Hyperinflation

[Random.Capital]

Quote from scriabinop23:

There is nothing to stop further debt creation and monetization to pay for all future obligations/deficits.

Sure there is - the lack of a lender with infinite lending capacity. Debt - and therefore inflation, which requires debt growth - cannot extend forever, regardless of monetary policy.

Need to stop thinking of the debt as being denominated in USD - visualize it as debt denominated in Yen or Euro or anything else - and then it should become clear why significant deflation is the end game to this process.

 

[jprad]

Quote from ProfitMania:

USA cannot default, nor hyperinflate.

I agree, it's not possible for any country using a fiat monetary system to default.

They could hyperinflate, but they won't.

If that happens, then no oil to run anything, in particular to run farms. Then mass starvation will follow and food price shoots to the moon.

In the event of a U.S. monetary collapse it's a good bet that every member country of the IMF is in the same shape.

At that point, barter takes over.

You should check into the amount of developed farmland the U.S. has as well as the undeveloped land within the farm belt.

Food for oil, food for this, food for that...

To overcome this, US will have to use its years of investment in military to "convince" oil producers and consumer goods producers to contribute to the US.

The U.S. may be at the vanguard of this financial crisis, but they're not the only ones in trouble, nor will they be the ones affected the most as we move further into it.

 

[jprad]

Quote from scriabinop23:

There is nothing to stop further debt creation and monetization to pay for all future obligations/deficits. And that has nothing to do with M0. (every year we are in budget deficit, pay the deficit portion with a new treasury bond float bought for by the fed with money newly created - no physical printing necessary.)

Now you're saying there's "nothing to stop further debt creation?" Right after you got done saying that all the Fed had to do was simply "print" money to pay off the national debt.?

Can you please pick a side and stick with it?

As for the problem with your latest scenario. The Fed does buy a lot of Treasury debt, but they don't buy all of it. About 25%, but rapidly growing to one third, of it is bought by foreign interests.

Once the Treasury runs out of buyers for their debt the government will have no choice but to start living within the revenues they receive.

There is a limit to everything on this ball of mud.

 

[jprad]

Quote from Random.Capital:

Need to stop thinking of the debt as being denominated in USD - visualize it as debt denominated in Yen or Euro or anything else - and then it should become clear why significant deflation is the end game to this process.

That's never going to happen.

Unfortunately, every country is in this together and if the IMF hopes to keep the world financial system in one piece they're going to figure a way of getting past this problem -- together.

The Federal Reserve Act does not bar the Treasury from printing interest-free notes. They were printed and circulated alongside Federal Reserve Notes until 1971.

The government could easily re-introduce them as legal tender within the country and continue to use Federal Reserve Notes to pay foreign held Treasury Bonds as they mature.

They could back that sort of threat up by a return to isolationism secured by their military.

The U.S. has enough farm land to feed their citizens with enough food surplus for trade; oil, etc., There's also more than enough rundown infrastructure to give their citizens work, paid in United States Notes while manufacturing is re-introduced into the economy.

 

[scriabinop23]

Quote from jprad:

Now you're saying there's "nothing to stop further debt creation?" Right after you got done saying that all the Fed had to do was simply "print" money to pay off the national debt.?

Can you please pick a side and stick with it?

As for the problem with your latest scenario. The Fed does buy a lot of Treasury debt, but they don't buy all of it. About 25%, but rapidly growing to one third, of it is bought by foreign interests.

Once the Treasury runs out of buyers for their debt the government will have no choice but to start living within the revenues they receive.

There is a limit to everything on this ball of mud.

There are no picking sides. When I originally referred to printing of money, I was referring to any method of money creation - whether it be physical printing or electronic money creation in the form of debt monetization or direct bank injection.

When the treasury runs out of the debt buyers, the fed can just synthesize (do you like that word better?), monetize, and prevent default that way. The US dollar exchange rate will fall cataclysmically depending on the market's view of sustainability of such actions. That's why it is called the nuclear option.

 

[scriabinop23]

Quote from Random.Capital:

Sure there is - the lack of a lender with infinite lending capacity. Debt - and therefore inflation, which requires debt growth - cannot extend forever, regardless of monetary policy.

Need to stop thinking of the debt as being denominated in USD - visualize it as debt denominated in Yen or Euro or anything else - and then it should become clear why significant deflation is the end game to this process.

Debt monetization is by definition the ability of the fed to create money and transfer it to government by the simultaneous creation of treasury debt for purchase by the fed (by the treasury). The fed is a lender of infinite capacity, with the downside of exchange rate impact. I never said such a situation, although desperate, would not impact exchange rates and lead to hyperinflation. That is the point of this thread's title.

 

[jprad]

Quote from scriabinop23:

There are no picking sides. When I originally referred to printing of money, I was referring to any method of money creation - whether it be physical printing or electronic money creation in the form of debt monetization or direct bank injection.

There are two separate parts to the money supply. There's the narrow, which is tied to the national debt and impacts the value of the dollar. And, there's the broad, which is what commercial banks use via fractional banking to make loans.

The Fed only has absolute control over the narrow money supply, they DO NOT have direct control over the broad money supply.

The Fed can only indirectly influence it by providing banks with additional reserves. It's the banks, through lending, that grows the broad money supply.

It's also why the broad money supply has no impact on the value of the dollar because the broad money supply does not raise or lower the national debt. As loans are paid back that money ceases to exist.

 

[jordanf]

Quote from jprad:

There are two separate parts to the money supply. There's the narrow, which is tied to the national debt and impacts the value of the dollar. And, there's the broad, which is what commercial banks use via fractional banking to make loans.

The Fed only has absolute control over the narrow money supply, they DO NOT have direct control over the broad money supply.

The Fed can only indirectly influence it by providing banks with additional reserves. It's the banks, through lending, that grows the broad money supply.

It's also why the broad money supply has no impact on the value of the dollar because the broad money supply does not raise or lower the national debt. As loans are paid back that money ceases to exist.

Pretend I am in idiot (it should not be hard ). Forget the debt, getting back to inflation. Are you saying steep inflation can only be caused by a increase in the narrow money supply, and not the broad money supply? If so, why not?

I've always considered the statement "printing money" or "creating money out of thin air" to simply mean an increase in money supply, whether it come from actual printing, or due to increasing reserves (or lowering reserve requirements) and letting fractional reserve banking do it's thing.

It looks to me like the Fed has added 500 billion to reserves, seemingly by magic. What was the point of doing this? Isn't this so it is available to banks to now lend out, and possibly leading to up to 5T in additional (broad?) money supply? Wouldn't this lead to serious inflation?

Of course, this would not happen right now, as no one wants to lend and no one credit worthy wants to borrow. But if/when lending picks up, won't these reserves lead to inflation via fractional reserve lending? Yes, the Fed can soak up excess reserves to prevent runaway inflation, but what if they get it wrong?

Thanks for taking the time to post in this thread, it's very useful info.

 

[jprad]

Quote from jordanf:

Pretend I am in idiot (it should not be hard ). Forget the debt, getting back to inflation. Are you saying steep inflation can only be caused by a increase in the narrow money supply, and not the broad money supply? If so, why not?

There's two types of inflation.

One is price inflation, which is a result of supply and demand. This is the kind of inflation the Fed tries to control via influence of the broad money supply.

The other is monetary inflation, which refers to the narrow money supply. As the government monetizes additional debt the new dollars that are added will devalue the dollars that are already in existence.

The Fed can't control monetary inflation only the government can by paying down the national debt.

Out of control government spending, which could be exacerbated by high price inflation, would ultimately lead to hyperinflation and an eventual collapse of the currency.

It looks to me like the Fed has added 500 billion to reserves, seemingly by magic. What was the point of doing this? Isn't this so it is available to banks to now lend out, and possibly leading to up to 5T in additional (broad?) money supply? Wouldn't this lead to serious inflation?

The Fed increases bank reserves by purchasing Treasury securities from the member banks. The "out of thin air" part comes from the Fed creating a journal entry on the selling bank's credit side of the ledger.

You're right in that if the Fed didn't reduce the money supply in the future the excess reserves can result in price inflation.

Ultimately, when the Fed needs to reduce the money supply they do the reverse; sell the securities to the member banks and reduce their credit ledger entry.

That is, if they can. Price inflation can, and often is, the result of rising commodity costs; oil, etc.

Which is where the government's responsibility for controlling monetary inflation comes into play...

 

[Random.Capital]

Quote from jprad:

That's never going to happen.

It's ALREADY happening.