zlacker

>>qqqqqu+(OP)
Macroeconomics. Central banks are "creating" a trillion here, a trillion there, like nobody's business. But what are the consequences? What is the thought process that central bankers have gone through to make these decisions?

Also why, exactly, are they buying the exact assets that they are buying (govt. debt, high-yield bonds, etc..) and why not others (e.g. stocks or put money into startups)? And then, what happens if a debtor pays back its debt? Is that money consequently getting "erased" again (just like it's been created)? What happens if a debtor defaults on its debt? Does that money then just stay in the economy, impossible to drain out? What is the general expectation of the central banks? What percentage of the debt is expected to default and how much is expected to be paid back?

And specifically in the case of central banks buying govt. debt: Are central banks considered "easier" creditors than the public? What would happen if a country defaults on a loan given by a central bank? Would the central bank then go ahead and seize and liquidate assets of the country under a bankruptcy procedure to pay off the debt (like it would be standard procedure for individuals and companies)?

>>rsp198+im1
I've wondered the same thing lately whenever someone here posits that defaults cause the destruction of money.

I'd love to see this properly explained, because it definitely has a counter intuitive ring to me.

>>jddj+Cu1
Whoever defaulted spent the money on something else, so it's still in circulation somewhere, just not in a form the original creditor can get hold of.

>>sidesh+Mu1
That would be my intuition too. But if you go down almost any "this crisis won't cause inflation because..." rabbit hole on hacker news, you should see multiple unopposed claims that defaults lead to deflation through the destruction of money.

I'm pretty ignorant in this field, and usually I've been a day or so behind the posts (missing the window to press for more information), but I feel like there's definitely some contention there.

>>jddj+mv1
The difference is that it's the liquidation process from defaults that causes deflation, not the defaulting itself. Without the liquidation process, if you assume defaulting had no consequences, that's indeed inflation - as everyone is allowed to create money without consequence.

>>bronze+3B1
Thanks. I think this point has made it a lot clearer.

So sure, the loaned money might still be in the system in some naive sense, but value has been destroyed in the asset price? Suddenly a lot less money buys a lot more asset and that's where we find the deflation.

If I borrow 1M for an asset in good times and can't pay it back, the creditor gets the asset and probably gets a good portion of that 1M back. If that same scenario plays out in bad times and my whole street defaults on the same asset at once, there's a resulting fire sale and far more value is destroyed (including being wiped off neighbouring, non-creditor-owned assets of the same type) than money added by leaving the loan sloshing around somewhere else in the economy.