat broader index than the “McDonald’s double cheeseburger meal index” (also, McDonald's prices have regional and even store-to-store variation, and it's possible your local prices have varied differently than average for that particular item.)

There certainly is a big Mac index.

The price of big Mac is used as purchasing power proxy.

McDonald's is pretty efficient in their supply chains to use as rough proxy to real world idea of how things are. The variations you talk about don't add up to 100% change in price OP mentions.

> Somehow I doubt that price difference is captured by the official 1 - 2% inflation rate.

It was captured. It's just that food, and specifically restaurants is only one component of CPI. In Canada it makes up 5% of the basket of goods ("Food" makes up 17%):

* https://www150.statcan.gc.ca/n1/pub/71-607-x/2018016/cpi-ipc...

You are probably 'suffering' from familiarity bias:

* https://www.valuewalk.com/2018/08/familiarity-bias-investing...

* https://en.wikipedia.org/wiki/Familiarity_heuristic

Inflation in consumer goods appears in insidious ways, such as shrinking portions in grocery items, decreasing quality of materials, and crapification of services.

Yes this failure to distinguish different types of inflation (wage inflation, financial asset inflation, consumer goods inflation) is a big analytical oversight.

"wheres the inflation?" "why cant I afford a house I dont get it"

For the average Joe, inflation is usually the price of milk, bread and eggs going up. America being an agricultural colossus with plenty of farm subsidies mean the price of essentials will not rise. Hence the unique manifestation of inflation in asset prices will not bring masses on the streets unlike most other countries. Coupled this with the fact that other countries are also printing money and are in worse shape ensures there isn't much to worry about yet..

https://chapwoodindex.com/

There are resources outside the CPI or individual verticals, to measure inflation.

This index doesn't pass the sniff test. 10% annual inflation would mean that someone making $100k today has the same standard of living as someone making $40k in 2010.

> There are resources outside the CPI or individual verticals, to measure inflation.

No, there are not. CPI is about measuring consumables that one needs to live: food, shelter (either rent or mortgage carrying costs), utilities, clothing, etc. If you want to measure something outside of this basket of goods, then use another word, because "inflation" / CPI is already taken and you're overloading it and causing confusion by conflating different things.

This "index" is garbage. Please see "Inflation Truthers":

> But if we take away the outlier 2020 data points, the average real annual GDP growth from 2010-2019 was 2.3%. The inflation rate in that time averaged roughly 1.8% per year.

> If you’re one of the conspiracy people who believe inflation has actually been running at 5-6% per year, that would assume the economy has been contracting by 1-3% per year over the past 10 years.

> And if you’re a full tinfoil hat person who assumes inflation is actually 10-12% per year, that’s like saying we’ve been in a full-blown depression and the economy has lost 80% of its value.

* https://awealthofcommonsense.com/2021/01/inflation-truthers/

* https://news.ycombinator.com/item?id=25644580

So if the GDP grew "only" ~2.5%, then any inflation above that (as the 'truthers' claim), would mean were actually in a recession/depression for the last decade… which makes no sense. If inflation is >5% (per the truthers), then the economic growth would have had to been on top of that, for a nominal growth rate of >7%.

Has anyone been claiming a US GDP growth of 7% or more?

> No, there are not.

Yes, there are. What a tiresome exchange.

What the CPI represents is rather narrow, which is described right in the CPI reports, along with links to their numbers https://www.bls.gov/news.release/cpi.nr0.htm

Ultimately the faith in the CPI depends on what you want to ignore. The sampling is 29% of the wage earners from the most populated centers. https://www.investopedia.com/articles/07/consumerpriceindex.... Of course it's biased toward consumerism, but that's a huge problem with calculating the cost of anything today. Even with that caveat, is that a 1.8% increase in shelter cost from 2019-2020? That's not realistic.

Like the unemployment rate, these stats have long ago become politicized to the point they are a reflection of what needs to be portrayed. These numbers (CPI, GDP, Unemployment, etc) can and are manually changed by whatever ad-hoc method that is convenient. It's important to have some insight as to what's going on that would result in a huge disconnect, rather than handwave off the "cranks" who must be complete morons because they are "the other side".

> So if the GDP grew "only" ~2.5%, then any inflation above that, would mean were actually in a recession/depression for the last decade

What you consider a recession and I consider a recession are different things. Consumerism skyrocketed and domestic manufacturing cratered. Commercial property has also bottomed out. The velocity of money has slowed ~2012 until we're at the height of efficiency in velocity...which is molasses. Money doesn't move on anything that isn't land, because that's the lowest risk at this time and middle markets/individuals are failing or barely subsiding.

> If inflation is >5% (per the truthers), then the economic growth would have had to been on top of that, for a nominal growth rate of >7%.

Economic growth is about debt growth, like it or not. All the new debt is in real estate (stocks and bonds for companies and individuals), which is where the inflation is living. see property prices in Los Angeles growing at about 7% year over year, same as a bag of cheetos and wholesale soda costs...but the monopolies are still duking out loss leading with $1 fountain sodas so nobody cares.

Property is immune to the deflation (cannot be outsourced, et al) and the only debt that banks are interested in, on a risk basis. Due to the ungodly improvements in efficiency (and outsourcing) most goods have been subject to massive deflation and have made the functional monopolies (and new tech) look super valuable, driving the tech stock frenzy. Unfortunately, those efficiencies have been maxxed out, more or less. You won't be seeing TVs drop from 700 to 70 (like they did from 7k to 700), the will go back up along with the food prices that have been slowly rising. This rise has been balanced out by the fantastically low prices of goods (eg 40oz Bag of Cheetos have risen just under 10% year over year) or loss leaders duking it out ($1 sodas from Hardees/McDs). Too bad your fast food is still routinely over 15$ a person.

I don't think it's prudent to throw my hands up and say "I just don't understand why things are the way they are, when I have a single number to tell me everything is ok." The CPI is a garbage index. There are reasons why the markets are the way they are and it's not hard to see, regardless of what the US gov wants to say about it.

The true increase in the cost of living is much higher than the official CPI.

CPI is nearly completely worthless for identifying inflation in the cost of living, which is what actually matters.

> The true increase in the cost of living is much higher than the official CPI.

There's a decent argument that it's slightly higher, especially when you talk about the minimum cost at the low end, because of hedonic adjustments included in the CPI.

There's not, that I've seen, a good argument that it is “much higher”.

> CPI is nearly completely worthless for identifying inflation in the cost of living

This claims is desperately in need of supporting evidence or at least argumentation.

You're right and wrong. You're talking more specifically about asset price inflation.

Read this: https://www.valuewalk.com/2014/11/central-banks-asset-vs-pri...

Btw it's an incredibly good topic and if anyone wants to talk more about it I would love to start a clubhouse room.

Under the conventional definition, "inflation" exclusively refers to an increase in the general price level, so it doesn't make a ton of sense to talk about "finding" the inflation or one sector or another. An increase in prices within specific industries isn't inflation, just a price increase.

(Of course, you're free to use nonstandard definitions if you'd like, but you can't just toss other perspectives out the window because they use the conventional ones.)

Like producer price inflation, asset inflation isn't what people are talking about when they talk about “inflation” without modifiers, which refers to consumer price inflation. When people predicted inflation from QE, they were predicting consumer price inflation. And depending on how you look at it, they were either right and that was entirely the point of the policy (if you look at the difference between actual results and what was predicted without the policy) or wrong because they failed to consider the deflation that would happen without the policy (if judged by a net standard rather than delta from without-the-policy expectations.)

Pointing to asset price inflation to say “there is the predicted inflation from QE” is the fallacy of equivocation; shifting definitions to suit the argument.

Giving people more money doesn't make them buy more basic goods, just more assets, so price of normal goods doesn't go up but price of assets do.

> Giving people more money doesn't make them buy more basic goods, just more assets

Under normal circumstances, in the limit as starting income approaches infinity, this is correct (marginal propensity to consume approaches 0 and marginal propensity to save approaches 1.)

In the limit as starting income approaches 0, OTOH, the opposite is true (marginal propensity to consume approaches 1 and marginal propensity to save approaches 0.)

While there may be some future society with the distribution of income such that the former limit is a decent approximation of average behavior, but for real current societies the latter limit is a fairly good approximation, with observed society-wide marginal propensity to consume in modern developed countries, IIRC, around 0.9 (90% of added income goes to spending, 10% to savings/investment.)

> so price of normal goods doesn't go up but price of assets do

Were that true, supply gluts in a commodity used for money (like, say, the result of Spain bringing in vast hoards of New World precious metals) would have no impact on nominal consumer prices while driving up nominal asset prices.

This is, empirically, not true.

Not to mention the inelastic necessities of healthcare, education, and housing, which don't make it into the CPI basket.

> the inelastic necessities of healthcare, education, and housing, which don't make it into the CPI basket.

they are all covered: https://www.bls.gov/cpi/questions-and-answers.htm#Question_1...

see :

https://www.bls.gov/cpi/factsheets/medical-care.htm

https://www.bls.gov/cpi/factsheets/college-tuition.htm

I stand corrected. Is this a new addition? Does it look at what people actually pay, or what insurance does? (Not trying to undermine your point - just genuinely curious.)

If you owe the bank $100, that's your problem. If you owe the bank $1000 billion, that's the bank's problem.

That metaphor works better for huge businesses. There's really no bank here(yes I'm well aware of central banks, but that's not really how bank is being used here from a balance sheet solvency perspective).

It's more like if you issue currency and owe trillions, that's the currency and the currency issuers problem.

It still applies.

The US as a country is so large economically , it is quite bad for the world to let the US default on loans or the economy collapse, compared to say Venezuela or Argentina.

Some of these banks have nukes.

Oh and they can form a 100 million man army.

Debt is exists to increase efficiency in a certain situation. Namely when there is idle production capacity because of a lack of resources and simultaneously an excess of resources because production capacity has been fully utilized somewhere else.

Person A needs a computer, electricity and access to the internet to run his software company.

Person B manufactures computers.

If you want to maximize economic efficiency then person B has to give his resources to person A. But why would person B do that in the first place? Of course, to make money. So person B will charge person A but person A can pay at a later time, when he has a stable income. That's debt.

What about electricity and internet? Instead of making a deal with every person directly you can increase efficiency of debt by denoting it in the money needed to buy the product or service. Person B lends you $2000 and sells his product for $1000. You spend $1000 and get a computer. As long as person A earns enough money to pay for the computer and the electricity and internet person A consumes then person B will be better off.

As long as person B has spare computers he can keep lending them out in the form of dollars. If person B doesn't have enough computers for everyone he will instead allocate his computers to the highest bidder.

Now introduce person C who does the same thing as person A but promises to give 20% more money than he borrowed. Person B wants the highest possible return for the loan and thus lends the money to C but he also would lend to A if he had enough spare computers.

Now lets take the macroscopic perspective. The government is a giant borrower. It can borrow resources that exist in the economy, but only if they actually exist. One very valuable resource is labor. If there is unemployment you can borrow until all the labor is actively used. Once you have reached full employment any money you borrow and spend on labor will directly translate into inflation. Mild inflation of 2% is necessary to have a well functioning economy.

What does inflation do? The free market is basically a continuous auction that allocates resources to the highest bidders. If there is lots of demand for labor then inflation will go up. The question is whether the labor is spent on economically useful work. Private borrowers tend to use the borrowed money carefully and with the intention to turn a profit so if inflation goes up slightly too much (think of 5%) then they will just allocate their workers to the most efficient use. This is basically solving the problem of too much bad debt automatically.

However, what if you are insane and keep borrowing money despite hitting 2% inflation goals? If you are debt ridden Germany after WW1 then you are forced to spend the borrowed money on war reparations. Meaning, lots of people will start working on undoing the damage the war has caused. The problem with that is that working for the government can end up being so "profitable" compared to private industries that those industries get neglected. This can be a very big deal if that private industry is the agriculture sector.

Summary? You can borrow and print money as long as you spend it wisely and hit your 2% inflation target.

let's find out

I'd really like to point out this:

> Hyperinflation is so incredibly destructive that you’d think macroeconomists would spend a lot of time studying the phenomenon, figuring out when and why it happens. Especially because the answer to the question of hyperinflation is also the answer to the question of how much the government can borrow. An understanding of hyperinflation would give us a flashlight to shine down the infinite corridor, so we could avoid the pit.

... is pretty ignorant. You have an unrealistic fear of hyperinflation propagated by your ideals; to the point, you think it's important or relevant in situations where it's not. Perhaps, and this is just a thought here, if no one educated on the matter seems to give a shit about it there might be a reason. The US deficit is by and large a bogey-man most people love to wax on but hate to learn about... unless you like the scientific method but even then it is mostly depressing.

To me, the whole things sounds like a rant telling physicists, "you haven't studied enough planets like Jupiter, and without Jupiter, I cannot explain Earth. Please explain Jupiter!"

Here's the real shit, that's boring, but true:

Hyperinflation is no risk to the US economy at present. We are the world's piggy-bank, the wealthiest piggies in the world love the US, because we're the only nation on the planet who has always let's them have it back. The USA has never frozen the dollar. This puts the US an unbelievable economic advantage that nearly all of its citizens fail to realize.

Think about it:

1. The US dollar is the defacto (for now) global currency.

2. It's really hard to default when your debt is in your own currency. See link below:

https://finance.yahoo.com/news/warren-buffett-explains-the-s...

The USA can quite literally print money and get away with it almost indefinitely. Yep, that's the rub. We can 100% print money.

Nope, instead of printing it [1] to invest in our infrastructure, citizens, and planet we share-- we piss it away. We piss it away handing out tax cuts to the rich. We piss it away blowing shit up in deserts fighting other nation's equivalent of rednecks. We piss it away funding racist police and prison systems. We piss it away every day; that's why it's called the "trickle down."

In another 50 or a 100 years, when other nations are financially larger, more stable, and many, many, trillions of dollars of risk could be safely diversified anywhere else... then yes, the US could be at risk because it may not be able to issue debt in its own currency.

[1] Most everyone doesn't understand extremely large numbers and when one looks at the quantities over a certain size they all muddle together. It takes a lot of effort and reading to be able to look at billions, hundreds of billions, and trillions to make sense of and not fear those numbers. That's why people are able to fear things that would literally help them; the numbers are "all the same to them" and thus they're all equally bad or misunderstood.

> It's really hard to default when your debt is in your own currency.

That’s true, but it misses the point because printing money is debasing your currency, not defaulting on debt.

And if it’s true that borrowing $x billion and printing money can be done without consequences ‘almost indefinitely’, then why stop at x? Why not 2x, or 10x, or 1000x?

I think that is the point though, that the very worst that can possibly happen is hyperinflation.

Why not stop at 1000x? That's the entire point of the article, we don't know the situations that set off currency debasement well enough. We all assume that there will at least be some period of normal inflation first, before we get to hyperinflation though.

When we have become the global currency, there is also great risk when we do not have enough dollars and treasury bills out there. Because the world's savings are pretty much equivalent to our "debt." As there is more wealth in the world and as more of that wealth is held in US dollars or in US T-bills, if we do not continue to deficit spend, or somehow get more money supply, there are other risks too.

> That’s true, but it misses the point because printing money is debasing your currency, not defaulting on debt.

> And if it’s true that borrowing $x billion and printing money can be done without consequences ‘almost indefinitely’, then why stop at x? Why not 2x, or 10x, or 1000x?

That's my whole fucking point. For America, right now, we pretty much can. And if we chose to invest it in ourselves instead of subsidising rich fuckos we'd surely see a positive return on our investment even (thereby paying it off).

sigh There's literally no place worse on the internet for Economics than HN. I should just delete this fucking account.

The author of this substack essay doesn't understand how things work

in the way that the 1st enlightenment lead to the separation of church and state, crypto is the 2nd enlightenment that will lead to the separation of state and money.

Economists handwringing about deficit spending? Wait, that only happens when...

Oh right, a Democrat is POTUS. "Right" on time.

I know this'll be immolated as being "political", but the article is also being sneakily political.

The subject may be legitimate. The timing... is not.

If you read the article, I don't think you'll find much hand wringing at all. The author doesn't name MMT, but talks about the key question whose answer let's us use MMT unsuccessfully in the economy. (For the record I think MMT is the right way to think of US dollars and US spending.)

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