[oarabbus_]

>Does it? Or is this just how the system is currently designed?

Yes, to both questions. The US Debt is at $31 trillion, it only works as long as the system keeps feeding money into government bonds.

The entire global financial system (not just the USA; the rest of the world is dependent on the USD and US banks) is reliant on this cycle of money.

>50 years ago we might have asked who will provide the Fed with the gold it needs to issue enough currency to avoid deflation as the population grows exponentially.

It was realized the gold standard stifled growth too much, and was abandoned just about 50 years ago as well.

You can have a safe system without growth (everything Tech was built off credit/debt and castles in the sky until decades after the companies were founded) or you can have the tech industry with a debt-credit based system.

[diffeomorphism]

That does not address the second question at all? The bonds need to be bought by someone, but you gave no argument why this someone has to be banks and why banks need tax money for bailouts on top of that.

[oarabbus_]

It was explained, maybe you didn't connect the reasoning.

First, there are no entities that have the amount of capital needed to keep the bond market moving besides banks. This is a $50 trillion market that makes the stock market look like a lemonade stand. I would suggest you do some research on the bond markets, it will become immediately apparent why only central and private banks have the capital necessary to drive it.

It's the nature of a credit/debt based system, which is currently in a booming credit cycle (although perhaps the end of the cycle)

As to why do banks need tax money for bailouts?

The banks don't need tax money, if you're willing to let banks fail - which would likely be healthy in the long run.

But in the short term, Joe Middle Class can't get a car loan to get a car, Wealthy Sally can't get a business loan to start a company and employ 50 people, Minimum Wage Mike can't get a home loan after saving up money for 25 years.

It's certainly a shame that banks basically face no consequences and the taxpayer has to pay for it. But people's perspective on bank bailouts changes quickly when they realize the "side effects" are their credit cards no longer exist and their loan rates tripled.

[a_new_user]

The banks need to buy treasuries, because they treat bonds as a risk free financial instrument. Everyone else would have to recognize the risks inherent in those bonds and thus demand higher interest. The federal government can't afford that.

The reason why banks need to be bailed out, is because they treat treasuries as risk-free financial instruments. If they didn't get bailed out from time to time, they'd have to recognize the risk in buying treasuries.

[nopassrecover]

So our banking system needs somewhere to park capital risk free, and it’s economically desirable that’s in a place that doesn’t create other distortions such as asset inflation or malinvestment. So we have treasuries as a tool for the financial system.

But there seems to be a premise in this thread that the US Gov needs (as in has no other possible choice, even via legislative change) to sell treasuries in order to fundraise.

I accept that’s sort of how the current system works in that effectively the US Gov creates capital/spend in the financial system via various programs and investments and attempts to offset inflationary effects / currency deflation effects by taxation and other revenue before finally encouraging other parties to allocate capital out of the system in the form of treasuries to make up the shortfall.

Effectively as I see it a treasury is then a promise not to spend capital for the term in exchange for the promise you’ll get the expected present value of that capital returned at the conclusion of that term (or in the case of TIPS/I-Bonds, the best approximation of the actual present value of that capital at that time).

Amongst other features, this neatly “allows” the US Gov to allocate an equivalent amount of capital to a purpose it considers appropriate while theoretically lessening impacts compared to simply spending that money without the offsetting treasuries.

But I’m not entirely sure there’s some sort of fundamental rule that the US Gov with the support of the Fed “needs” anyone to buy treasuries - together they could, as an example I’m not necessarily advocating, provide a safe haven facility for anyone who wanted it and continue to influence the monetary system and zero-risk rate of return (eg by the Fed paying interest on reserve accounts as they have since 2008) while otherwise having the Fed simply create the currency the government requires for deficit expenditure (eg by directly buying treasuries from the Gov if we perpetuate the illusion) and using other fiscal policy to control the inflationary/distortion effects of this spend.

That is, I’m not sure it’s the case that the US Gov exactly needs the banks to borrow treasuries because it could not afford them not to. Rather, the value of treasuries is as a measure to absorb excess liquidity, provide safe haven, and adjust risk behaviour in the financial system.

My open question is whether the current system is the only way, yet alone the best way, to practically achieve this goal?

[phpisthebest]

you think inflation is a problem now, wait until Congress has the literal power to order the Fed the print money which is effectively what you are proposing.

I do not trust the Fed, but I Sure as shit do not trust the US Congress.

[landemva]

The federal reserve does not print money, the Treasury does.

Supposedly the debt ceiling prevents runaway spending. That already doesn't work because money is loaned into existence in ever-increasing amounts.

[phpisthebest]

Wrong..

The Treasury makes coins.

Paper money is a "Federal Reserve Note". It comes from the federal reserve not the Treasury

The Treasury creates coins or bonds. This is one of the reasons congress has floated the idea of the 10 trillion dollar coin. As it is within their power to order the Treasury to mont that. They can not order the federal reserve to make a 10 trillion dollar bill

[331c8c71]

Of course it is the fed who prints the money in the US and has dual inflation/unemployment targeting mandate. In other countries this role is typically performed by the central bank.

https://www.federalreserve.gov/aboutthefed.htm

[mmusson]

The debt ceiling doesn’t control spending because it is a misnomer. The money has already been spent. The debt ceiling controls whether the government will honor the obligations it has already made.

[diffeomorphism]

And that is cheaper? How much more expensive would a "correct" interest rate be compared to bailouts+economic fallout+loss of public trust you get from the current "risk-free" fantasy?

[BlueTemplar]

Trying to keep up the growth half a century ago was the last thing that (at least the West) needed to do - and it was already aware of that at that point.