[slv77]

This is less of a problem with the way that the monetary system operates and more about policy choices made by central banks and politicians after the 2008 financial crisis.

Debt is a promise to return something if value tomorrow for something of value today. Too many promises have been made than will ever be able to be repaid and promises are going to be broken.

Regulators and politicians have three choices on how to deal with broken promises. The first is through bankruptcy courts where a judge allocates losses according to the law. The second is through taxes where politicians take money from one group to honor promises made to another. The third is to drive inflation and break promises by returning dollars that have less value then promised.

This choice that central banks made was the latter by trying to drive up inflation. The side effect of the policy choice however it has tended to favor speculators and the well connected versus other policy paths.

I’m not entirely sure those other paths would have been better. Broken promises tend to be what drives revolutions and the best path is to not make promises that you can’t keep.

[BoiledCabbage]

It's a good comment, but you left off one important detail on option 3. When choosing the inflation route, there are two ways to inflate the economy by "providing" more dollars.

One option is to provide more money to people/entities that primarily purchase investments/assers. The revenue stream of these investments will roughly remain the same, but their cost will go up permanently. Effecrively increasing "P/E ratios" or equivalent of all assets. This increases inequality in society.

The second option is to provide money to people that primarily purchase goods/services. This increases the demand and thus the price on goods and services, the increased demand pushes up demand for labor, which increases wages and benefits that group. The increased prices of goods/services also increases the value of assets/investments that depend on those revenue streets - but due to the nominal increases in revenues there is no "bubble" increase in "P/E ratios" and equivalent metrics.

2008 did mostly the former and essentially none of the latter.

Covid did a mixture of both, although it coincided with severe supply shortages and oil shocks making its impact unseparable for measuring and not controllable due to the external factors.

[slv77]

The Federal Reserve operates like any other bank with the exception that as a central bank it is exempted from capital ratios and also serves as the Bank for the US Treasury. Because it isn’t limited by capital ratios it can’t absorb losses and so is constrained by US Congress to US guaranteed debt instruments.

If this were not the case and the Federal Reserve were to lose money and be need to be bailed out the Federal Reserve would be making fiscal policy which is reserved to the US Congress by the constitution.

In other words the Federal Reserve would be able to bail out Ford Motors investors (if it wanted to) by simply buying unlimited amounts of Ford Motors bonds at below market rates. This would tend to piss off Congress who rightly believes that the Constitution grants them that authority.

In some cases Congress has granted the Federal Reserve some authority to purchase other assets such as during the 2008 financial crisis. I’m that case a specific amount of money was allocated by Congress. The Federal Reserve ended up leveraging up the allocated funds which ended up working out for the Taxpayer but didn’t make some in Congress happy.

The net-net of that rambling is that the Federal Reserve is fairly limited in what it can buy so it has very limited control over where they money it creates goes. It can flow into assets like stocks or real estate or into consumer loans to purchase groceries if there are people willing and able to assume more debt and banks able to lend it.

Congress and the Federal Reserve working together have more options. Congress can allocate $1 trillion dollars to fund a green energy program and then the Federal Reserve can buy all of the bonds necessary for the Treasury to fund it. The Treasury pays interest on those bonds and the Federal Reserve gives it back to Congress. As long as the Federal Reserve continues to roll the bonds it is essentially “free money”.

Of course nothing is ever really free as this free money transfers purchasing power from people holding cash as they are diluted. This is essentially what happened during covid.

Long term the bill still has to be paid either through taxes or increased inflation (like we’re seeing now) both with consequences for the economy.

If Congress wanted to provide more tools to the Federal Reserve it could provide them with tools to funnel money directly to households. For example creating an “America Saves” program where employers would be required to fund an employee savings account each year invested in US Treasuries which employees could borrow against and interest paid accumulated to the employee.

The Federal Reserve could create money by purchasing Treasuries from these accounts when consumers took out loans and remove money by increasing interest rates and limiting the percentage of assets that could be borrowed against.