Are recessions/depressions natural in a economy ? If the Uni

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Profit and quality are not mutually exclusive. If you think of infrastructure as a form of "software", there is usually a period afterwards of maintenance, updates and so on. Corporations tend to make investment decisions in a "net present value" perspective, and this does in fact value the lifetime of the assets. However, corporations tend to make use of depreciation, in which case it for accounting and thus tax purposes could pay off to change something every 3 years rather than 5 years.

I suppose we can say that government creations rarely break but are outdated, private sector creations break a lot more often but are much more up to date.

I still couldn't say that I understand the bond thing.

That's an interesting way of putting it, and I think quite accurate. The government doesn't have to make a profit, but (with the possible exception of the military) it also doesn't have to compete.

Doesn't have to compete. A sure fire guarantee of incompetence and low quality.

ruveyn

Governments rarely take up debt in a huge chunk, they issue multiple bonds at different times in order to avoid interest payments on money that's sitting the bank so to speak. Instead of borrowing 30 million in one 30 year bond, they are more likely to borrow 10 million in 3 10 year bonds etc.

What then happens is that new bonds tend to be issued when old ones expire, so just because you can borrow at less than inflation now, it doesn't mean you can do so when times come to rotate bonds, if you have to pay a much higher interest on your bonds due to concerns about being able to pay the bonds or due to currency risk, rotating them becomes a lot more expensive, yet you have to do it in order to be able to pay your costs.

Bonds themselves are quite simple, however the mechanics surrounding them are not.

As this thread is really an economics one not a p,p or r thread shouldn't the mods delete it so that we can get back to tub thumping about gods and political parties?

I think the ties to economics is why this thread is a a mature meeting of the minds, because the "god", "feminism", "ideology" etc threads are threads where there is rarely such a thing as a fact, just a belief. There are also moderates in this thread, as a matter of fact, I don't think any of the ones involved in this discussion are extremists or fundamentalists in terms of schools of economics. Each belief is supported by X number of sources, since you can find a source for just about every point of view if you search indiscriminately and widely enough on google.

Rather than discussing "does X work" the discussion tends to be "to what degree should X be done" and "what are alternatives to X"

Historically, economics was called political economics. That certainly makes since any economic discussion eventually will address political points.

They are not. Depressions happen by choice. Austrians love depressions. They think it cleanses the system. They say that in the long run everything will be fixed. Millions of lives will be irrevesibly ruined though... now that's ruthlessness. "Can't make omelette without breaking eggs".

A monetary sovereign sets interest rates at leisure. Moreover, it also has the option to have the central bank purchase these bonds. The bond vigilantes do not have everyone over a barrel no matter what is repeated through the media.

The interest rates are contingent on inflation and employment; setting interest rates is the machete with which the central bank attempts to regulate the metabolism of the economy. They can't just say, 'we want to pay less interest, this is what the rate will be.' As for the central bank *purchasing* bonds that the government issues, do you not see that this is a circular process that does not lead to any actual income for the government?

I do agree with you, though, that the US has more leeway than is commonly assumed. Everyone thought that we were doomed when our credit was downgraded, and we're still borrowing at less than inflation. We're still the biggest economic power on the planet that is willing to take out loans from the public, and we're still seen as the safest bet out there.

When the central bank purchases government bonds, that's called "printing money" and is a legitimate function of the central bank. This function guarantees that defaults can never happen and create absolute security for government bonds, permitting interest rates to be set at whatever level desired. Japan's central bank holds half of Japan's total debt.

Yes and no, bonds require buyers, if the US were to go nuts and print money excessively, a call would go from Moscow to Beijing or vice versa and you'd see billions if not trillions in US bonds flood the market immediately since the value of the bond would rapidly diminish due to inflation. After all, if you're holding a let's say $100 bond with a coupon of 5% and the coupon and bond loses its purchasing power people won't buy it. Furthermore, it would create uncertainty in regards to future monetary policy, thus increasing the premium investors would require to invest in bonds.

The thing is, bonds are a way of borrowing money, if the people who is lending you said money have a feeling that you'll f**k them over they won't lend to you or will require very high premiums to make the investment worth the risk.

As an investor, you are looking for the maximum amount of return for the least possible risk. The problem with bonds is that they are supposed to make up for a static return with a high level of security. If you inflate the currency the bond is issued in, it becomes worth less.

A monetary sovereign country can set its own interest rate, however investors decide whether or not they are willing to invest in the bond on a bad risk/reward level. For instance, I'm not going to invest in US government bonds at less than inflation when I can find corporate bonds that are pretty much just as safe with coupons of 6 - 12%.

The risk isn't that the bond will be defaulted on, but that the coupon + initial cost is worth fuck-all because the government has fired up the printing press.

Great, so we can all follow Zimbabwe's example.

The bond vigilantes do have every one over a barrel, because the value of your currency is set by the market.

Sure, you can issue as many bonds as you like at 0% interest and get your central bank to buy them all but you swiftly find that the 10 billion dollars that used to buy a small fleet of nuclear submarines will now only buy you a scrawny chicken on the international markets.

If you want to be a hermit nation like North Korea you can do whatever you want with monetary issuance, but if the rest of the world needs to maintain confidence in your currency for trade purposes then you have earn that trust by not turning their money into toilet paper.

Inflation or even expected inflation tends to drive up interest rates because of the inflation rate premium.

If you are loaning out money you want the money you are paid back with to have at least the same value as the money loaned out, which, due to inflation, is usually not the case. Ergo, we have the inflation rate premium.

Because of the inflation rate premium, I think it would be very hard for the government to try and inflate its way past the interest rate, which is why I'm a bit critical of quantitative easing.

The only reason that we haven't seen escalating inflation is because most of this money is stored in excess reserves at financial institutions.

In the meantime, here is a nice video to watch while the world burns:



[youtube]http://www.youtube.com/watch?v=d0nERTFo-Sk[/youtube]

The market sets the currency's value based on the economic output... if you choose to strangle your economy in the name of having a scarce currency you'll find that its real value will plummet. Japan is an excellent example of a place where they're printing money like mad by having the Bank of Japan hold half of the bonds and yet ... yet, not only do they have no hyperinflation, they are closer to deflation... their debt to GDP ratio is 250% yet their 10 year bonds go last I read at 0.91%. All these things completely contradict conventional wisdom. Countries like Zimbabwe have large debts in foreign currencies and depend on selling cash crops. To buy oil they need US dollars. You can't compare that with an advanced economy.