Comment by giantg2
7 days ago
"because inflating our currency to pay for them could result in functionally not being able to import goods required to run our economy."
You can't inflate your currency to payoff a debt that's due in in a different currency. As soon as you inflate your currency, the exchange rate changes.
The US issues debt in dollars and repays those debts in dollars. The purchasing power of dollars can change due to inflation. If you suddenly increase the global supply of dollars by 2x, dollars that existed prior to the increased supply will be able to purchase less.
That's true for domestic public debt. But in the scenario given by the parent where the dollar falls out of favor, it is assumed that we could be issuing public foreign debt in foreign currency. Even if it was still domestic currency, the FX rate would matter to the foreign investors. Interest rates matter. So does inflation. Money supply is less relevant than the actual inflation it generates. Most debt instruments rely on the interest rates that fluctuate based on monetary policy to combat inflation. Eg your interest on debt will increase as your inflation rate does. Even the world bank will jack up your interest if your currency has issues, such as rampant inflation.
> it is assumed that we could be issuing public foreign debt in foreign currency.
That isn't how it works. You issue bonds, denominated in your own currency, and promise to pay the bearer of the bonds a coupon (interest) and repay the full amount (in USD) at the end of the bonds life.
Unless I misunderstood what you're saying.
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> If you suddenly increase the global supply of dollars by 2x, dollars that existed prior to the increased supply will be able to purchase less.
I don't think this is true. The US issues currency in two forms:
1) Deflating dollars
2) Treasury notes
At the time you've issued a T-bill worth $1B, the effect is pretty similar to printing $1B. If interest rates are in-line with inflation, it's a safe way to maintain foreign reserves. If interest rates are higher -- long-term, the US has a problem, and if they're lower, the foreign government has a problem.
But issuing treasury notes is not too dissimilar from printing physical dollar bills.