Re: Federal debt ceiling

[boglerdude]

The Fed is always there to buy?

[Maddy]

So, I would say, yes, the Fed is always there to buy.

And the Fed *creates* the cash to pay for them? That strikes me as an entirely fictional market, and I'm not sure why it should inspire confidence on the part of any ordinary investor who is required to assume that the Fed will be there to buy their bonds when it's time to sell.

Honestly, Amway makes more sense to me.

[Libertarian666]

So, I would say, yes, the Fed is always there to buy.

And the Fed *creates* the cash to pay for them? That strikes me as an entirely fictional market, and I'm not sure why it should inspire confidence on the part of any ordinary investor who is required to assume that the Fed will be there to buy their bonds when it's time to sell.

Honestly, Amway makes more sense to me.

No, the Fed will buy every bond issued if no one else wants it.
The fact that they do it with freshly printed "money" means that they can keep it up until no one wants that "money".

[Kriegsspiel]

https://dailyreckoning.com/golden-solut ... bt-crisis/

Right on time, Jim.

When the Treasury took control of all the nation’s gold during the Depression under the Gold Reserve Act of 1934, it also took control of the Federal Reserve’s gold.

But we have a Fifth Amendment in this country which says the government can’t seize private property without just compensation. And despite its name, the Federal Reserve is not technically a government institution.

So the Treasury gave the Federal Reserve a gold certificate as compensation under the Fifth Amendment (to this day, that gold certificate is still on the Fed’s balance sheet).

Now come forward to 1953.

The Eisenhower administration actually had the same debt ceiling problem we have today. And Congress didn’t raise the debt ceiling in time. Eisenhower and his Treasury secretary realized they couldn’t pay the bills.

What happened?

They turned to the weird gold trick to get the money. It turned out that the gold certificate the Treasury gave the Fed in 1934 did not account for all the gold the Treasury had. It did not account for all the gold in the Treasury’s possession.

The Treasury calculated the difference, sent the Fed a new certificate for the difference and said, “Fed, give me the money.” It did. So the government got the money it needed from the Treasury gold until Congress increased the debt ceiling.

That ability exists today. In fact, it is exists in much a much larger form, and here’s why…

Right now, the Fed’s gold certificate values gold at $42.22 an ounce. That’s not anywhere near the market price of gold, which is about $1,330 an ounce.

Now, the Treasury could issue the Fed a new gold certificate valuing the 8,000 tons of Treasury gold at $1,330 an ounce. They could take today’s market price of $1,330, subtract the official $42.22 price, and multiply the difference by 8,000 tons.

I’ve done the math, and that number comes fairly close to $400 billion.

In other words, tomorrow morning the Treasury could issue the Fed a gold certificate for the 8,000 tons in Fort Knox at $1,330 an ounce and tell the Fed, “Give us the difference over $42 an ounce.”

The Treasury would have close to $400 billion out of thin air with no debt. It would not add to the debt because the Treasury already has the gold. It’s just taking an asset and marking it to market.

If the debt ceiling isn’t raised, this gold certificate trick could finance the government for almost an entire year, because we have about a $400 billion deficit.

It’s not a fantasy. It was done twice. It was done in 1934 and it was done again in 1953 by the Eisenhower administration. It could be done again. It doesn’t require legislation.

I thought this was neat.

[Xan]

In a not-too-dissimilar scheme, the Mint could create a new coin, put the words "one trillion dollars" on it, and give it to the Fed in exchange for a trillion dollar check.

I think that's a pretty good illustration of how "not really real" money is.

[Maddy]

There's no doubt that there are many ways for the government to print its way out of its debt, but that can't change the fact that there is a finite limit to the hard assets upon which all this money represents a claim. The game works so long as everybody closes their eyes and pretends that there's enough to go around, but that's the rub--there's not. God forbid the moment when the crowd wakes up and realizes that the emperor has no clothes. I have no idea how such an event would play out, but I'm pretty sure it will happen over night, and I have a good idea of who will come out unscathed and who will get flushed. Perhaps the only sane investment these days is in Steinway grands, liquor, ammunition, and tampons.

[Xan]

Money doesn't represent a claim on hard assets. At least, dollars don't. They used to be backed by gold, at least in theory, but now they're not.

Dollars are valuable because a) people believe them to be valuable, and b) because taxes must be paid in dollars.

[Maddy]

Money doesn't represent a claim on hard assets. At least, dollars don't. They used to be backed by gold, at least in theory, but now they're not.

Dollars are valuable because a) people believe them to be valuable, and b) because taxes must be paid in dollars.

Maybe not literally, but ultimately money represents--at least to the man on the street--a claim to something tangible that he wants or needs--which I guess would include both goods and services. Money is valuable because people believe it can be converted immediately to one of those two things.

Am I wrong here?

[Libertarian666]

In a not-too-dissimilar scheme, the Mint could create a new coin, put the words "one trillion dollars" on it, and give it to the Fed in exchange for a trillion dollar check.

I think that's a pretty good illustration of how "not really real" money is.

It's an excellent illustration of how "not really real" fiat paper "money" is.

[Libertarian666]

There's no doubt that there are many ways for the government to print its way out of its debt, but that can't change the fact that there is a finite limit to the hard assets upon which all this money represents a claim.

Yes, there is a finite limit to the real goods and services that money can be exchanged for. But this is true regardless of how much money exists in the economy, right?

Yes, of course.

Printing more "money" doesn't increase goods or services. It just increases the number of claims on the same goods or services.

Thus, each claim loses value over time.

[boglerdude]

People take cash out of circulation by saving it, maybe then banks can put some of it back in circulation though loans.

But if people stop borrowing, because they have too much debt, or dont need to borrow...

So, could an economy run on gold coins? If they're being taken out of circulation by savers, and mining new gold is minimal

[Maddy]

There must be a limit to this process, but I don't think we're anywhere close to it yet.

I'd like to think that we could see it coming, but considering how things are interconnected, especially through derivatives, it's hard to say what might set things off. The spark could come from the most unlikely place. Who'd have predicted what Lehman set in motion?

[Libertarian666]

There must be a limit to this process, but I don't think we're anywhere close to it yet.

I'd like to think that we could see it coming, but considering how things are interconnected, especially through derivatives, it's hard to say what might set things off. The spark could come from the most unlikely place. Who'd have predicted what Lehman set in motion?

Correct. When the unraveling starts, it will be far too late to take evasive action if you haven't prepared in advance.

[boglerdude]

When banks lend they just print up the money for it, what happens when the loan defaults.

ie they make a mortgage loan for 200k and count that as an asset, the bank's net worth increases by 200k

if the loan defaults, does the bank lose anything? Do they have to put 10% down on these loans

[Libertarian666]

When banks lend they just print up the money for it, what happens when the loan defaults.

ie they make a mortgage loan for 200k and count that as an asset, the bank's net worth increases by 200k

if the loan defaults, does the bank lose anything? Do they have to put 10% down on these loans

Most mortgage loans are sold to one of the government-sponsored agencies like FNMA, and in that case I doubt that the bank suffers a loss (although they should).

If they keep the loan, then they have to take the loss.

One other point: the bank's net worth doesn't increase by 200k when they make a 200k loan. Yes, the 200K asset goes on their books, but they have to pay out 200k to the seller.

[Libertarian666]

When banks lend they just print up the money for it, what happens when the loan defaults.

ie they make a mortgage loan for 200k and count that as an asset, the bank's net worth increases by 200k

They also have a liability - the 200k they deposited in the borrowers account.

if the loan defaults, does the bank lose anything?

Of course. The value of the asset is greatly reduced, and they still have the liability. The bank doesn't get a free lunch.

But of course if the bank is "too big to fail", the taxpayer will end up with the bill.

[jhogue]

Does the growth in total debt really matter in the modern economy?

See in today's Wall Street Journal an article by Melvyn King, "Warning Signs About the Global Economy: The former governor of the Bank of England says total debt is troublesome."

As former governor of the Bank of England from 2003-2013, King had a ringside seat watching the financial crisis of 2008-2009, its runup and its aftermath.

[Libertarian666]

Does the growth in total debt really matter in the modern economy?

See in today's Wall Street Journal an article by Melvyn King, "Warning Signs About the Global Economy: The former governor of the Bank of England says total debt is troublesome."

As former governor of the Bank of England from 2003-2013, King had a ringside seat watching the financial crisis of 2008-2009, its runup and its aftermath.

No, with "modern" monetary technology we can spend ourselves rich!
Math is hard...

[Maddy]

So the answer to the question "Does the debt matter?" is. . . [drumroll]. . .

To the government itself: No
To the multinational corporate monopolies that run this country and to their whores in Congress: No
To you and me: Hell yes

[Xan]

To you and me: Hell yes

How, exactly? Suppose the Mint did create twenty 1-trillion-dollar coins and gave them to the Treasury. The national debt would suddenly be zero. Nothing in real life would change.

If things are the same, regardless of whether the national debt is twenty trillion dollars or zero, then it seems like it in fact doesn't matter.

[Maddy]

To you and me: Hell yes

How, exactly? Suppose the Mint did create twenty 1-trillion-dollar coins and gave them to the Treasury. The national debt would suddenly be zero. Nothing in real life would change.

If things are the same, regardless of whether the national debt is twenty trillion dollars or zero, then it seems like it in fact doesn't matter.

Well, it's the next step that matters. The Treasury takes its 1 trillion new dollars and spends them on goods and services that I'd also like to buy, or that the people from whom I buy things also would like to buy. The cost of everything goes up.

[Libertarian666]

To you and me: Hell yes

How, exactly? Suppose the Mint did create twenty 1-trillion-dollar coins and gave them to the Treasury. The national debt would suddenly be zero. Nothing in real life would change.

If things are the same, regardless of whether the national debt is twenty trillion dollars or zero, then it seems like it in fact doesn't matter.

Well, it's the next step that matters. The Treasury takes its 1 trillion new dollars and spends them on goods and services that I'd also like to buy, or that the people from whom I buy things also would like to buy. The cost of everything goes up.

How does that differ from the current situation, where they spend whatever they want and add it to the debt?

[Maddy]

How, exactly? Suppose the Mint did create twenty 1-trillion-dollar coins and gave them to the Treasury. The national debt would suddenly be zero. Nothing in real life would change.

If things are the same, regardless of whether the national debt is twenty trillion dollars or zero, then it seems like it in fact doesn't matter.

Well, it's the next step that matters. The Treasury takes its 1 trillion new dollars and spends them on goods and services that I'd also like to buy, or that the people from whom I buy things also would like to buy. The cost of everything goes up.

How does that differ from the current situation, where they spend whatever they want and add it to the debt?

I can't see any difference at all.

[Xan]

It sounds like everyone just agreed that the national debt doesn't matter, then.

[Maddy]

It sounds like everyone just agreed that the national debt doesn't matter, then.

You guys have lost me.

I'd just as soon the red bell pepper that they wanted $4.25 for yesterday (I put it back) didn't go up to $6.25 next year.