[ExI] Deficit spending and never admitting you were wrong

[Dylan Distasio]

On Wed, May 27, 2020 at 7:44 AM John Clark via extropy-chat <
extropy-chat at lists.extropy.org> wrote:

> On Wed, May 27, 2020 at 12:25 AM Dylan Distasio via extropy-chat <
> extropy-chat at lists.extropy.org> wrote:
>
> > *However, when they wind down the balance sheet,*
>>
>
> If by that you mean reduce the amount of debt I doubt that will ever
> happen and see no reason why it should ever happen; and the worst time
> imaginable to even consider doing such a thing would be in the middle of a
> global economic depression caused by a global biological pandemic.
>
>

No, that's not what I mean.  Brent was talking about the balance sheet of
the Fed, something entirely different from the debt of the US as a nation.
 The Fed never carried a big balance sheet before QE and the financial
crisis.  They were in the process of winding it down until the latest QE
around CV-19.   I'm not speaking to the US debt load, although because of
QE that Fed currently holds a significant portion of it.



> > *they are constrained by the current price of a security they are
>> selling. *
>>
>
> We have a lot of economic problems today but that is not one of them. If
> nobody is buying a bond then the solution is to reduce its price, but today
> bonds have never been more expensive and yields have never been lower yet
> people still buy them so there is no need to reduce their price.
>

The Fed is also not liquidating its balance sheet right now.   It's
partially creating the demand (purposefully) for US Treasuries.  You're
assuming there will always be buyers at good prices when they need to
unwind.


>
>
>> > *They don't have the ability to create bonds out of thin air like they
>> can do for dollars. *
>>
>
> Of course they do, even companies can create bonds out of thin air.
>

John, please get more educated on a topic before saying something with
certainty.  The Fed is bound by the rules of its charter.  THEY cannot
create government bonds.   If you're talking about the US Treasury which
you likely are based on your response above, that's another story
entirely.   The distinction however is important.   Again, Brent asked
about the Fed's balance sheet, not the US government's.



>
>
>> * > I don't think people are really talking about them directly here in
>> the context of expanding US deficits.  That doesn't really involve
>> "printing money."  The Treasury finances deficits by conducting auctions of
>> Federal debt.  *
>>
>
> A distinction without a difference.
>

Again, John, learn more about a topic before pontificating on it.   Brent's
question was about the Fed printing money and expanding THEIR balance
sheet, at least that's the way it was worded.   I was pointing out the Fed
does not print money to finance US deficits.   There is an important
distinction there.

>
> *>The risk is that demand isn't there due to vastness of supply / loss of
>> confidence causing interest rates to climb, leading to inflation. *
>>
>
> If demand isn't there then increase interest rates, but demand is there
> even though interest rates are currently low. Ridiculously low! The yield
> on a 2 year treasury bill is only 0.19%, the lowest in history. And the
> average 30 year fixed rate mortgage is 3.23%, also the lowest in history.
> The deficit hawks are like a doctor refusing to feed a 70 pound starving
> man because he's worried about the dangers of obesity.
>
> Demand is there until it isn't.   It's there because the US is still the
global reserve currency, considered a safe haven with an established rule
of law, and is still paying higher rates than the rest of the developed
world.   The US debt is a burden on future productivity and already
consumes 8.7% of the US budget and is more than 100% of GDP.

Additionally, I'm surprised you continue to lament the death of
libertarians on this list in the age of Trump when you appear to be far
from one yourself.  You seem perfectly happy with central banks distorting
financial markets to such a large degree that it is impossible to
disentangle real signals that the market may be trying to bubble up.
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