Given:<p>- ~Most of the Fed's balance sheet is government debt<p>- ~Most government debt is held by the Fed<p>- The Fed executes monetary policy by buying and selling (mostly) government debt; expansionary policy consists of buying Treasury debt, thereby raising its price / lowering yields; this effect seems more direct than the effect on the Federal funds rate<p>Mathematically, I'd expect:<p>Nominal Yields on Treasury debt = (future dollar value of debt) / (current dollar value of debt)<p>= ((future dollar value of debt) / (future value of debt, measured against basket of goods)) * (future value of debt, measured against basket of goods) / (current value of debt, measured against basket of goods )) * ((current value of debt, measured against basket of goods )/(current dollar value of debt))<p>= (future CPI) * (real yields on Treasury debt) / (current CPI)<p>Or, rearranging:<p>Inflation=(future CPI)/(current CPI)=(nominal yield on Treasury debt)/(real yield on Treasury debt)<p>In particular, I'd expect the "real" yield here to denote the "natural" yield you'd expect if the Fed was not buying debt for much more money.<p>So, the narrative becomes:<p>Government spends a lot of money, and market doesn't believe it's a good investment (in terms of effect on future taxable revenue base), therefore Treasury borrowing costs should go up; but Fed forces Treasury yields to stay around 0, so inflation goes up instead.<p>Does any of this make sense, or am I missing something obvious?<p>Is there a source that formulates the issue in this way?
No. And right now it’s evident that it’s just plain old supply and demand for some of the things in the basket.<p>Look at a decent intro macro book from college. Money supply can be connected with inflation but it’s not “just” that.