Bonds and Inflation

I have been preoccupied recently trying to counter (mostly in my own mind) the inevitable pantsuit reply to any reference to the Federal Reserve’s continual printing of money. It goes like this:

Actually the real problem is trying to prevent deflation.

Outside of the fact that this claim doesn’t match observable reality (see home prices, health insurance premiums, “education” costs - everything excluded from the CPI - vs. median real income over whatever period you wish in the last 100 years or so) there are the nebulous zombie financial markets, which include the buying and selling of bonds.

  1. As interest rates are going to zero, and real rates are going negative, bonds have become a cash equivilant (in terms of rate of return).

  2. Bonds make very bad cash otherwise, so people are selling them.

  3. No one wants to buy them so the Federal Reserve is now creating debt to buy them.

This money being received by the bond sellers causes inflation. Those former bond hodlers are spending that money elsewhere and bidding up the price of other things that would not be bid up otherwise.

Another aspect to this is that there is this ridiculous assumption out there that all this debt is going to be paid back, but it’s not.

Thought experiment. Fed loans a bank money. The bank spends the money but gets no return. The bank can’t pay back the loan. The fed loans the bank more money to pay back the loan, and additional money to try again to get a return. Is this deflation?

I would be grateful for any corrections anyone has to offer on my comments on this topic.

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