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
Here's how I would think of that:

Suppose I'm a bank, and I lend you $10 to buy apple tree seedlings. You spend all $10 on seedlings as promised.

The person who sold you the seedlings has $10. You have the seedlings. I have an expectation of getting $10 in the future, presumably from your sales of apples.

Because most people repay their loans, I'm confident I'll get the $10 back, and being a bank, my business is lending money. I might treat the $10 loan as $7 on my balance sheet when I decide how much money is safe to lend out.

Then the price of apples crashes. You come to me and say, 'look, there's no way I'll make $10 selling apples in the time I promised to repay you. Best I can do is deliver you the seedlings or sell them to my neighbor for $3 and give you that'. I grumble a little, but take your deal.

The person you bought the seedlings from still has $10. Your neighbor now has the seedlings and $3 less. I now have 3 real dollars instead of 7 hypothetical dollars. In other words, 4 hypothetical dollars disappeared. When I decide how much to lend out, I'll be basing that on $3 I know I have, instead of the $10 I thought I'd probably get back. I don't lend as much money to aspiring orchardists (orchardeers?), and the price of apples rises.

Edit: This fragility is probably a major factor why some people are so against fractional reserve banking (my counting hypothetical dollars as having value) but without that hack, there's no saying I could have lent you the original $10, so it's a bit of a double-edged sword.

>>SuoDua+BB1
So in this case the business did not create as much wealth as intended (it produced apples which turned out not to be needed as much they had originally planned).

The default is a side effect of that outcome, not its cause.

>>sidesh+jE1
Could you not see the $4 disappearing on the GP scenario?

>>marcos+na2
I can see that the bank ended up with $4 less than it planned to, but I don't see that as money being destroyed. It happened because the original estimate of hypothetical dollars was wrong. (Also if the hypothetical dollars are "money" then you're double counting it: creating $10 in circulation has required creating $17 overall which strikes me as poor notation to say the least). (Also if all had gone according to plan, the extra $4 would have come from the pockets of people buying apples. That $4 is still in circulation, either in the same pockets or it got spent elsewhere).

Suppose I buy a painting. I believe it to be an original Van Gogh so I pay $10 million for it. I then find out it is fake, and worthless. Was $10 million (of money) destroyed? Of course not, I just mis-valued an asset. Suppose it then turns out to be real after all. Owing to the fascinating history of this painting it is now valued at $20 million. Was $10 million of money created (relative to the moment when I originally thought it was a Van Gogh)? No. Was $10 million of wealth created? Yes as the world now has one more thing worth $10 million in it.

Money != wealth, even in the materialist sense where wealth consists purely of goods and services. Money is a metric we use to keep track of wealth, and in general it's considered helpful if that relationship holds, so if we're trying to maintain that relation rigorously the central bank should print another $10 million (or create it by making loans) to reflect our knowledge and appreciation of the Van Gogh - if it doesn't then the existing fixed quantity of money in the system will now be representing a greater quantity of wealth, causing deflation.

As I said in my other post I am not an economist by training. If the economists want to call this thing that got created/destroyed here "money" then I guess I should let them, but I would like to hear a good reason why it makes sense to do so, and I haven't heard one. Absent of a good reason I might as well call it haddock. Or, considering the OP was asking which things that could be explained better, we could acknowledge what any good programmer knows: part of a good explanation is choosing the right names for things.