Ask HN: Is inflation just the cost of government borrowing?
- ~Most of the Fed's balance sheet is government debt
- ~Most government debt is held by the Fed
- The Fed executes monetary policy by buying and selling (mostly) government debt; expansionary policy consists of buying Treasury debt, thereby raising its price / lowering yields; this effect seems more direct than the effect on the Federal funds rate
Mathematically, I'd expect:
Nominal Yields on Treasury debt = (future dollar value of debt) / (current dollar value of debt)
= ((future dollar value of debt) / (future value of debt, measured against basket of goods)) * (future value of debt, measured against basket of goods) / (current value of debt, measured against basket of goods )) * ((current value of debt, measured against basket of goods )/(current dollar value of debt))
= (future CPI) * (real yields on Treasury debt) / (current CPI)
Or, rearranging:
Inflation=(future CPI)/(current CPI)=(nominal yield on Treasury debt)/(real yield on Treasury debt)
In particular, I'd expect the "real" yield here to denote the "natural" yield you'd expect if the Fed was not buying debt for much more money.
So, the narrative becomes:
Government spends a lot of money, and market doesn't believe it's a good investment (in terms of effect on future taxable revenue base), therefore Treasury borrowing costs should go up; but Fed forces Treasury yields to stay around 0, so inflation goes up instead.
Does any of this make sense, or am I missing something obvious?
Is there a source that formulates the issue in this way?