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Question Economics 101

nutwood

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I've a question that I've been putting to friends in the appropriate fields and I'm starting to feel like an elephant's child. I suspect it's only the 1.5 m distancing that has stopped me feeling much warmer! I'm hoping some economically minded persons here can help.
I'm puzzled about the whole printing of money thing. Everyone is talking about how long it's going to take to pay back the current largesse but I'm not sure to whom we are indebted? The Government doesn't front the local bank and ask for a loan, it simply provides money as required. As I understand the concept, if it does this to excess, we get local inflation and the value of our currency drops.
Looking at the big picture, if production across the globe is plummeting and governments everywhere are frantically pumping out cash to keep the wheels turning, doesn't this cancel out the inflation and the devaluation? As I understand it, our dollars are simply numbers. There's no block of gold somewhere to back them up. A huge amount of our economy is services. It doesn't really matter whether they are performed or not, as long as the $'s keep circulating.;
 

muppet

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The Australian Office of Financial Management issues bonds to investors (super funds etc.).

In Australia Quantitive Easing (printing money) involves the RBA buying bonds via the secondary market so real creditors are still involved in Australian Government borrowing.

In the US and EU the central banks just buy the Government bonds directly.

Australian Government still has to pay the bond coupons to the RBA.

Large scale QE is Very risky long term (Zimbabwe). People couldnt even buy bread until they switched to foreign currency.
 

I love to travel

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I get what your asking though as I wondered during the GFC why on a worldwide level debt could not be forgiven. Never got an answer to it.
 

muppet

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I get what your asking though as I wondered during the GFC why on a worldwide level debt could not be forgiven. Never got an answer to it.
Ummmm... am i misunderstanding your question?

Who currently owes you money that you’re willing to just forgive?

Say your super fund owns a $10b in Aus Gov bonds, are you happy to have your share written off? Or do you want to be paid back so you can fund your retirement?
 

odysseus

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Looking at the big picture, if production across the globe is plummeting and governments everywhere are frantically pumping out cash to keep the wheels turning, doesn't this cancel out the inflation and the devaluation? As I understand it, our dollars are simply numbers.
Theoretically, if _every_ country did that at the same rate AND there were no other external changes, then the exchange rates should stay the same. That's the only impact of governments elsewhere doing the same.

However, you're still in an environment where your local money supply has increased i.e. dollars are more readily available, because the government has just passed $150 billion more around. Thus, the banks are awash with it, and those that have items in demand can therefore increase their prices more, and therefore you still have inflation (because some have more cash for a limited supply of goods so can bid the items up). This is why they issue them as bonds, so that it has a corresponding debt that needs to be paid back rather than being unencumbered, and (a negligible) amount of interest to keep them honest.
 

samh004

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Theoretically, if _every_ country did that at the same rate AND there were no other external changes, then the exchange rates should stay the same. That's the only impact of governments elsewhere doing the same.
So it would be possible... but then, when have all the countries in the world agreed on the same issue before? 😂
 

juddles

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It is against modern economics theory, but the current lockdown shows that almost half the population can stop working - yet everyone still has power and food and fuel, etc.

To me, the most ignorant economist out there, it seems that in a general sense, the current human world is so affluent that many just work in superfluous services that are actually non-essential. Travel, bars, etc. If the consumer demand for such frivolities was less those same people could actually be producing more wealth....
 

nutwood

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Theoretically, if _every_ country did that at the same rate AND there were no other external changes, then the exchange rates should stay the same. That's the only impact of governments elsewhere doing the same.

However, you're still in an environment where your local money supply has increased i.e. dollars are more readily available, because the government has just passed $150 billion more around. Thus, the banks are awash with it, and those that have items in demand can therefore increase their prices more, and therefore you still have inflation (because some have more cash for a limited supply of goods so can bid the items up). This is why they issue them as bonds, so that it has a corresponding debt that needs to be paid back rather than being unencumbered, and (a negligible) amount of interest to keep them honest.
This is the way I understand the issue. More cash, same goods, result: inflation. The thing is that, at the moment, production has plummeted, assuming of course that a restaurant meal forms part of the GDP. Does the conventional theory still work?

It is against modern economics theory, but the current lockdown shows that almost half the population can stop working - yet everyone still has power and food and fuel, etc.

To me, the most ignorant economist out there, it seems that in a general sense, the current human world is so affluent that many just work in superfluous services that are actually non-essential. Travel, bars, etc. If the consumer demand for such frivolities was less those same people could actually be producing more wealth....
I find this truly fascinating and it's at the crux of my question. If you pay me $5 for a cup of coffee, my coffee shop stays in business and my employees receive a wage. You enjoy the coffee but gain no more benefit than if you had drunk water. Does it make a difference if the government gives me $5 not to provide you coffee? Under normal circumstances it would because you are now $5 richer but if the Government is printing money, which drives your nett value down by $5.....?
 

daft009

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I found this video very interesting and relevant to the topic on hand, made by an Aussie..

 

CaptJCool

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Bond rates of interest payable are so low.....

Annual expenditure interest only on 1/2 trillion ($500 billion) is like $1.25 - $$7.5 billion !


Of course, who bothers repaying Principal!
 

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