What is money?

[Libertarian666]

The fundamental difference is that it is possible that the Fed will not buy every Treasury the government issues at ridiculously low interest rates. If the Fed would commit forever to buying all the Treasurys at these rates, then there would be almost no difference (aside from the interest, most of which is rebated to the Treasury anyway).

Of course that would also cause the dollar to lose most of its tiny fraction of its 1913 purchasing power, which is why the Fed doesn't announce that.

I think it's pretty obvious that the Fed is going to, though. I mean, it's their primary job.

It's obvious to you and to me, but obviously not obvious to everyone. Otherwise, gold would be at $10,000 already.

[Gumby]

I don't understand why people think the Fed needs to buy Treasury Bonds going forward — other than to artificially set interest rates at whatever they want them to be. If the Fed stopped buying bonds, the banks would still want to buy them to get a return on reserves. Every time the Treasury issued a bond, the Treasury is simultaneously spending money, and that spent money would just become new reserves in the private sector and further increase the demand for Treasury bonds. Obviously the interest rate would be different if the Fed wasn't targeting, but targeting is their job and POMO purchases allows them to do that.

So, from my perspective, the bond issuance doesn't really "fund" anything — they are just a legacy operation where fiat money goes around in a giant circle to tweak interest rates and drain reserves.

If the Fed stopped buying, the rate would be set by the market, but the banks would still want Treasury bonds so that they could use their reserves to buy bonds and acquire more base money on a Macro level.

And the Fed already requires the Primary Dealers to do just that! The Primary Dealers are prepared to oversubscribe by at least 2x over for every Treasury auction — even if nobody else shows up!

[moda0306]

Wait, what about debts that are not denominated in money, but in products or services?

You would "extinguish" debt not with money, but with real economic value.

So how can you say that only money can extinguish debt if by the very language of a private contract, the only thing that can extinguish debt is (insert delivery of product or service here).

I already said that you can write a contract with any terms you like. But if I agree with you to pay you for your work in bushels of wheat, which side of the contract is the "money" side? Obviously, neither, since neither your work nor bushels of wheat are commodities having the greatest liquidity of any commodity ("money", for short).

Which side is the "debt" side? Well, that depends on who delivers first. If you work for me and then I "pay" you with wheat, then I owe you wheat in the meantime. If I deliver the wheat and then you "pay" me with labor, then you owe me labor. But in neither case is the contract denominated in monetary terms, and there is therefore no debt as is commonly understood.

Tech,

The contract IS a debt instrument. A debt is an obligation. Not just a debt denominated in money.

The contract is also money.  Neither the service performed nor the service indebted to be performed are money, but the contract itself is the money. Or so it is if people start using it as a store of value and medium of exchange.

I am kind of confused how you are so confident that you know exactly what money is, and what it isn't, when money is essentially a social construct... If people want it to be money, it seems to me it's money, even if it's the equivalent of a get out of jail free card (US dollar).

I'm not making a moral claim here... Just a social one.  If a commodity is the most liquid, but nobody has any, it's not going to function as a medium of exchange.

[moda0306]

tech,

Though it seems that kshartle still disagrees, if you agree with Gumby and I that our currency and our treasury bonds are just fiat liabilities of the government on our balance sheets, what is the fundamental difference between the two?  Why should a swap of one for the other have any meaningful affect on our nominal purchasing power?

The fundamental difference is that it is possible that the Fed will not buy every Treasury the government issues at ridiculously low interest rates. If the Fed would commit forever to buying all the Treasurys at these rates, then there would be almost no difference (aside from the interest, most of which is rebated to the Treasury anyway).

Of course that would also cause the dollar to lose most of its tiny fraction of its 1913 purchasing power, which is why the Fed doesn't announce that.

The fed will buy what it has to buy to balance price stability and full employment (per its congressional mandate as a part of the federal government). Lowering rates to the US government allows cheaper lending in the economy, which could increase employment, inflation or both. 

Right now, they're letting one mandate completely take precedence over the other.

With inflation at 2%, and unemployment at 7% (nevermind underemployment), I'll let you guess which one .

[moda0306]

Guys,

Let's realize for a second that we're dealing with an ambiguous asset and social construct that we can't even agree on a definition of (money), combined with a coercive but socially accepted entity (government), along with another unique economic construct that nobody can agree with the definition of (debt), along with a difficult-to-measure cost measurement concept (inflation), along with the ever-present counter-intuitive nature of macroeconomics, along with all this being within a country so powerful it could destroy the world 20 times.

This is going to be a LOOONG, very frustrating conversation if we want to stir those things together and all come out with the same conclusion, or anywhere close to it.

But I conclude Gumby and I are still correct.

[Kshartle]

Since we have such a fundamental disagreement about how markets and humans work as well as the concept of money, perhaps it would be more interesting if we didn't post on the same monetary threads. At least the ones that discuss government debt.

Just throwing that out there. I'd like to hear Tech or Mdraf's or PS' opinion on my synopsis of the Government's position without saying it's irrelevant because the government can either borrow endlessly or print endlessly without consequence.

If that last sentence misrepresents the MR position or whatever then I'm sorry. Please correct me.

[moda0306]

Kshartle,

I don't know if we disagree so much on markets and human nature so much as we're continuing to talk past each other in ways that only God could comprehend.

But I'll try to ignore posts about solvency when it comes to our currency-issuer... But it's gonna be hard.

[Kshartle]

Kshartle,

I don't know if we disagree so much on markets and human nature so much as we're continuing to talk past each other in ways that only God could comprehend.

But I'll try to ignore posts about solvency when it comes to our currency-issuer... But it's gonna be hard.

The notion that the government can do what would be required to keep it's debt risk free in nominal terms highlights a fundamental disagreement in how humans and markets work.

[moda0306]

Kshartle,

I don't know if we disagree so much on markets and human nature so much as we're continuing to talk past each other in ways that only God could comprehend.

But I'll try to ignore posts about solvency when it comes to our currency-issuer... But it's gonna be hard.

The notion that the government can do what would be required to keep it's debt risk free in nominal terms highlights a fundamental disagreement in how humans and markets work.

Touché.  Maybe Gumby and I would learn more about your position if we left your threads alone and let them get discussed on your terms, and not jump in like we're accusing you of dividing by zero.

[Gumby]

Kshartle,

I don't know if we disagree so much on markets and human nature so much as we're continuing to talk past each other in ways that only God could comprehend.

But I'll try to ignore posts about solvency when it comes to our currency-issuer... But it's gonna be hard.

The notion that the government can do what would be required to keep it's debt risk free in nominal terms highlights a fundamental disagreement in how humans and markets work.

Touché.  Maybe Gumby and I would learn more about your position if we left your threads alone and let them get discussed on your terms, and not jump in like we're accusing you of dividing by zero.

Agreed. It's a very interesting point you're making, KShartle. And we'd all like to hear more. (Not joking at all). All we were saying is that there is no (nominal) solvency constraint on debt servicing. But, we all agree that there is an inflationary constraint.

The question is which theory on inflation forecasting is best?

Originally you seemed to be a big proponent on the Quantity Theory of Money — as if there was a direct linear relationship between the amount of government debt issued and inflation. But, the Quantity Theory of Money was disproven in the 1930s when it fell flat. Monetarists tried to revive it over the next few decades, but Quantity Theory of Money failed again in the 1980s during the massive Reagan deficits and it failed again since 2008.

So, I think we need to bury Quantity Theory of Money. It was disproven and it doesn't work.

These days, economists tend to use other forms of inflationary monitoring. Looking at productivity and/or employment level — in relation to spending — seems to have a lot more potential than looking at the raw quantity of dollars.

I mean, if the top 1% are getting most of the newly issued dollars — and many middle-class Americans are unemployed — it would make sense that only the top 1% would see much inflation (which is what has happened over the past few years).

[moda0306]

Another thing to keep in mind is that we all came to this board trying to figure out how to grow and/or protect wealth. We're all capitalists now.

[Gumby]

As far as the Treasury auctions are concerned, all we have to do is look at the public auction results to see what the demand is for new Treasuries.

Here is the latest auction results for the latest batch of 28-day T-Bills going at a blistering 0.010%!

[align=center][/align]

The auction's Bid-to-Cover ratio was 4.45 times oversubscribed! And that's for T-Bills that only return 0.010%.

Take a look at the Direct and Indirect Bidders — that's the demand for Treasury Bonds from people who aren't Primary Dealers. The Direct and Indirect Bidders almost took down the entire auction on their own. Again, for almost no return whatsoever.

The Primary Dealers showed up with enough bids to cover more than 3 auctions worth of Treasury Bills!!

So, even without the Primary Dealers, the demand for T-Bills is already high. But, the Primary Dealers are bidding for waaaay more 28-day T-Bills than the government ever plans on buying from them during that timeframe.

What's clear is that the Primary Dealers are more than happy to turn their excess reserves into T-Bills — even if the Fed isn't buying them.

Now, granted, not every last bid was probably super competitive. But, the bids that were the most competitive were the ones that got accepted. So, I think it's hard to argue that a government auction that is 4.45x oversubscribed is at risk of any debt-serving problems or is about to suffer a loss of confidence.

The demand for government debt is just too high.

And why shouldn't it be? The government is creating a scarcity and the Primary Dealers want more government debt, and less reserves, so that they can try to do better than the Fed's Interest on Reserves (IOR) policy.

This is what Monetary Policy looks like — just altering the balance of base money reserves to bond assets and targeting interest rates.

[Libertarian666]

As far as the Treasury auctions are concerned, all we have to do is look at the public auction results to see what the demand is for new Treasuries.

Here is the latest auction results for the latest batch of 28-day T-Bills going at a blistering 0.010%!

[align=center][/align]

The auction's Bid-to-Cover ratio was 4.45 times oversubscribed! And that's for T-Bills that only return 0.010%.

Take a look at the Direct and Indirect Bidders — that's the demand for Treasury Bonds from people who aren't Primary Dealers. The Direct and Indirect Bidders almost took down the entire auction on their own. Again, for almost no return whatsoever.

The Primary Dealers showed up with enough bids to cover more than 3 auctions worth of Treasury Bills!!

So, even without the Primary Dealers, the demand for T-Bills is already high. But, the Primary Dealers are bidding for waaaay more 28-day T-Bills than the government ever plans on buying from them during that timeframe.

What's clear is that the Primary Dealers are more than happy to turn their excess reserves into T-Bills — even if the Fed isn't buying them.

Now, granted, not every last bid was probably super competitive. But, the bids that were the most competitive were the ones that got accepted. So, I think it's hard to argue that a government auction that is 4.45x oversubscribed is at risk of any debt-serving problems or is about to suffer a loss of confidence. The demand for government debt is just too high.

The reasons that there is so much demand for T-bills and T-bonds are:

1. The purchasers know that the Fed will buy them at these rates, thus preventing the purchasers from suffering capital losses from rising interest rates.
2. The flood of liquidity that the Fed is producing by buying these instruments is forcing interest rates down around the world.

What do these reasons have in common? The tremendous amount of buying that the Fed is doing.

When (if) they stop, then we will see market interest rates. My claim is that they are far higher than the current Fed-induced rates. Others think that is wrong. We'll have to let the market decide.

[Libertarian666]

Wait, what about debts that are not denominated in money, but in products or services?

You would "extinguish" debt not with money, but with real economic value.

So how can you say that only money can extinguish debt if by the very language of a private contract, the only thing that can extinguish debt is (insert delivery of product or service here).

I already said that you can write a contract with any terms you like. But if I agree with you to pay you for your work in bushels of wheat, which side of the contract is the "money" side? Obviously, neither, since neither your work nor bushels of wheat are commodities having the greatest liquidity of any commodity ("money", for short).

Which side is the "debt" side? Well, that depends on who delivers first. If you work for me and then I "pay" you with wheat, then I owe you wheat in the meantime. If I deliver the wheat and then you "pay" me with labor, then you owe me labor. But in neither case is the contract denominated in monetary terms, and there is therefore no debt as is commonly understood.

Tech,

The contract IS a debt instrument. A debt is an obligation. Not just a debt denominated in money.

The contract is also money.  Neither the service performed nor the service indebted to be performed are money, but the contract itself is the money. Or so it is if people start using it as a store of value and medium of exchange.

I am kind of confused how you are so confident that you know exactly what money is, and what it isn't, when money is essentially a social construct... If people want it to be money, it seems to me it's money, even if it's the equivalent of a get out of jail free card (US dollar).

I'm not making a moral claim here... Just a social one.  If a commodity is the most liquid, but nobody has any, it's not going to function as a medium of exchange.

So both parties to the contract are in debt, each to the other? That's an odd notion, to say the least. Normally we think of a debt as involving a lender and a borrower, who are the two parties to the contract. Of course, that requires that one of the items being exchanged is money, so that we say that the one who is providing money now, to be repaid later, is the lender, and the other is the borrower.

Yes, money is a social construct, namely, it is the commodity most readily exchanged against other goods. Just because a few people use something as a "store of value" or as a "medium of exchange" doesn't make it money. For something to be money, it has to be generally accepted at par or near par (very high liquidity).

Even today, the commodity with the greatest liquidity is gold. The fact that it isn't in wide circulation as money is a large part of the reason that we have so much financial instability in the world. An "all-fiat" regime is a new situation in history, only about 40 years old. I don't expect it to last much longer, and the crash will be epic.

[Gumby]

The reasons that there is so much demand for T-bills and T-bonds are:

1. The purchasers know that the Fed will buy them at these rates, thus preventing the purchasers from suffering capital losses from rising interest rates.

No, no, no, no...

Here is the Fed's purchase schedule:

http://www.newyorkfed.org/markets/tot_o ... edule.html

There are no purchases scheduled for any short term debt during that time whatsoever. Those 28-day T-Bills won't be touched by the Fed. Your argument just isn't supported by the facts.

2. The flood of liquidity that the Fed is producing by buying these instruments is forcing interest rates down around the world.

You are talking about excess reserves. And it's true that excess reserves creates more demand for T-Bills. But, even everyday government spending creates the same kind of increase in excess reserves. Therefore, every dollar of government spending also creates the same exact demand for Treasury Bonds.

Every dollar that the Treasury spends can be used to buy a new T-Bill or T-Bond.

What do these reasons have in common? The tremendous amount of buying that the Fed is doing.

According to the schedule, above, the Fed will purchase ~$45 billion in US debt from Primary Dealers over the next 30 days (for maturities between 2017-2043). And the Fed has been purchasing ~$45 billion each month, throughout 2013. The Treasury Auction I posted shows that the Primary Dealers bid ~$129 billion for just a single 4-week T-Bill auction that the Fed has no intention of purchasing from them!

When (if) they stop, then we will see market interest rates. My claim is that they are far higher than the current Fed-induced rates. Others think that is wrong. We'll have to let the market decide.

The market data shows a much, much higher demand for T-Bills than what the Fed is planning on buying over the next 30 days (the Fed isn't buying any!). Yes, the Fed is buying a lot of government medium-term and longer term government debt that the Primary Dealers are able to get their hands on at auction, but the Direct and Indirect Bidders are putting a LOT of demand in for 0.010% 28-day T-Bills. And the Fed will definitely not be purchasing anything from the Direct and Indirect Bidders.

We are looking at very high T-Bill demand and the Fed isn't even buying these 28-day T-Bills at all!

[Libertarian666]

The reasons that there is so much demand for T-bills and T-bonds are:

1. The purchasers know that the Fed will buy them at these rates, thus preventing the purchasers from suffering capital losses from rising interest rates.

No, no, no, no...

Here is the Fed's purchase schedule:

http://www.newyorkfed.org/markets/tot_o ... edule.html

There are no purchases scheduled for any short term debt during that time whatsoever. Those 28-day T-Bills won't be touched by the Fed. Your argument just isn't supported by the facts.

2. The flood of liquidity that the Fed is producing by buying these instruments is forcing interest rates down around the world.

You are talking about excess reserves. And it's true that excess reserves creates more demand for T-Bills. But, even everyday government spending creates the same kind of increase in excess reserves. Therefore, every dollar of government spending also creates the same exact demand for Treasury Bonds.

Every dollar that the Treasury spends can be used to buy a new T-Bill or T-Bond.

What do these reasons have in common? The tremendous amount of buying that the Fed is doing.

According to the schedule, above, the Fed will purchase ~$45 billion in US debt from Primary Dealers over the next 30 days (for maturities between 2017-2043). And the Fed has been purchasing ~$45 billion each month, throughout 2013. The Treasury Auction I posted shows that the Primary Dealers bid ~$129 billion for just a single 4-week T-Bill auction that the Fed has no intention of purchasing from them!

When (if) they stop, then we will see market interest rates. My claim is that they are far higher than the current Fed-induced rates. Others think that is wrong. We'll have to let the market decide.

The market data shows a much, much higher demand for T-Bills than what the Fed is planning on buying over the next 30 days (the Fed isn't buying any!). Yes, the Fed is buying a lot of government medium-term and longer term government debt that the Primary Dealers are able to get their hands on at auction, but the Direct and Indirect Bidders are putting a LOT of demand in for 0.010% 28-day T-Bills. And the Fed will definitely not be purchasing anything from the Direct and Indirect Bidders.

We are looking at very high T-Bill demand and the Fed isn't even buying these 28-day T-Bills at all!

I'm not interested in this topic to the point where I want to get into another argument about it. You believe whatever you want to; I'm perfectly happy to wait and see what happens if and when they stop distorting the market with their interest rate suppression tactics.

[Gumby]

I'm not interested in this topic to the point where I want to get into another argument about it. You believe whatever you want to; I'm perfectly happy to wait and see what happens if and when they stop distorting the market with their interest rate suppression tactics.

Me too. I believe that the Fed will continue to buy $45 billion/month on the medium-long end of the curve. It's pointless for them to waste their time buying on the short maturities (the T-Bills just turn back into cash within a few days anyhow). The point being that the short maturity T-Bills are obviously selling themselves — with very high demand — without any purchases from the Fed.

[moda0306]

I already said that you can write a contract with any terms you like. But if I agree with you to pay you for your work in bushels of wheat, which side of the contract is the "money" side? Obviously, neither, since neither your work nor bushels of wheat are commodities having the greatest liquidity of any commodity ("money", for short).

Which side is the "debt" side? Well, that depends on who delivers first. If you work for me and then I "pay" you with wheat, then I owe you wheat in the meantime. If I deliver the wheat and then you "pay" me with labor, then you owe me labor. But in neither case is the contract denominated in monetary terms, and there is therefore no debt as is commonly understood.

Tech,

The contract IS a debt instrument. A debt is an obligation. Not just a debt denominated in money.

The contract is also money.  Neither the service performed nor the service indebted to be performed are money, but the contract itself is the money. Or so it is if people start using it as a store of value and medium of exchange.

I am kind of confused how you are so confident that you know exactly what money is, and what it isn't, when money is essentially a social construct... If people want it to be money, it seems to me it's money, even if it's the equivalent of a get out of jail free card (US dollar).

I'm not making a moral claim here... Just a social one.  If a commodity is the most liquid, but nobody has any, it's not going to function as a medium of exchange.

So both parties to the contract are in debt, each to the other? That's an odd notion, to say the least. Normally we think of a debt as involving a lender and a borrower, who are the two parties to the contract. Of course, that requires that one of the items being exchanged is money, so that we say that the one who is providing money now, to be repaid later, is the lender, and the other is the borrower.

Yes, money is a social construct, namely, it is the commodity most readily exchanged against other goods. Just because a few people use something as a "store of value" or as a "medium of exchange" doesn't make it money. For something to be money, it has to be generally accepted at par or near par (very high liquidity).

Even today, the commodity with the greatest liquidity is gold. The fact that it isn't in wide circulation as money is a large part of the reason that we have so much financial instability in the world. An "all-fiat" regime is a new situation in history, only about 40 years old. I don't expect it to last much longer, and the crash will be epic.

No. Sorry that it wasn't clear.

One service was provided.  The other has yet to be. If I owe someone a service or good, that is debt.  Whether I owe them money or not.

[Libertarian666]

I'm not interested in this topic to the point where I want to get into another argument about it. You believe whatever you want to; I'm perfectly happy to wait and see what happens if and when they stop distorting the market with their interest rate suppression tactics.

Me too. I believe that the Fed will continue to buy $45 billion/month on the medium-long end of the curve. It's pointless for them to waste their time buying on the short maturities (the T-Bills just turn back into cash within a few days anyhow). The point being that the short maturity T-Bills are obviously selling themselves — with very high demand — without any purchases from the Fed.

My theory is that there is some kind of scam that the big boys are running that requires T-bills to participate in. Maybe they can pledge them as collateral to borrow gigantic amounts from the Fed to buy longer bonds or something like that. But I'm pretty sure they're not doing it for the 0.01%/year interest.

But that's just a theory, which I have no evidence for and won't try to defend.

[Libertarian666]

An "all-fiat" regime is a new situation in history, only about 40 years old. I don't expect it to last much longer, and the crash will be epic.

When do you think it will it die?

Who knows? The one thing I'm fairly sure of is that there will be some event that everyone will blame for causing the crash, which will actually just be a trigger. If you keep blowing a bubble in a room with spikes on the walls, does it really matter which one it hits first?

[Libertarian666]

Tech,

The contract IS a debt instrument. A debt is an obligation. Not just a debt denominated in money.

The contract is also money.  Neither the service performed nor the service indebted to be performed are money, but the contract itself is the money. Or so it is if people start using it as a store of value and medium of exchange.

I am kind of confused how you are so confident that you know exactly what money is, and what it isn't, when money is essentially a social construct... If people want it to be money, it seems to me it's money, even if it's the equivalent of a get out of jail free card (US dollar).

I'm not making a moral claim here... Just a social one.  If a commodity is the most liquid, but nobody has any, it's not going to function as a medium of exchange.

So both parties to the contract are in debt, each to the other? That's an odd notion, to say the least. Normally we think of a debt as involving a lender and a borrower, who are the two parties to the contract. Of course, that requires that one of the items being exchanged is money, so that we say that the one who is providing money now, to be repaid later, is the lender, and the other is the borrower.

Yes, money is a social construct, namely, it is the commodity most readily exchanged against other goods. Just because a few people use something as a "store of value" or as a "medium of exchange" doesn't make it money. For something to be money, it has to be generally accepted at par or near par (very high liquidity).

Even today, the commodity with the greatest liquidity is gold. The fact that it isn't in wide circulation as money is a large part of the reason that we have so much financial instability in the world. An "all-fiat" regime is a new situation in history, only about 40 years old. I don't expect it to last much longer, and the crash will be epic.

No. Sorry that it wasn't clear.

One service was provided.  The other has yet to be. If I owe someone a service or good, that is debt.  Whether I owe them money or not.

Okay. But that still doesn't affect the fact that a good can only be money if it is the most marketable (liquid) commodity and thus develops a monetary demand as well as a demand for it to use in its role as a commodity. It would be very difficult for you to trade your bushel of wheat for other goods without the intervention of money, at least at anything resembling the full value of the wheat. And how would you know if you had made a profit or were wasting resources?

I suppose it is possible to have an economic system without money, in which nothing is marketable enough to develop that extra demand as money, but that would be very inefficient economically. You can't make economic calculations without something extremely marketable, in which prices for all other tradeable goods can be denominated.

[Gumby]

But that's just a theory, which I have no evidence for and won't try to defend.

I don't think anyone would argue that the banks aren't a threat to the system. It's just ironic because the bankers designed the very system that they have made so fragile. Private credit is very unstable, and private credit is the heart if the whole system. If they manage to f@ck up private credit, by freezing up the private credit markets, all hell could break loose. I bet that's how it goes down. In my opinion, the T-Bond market is a very tightly run ship, but I agree that giving bankers access to more and more government assets will just cause them to leverage them to the moon which could destabilize private credit. In other words, private credit gets more unstable and fragile over time as "risk free" assets grow and are available for leverage. Minsky predicted this over 50 years ago. A "Minsky Moment" will happen again at some point. 2008 was probably just a preview.

See, I really do have similar views about the fragility of the market. I just think the issuance of government fiat money is a tightly run ship (i.e. the auctions are rigged and the market knows it). It's the private credit markets that are really vulnerable. But that's why I hold gold and T-Bonds and avoid private credit instruments as much as possible. Just as HB recommended.

It's certainly possible that such an incident could destabilize the government, but that's why I hold 25% gold.

[moda0306]

Okay. But that still doesn't affect the fact that a good can only be money if it is the most marketable (liquid) commodity and thus develops a monetary demand as well as a demand for it to use in its role as a commodity.

Tech,

I know gold has some awesome traits, but it's almost like you're assuming that a monetary commodity MUST be the main medium of exchange.  There were a lot of societies that didn't build their monetary economy on gold or some other commodity.

Not saying that this is good or bad. It's just that if money is a social animal, then you (nor I) get to just decide what it is based on some kind of hard economic logic.  Do you or I get to just decide what money is?  If a rich economy that has no reasonable access to commodities wants to make their IOU contracts the main form of medium of exchange, who are we to tell them otherwise?

[Kshartle]

The notion that the government can do what would be required to keep it's debt risk free in nominal terms highlights a fundamental disagreement in how humans and markets work.

Touché.  Maybe Gumby and I would learn more about your position if we left your threads alone and let them get discussed on your terms, and not jump in like we're accusing you of dividing by zero.

Agreed. It's a very interesting point you're making, KShartle. And we'd all like to hear more. (Not joking at all). All we were saying is that there is no (nominal) solvency constraint on debt servicing. But, we all agree that there is an inflationary constraint.

The question is which theory on inflation forecasting is best?

Originally you seemed to be a big proponent on the Quantity Theory of Money — as if there was a direct linear relationship between the amount of government debt issued and inflation. I mean, if the top 1% are getting most of the newly issued dollars — and many middle-class Americans are unemployed — it would make sense that only the top 1% would see much inflation (which is what has happened over the past few years).

I've never heard of the Quantity Theory of money.

As far as forecasting an inflation rate...I've said that inflation is necessary to stave of collapse now that so many institutions are either so in in-debted or carry so many bonds as assets on their balance sheet that even a slow down in the infl-er expansion of the money supply is necessary to prevent collapse.

I've provided an equation that I think demonstrates that the government or central bank increasing base money is by it's nature infl-er...expansive of the money supply.

At current rates and debt levels the US government needs to expand the ENTIRE money supply by greater than 4% annually at this point to maintain it's debt servicing in the long run.

I would submit that even a single dollar expansion of the economy makes the long-term position of the government worse. Every drop of inflation raises the future budgets of the government if they do not make a fundamental change that is politically unpalatable (slash agencies, cut off dependants). It also further distorts the market by misallocating resources towards what the market does not want and towards what the central planners want. This is always and forever destructive of capital which hampers future tax revenues (Tech has pointed this out). By taking inflation to it’s natural conclusion and assuming say…the government prints 500 trillion and spends we would witness the complete collapse of the economy and full destruction of the tax base coincide with an absolute explosion in the budget requiring further expansion just to avoid default in nominal terms.

Therefore….if the government does in fact have an inflationary constraint it must also have a risk of outright default. If inflation is the only way to have absolute assurance of payment, and we know there is an inflationary constraint, there has to be a level of inflation that causes such a threat to the government that they will not choose to go that route or at least might not consider going that route…..thus, default becomes necessary.

Or they change course and they take steps to prevent either scenario. They stop destroying the economy with taxes and regulation, they stop paying people to not work and punishing them for working. They sell assets. They slash their budgets by eliminating agencies. If they don’t take these steps they sow their own destruction. The problem for the government is it’s democratically elected. Therefore they have to pander for votes by giving away stuff…seemingly for free. But nothing is free because everything has a cost.

Therefore I think the central bank and market will have to correct the government by rejecting the printing and refusing to loan money to someone who cannot pay back in REAL terms.

Nothing is risk free, even in nominal terms let alone in real terms. The concept is foolish.

[Kshartle]

Look at the chart of the total money supply or broad liquidity or whatever that was posted earlier. It shows the tiniest drop in the 2008 timeframe. The economy was not nearly as addicted to base money monetary expansion as it is now and that tiny drop caused the "great recession". At this point anything even resembling that tiny deflat...er contraction of the money supply was all it took.

At this point I think even an extended period where the rate of increase doesn't grow will be enough to bring on collapse requiring an even bigger dose of printing. What effect this will have on the general price level I am not certain because I don't know how everything else will play out. If it doesn't result in a big increase in prices it will be because other bad things are happening to reduce the standard of living.

There are consequences for central planning the economy and buying votes with stolen purchasing power (either taxes or printing). There are consequences for being addicted to massive amounts of debt, particularly at low rates.