This is a stub, as they say at Wikipedia. I want to figure out whether we’re going to have high inflation in 2021. I will put some notes here, and eventually work them up into a real post.
We’re in a curious situation now. We have massive new government spending. We are paying for it by borrowing from the Federal Reserve— that is, the government is borrowing from itself. The Fed is printing the money it lends. One of these four hings is true (or a mix):
1. It is going to be paid for by inflation reducing some people’s wealth int he future . But the money markets are acting as if this is not the case.
2. It’s going to be paid for by labor taxes. Politically unlikely.
3. It’s going to be paid for by capital taxes. But the money markets are acting as if this is not the case, unless maybe they think all kinds of capital will be hit equally.
4. It is a free lunch. The Fed can forgive the Treasury its debt, and nobody will ever have to pay for it. This would be very odd, but is possible.
How does the Modigliani-Miller Theorem apply to the Treasury/Fed, considered as two divisions of one corporation?
Who bears the risk of a risky government asset? How much is on taxpayers at various levels, how much on beneficiaries of government spending, how much on people who bear inflation risk? (Really: has anyone written about what the government’s required risk premium should be, like the 7% (?) cost-benefit discount rate the OMB says to use for cost-benefit analysis in the famous Circular A-94, https://www.whitehouse.gov/sites/whitehouse.gov/files/omb/circulars/A94/a094.pdf)
How do I trade T-bond futures? Can it be done in units of less than $100,000?
Do we get a free lunch from Fed lending to Treasury?
Is inflation a good idea?
Would the markets get spooked if Treasury tried to issue perpetuities?