[1] "In Defense of Deflation": https://news.ycombinator.com/item?id=40206205
The treasury prints money. Remember when Janet Yelled said she is ready to mint a one trillion USD coin in case it is needed to avoid the debt ceiling.
What the Fed does is a duration transformation. Commercial banks can deposit US treasuries at the central bank and receive a claim on those treasures in the form of liquid central bank reserves. This is done because people keep holding more and more short term duration deposits in their checking accounts or at brokerage accounts. Buying a 10 year treasury with deposits that only have a 1 day duration is quite insane. This means that in practice whatever deposits you are keeping in your account are missing from the economy.
The US federal government can run a deficit and it can run it regardless of the financing conditions. It will merely pay an exorbitant interest rate if it chooses to do so.
Here is a loosely related paper:
https://www.elsevier.es/en-revista-investigacion-economica-1...
In an equilibrium economy, the expected net money supply is always zero, that is, every dollar in the money supply is offset by a dollar in debt. So called inside money.
If the neoclassical theory is true, then attempts at extracting seigniorage would immediately be spotted and no inflation could ever occur. The inverse is also true. If the government artificially restricted the money supply, people would find alternative means of providing themselves with the ability to exchange. So the expectation is that the government has zero power or ability to influence the economy with monetary policy. The only reason why it would have the ability to do so, is because it has made those alternatives illegal.
It's a euphemism for the modern way of simply issuing more debt, and more debt to cover existing debt.
Exactly: In periods like the 1930's, central must lend to banks at lower rates and buy fixed-income securities with newly created money as necessary, in order to prevent a deflationary loop. In the 1930's the Fed did the opposite, sending the economy into an even more painful deflationary spiral.
Inflation/deflation happens when there is a mismatch between the supply of money and the value of goods and services in the economy. This mismatch usually happens because the central bank prints deficit money.
Deflation in the 1930s happened because the Fed went the other way, refusing to create money. This continued until the late 30s when the Fed changed course, and (you guessed it) produced lots of inflation.