Skip to content

Instantly share code, notes, and snippets.

Embed
What would you like to do?

"Instantly" Understand U.S. Monetary Policy

Well, maybe. If any of this is confusing, see the Resources section at the bottom.

U.S. Economic Policy In A Nutshell

Quick terms (might differ a bit from other sources):

  • "T-bills"/"treasuries"/"bonds" (there are multiple types) = a promise (from the US government) to repay an amount of cash at a specific future date, with interest. These are not intended to be used as money to buy goods/services, but are a mechanism for "the fed" to manipulate interest rates, the amount of cash flowing through the economy, and the amount of cash that the government has to spend on things.
  • "Reserves" = cash (typically cash that a bank actually has).
  • "fed", "the fed" = Federal Reserve, a central bank which, together with the U.S. Treasury, is primarily responsible for the reality of U.S. monetary and economic policy, by managing the supply of "currency" (cash) and treasuries (promises for future cash).
  • "interest rates" = refers to a variety of different rates, including the "federal funds rate" (the "target rate"), which is rate that the fed tries to get banks to lend money to each other at, and the "discount rate" (or "discount window"), which is the rate at which banks can borrow money from the fed at (typically this is higher than the target rate). If cash is scarce among banks in the system, the fed might decide to lower the target rate, and it can do this by injecting cash into the system (by buying treasuries).

We'll consider a generalized "total US monetary supply" = treasuries + dollars (cash), because they can both be printed in unlimited supply by the same entity and are backed (effectively) by the same thing (the US economy and the government's ability to tax). However, only dollars (USD) can be used as fungible money.

"fed 'buys' treasuries"

Putting cash (USD) into the system (via former bond holders who trade bonds for USD) and out of governments hands causes interest rates to go down (see nuance), increasing the supply of cash in the economy (decreasing amount of money government has to spend), causing monetary inflation (an increase in the money supply, which doesn't necessarily mean "USD is worth less"), and resulting in price inflation ("things costing more") only when it causes an increase in demand that outstrips any increase in supply of goods/services.

Monetary inflation might not necessarily mean that "USD is worth less" in the event that the money printed results in an increase in the monetary value of the output of the economy (i.e. through investments). It depends on how that money is used.

"fed 'sells' treasuries"

Taking cash (USD) out of the system (via new bond buyers who trade USD for bonds) and putting into government hands causes interest rates to go up, decreasing the cash in the economy (increasing amount of money government has to spend), causing monetary deflation, and resulting in price deflation ("things costing less") only when it causes a decrease in demand that outstrips any corresponding decrease in supply of goods/services.

Understanding unique nature of government so-called "debt"

  • "Fed buys treasuries/bonds" = repaying "debt".
  • "Fed sells treasuries/bonds" = going into "debt".
  • "debt" is in quotes because federal bonds (treasuries AKA "debt") are guaranteed to be repayed so long as the U.S. government continues to exist (because taxation and/or printing money). This is completely unlike the normal debt that most people are used to where the possibility of non-payment is very real. It is possible (though very unlikely) that there would not be a buyer for treasuries (it would imply a situation where USD is already considered worthless by the market), but even in this case the "debt" would still technically be payed via printing of money.

Directionality

"increase debt" means selling treasuries (bonds) which means interest rates go up.

  • if interest rate goes up, the price of bonds go down
  • if interest rate goes down, the price of bonds go up

If the fed wants to sell treasuries, then the price of bonds go down.

If the US government needs more money, it can either:

  • print money (monetary inflation and temporary (possibly) price inflation)
  • sell treasuries (can print as many of these as it wants, it is "debt" to be paid back later either via printing money or collecting taxes. this decreases the monetary supply and causes interest rates to go up).
  • collect more taxes

Nuance On Interest Rate Adjustment

According to Steve Randy Waldman, this is no longer an entirely accurate description of how interest rates are affected because during the "quantitative easing" bit, the Fed bought such a large amount of bonds that banks are now swimming in "reserves" (cash), and therefore "putting cash in or taking cash out has basically no effect on interest rates" and "it would have to sell off a few trillion dollars worth of bonds to change this." See also this and this.

Interpretation

A very smart friend of mine recently told me he felt that the government should "have gone into more debt" in order to take advantage of the many out-of-work people as a result of the 2008 financial crisis. The idea being, that at this point in time "some job is better than no job at all", and that therefore more people would be willing to work at a discounted rate at such a time, whereas when "the economy is booming", fewer people would be willing to work infrastructure jobs at those rates. The government could, in other words, have our infrastructure rebuilt on the cheap by "going into debt" (asking the market for some of the cash it previously printed).

Now, whether or not such an idea is bullet-proof is not the point. The reason I brought up that story is to illustrate how such suggestions may be misunderstood by many people simply because of the misleading nature of the words that are used in economics, such as "government debt". By this point, you should understand that "government borrowing" is merely the government selling promises to pay back money that they create in the first place. And you should also understand why such an action would not necessarily lead to dangerous price inflation.

To me, modern economic policy is an outdated and deceptive field that is seemingly built for the purpose of confusing people in order to make it easier to control them.

The health of any group's economy depends not so much on "what the interest rate is", but rather on the choices that the members of that group make, and the design of their economic system.

The very fact that interests rates are being discussed with such intensity is an indication that the "entire economy" (or a few crazed economists) are obsessed with putting people into debt, and from the perspective of creating a happy, healthy society, that is failure from the get-go.

What matters in any economy is not interest rates, but:

  • The group.
  • Its members.
  • Their happiness (both short term and long term).

All economic systems should be designed to focus around those factors.

Designing your economy to focus on the concept of placing people into debt is a sure fire way of sowing the seeds of much unhappiness, and unfortunately that is the economic system that we have today.

We know what makes people happy. It is not credit cards or interest rates. The economic aspect of group dynamics is important, but there are better ways of facilitating purchasing power and investment in a group than systems that are designed to privilege the few at the expense of the many. In fact, those "few privileged" are always worse off in such systems. Many of them are in a constant state of anxiety over their money and their personal safety, and they are all, like all of us, living on a planet that is less healthy, less technologically sophisticated, and less happy.

Modern economics has brought us to where we are, but it is now time to close this chapter of our evolution and move on.

Resources

Many thanks to Steve Randy Waldman for answering some questions!

Sign up for free to join this conversation on GitHub. Already have an account? Sign in to comment
You can’t perform that action at this time.