Do you want to pay thousands of dollars for a loaf of bread? Ask the Germans, it was not pretty.
See the link I posted above. Two coins (in my possession) side by side. I seem to be missing the third one, will have to check my safe.
The one I’m missing was bronze, 1922, 50 pfennig (50 cents).
The one on the left is bronze, 1922, 500 marks.
The one on the right is aluminum, 1923, 50 million marks.
That’s *10 billion *percent inflation in a year.
They certainly have an ROI. You simply attach a figure to how much you value “gramma not starving” or “the US not getting invaded”, or whatever, and compare that value to what you’re paying for it. Of course, there are bound to be debates on just what those figures should be: That’s why I said it was hard. But pretty much everyone can agree that those things have some value.
The last night in Hamburg before my Grandfather emigrated to the US with his friends in the 20’s; they all toasted to themselves that this would be the last night they’d ever be multi-multi-millionaires.
Remind me of your home address, please? I’ll be right over!
Actually, what you said was:
This implies that investors attach a value to gramma not starving.
Ummm. They don’t.
We are already doing it-the Government issues bonds, which the Fed buys…by printing money!
All well and good, but this is a big reason why oil is over $88/barrel-the people who we buy our oil from don’t like to hold worthless currency.
Obama plans to spen even more next year-so, look for inflation to make a comeback…soon.
The President doesn’t spend money. Congress does. The Constitution specifies that all spending bills must originate with the House of Representatives.
But that is a political discussion or blame not entirely relevant to the OP.
You’re confusing whose return **Chronos **was talking about. Bondholders are buying US debt because of the interest payments they receive. From the bondholder’s point of view, the return on investment is a simple calculation - what % do they make on buying US debt.
What **Chronos **is talking about is the value the US government gets out of the money it borrows. For us, as Americans, the money we pay out in interest doesn’t have anything to do with the return we get. It’s a cost of capital. What we worry about as a government and as citizens is what value to we get out of what we do with the money.
It works the same was for corporations, it’s just more explicit and obvious. If Acme Corp has to pay 5% to issue debt, that’s its cost of capital (cost of debt specifically). When Acme makes investment decisions, they look at whether they can build a new factory or a new product and earn more than 5%. The return on the money they spend is their ROI. It’s incidental that there are bondholders looking at the 5% they make as their investment return - from Acme’s perspective the 5% is just their cost of obtaining capital.
Except that he’s explicitly talking about lender behavior in that context so . . .
And the lender behavior depends on the interest rate.
Whether new debt gets issued by the government depends on two things: Whether the government considers it worthwhile to borrow the money, and whether other investors consider it worthwhile to lend the money. The government, in making the decision whether to borrow, has to consider squishy variables like “gramma not starving”. Currently, the government has valued such squishy variables higher than the cost of the interest payments, and so the government is willing to go into debt. The investors don’t care about that, but they do care about their (less squishy) return on investment, and about things like the risk of the government not paying back their debts (or of paying them back in devalued dollars). Currently, enough investors have decided that the risk is small enough to justify the low interest rate, so the investors are willing to invest in government debt. Both sides are willing to go on like this, so for now, matters continue as they are.
Nothing. It would simply transfer the debt from one branch of the government (the Treasury) to another (the Fed). The difference being that Treasury liabilities pay interest, and the Fed (with the exception of interest it pays to depository institutions) does not.
People will say: inflation, inflation, inflation. But the effect on net private wealth would be zero. People who previously had wealth in the form of Treasuries would have wealth in the form of dollars. They will say that people will want to spend all those dollars. But the fact they were holding the assets in the form of Treasuries indicates they want to save the money, not spend it. The fact they could no longer hold the wealth as government bonds wouldn’t mean they’d stop wanting to save; they’d simply have to find alternate investments, or else save dollars rather than Treasury bonds.
Who do you think determines the interest rate?
edit: also, you’re overlooking a variety of variables such as the safe haven effect.
I haven’t read the whole thread yet or all of its links, so I apologize if this was already answered.
One thing that always puzzled me was how people would know? Lets say the president authorizes this printing of a trillion dollars, deposits it into the Treasury, then immediately cuts a check to our creditors. When I say immediately, I mean like within the hour. How would inflation even have an effect that fast? Lets say he does this in secret, so that only a handful of people know about this extra trillion. And through multiple locations and trusted bankers, he slowly deposits this into our account from more than one source so that none are the wiser. How would inflation even figure into it? Our creditors aren’t going to ask to see the bank statements of the US Treasury and match up a deposit’s timestamp to an hour ago, right? They’d accept the money and it’d be a done deal
As for inflation, what if a law was passed to set item prices in stone? Forget the possibility of getting it passed, lets just assume it passed. Bread, milk, etc. cannot swing more than 5% of its cost prior to the printing of the secret money. If money is only as valuable as people feel it is, forcing a law that keeps price increases in check should balance things out, shouldn’t it?
Generally speaking, an entity’s cost of debt is determined by the market. This is true of US government debt as well. However, in spite of the bluster about downgrading our credit, treasury debt is still an essentially a risk-free investment and a good proxy for a risk-free interest rate, and the risk-free rate of return is a much more interesting concept than just ‘the market sets a cost of capital’.
I cited facts:
Roosevelts executive orders, #6102
http://en.wikipedia.org/wiki/Executive_Order_6102
now what was irrational??
sorry if you make sense of this stuff for yourself, and how it has impacted our lives.
And who makes up the market? Investors perhaps?
Look, the 10 year note is yielding 1.77%. For Nov., annualize inflation was 1.76%. But go back to October and September and the rate was closer to 2%.
IOW, sophisticated investors, the kind that buy these things in bulk, are accepting 0-negative returns. If you can explain that based only on the parameters you and Chronos have elucidated so far, you’ll be first in line for a nobel prize in economics.
The fact of the matter is that there are a number of other factors involved and I don’t know if you’re just ignoring them or if you’re simply unaware.
[Moderator Note]
If you want to take issue with wildorchid’s post, you can do it factually without the insulting remarks. If you want to engage in personal attacks, do it in the Pit.
Colibri
General Questions Moderator
I wasn’t attacking the poster - it was not a personal attack. It was the statement that the claim being made was specious ‘Sovereign Citizen’ stuff with zero connection to reality.
As others have noted, they would accept the the money whether they saw the statements or not. They have no choice because they signed a deal that they would provide X amount of material for Y amount of US dollars.
However you have just paid your debt with massively devalued currency. Once word of that got out, and I’ll explain below that it *must *get out, foreign investors would flee from US dollars like rats deserting a sinking ship. US bonds would get sold as fast as possible, adding to the already massive devaluation of the greenback. Foreign currency traders would be unable to trade US dollars, and the whole situation would be far worse than if you had openly printed the money.
The value of a currency is based almost entirely on the faith the market can place in that currency over the term of their investment. The natural resources, labour pool and so forth backing the currency are only a tiny proportion of the value. And that makes sense of course.
It doesn’t matter to some banker if India if the US has great natural resources and can easily repay the loan it is asking for. All that matters to her is if she is going to get her money back with interest. If she believes that the US government is going to pay her in worthless notes as soon as it hits financial difficulties, she won’t negotiate a loan in US currency. She will demand payment in gold or Euros or some other trade unity.
So the result of the US government secretly printing will be that the US dollar becomes worthless as a unit of international trade. People will still trade with the US, but they will do so only via other currencies. This is the situation that many third world nations find themselves in, and it royally screws their economy. Before anyone can negotiate a deal, thy have to purchase collateral in a foreign currency, and they have to make the repayments in the foreign currency.
At that stage the ability of the government to control the economy is dramatically reduced. Because their is no trade in their own currency, changes in interest rates or taxation can only affect the local economy, it can’t influence foreign trade. So the value of the currency is entirely at the whim of foreign investors and the government has no way to entice them to buy or sell the currency. That’s not a good position to be in.
So why will inflation occur? Because you have released the money into the trading pool. In essence, every currency transaction is a bidding process, with the product going to whoever is prepared to bid the most. By releasing a trillion dollars you’ve increased the ability of foreign workers to bid for Ipads. As a result the value of Ipads, in US dollars, will increase: you will need to bid more US dollars to get an Ipad. But US workers also want Ipads, so they will also have to pay more for them. All of this means that workers at Apple stores make more money, which means they can bid more for all the other things they want, which means that other workers need to bid more for food and clothing.
Repeat that cycle a few times, and you have inflation that is directly related to how much money you print. The fact that nobody *knew *that you printed the money won’t prevent the inflation. All it means is that there will be a delay of a few days between the printing and the devaluation of the currency. The actual amount of inflation will be exactly the same. And once the market works out why there had been this sudden spike in inflation, they will lose all trust in the US treasury and the dollar will devalue even more than the extra printing has caused.
IOW your plan will make inflation worse, not better.
You can’t control inflation by just controlling the price of a limited basket of goods. There isn’t any way to allow the market to determine the price of the inputs of a product and still limit the cost of the product to *below *market value. Put simply, you can’t make money selling something for less than you paid for the components.
At the moment, bread is worth $2/loaf because it contains 50c worth of flour, 50C worth of electricity for baking and 50C worth of labour. That leaves 50c profit to the bakery on each loaf.
If we print a trillion dollars worth of notes, the bakery will need to spend a full dollar to buy the flour needed to bake the bread, and $1 for electricity and $1 for labour. So the bakery need to exchange $3.00 to obtain the materials and services needed to make a loaf of bread.
But you have dictated that the price of a loaf of bread is set in stone at just $2. So the bakery will lose $1 for every loaf of bread that it makes. Of course nobody in the country will make bread if it is costing them money to do so.
So now, in addition to inflation, you have large numbers of unemployed bakers and delivery drivers. which is slowing the economy further still.
Or you could try to have the government subsidise bakers to the tune of $1.50 on every loaf of bread. But that just pushes the shit downhill. Because the bakers are not paying for the cost of flour and electricity and labour out of their own pockets, they can ignore those costs. That means that the people supplying those services can increase their prices because the bakers will just send the bill to “The Government”. Any costs have to be automatically passed on. That in turn means that bakers can pay electricity generators and flour mills and bakery labourers more for their product than anyone else can pay, which drives up the price of those things for everyone else.
So while the price of bread may be set in stone, the inflationary rate of electricty and wheat and labour will increase more than enough to offset it, and you also have an extra tax of $1.50/person/day that is further strangling the economy.
You simply can not control inflation by preventing price movement on a limited basket of goods, because the price is dictated by the market. If the price wants to rise, and you keep it static, then either the profits vanish or the increased cost is passed down the production chain, paid via taxation or, in every real world case I’ve seen, both.