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by wrong_variable 2515 days ago
Products don't grow on trees.

If the fed buys every USD bond in existence ( aka monetize the debt ) - it would lead to a good amount of inflation.

3 comments

Yes and no. Let me give you an example: if 70% of Americans get $40K bonus per annum from the fed, it will lead to inflation. However, if the same amount of money (70% of 300M times $40K =8.4T) is given to ten billionaires, it won't lead to inflation.
Only if the billionaires don't spend, invest or hold it in a bank.

Any of the three, it will go back to the market and result in inflation.

You are describing inflation caused by consumption (i.e. high demand driving up prices).

The inflation the OP was describing is the massive inflation caused by printing money.

The US bond is effectively an IOU representing US dollars the USA owes the bond holder.

For the USA to buy back those bonds they only have two choices:

1. Run an strong economy earning lots of US dollars (i.e. a trade surplus) and use that USD income to buy back those bonds.

2. Turn on the printing press and print lots of USD to buy back the bonds.

That later option would render the USD worthless and since most commodities are priced in USD that would also lead to hyper inflation.

There are second order effects: if billionaires start buying stocks, thereby increasing the value of RSUs that tech employees hold, this can cause inflation in housing prices.
Options you missed:

3) sell more reserves (gold, currency)

4) bond swap with other countries

Yes, but the pressure to pay off those bonds would be deflationary, so in order to sustain the inflation next the Fed would have to do something even more extraordinary! AFAIK this policy pathway leads ultimately to bond forgivenesses (or funky bankruptcies) that eliminate deflationary pressure but may well have the unpleasant side effect of radically adjusting the fiat currency system.
How do you mean? If the Fed creates new money and buys bonds with it, the Fed can continue to hold them forever (really just until they mature) if it wants to. Then the Fed is more or less part of the government, so when the bond matures the Fed takes the bond to the treasury which gives it cash, then it gives the cash back to the treasury. It's like the bond evaporates into nothing when it matures while the Fed is holding it.

If the Fed theoretically bought all the bonds then it could obviously no longer increase the money supply by buying bonds, but we're a long way from that, and even then the Fed could still create new money and give it directly to the treasury to spend in lieu of collecting taxes. Or in the utopia where buying all outstanding government debt and funding the entire federal budget out of new money still hasn't caused the desired amount of inflation, to use to enact a negative income tax.

> Pay off those bonds

I don't think that would happen. They will just borrow ever more. Which if debt increases slowly enough, is sustainable but causes inflation.

Inflation isn't global, it can easily happen in economic sectors that exclude the vast majority of the population.