Gumby wrote:
The BOJ can purchase directly from the MOF and return all of the interest payments back to the MOF.
Where do they get the Yen to buy the bonds?
Central banks are printing and buying dollars, holding them as reserves. When they use the dollars or cash the bonds and try to buy something with them the prices of goods globaly in dollars will be bid up. The US has exported a lot of inflation as the reserve currency in the world. When that status ends the effects of the inflation will be felt here as opposed to there. Trillions of dollars are offshore tucked away.
Normally, when a country has a trade deficit with another, its currency will depreciate as there is a greater outflow (i.e. supply) of its currency to foreign markets. That will result in foreign imports becoming relatively more expensive (in term of its currency) and its exports relatively cheaper to foreigners. As a result, foreigners will then import more its goods and services, increasing the demand of its currency, which in turn will reverse the outflow of its currency. This will continue until equilibrium is reached.
For the US, because of the special status of its dollar being the world’s primary reserve currency, this conventional arrangement does not really apply Since foreign countries accumulate the US dollars as a form of savings, the demand for US dollars is
more than just an implicit demand for its goods and services. Hence, the saved US dollars that foreign countries accrued have to be saved somewhere by recycling them back to the US (usually via the purchase of US Treasury Bonds).
The US, being in the enviable position of having its money as the world’s primary reserve currency, is not subjected (for now) to the same rules as the other countries—it can spend more than it earns simply by printing its own dollars to pay foreigners.
Through this convention, the US can expropriate resources from foreign countries by buying their goods and services with its own printed money. Since the exported glut of US dollars has to return home through the foreign purchases of its Treasury Bonds, they do not remain within the US economy to cause the problem of price inflation.
When foreigners receive their US dollars, they have to convert these US dollars to their domestic currencies for domestic use. Where are the domestic currencies going to come from? If left to market forces alone, the glut of US dollars will bid up the price of domestic currencies, resulting in a sharp appreciation of the domestic currencies. An appreciation of the domestic currencies is currently (incorrectly) viewed as disadvantageous to those foreign countries because that will cripple their export industries which they believe they are dependent on. Furthermore, over the past decades, US industries are losing their competitive edge. Foreign countries have less of an incentive to use their surplus US dollars to purchase US goods and services. This have come to a point where they have so much excess US dollars that they do not know what to do with it. The only option then is for the foreign central bank to devalue their domestic currencies by printing them and buying more treasuries.
That is why when the US opens up their spigot of US dollars and engages in a global spending spree, foreign countries have to follow suit by inflating their own money supply so that their currencies will not be overly expensive relative to the US dollar. The result is worldwide synchronised price inflation and asset bubbles.
Eventually their people will demand to keep their own production and that their government stops subsidising US consumption. The dollars will come home to bid up prices. The inflation chickens will come home to roost. The dollar will be seen for what it is. A paper tiger.
I plagerized a good amount of the above because I'm getting tired of this. Can anyone answer how bonds yields will stay down without more printing or how the US govt will service the debt at higher rates?
