The Truth about Money Printing. Do you want to understand?

Discussion in 'Markets & Economies' started by President Trump, Jul 4, 2020.

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After reading the above what do you believe:

  1. Interest rates will go up.

    7 vote(s)
    22.6%
  2. The Fed can just keep buying treasuries to infinity

    17 vote(s)
    54.8%
  3. Modern Monetary Theory will fix the problem

    2 vote(s)
    6.5%
  4. The US will default.

    10 vote(s)
    32.3%
Multiple votes are allowed.
  1. President Trump

    President Trump Active Member Silver Stacker

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    The big experiment that started in 2007 will eventually end. Governments have to spend to provide the basic services that governments provide ie education, health, defence etc. Eventually these things may have to take priority over supporting parts of private sector. And I want to explain in my own words why.
    Like in your own family or business the thing that will drive governments to change spending habits will be access to funds. Governments if they are lucky (like the US) have 3 sources of funds; taxes, borrowing and money printing.

    TAXES
    It is easy to understand how the ability to tax is limited, so spending from taxes is not unlimited.

    BORROWING
    There are some who believe that governments can borrow forever and in unlimited amounts. Obviously this would not be true if they were borrowing from lenders (lets call them "External Lenders") that can calculate the governments ability to repay interest from the taxes they raise. This should be self-evident because there comes a point when taxes can't be raised enough to pay interest. And as this point in time gets closer, interest rates should rise (to cover the extra credit risk)... not fall. But even though the ability to pay back interest is just math, the FED doesn't calculate the ability of the US Government to pay interest back. Rule number 1 the US can always pay back. Rule number 2 if the math disproves this, refer to Rule number 1. So as external lenders, who do calculate credit risk, choose not to lend to the US (ie buy treasuries) the FED increasingly becomes the only lender (ie buyer of treasuries). The math (on the ability to repay principal and interest) will eventually cause other buyers of treasuries to stop buying. As new treasuries are issued to fund the governments activities the FED has to buy these. As old treasuries (held by external lenders) mature (which is simply the Gov being required to pay back debt at the end of its term) the Fed buys new treasuries to give the government the money to repay the maturing debt. So maturing treasuries (gov debt) never matures and the lender to the US government over time changes from External Lenders (who care about the credit worthiness of the US government) to the Fed (who doesn't care and can create money to buy more). And this insn't just happening at the maturity of treasuries. Treasuries can be sold prior to maturity. If lots of external lenders sell treasuries then like any asset the treasury goes down in value. Because the interest rate stays the same, this has the effect of a higher interest rate to the holder of this treasury. This affects interest rates on the issuance of new treasuries. The US government can't have interest rates rising (remember issue of paying interest with taxes) so it buys these treasuries also. So is the ability of the US government to borrow unlimited? Yes it is while the Fed exists but it would require an explosion in the Fed balance sheet as issuance increases and the Fed becomes the only buyer. The only solution is if the Fed slows its buying and this means interest rates rising and accepting the pain of this.

    MONEY PRINTING
    Money printing has always existed in our fractional reserve system, but it has been tethered because the opposite, money destruction, also happens. Every time credit is issued in the system money is printed. When this credit is paid back money is destroyed. When you lend $100 of your money to a friend ,you take $100 of your money and give it to your friend who now has that $100. No money is printed. This is not the case when you lend from a bank. An example most can relate to: You buy a house for $500000, you give a $50,000 deposit to the seller. Your mortgagee bank takes a mortgage over your $500,000 house and the bank with a key stroke creates $450,000 for you to pay to the seller. This $450000 did not exist before you took out your mortgage. The bank does not have a corresponding amount of term deposits or other assets that it takes from to give you this $450000. When the mortgage is paid back to the bank the bank does not get to keep the $450,000. This credit is destroyed in the inverse of how it was created. This creation and destruction keeps money supply (from this type of printing) from exploding over time. The destruction always occurs. The bank only keeps the interest. When the government lends from its central bank, it is the same, a key stroke creates the billions of dollars. If the government ever paid back the money the inverse would occur it would also be destroyed. When it becomes clear that the money cannot be paid back or the debt is forgiven, this is monetisation and the mechanism that keeps money supply from exploding is gone. If so much debt has been issued that it can't be paid back from taxes and borrowing just makes the problem worse, what should the government do? Well ask any Bankrupt person and they will tell you that there is a point when they realised the problem could not be solved even if they could borrow more. The only way is accepting higher interest rates or default. They can't accept higher interest rates. The US will default and cents on the dollar will be paid to all holders of treasuries. It has happened to many countries in the past and it can happen in the US. It is just maths. Well done if you have gotten to here in my Silverstackers rant. One final point. What does this default do to interest rates? Well after a default the borrowing cost of the US government will be set by the markets and it will be much higher. So eventually the pain that comes from too much debt will have to be felt throughout the economy.
    I'm not saying that is is all going to happen tomorrow. But this is the path we have been on since about 2009. It isn't something that simply wont happen because it is a bad thing. Lack of understanding on how this works is what is driving the problem towards solutions like modern monetary theory (MMT). Maths says that this will eventually happen. A Biden win in the US will speed it up even more, but I think it will happen either way. I am not republican or democratic or left or right I am a believer in the truth.
     
    Last edited: Jul 4, 2020
  2. JohnnyBravo300

    JohnnyBravo300 Well-Known Member

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    Good post!
     
  3. mmm....shiney!

    mmm....shiney! Well-Known Member Silver Stacker

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    Except a sovereign nation cannot default unless it chooses to.

    And MMT is not a solution, it is an explanation.
     
  4. President Trump

    President Trump Active Member Silver Stacker

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    Correct. It can pay higher interest rates instead.

    And if it doesn't want to pay higher interest rates it has to buy all its own debt.

    Neither are good solutions... both end in economic pain.
     
  5. alor

    alor Well-Known Member Silver Stacker

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    they no longer print, they just add 0101 digitally
    cashless
     
  6. leo25

    leo25 Well-Known Member Silver Stacker

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    You overlooked an important point. Without the FED the US government would not have to pretend to borrow, they will just directly issue currency. Government spending will then become bank reserves and thus keep interest rates at or near zero, since banks will have no need to bid for reserves.
     
    Last edited: Jul 5, 2020
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  7. JohnnyBravo300

    JohnnyBravo300 Well-Known Member

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    The dollar crash will come before mmt. By then no one will want it.
     
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  8. leo25

    leo25 Well-Known Member Silver Stacker

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    Everyone will still use it, 100% guaranteed. And FYI, MMT is already here.

    The dollar might crash at some point, but it will have nothing to do with MMT.
     
    Last edited: Jul 5, 2020
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  9. President Trump

    President Trump Active Member Silver Stacker

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    MMT may already be here,..depending on how you define it. I understand MMT to be where government can spend without the restriction of the Treasury having to borrow from its central bank first. The central bank being the anchor on government spending. The other part of the theory as I understand it is that the money printed in this unrestrained manner chases goods and services soaking up excess slack in the economy. Just keep printing until everyone is employed. I don’t think we are there yet under this definition. But if you belief the Fed is a puppet of the government and will never be paid back by treasury then I guess we may as well regard the experiment as already started.
     
  10. mmm....shiney!

    mmm....shiney! Well-Known Member Silver Stacker

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    Or it may have everything to do with MMT. ;)
     
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  11. JohnnyBravo300

    JohnnyBravo300 Well-Known Member

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    Yeah it's already here pretty much. The central bank is the govt so it's all the same really. Theres no difference without sovereignty. They are one in the same.
     
  12. JohnnyBravo300

    JohnnyBravo300 Well-Known Member

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    Half of working age Americans are jobless now, they'd better print nonstop. The sheeple are growing restless!
     
  13. Lovey80

    Lovey80 Well-Known Member

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    Of course the dollar crash will have everything to do with MMT.

    it may be triggered by China. Or a war with China. It may be triggered by the collapse of the petroleum dollar. It may be a slow bleed from Japanese demographics as the Japanese slowly offload USD assets to pay for their own huge debts.

    There’s way too much USD in circulation right now. The big chunk of that is 25T in federal debt that cannot ever be repaid. MMT is allowing all that to happen. This can’t go on for ever. At some point OPEC or China or the rest of the world will have to stop using the USD as the reserve currency. That alone will bring Zimbabwe back to Washington.
     
  14. leo25

    leo25 Well-Known Member Silver Stacker

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    MMT didn’t allow this to happen, the USD being the reserve currency allowed it to happen. That’s why no single currency should be used as a reserve currency.

    If the USD was not the reserve currency, they could not have created so much currency and export it across the globe.
     
    Last edited: Jul 5, 2020
  15. leo25

    leo25 Well-Known Member Silver Stacker

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    Government is just topping up their spending account. I would imagine there will be some big spending soon. Vote for Trump and get a $10,000 cheque. :D

    Reserve Balances U S Treasury.png
     
    Last edited: Jul 5, 2020
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  16. 66rounds

    66rounds Well-Known Member Silver Stacker

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    Just in time for the elections.
     
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  17. JohnnyBravo300

    JohnnyBravo300 Well-Known Member

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    Both sides will need to campaign on ubi and government support checks this go around. Which one will pay us more?!

    They can call it covidrelief or covrescue or something catchy like that. Maybe covidbucks.
     
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  18. 66rounds

    66rounds Well-Known Member Silver Stacker

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    No different to Aussie elections, whoever promises more dreams gets in.
     
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  19. President Trump

    President Trump Active Member Silver Stacker

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    I wasn't going to delve in to the structural changes that true MMT would require, but you bring up a good point. As you say the government could be permitted to print money without borrowing it from the Fed. Such action would essentially dissolve the Fed (even if it was not formally dissolved) because its main tools to fulfil its mandate would be gone. But it is true that once this happened we would truly be in a world where the government can print what it needs. This may sound great but it would not make Treasuries an attractive asset to hold; 1 because the US government doesn't ever need to borrow again it can just print (and government borrowing is Treasuries) and 2. because for any existing Treasuries, the government will just print money to pay back these Treasuries and to pay interest on these Treasuries. I think it is hard to argue that the treasury market would not immediately implode. I don't know what the geopolitical effects of this would be but they wouldn't be good. Putting that to one side, the government could immediately pay back everyone, these lenders would of course receive dollars. So I must ask why would anyone keep holding these dollars, if the number of dollars has just gone exponential. Its easy to see that you don't decide to sell Treasuries and then decide to keep holding dollars. Dollars would be sold for other currencies or other assets. This selling of the dollar would not cause a subtle fall. Above you say: "Everyone will still use it [the dollar], 100% guaranteed. And FYI, MMT is already here. The dollar might crash at some point, but it will have nothing to do with MMT." I would like to understand your thinking on this.

    Anyway back to the interest rate point. At the moment (with the Fed in place) not only is a tally kept of how much money the US has borrowed (ie it can't raise from taxes) but the market (which includes the Fed) assigns an interest rate to those borrowings. At the moment this interest rate is close to zero because the fed buys treasuries. When any asset has buying pressure it goes up and interest rates are the inverse to prices so interest rates go down. If the fed disappears as a buyer and treasuries remain interest rates go up. If the fed disappears and treasuries disappear we need a new interest rate setting mechanism.

    You have said government spending becomes bank reserves and keeps interest rates down. I agree that if extra funds flow into the banking system and market forces are left to operate more money would push interest rates down. But the stimulus cheques didn't just flow into the banking system as deposits that become reserves. It doesn't seem to me that MMT makes holding cash any more attractive, so these funds will flow into other assets and inflate bubbles just as stimulus funds do now all that has happened is that the mechanism for holding rates down is gone.

    Once the Fed is gone and treasuries are gone the value of the dollar and interest rates are entirely reliant on the good will and honest of politicians who are looking to be elected. They decide how much money is printed. Even if they have the best will in the world, have they had the experience to understand the pitfalls I think not. The Fed may be their puppet, it may do the wrong thing, even though it knows better, but at least it has the capacity to do the right thing.
     
    Last edited: Jul 6, 2020
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  20. leo25

    leo25 Well-Known Member Silver Stacker

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    I would imagine Treasuries (term deposit savings account) would just be converted to a checking account. After that the concept of government debt will disappear. If desired I guess the government can setup a government backed saving account with an interest rate of its choosing.

    The main buyers of government debt atm are central banks and places like super funds that are forced to hold a certain amount of risk free assets (government debt). As for general investors the only reason people were buying government debt is due to central banks bidding up the price as they took rates to zero, but now rates are zero there is no more spread/profit to be made. So we can now conclude to only real buyers are central banks and places that are forced to buy.

    The same reason why the world holds USDs now, mainly because it's the reserve currency and to simplify that further, because the world is forced to. Also the amount of dollars wouldn't have gone exponential, just that dollars got converted from a "term deposit" account to a checking account.

    Banks will still charge interest to the borrower based on risk. The banks base interest will be zero, but they will lend out at a higher rate to the borrower and earn the spread. So not much changes from how it is now.

    The government will be able to control currency in the system by either adjusting spending or adjusting taxation. Also as mentioned above, they could have an government backed interest saving account if they want to encourage people to offset their spending into the future.

    Yes it did. When you cash the cheque it goes into your bank account. Since the world is becoming cashless, it's a closed loop system.


    And last of all i just want to reiterate MMT doesn't solve any structural problems. It's just a different way of seeing something and more closely explains what is happening today once you remove all the shell games.
     
    Last edited: Jul 6, 2020

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