Questions You Should be Asking the World Around You
Going to be honest. I understand a bit about these two things, about as much as a normal person could, given what is available to read on the web. The discussion on this is pretty big. Normal people like you and me, and not just the economists, are talking about inflation. Generally, people believe that we are in an inflation period, but some people are also saying that there will be deflation…after a market collapse! It sounds a bit scary because I’m familiar with inflation, but I have no clue what deflation can do to a society.
Central banks control the value of currency by selling and buying bonds. For example:
The central bank sells treasury bonds to Microsoft. Cash goes to the central bank to be stored or destroyed. This takes the money out of circulation and therefore decreases the “money supply.” Deflation.
Microsoft sells treasury bonds back to the central bank. Cash is printed by the central bank and is given to Microsoft. This puts money into circulation and therefore increases the “money supply.” Inflation.
This is a very very very rough explanation of inflation and deflation. It’s a lot more complicated when you get into it.
When the central bank sets interest rates low, let’s say 0.5 percent, you essentially get a risk free environment for borrowing and spending. For example:
Microsoft borrows $1,000,000 for 30 days. Microsoft will only owe the central bank $1,005,000 after 30 days.
Meanwhile, Microsoft spends $1,000,000, on treasury bonds that are set to mature after two months. Let’s say that treasury bonds are set to a 1.25 percent coupon rate, and it pays you every 2 days. Every two days, Microsoft gets $12,500 deposited into its bank account. At the end of 60 days, Microsoft will have collected $375,000.
Overall, Microsoft pays $5,000 upfront as an “initial investment,” and earns $375,000 back. That’s $370,000 in profit, risk free.
This is inflation by design, and this is how the economy operates currently.
But how can the central bank afford all these giveaways??
Whenever the goobers on TV mention the $28 trillion national debt, they’re not realistically considering paying all this debt back. A large chunk of that $28 trillion debt consists of money, that the central bank & government owes in total, to treasury bond holders. How the central bank & government pays all these treasury holders is by taxation. You get taxed every year to pay off – not the $28 trillion debt – but merely the interest on that debt – to treasury holders.
Imagine if Microsoft staggered these “transactions” biweekly, they would be siphoning money at 2X to 4X the typical rates, and I imagine that this is really what is happening all over the place! And it’s not simply the treasury market that is involved here, it’s also the housing market, stock market trades, natural resources, asset markets, etc. etc. It’s a huge mega multi vectored bubble!
When the bubble pops – now this is the part I’m trying to understand – and this seems to be theoretical from the standpoint where I’m hearing these things – when the bubble pops, the money lenders will have no choice but to roll back their carefree ways and cease all this money giving. It sounds idealistic and optimistic, except for the bubble pop precursor.
The theory behind this is encumbent upon the circumstance where one money lender is subjugated by another even bigger money lender. It works its way up the heirarchy whereby the biggest money lender – the central bank – commands or forces all the minion money lenders into capitulation by making monetary policy extremely and universally stringent. Like I said, I don’t understand how it works exactly. This is just what some people are talking about.
I think people are going to need to get rid of the all the present policy makers first before any of this can come to pass.
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