The U.S. National Debt/federal deficit thread (1 Viewer)

[JohnfrmCleveland]

The U.S. govt. is the only entity with the ability to create U.S. dollars. They are also the only entity with the ability to create U.S. bonds. When they trade bonds for dollars, or dollars for bonds, it's not costing them anything to do so, because either way, they have created their instrument out of thin air. Yet people insist on calling sovereign bonds "debt" and running the economy as if we were $17 trillion in the hole.

What do you think?

 

[Joe T]

in

 

[timschochet]

Well you've made this point in several threads. Let me turn it around by asking you a question: under which of the following conditions would our national economy be better off?:

1. No debt.

2. 5 trillion in debt

3. 15 trillion in debt

4. 25 trillion in debt

5. 250 trillion in debt

 

[Joe T]

I love Fridays.

 

[JohnfrmCleveland]

Well you've made this point in several threads. Let me turn it around by asking you a question: under which of the following conditions would our national economy be better off?:

1. No debt.

2. 5 trillion in debt

3. 15 trillion in debt

4. 25 trillion in debt

5. 250 trillion in debt

Good question.

First of all, I think the way to frame this is not "debt," but "dollars + debt," and that still leaves you with another question - does it matter what form people hold their dollars in? (I don't think it does.)

So while I haven't really thought about this one before, I'll say somewhere between $5-25 trillion in total dollars/debt, just because I don't like the idea of too much potential demand lying around doing nothing. If China is sitting on $30 trillion in spending power, and our economy is $15 trillion, I can see the potential for real trouble there.

 

[Politician Spock]

The US treasury issues US Treasury Bonds. The US Treasury is 100% government.

The overall Federal Reserve System is a combination of both government and private.

The 12 Federal Reserve banks that issue the Federal Reserve Notes are 100% private.

We have this system because there are two sides of thought. One side says the creation of money is too important an issue to leave it up to the government. The other side says the creation of money is too important an issue to leave it up to the private sector. Thus we have a system that is neither, as well as both, simultaneously.

Your view of the system is that it is all 100% government.

 

[timschochet]

Well you've made this point in several threads. Let me turn it around by asking you a question: under which of the following conditions would our national economy be better off?:

1. No debt.

2. 5 trillion in debt

3. 15 trillion in debt

4. 25 trillion in debt

5. 250 trillion in debt

Good question.

First of all, I think the way to frame this is not "debt," but "dollars + debt," and that still leaves you with another question - does it matter what form people hold their dollars in? (I don't think it does.)

So while I haven't really thought about this one before, I'll say somewhere between $5-25 trillion in total dollars/debt, just because I don't like the idea of too much potential demand lying around doing nothing. If China is sitting on $30 trillion in spending power, and our economy is $15 trillion, I can see the potential for real trouble there.

OK, but you would agree that if we were $250 trillion dollars in debt, with our gross national product exactly what it is now, that would be problematic?

If your answer is "no", (which seems unfathomable to me), then why shouldn't the government go on a crazy spending spree? Let's completely redo our infrastructure, pay every school teacher $150,000 a year, spend trillions on new energy supplies, the works?

If your answer is "yes", then at what point does the debt become problematic in your eyes? And why isn't it problematic right now?

 

[JohnfrmCleveland]

The US treasury issues US Treasury Bonds. The US Treasury is 100% government.

The overall Federal Reserve System is a combination of both government and private.

The 12 Federal Reserve banks that issue the Federal Reserve Notes are 100% private.

We have this system because there are two sides of thought. One side says the creation of money is too important an issue to leave it up to the government. The other side says the creation of money is too important an issue to leave it up to the private sector. Thus we have a system that is neither, as well as both, simultaneously.

Your view of the system is that it is all 100% government.

Pretty much. The Fed + The Treasury acts like a prototypical central bank. They do the bidding of the government - Congress decides what to spend, and the Fed + Treasury makes it happen. And, the Fed responds to demand for dollars. They don't do much string-pulling, really.

 

[Politician Spock]

The US treasury issues US Treasury Bonds. The US Treasury is 100% government.

The overall Federal Reserve System is a combination of both government and private.

The 12 Federal Reserve banks that issue the Federal Reserve Notes are 100% private.

We have this system because there are two sides of thought. One side says the creation of money is too important an issue to leave it up to the government. The other side says the creation of money is too important an issue to leave it up to the private sector. Thus we have a system that is neither, as well as both, simultaneously.

Your view of the system is that it is all 100% government.

Pretty much. The Fed + The Treasury acts like a prototypical central bank. They do the bidding of the government - Congress decides what to spend, and the Fed + Treasury makes it happen. And, the Fed responds to demand for dollars. They don't do much string-pulling, really.

When the private portion of the fed system decides that the government is about to raise debt to more than the tax payers can maintain, but needs to increase the base money supply, they will issue federal reserve notes and buy assets other than US Treasury Bonds. The Fed's balance sheet isn't made up entirely of US Treasury Bonds.

You will never get the private portion of the fed to let the Federal Reserve system function the way you want it to.

 

[JohnfrmCleveland]

Well you've made this point in several threads. Let me turn it around by asking you a question: under which of the following conditions would our national economy be better off?:

1. No debt.

2. 5 trillion in debt

3. 15 trillion in debt

4. 25 trillion in debt

5. 250 trillion in debt

Good question.

First of all, I think the way to frame this is not "debt," but "dollars + debt," and that still leaves you with another question - does it matter what form people hold their dollars in? (I don't think it does.)

So while I haven't really thought about this one before, I'll say somewhere between $5-25 trillion in total dollars/debt, just because I don't like the idea of too much potential demand lying around doing nothing. If China is sitting on $30 trillion in spending power, and our economy is $15 trillion, I can see the potential for real trouble there.

OK, but you would agree that if we were $250 trillion dollars in debt, with our gross national product exactly what it is now, that would be problematic?

If your answer is "no", (which seems unfathomable to me), then why shouldn't the government go on a crazy spending spree? Let's completely redo our infrastructure, pay every school teacher $150,000 a year, spend trillions on new energy supplies, the works?

If your answer is "yes", then at what point does the debt become problematic in your eyes? And why isn't it problematic right now?

Sure, because $250 trillion in debt also means $250 trillion in spending power. That's what I meant when I made the China example, with $30 trillion. I don't think you want to get too far between the number of dollars out there and the number of dollars your economy could handle if it had to.

Why shouldn't the govt. spend like crazy? Because you don't want demand to outstrip your economy's ability to meet that demand, which would mean demand-pull inflation. But up to that point, spending would be beneficial.

To me, the real key is finding a way to keep rolling the same dollars over as much as possible. This was way easier when American labor was needed and had the leverage to demand a bigger slice of the pie. Eventually, all dollars find their way to the top, where they are hoarded away, but the more we can churn them around before that happens, the better off the economy is.

 

[JohnfrmCleveland]

The US treasury issues US Treasury Bonds. The US Treasury is 100% government.

The overall Federal Reserve System is a combination of both government and private.

The 12 Federal Reserve banks that issue the Federal Reserve Notes are 100% private.

We have this system because there are two sides of thought. One side says the creation of money is too important an issue to leave it up to the government. The other side says the creation of money is too important an issue to leave it up to the private sector. Thus we have a system that is neither, as well as both, simultaneously.

Your view of the system is that it is all 100% government.

Pretty much. The Fed + The Treasury acts like a prototypical central bank. They do the bidding of the government - Congress decides what to spend, and the Fed + Treasury makes it happen. And, the Fed responds to demand for dollars. They don't do much string-pulling, really.

When the private portion of the fed system decides that the government is about to raise debt to more than the tax payers can maintain, but needs to increase the base money supply, they will issue federal reserve notes and buy assets other than US Treasury Bonds. The Fed's balance sheet isn't made up entirely of US Treasury Bonds.

You will never get the private portion of the fed to let the Federal Reserve system function the way you want it to.

Taxpayers don't have to be able to maintain anything. The govt. can buy their own debt without limit. Past reserve chairs have said as much.

 

[Politician Spock]

The US treasury issues US Treasury Bonds. The US Treasury is 100% government.

The overall Federal Reserve System is a combination of both government and private.

The 12 Federal Reserve banks that issue the Federal Reserve Notes are 100% private.

We have this system because there are two sides of thought. One side says the creation of money is too important an issue to leave it up to the government. The other side says the creation of money is too important an issue to leave it up to the private sector. Thus we have a system that is neither, as well as both, simultaneously.

Your view of the system is that it is all 100% government.

Pretty much. The Fed + The Treasury acts like a prototypical central bank. They do the bidding of the government - Congress decides what to spend, and the Fed + Treasury makes it happen. And, the Fed responds to demand for dollars. They don't do much string-pulling, really.

When the private portion of the fed system decides that the government is about to raise debt to more than the tax payers can maintain, but needs to increase the base money supply, they will issue federal reserve notes and buy assets other than US Treasury Bonds. The Fed's balance sheet isn't made up entirely of US Treasury Bonds.You will never get the private portion of the fed to let the Federal Reserve system function the way you want it to.

Taxpayers don't have to be able to maintain anything. The govt. can buy their own debt without limit. Past reserve chairs have said as much.

The US Treasury doesn't buy debt. It issues it.

The 12 privately owned Federal Reserve banks buy government debt (as well as other types of assets).

The decision of fed buying (and selling) is made by the Federal Reserve Board of Governors, which is made up of 5 of the 12 bank presidents and 7 people appointed by the POTUS. Thus the decision is nether made by government, nor by the private sector, yet by both. The decision to buy is then executed by the private sector (the 12 privately owned bank) buying government issued debt by issuing Federal Reserve notes out of thin air (base money creation). The stock holders of the 12 Federal Reserve banks can buy government debt without limit, assuming the Federal Reserve Board of Governors made the decision for the to do so. This has never happened and probably never will. The presidents of the 12 banks wouldn't ever let that green light happen.

 

[Maelstrom]

Not much to add, but I am interested in this topic. I will say I lean more towards the JohnfrmCleveland line of thinking, but don't know enough about it to really be able to challenge Politician Spock's viewpoints. At least, not without a lot of research, and this is a topic that is hard to research online because there are soo many conspiracy and worse sites about this, it's hard to sort through the chaff.

 

[JohnfrmCleveland]

Taxpayers don't have to be able to maintain anything. The govt. can buy their own debt without limit. Past reserve chairs have said as much.

The US Treasury doesn't buy debt. It issues it.

The 12 privately owned Federal Reserve banks buy government debt (as well as other types of assets).

The decision of fed buying (and selling) is made by the Federal Reserve Board of Governors, which is made up of 5 of the 12 bank presidents and 7 people appointed by the POTUS. Thus the decision is nether made by government, nor by the private sector, yet by both. The decision to buy is then executed by the private sector (the 12 privately owned bank) buying government issued debt by issuing Federal Reserve notes out of thin air (base money creation). The stock holders of the 12 Federal Reserve banks can buy government debt without limit, assuming the Federal Reserve Board of Governors made the decision for the to do so. This has never happened and probably never will. The presidents of the 12 banks wouldn't ever let that green light happen.

The government (often) buys their own debt, and that transaction, while just an accounting gimmick, puts Treasury's account at the Fed in the black, allowing them to spend dollars. And even though the govt. includes the private sector in this transaction, they create their own demand (if necessary) by buying the bonds back. Not that normal demand is lacking - bonds are still being purchased at incredibly low yields. It's just a safe place to park dollars.

So the government fires up some bonds out of thin air, and the net result is that they can now (legally) spend that money. Or, more succinctly, the government just cranks out some more dollars. That (with varying legal hoops to jump through that don't affect the final outcome) is how every fiat currency economy operates. Bond issuance is just a sideshow, and not operationally necessary at all.

Greenspan: "The United States can pay any debt it has because we always print money to do that."

John Harvey: It is impossible for the U.S. to default.

Bill Mitchell: The U.S. can buy as much of its own debt as it chooses.

 

[JohnfrmCleveland]

Not much to add, but I am interested in this topic. I will say I lean more towards the JohnfrmCleveland line of thinking, but don't know enough about it to really be able to challenge Politician Spock's viewpoints. At least, not without a lot of research, and this is a topic that is hard to research online because there are soo many conspiracy and worse sites about this, it's hard to sort through the chaff.

Thanks. I'll try to include as many links as possible.

 

[Politician Spock]

Taxpayers don't have to be able to maintain anything. The govt. can buy their own debt without limit. Past reserve chairs have said as much.

The US Treasury doesn't buy debt. It issues it.The 12 privately owned Federal Reserve banks buy government debt (as well as other types of assets).

The decision of fed buying (and selling) is made by the Federal Reserve Board of Governors, which is made up of 5 of the 12 bank presidents and 7 people appointed by the POTUS. Thus the decision is nether made by government, nor by the private sector, yet by both. The decision to buy is then executed by the private sector (the 12 privately owned bank) buying government issued debt by issuing Federal Reserve notes out of thin air (base money creation). The stock holders of the 12 Federal Reserve banks can buy government debt without limit, assuming the Federal Reserve Board of Governors made the decision for the to do so. This has never happened and probably never will. The presidents of the 12 banks wouldn't ever let that green light happen.

The government (often) buys their own debt, and that transaction, while just an accounting gimmick, puts Treasury's account at the Fed in the black, allowing them to spend dollars. And even though the govt. includes the private sector in this transaction, they create their own demand (if necessary) by buying the bonds back. Not that normal demand is lacking - bonds are still being purchased at incredibly low yields. It's just a safe place to park dollars.

So the government fires up some bonds out of thin air, and the net result is that they can now (legally) spend that money. Or, more succinctly, the government just cranks out some more dollars. That (with varying legal hoops to jump through that don't affect the final outcome) is how every fiat currency economy operates. Bond issuance is just a sideshow, and not operationally necessary at all.

Greenspan: "The United States can pay any debt it has because we always print money to do that."

John Harvey: It is impossible for the U.S. to default.

Bill Mitchell: The U.S. can buy as much of its own debt as it chooses.

The social security trust fund buys bonds, so yes there are government entities that do buy US Treasury debt. But they do so with surplus tax dollars. With no surplus of tax dollars, those entities do not by bonds.

When the Federal Reserve prints Federal Reserve Notes out of thin air, and buy US Treasury Bonds that the US Treasury printed out of thin air, the government is not buying its debt. 12 private banks are. The interest these banks collect on these new bonds at some point during the year from this buying process reaches the point where it just gets funneled back to the US Treasury via Federal Reserve rules. So it is "free money", but the government is not buying it's own debt.

You will have some people speak with the assumption that the entire Federal Reserve system is government. This however would mean that the stock holders who own the 12 banks are appointing a government official when they elect a president for their bank, because those twelve presidents rotate through serving on five seats of the Federal Reserve Board of a Governors. They aren't government officials. They are neither elected by the people nor appointed by an elected official. Only the seven seats on the board appointed by the POTUS are government officials. The bank presidents are private officials. People who speak that the entire Federal Reserve system is government are not being completely accurate.

 

[JohnfrmCleveland]

The social security trust fund buys bonds, so yes there are government entities that do buy US Treasury debt. But they do so with surplus tax dollars. With no surplus of tax dollars, those entities do not by bonds.

When the Federal Reserve prints Federal Reserve Notes out of thin air, and buy US Treasury Bonds that the US Treasury printed out of thin air, the government is not buying its debt. 12 private banks are. The interest these banks collect on these new bonds at some point during the year from this buying process reaches the point where it just gets funneled back to the US Treasury via Federal Reserve rules. So it is "free money", but the government is not buying it's own debt.

You will have some people speak with the assumption that the entire Federal Reserve system is government. This however would mean that the stock holders who own the 12 banks are appointing a government official when they elect a president for their bank, because those twelve presidents rotate through serving on five seats of the Federal Reserve Board of a Governors. They aren't government officials. They are neither elected by the people nor appointed by an elected official. Only the seven seats on the board appointed by the POTUS are government officials. The bank presidents are private officials. People who speak that the entire Federal Reserve system is government are not being completely accurate.

I could go over all of the ways that the Fed doesn't act like a private operation, but I'm sure you know that stuff already. It doesn't really matter what we call it, public, private, or something in between. What matters is how it acts. It's purpose isn't to make a profit, it's purpose is to enact monetary policy and be the nation's bank. The Congress dictates the spending, and the Fed, along with the Treasury, do whatever has to be done to pay those bills. There is never a question of "is it possible" or "if the Fed agrees," it just happens. If the Congress doesn't muck things up with their stupid debt ceiling shenanegans, there is zero chance of those bills not getting paid. It doesn't matter if China (or any other non-governmental entity) stops buying bonds, either.

So I do prefer to take the shortcut and call the Fed part of the government. Calling it anything different doesn't change the process of dollar creation. The important point is that dollar creation does not entail actual debt, or otherwise cost the government anything.

 

[Politician Spock]

The social security trust fund buys bonds, so yes there are government entities that do buy US Treasury debt. But they do so with surplus tax dollars. With no surplus of tax dollars, those entities do not by bonds.

When the Federal Reserve prints Federal Reserve Notes out of thin air, and buy US Treasury Bonds that the US Treasury printed out of thin air, the government is not buying its debt. 12 private banks are. The interest these banks collect on these new bonds at some point during the year from this buying process reaches the point where it just gets funneled back to the US Treasury via Federal Reserve rules. So it is "free money", but the government is not buying it's own debt.

You will have some people speak with the assumption that the entire Federal Reserve system is government. This however would mean that the stock holders who own the 12 banks are appointing a government official when they elect a president for their bank, because those twelve presidents rotate through serving on five seats of the Federal Reserve Board of a Governors. They aren't government officials. They are neither elected by the people nor appointed by an elected official. Only the seven seats on the board appointed by the POTUS are government officials. The bank presidents are private officials. People who speak that the entire Federal Reserve system is government are not being completely accurate.

I could go over all of the ways that the Fed doesn't act like a private operation, but I'm sure you know that stuff already. It doesn't really matter what we call it, public, private, or something in between. What matters is how it acts. It's purpose isn't to make a profit, it's purpose is to enact monetary policy and be the nation's bank. The Congress dictates the spending, and the Fed, along with the Treasury, do whatever has to be done to pay those bills. There is never a question of "is it possible" or "if the Fed agrees," it just happens. If the Congress doesn't muck things up with their stupid debt ceiling shenanegans, there is zero chance of those bills not getting paid. It doesn't matter if China (or any other non-governmental entity) stops buying bonds, either.

So I do prefer to take the shortcut and call the Fed part of the government. Calling it anything different doesn't change the process of dollar creation. The important point is that dollar creation does not entail actual debt, or otherwise cost the government anything.

If what you say is true, then the 12 banks sending their representation to the board of governors is a waste of time and effort. It's also a waste of time and effort for the POTUS to appoint 7 people to the board. If the fed just takes what congress and the president want to do and make it happen, then the president should just appoint one person to run the fed.

I think you are turning a blind eye to the fact that the Federal Reserve Board of Governors doesn't just do what congress and/or the president want. If they are in fact a "government entity" then they are a fourth branch of government, in addition to the executive, legislative and judicial branches.

The truth of the matter is neither the government nor the private sector is in charge of monetary policy. Together they both are. This eliminates government's ability to dictate to the fed what it does. So your proposals are not pragmatic. It also eliminates the private sectors ability to dictate to the fed what it does. It is it's own entity, and decides what it does on it's own.

 

[JohnfrmCleveland]

If what you say is true, then the 12 banks sending their representation to the board of governors is a waste of time and effort. It's also a waste of time and effort for the POTUS to appoint 7 people to the board. If the fed just takes what congress and the president want to do and make it happen, then the president should just appoint one person to run the fed.

I think you are turning a blind eye to the fact that the Federal Reserve Board of Governors doesn't just do what congress and/or the president want. If they are in fact a "government entity" then they are a fourth branch of government, in addition to the executive, legislative and judicial branches.

The truth of the matter is neither the government nor the private sector is in charge of monetary policy. Together they both are. This eliminates government's ability to dictate to the fed what it does. So your proposals are not pragmatic. It also eliminates the private sectors ability to dictate to the fed what it does. It is it's own entity, and decides what it does on it's own.

What I said about the Fed carrying out the government's spending orders is true, but what you said here doesn't follow from that. The Fed is in charge of monetary policy, and I'm sure the private banks have plenty of say in that. I just don't think monetary policy does a whole lot. They can tinker all they want with interest rates and reserve levels, and as we have seen, it has little effect on the economy. And interest rates are about all they have, because it is also clear that central banks really can't control the amount of money in an economy, even if that worked (which it doesn't).

These aren't proposals, either. This is how it works. I mean, what am I suggesting here that isn't already done? And when has the Fed ever gone against the government?

 

[Politician Spock]

What I said about the Fed carrying out the government's spending orders is true, but what you said here doesn't follow from that.

What you said isn't true. It only appears like it because historically the fed hasn't been willing to make waves. You are basing your argument on a perception. If we were to do what you want to do, and at some point the fed decides not to support the effort, the US Treasury would be issuing more bonds than the Federal Reserve is issuing Federal Reserve Notes to buy them. This would cause bond rates to rise much like what happens in Europe when Euro countries issue bonds without the support of the ECB.

 

[JohnfrmCleveland]

What I said about the Fed carrying out the government's spending orders is true, but what you said here doesn't follow from that.

What you said isn't true. It only appears like it because historically the fed hasn't been willing to make waves. You are basing your argument on a perception. If we were to do what you want to do, and at some point the fed decides not to support the effort, the US Treasury would be issuing more bonds than the Federal Reserve is issuing Federal Reserve Notes to buy them. This would cause bond rates to rise much like what happens in Europe when Euro countries issue bonds without the support of the ECB.

What effort are you referring to that the Fed might not support? Congressional spending?

I'm basing my argument not only on perception, but also on the Fed's job - it is our central bank. What else are they going to do, but follow the government? Lay it out, and give me some hypothetical scenario that you think would illustrate your point.

I'm not arguing that there aren't checks and balances, or that the Fed is powerless. No matter what the laws say, there isn't a bunch of case law to fall back on at this level. Yellen could certainly dig in her heels and refuse to do this or that - her exact powers and limitations are not as well-defined as they could be. But what is written doesn't favor the Fed - there is clear language in the FR Act that gives Treasury the edge in disputes. If the Fed strangely decides to go maverick, I'm sure it would get wrangled out pretty quickly, either politically or in a quick court ruling. And my guess is, the Fed is going to lose that battle to the executive/Treasury either way.

But this is all getting far more theoretical, and uniquely American (process-wise), than I intended. The point was, the govt. can make money without cost. Govt. bonds themselves are adequate collateral. So it's really all just accounting now. The govt. creates bonds out of thin air, and more dollars are created. The govt. could (probably) mint a trillion-dollar coin, and $1 trillion new dollars are created. In the future, maybe the govt. changes a few laws so they can issue dollars directly, then does so. It's all the same thing in the end, because all of the hoops they make themselves jump through are self-imposed, and they really don't change the final outcome anyway. Governments sovereign in their own currency can issue that currency in any way they please. I don't know the exact details of how the Japanese create yen, or how Canadians or Australians create dollars, etc., but I do know that, like all fiat currency regimes, you can distill it down to the government creating currency at no cost. And none of those sovereign bonds that only promise more soft currency are true debt.

 

[JohnfrmCleveland]

Are we the only two guys interested in talking about this? Usually, there is a lot more action. :whoosh:

 

[sporthenry]

What I said about the Fed carrying out the government's spending orders is true, but what you said here doesn't follow from that. The Fed is in charge of monetary policy, and I'm sure the private banks have plenty of say in that. I just don't think monetary policy does a whole lot. They can tinker all they want with interest rates and reserve levels, and as we have seen, it has little effect on the economy. And interest rates are about all they have, because it is also clear that central banks really can't control the amount of money in an economy, even if that worked (which it doesn't).

Well this isn't more lively because it's the weekend and you guys are beyond most peoples understanding and veering off into the abstract. I still have to respond to the deposits/loans debate. But what do you mean by interest rates/reserve levels don't affect the economy? Are you saying the artificially low rates have not had some effect on lending and the like? And how does the government not have some control over the money in circulation?

 

[Politician Spock]

What I said about the Fed carrying out the government's spending orders is true, but what you said here doesn't follow from that.

What you said isn't true. It only appears like it because historically the fed hasn't been willing to make waves. You are basing your argument on a perception. If we were to do what you want to do, and at some point the fed decides not to support the effort, the US Treasury would be issuing more bonds than the Federal Reserve is issuing Federal Reserve Notes to buy them. This would cause bond rates to rise much like what happens in Europe when Euro countries issue bonds without the support of the ECB.

What effort are you referring to that the Fed might not support? Congressional spending?

I'm basing my argument not only on perception, but also on the Fed's job - it is our central bank. What else are they going to do, but follow the government? Lay it out, and give me some hypothetical scenario that you think would illustrate your point.

I'm not arguing that there aren't checks and balances, or that the Fed is powerless. No matter what the laws say, there isn't a bunch of case law to fall back on at this level. Yellen could certainly dig in her heels and refuse to do this or that - her exact powers and limitations are not as well-defined as they could be. But what is written doesn't favor the Fed - there is clear language in the FR Act that gives Treasury the edge in disputes. If the Fed strangely decides to go maverick, I'm sure it would get wrangled out pretty quickly, either politically or in a quick court ruling. And my guess is, the Fed is going to lose that battle to the executive/Treasury either way.

But this is all getting far more theoretical, and uniquely American (process-wise), than I intended. The point was, the govt. can make money without cost. Govt. bonds themselves are adequate collateral. So it's really all just accounting now. The govt. creates bonds out of thin air, and more dollars are created. The govt. could (probably) mint a trillion-dollar coin, and $1 trillion new dollars are created. In the future, maybe the govt. changes a few laws so they can issue dollars directly, then does so. It's all the same thing in the end, because all of the hoops they make themselves jump through are self-imposed, and they really don't change the final outcome anyway. Governments sovereign in their own currency can issue that currency in any way they please. I don't know the exact details of how the Japanese create yen, or how Canadians or Australians create dollars, etc., but I do know that, like all fiat currency regimes, you can distill it down to the government creating currency at no cost. And none of those sovereign bonds that only promise more soft currency are true debt.

It's a simple concept, and you have to be obtuse to continue ignoring it.

The motivation behind the setup if the Federal Reserve is that monetary policy is too important of an issue to leave to the government.

Thus your idea that the fed will just follow the government flies in the face of its entire design. Can it? Yes. Does it? Quite often. Does it have to? No.

 

[JohnfrmCleveland]

What I said about the Fed carrying out the government's spending orders is true, but what you said here doesn't follow from that. The Fed is in charge of monetary policy, and I'm sure the private banks have plenty of say in that. I just don't think monetary policy does a whole lot. They can tinker all they want with interest rates and reserve levels, and as we have seen, it has little effect on the economy. And interest rates are about all they have, because it is also clear that central banks really can't control the amount of money in an economy, even if that worked (which it doesn't).

Well this isn't more lively because it's the weekend and you guys are beyond most peoples understanding and veering off into the abstract. I still have to respond to the deposits/loans debate.But what do you mean by interest rates/reserve levels don't affect the economy? Are you saying the artificially low rates have not had some effect on lending and the like? And how does the government not have some control over the money in circulation?

Some people used to think that you could control the amount of money in an economy by adjusting reserve levels. By making it easier for banks to lend, more lending should happen, and the amount of money goes up. But this reasoning is bad - in the modern era, banks were never constrained in making loans by the amount of reserves they held. They made loans, and adjusted their reserves after the fact. And if they couldn't borrow excess reserves on the interbank market, they could always borrow some through the Fed's discount window. So the limit on how much credit banks created had nothing to do with reserves - it was always the economy itself. If the economy was good, you had more creditworthy borrowers, and banks made more loans. With QE, the Fed bought bonds and other assets from banks, making them cash-rich, so banks had tons of excess reserves. But that didn't help lending a bit, because the economy still stunk and nobody was borrowing.

Interest rates have been very low for a few years now, and they haven't been the answer, either. They're better than high interest rates, I suppose, but businesses still need customers. So the cost to banks is about as close to zero as you can get, and lending is still disappointing. There is nothing more the Fed can do.

Also, it is very arguable that today's interest rates are "artificially" low. That implies that there is a natural level where interest rates should float to. Most of what you probably have been taught about interest rates and what affects them were applicable in the gold standard era, but fiat money is very different. There was a limited amount of gold, and that affected dollar creation, and just about everything else. There is no limit to fiat money creation, and that changes all of the equations. Now, the government can set the overnight rate wherever they want it. But they can't control what the economy does with that - how many loans are made, how much credit is created, etc.

 

[JohnfrmCleveland]

What I said about the Fed carrying out the government's spending orders is true, but what you said here doesn't follow from that.

What you said isn't true. It only appears like it because historically the fed hasn't been willing to make waves. You are basing your argument on a perception. If we were to do what you want to do, and at some point the fed decides not to support the effort, the US Treasury would be issuing more bonds than the Federal Reserve is issuing Federal Reserve Notes to buy them. This would cause bond rates to rise much like what happens in Europe when Euro countries issue bonds without the support of the ECB.

What effort are you referring to that the Fed might not support? Congressional spending?

I'm basing my argument not only on perception, but also on the Fed's job - it is our central bank. What else are they going to do, but follow the government? Lay it out, and give me some hypothetical scenario that you think would illustrate your point.

I'm not arguing that there aren't checks and balances, or that the Fed is powerless. No matter what the laws say, there isn't a bunch of case law to fall back on at this level. Yellen could certainly dig in her heels and refuse to do this or that - her exact powers and limitations are not as well-defined as they could be. But what is written doesn't favor the Fed - there is clear language in the FR Act that gives Treasury the edge in disputes. If the Fed strangely decides to go maverick, I'm sure it would get wrangled out pretty quickly, either politically or in a quick court ruling. And my guess is, the Fed is going to lose that battle to the executive/Treasury either way.

But this is all getting far more theoretical, and uniquely American (process-wise), than I intended. The point was, the govt. can make money without cost. Govt. bonds themselves are adequate collateral. So it's really all just accounting now. The govt. creates bonds out of thin air, and more dollars are created. The govt. could (probably) mint a trillion-dollar coin, and $1 trillion new dollars are created. In the future, maybe the govt. changes a few laws so they can issue dollars directly, then does so. It's all the same thing in the end, because all of the hoops they make themselves jump through are self-imposed, and they really don't change the final outcome anyway. Governments sovereign in their own currency can issue that currency in any way they please. I don't know the exact details of how the Japanese create yen, or how Canadians or Australians create dollars, etc., but I do know that, like all fiat currency regimes, you can distill it down to the government creating currency at no cost. And none of those sovereign bonds that only promise more soft currency are true debt.

It's a simple concept, and you have to be obtuse to continue ignoring it.

The motivation behind the setup if the Federal Reserve is that monetary policy is too important of an issue to leave to the government.

Thus your idea that the fed will just follow the government flies in the face of its entire design. Can it? Yes. Does it? Quite often. Does it have to? No.

I'm not ignoring it. I just don't think it's all that important. You disagree, obviously. So, give me a scenario where the Fed might veer in a different direction than the government. I'm far more interested in learning how things work in practice than in theory.

I said that the Fed follows orders when it comes to spending, because it does. That's not monetary policy, that's fiscal policy, and it's not Fed business. Has it ever refused? Why would it?

 

[cstu]

Let me make it as simple as possible:

At a growth rate of 3%, the U.S. GDP grows $510 billion a year.

The government collects ~18% of GDP in taxes, or $92 billion off the increase in GDP.

Yearly interest on our debt is $354 billion.

You guys figure it out.

 

[jon_mx]

My impression of the Feds is they act mostly in the interest of maximizing profits for the banks and wealth protection (anti-inflation) until the economy is about to tank, then they loosen to try to keep the economy going. It is important fact that it is a private owned entity. There are both pros and cons to it. But allowing the government free reign on money creation is more dangerous. Of course in reality they have ultimate power since they can change the law or just issue US Notes as money.

 

[Politician Spock]

What I said about the Fed carrying out the government's spending orders is true, but what you said here doesn't follow from that.

What you said isn't true. It only appears like it because historically the fed hasn't been willing to make waves. You are basing your argument on a perception. If we were to do what you want to do, and at some point the fed decides not to support the effort, the US Treasury would be issuing more bonds than the Federal Reserve is issuing Federal Reserve Notes to buy them. This would cause bond rates to rise much like what happens in Europe when Euro countries issue bonds without the support of the ECB.

What effort are you referring to that the Fed might not support? Congressional spending?

I'm basing my argument not only on perception, but also on the Fed's job - it is our central bank. What else are they going to do, but follow the government? Lay it out, and give me some hypothetical scenario that you think would illustrate your point.

I'm not arguing that there aren't checks and balances, or that the Fed is powerless. No matter what the laws say, there isn't a bunch of case law to fall back on at this level. Yellen could certainly dig in her heels and refuse to do this or that - her exact powers and limitations are not as well-defined as they could be. But what is written doesn't favor the Fed - there is clear language in the FR Act that gives Treasury the edge in disputes. If the Fed strangely decides to go maverick, I'm sure it would get wrangled out pretty quickly, either politically or in a quick court ruling. And my guess is, the Fed is going to lose that battle to the executive/Treasury either way.

But this is all getting far more theoretical, and uniquely American (process-wise), than I intended. The point was, the govt. can make money without cost. Govt. bonds themselves are adequate collateral. So it's really all just accounting now. The govt. creates bonds out of thin air, and more dollars are created. The govt. could (probably) mint a trillion-dollar coin, and $1 trillion new dollars are created. In the future, maybe the govt. changes a few laws so they can issue dollars directly, then does so. It's all the same thing in the end, because all of the hoops they make themselves jump through are self-imposed, and they really don't change the final outcome anyway. Governments sovereign in their own currency can issue that currency in any way they please. I don't know the exact details of how the Japanese create yen, or how Canadians or Australians create dollars, etc., but I do know that, like all fiat currency regimes, you can distill it down to the government creating currency at no cost. And none of those sovereign bonds that only promise more soft currency are true debt.

It's a simple concept, and you have to be obtuse to continue ignoring it.The motivation behind the setup if the Federal Reserve is that monetary policy is too important of an issue to leave to the government.

Thus your idea that the fed will just follow the government flies in the face of its entire design. Can it? Yes. Does it? Quite often. Does it have to? No.

I'm not ignoring it. I just don't think it's all that important. You disagree, obviously. So, give me a scenario where the Fed might veer in a different direction than the government. I'm far more interested in learning how things work in practice than in theory.

I said that the Fed follows orders when it comes to spending, because it does. That's not monetary policy, that's fiscal policy, and it's not Fed business. Has it ever refused? Why would it?

You're argument is a logical fallacy. Essentially it assumes what has occured in the past will continue to occur in the future. I don't need to give an example to prove you are wrong. You need to bring more than assumption to prove you are right.

 

[JohnfrmCleveland]

Let me make it as simple as possible:

At a growth rate of 3%, the U.S. GDP grows $510 billion a year.

The government collects ~18% of GDP in taxes, or $92 billion off the increase in GDP.

Yearly interest on our debt is $354 billion.

You guys figure it out.

The govt. can run a surplus (more taxes come in than they spend) or a deficit. We run a pretty big deficit. So (govt. spending (G) minus taxes (T) = new money in the economy. I think it was somewhere around $700 billion last year, so the world had $700 billion more net dollars than it did the year before. A $700 billion surplus for us, and a matching deficit for the government.

Now break that surplus up into America and the rest of the world. The rest of the world gets, to a close approximation, (imports - exports), our trade deficit. That was about $470 billion last year. So Americans ran a $230 billion surplus, and the rest of the world ran a $470 billion surplus.

The important thing is to make sure that our domestic economy has enough dollars to run smoothly. Our trade deficit meant that $470 billion left our economy and didn't come back, so to prevent a shortage of dollars, the government has to create some new ones.

Interest on the debt doesn't really cost anything. The govt. creates it at no cost, pays it out, and most of it just gets rolled over into more bonds.

 

[Maelstrom]

What I said about the Fed carrying out the government's spending orders is true, but what you said here doesn't follow from that.

What you said isn't true. It only appears like it because historically the fed hasn't been willing to make waves. You are basing your argument on a perception. If we were to do what you want to do, and at some point the fed decides not to support the effort, the US Treasury would be issuing more bonds than the Federal Reserve is issuing Federal Reserve Notes to buy them. This would cause bond rates to rise much like what happens in Europe when Euro countries issue bonds without the support of the ECB.

What effort are you referring to that the Fed might not support? Congressional spending?

I'm basing my argument not only on perception, but also on the Fed's job - it is our central bank. What else are they going to do, but follow the government? Lay it out, and give me some hypothetical scenario that you think would illustrate your point.

I'm not arguing that there aren't checks and balances, or that the Fed is powerless. No matter what the laws say, there isn't a bunch of case law to fall back on at this level. Yellen could certainly dig in her heels and refuse to do this or that - her exact powers and limitations are not as well-defined as they could be. But what is written doesn't favor the Fed - there is clear language in the FR Act that gives Treasury the edge in disputes. If the Fed strangely decides to go maverick, I'm sure it would get wrangled out pretty quickly, either politically or in a quick court ruling. And my guess is, the Fed is going to lose that battle to the executive/Treasury either way.

But this is all getting far more theoretical, and uniquely American (process-wise), than I intended. The point was, the govt. can make money without cost. Govt. bonds themselves are adequate collateral. So it's really all just accounting now. The govt. creates bonds out of thin air, and more dollars are created. The govt. could (probably) mint a trillion-dollar coin, and $1 trillion new dollars are created. In the future, maybe the govt. changes a few laws so they can issue dollars directly, then does so. It's all the same thing in the end, because all of the hoops they make themselves jump through are self-imposed, and they really don't change the final outcome anyway. Governments sovereign in their own currency can issue that currency in any way they please. I don't know the exact details of how the Japanese create yen, or how Canadians or Australians create dollars, etc., but I do know that, like all fiat currency regimes, you can distill it down to the government creating currency at no cost. And none of those sovereign bonds that only promise more soft currency are true debt.

It's a simple concept, and you have to be obtuse to continue ignoring it.

The motivation behind the setup if the Federal Reserve is that monetary policy is too important of an issue to leave to the government.

Thus your idea that the fed will just follow the government flies in the face of its entire design. Can it? Yes. Does it? Quite often. Does it have to? No.

Can you give any examples in the past where the Fed has acted in that way (i.e. not buying the gov't bonds/supporting the spending)? Isn't a majority of the board members gov't officials (I thought it was 7-5) and so likely to act as the gov't does/wants?

I know the Fed "could" do all kinds of things, but I haven't seen you say where you think they WILL, just continue to argue that they could. I don't think anyone is arguing that they "could", just that it is extremely unlikely they will act differently than they have so far.

 

[cstu]

Let me make it as simple as possible:

At a growth rate of 3%, the U.S. GDP grows $510 billion a year.

The government collects ~18% of GDP in taxes, or $92 billion off the increase in GDP.

Yearly interest on our debt is $354 billion.

You guys figure it out.

The govt. can run a surplus (more taxes come in than they spend) or a deficit. We run a pretty big deficit. So (govt. spending (G) minus taxes (T) = new money in the economy. I think it was somewhere around $700 billion last year, so the world had $700 billion more net dollars than it did the year before. A $700 billion surplus for us, and a matching deficit for the government.

Now break that surplus up into America and the rest of the world. The rest of the world gets, to a close approximation, (imports - exports), our trade deficit. That was about $470 billion last year. So Americans ran a $230 billion surplus, and the rest of the world ran a $470 billion surplus.

The important thing is to make sure that our domestic economy has enough dollars to run smoothly. Our trade deficit meant that $470 billion left our economy and didn't come back, so to prevent a shortage of dollars, the government has to create some new ones.

Interest on the debt doesn't really cost anything. The govt. creates it at no cost, pays it out, and most of it just gets rolled over into more bonds.

It comes at the cost of a weaker dollar and it's also $340 billion that gets spent on paying interest expense instead of things that would improve the country.

If we are going to print the money then is it not better to spend on R&D, infrastructure or even health care rather than interest?

The fact that we can print money doesn't change the fact that it's a tremendous drain on the country.

 

[Politician Spock]

What I said about the Fed carrying out the government's spending orders is true, but what you said here doesn't follow from that.

What you said isn't true. It only appears like it because historically the fed hasn't been willing to make waves. You are basing your argument on a perception. If we were to do what you want to do, and at some point the fed decides not to support the effort, the US Treasury would be issuing more bonds than the Federal Reserve is issuing Federal Reserve Notes to buy them. This would cause bond rates to rise much like what happens in Europe when Euro countries issue bonds without the support of the ECB.

What effort are you referring to that the Fed might not support? Congressional spending?

I'm basing my argument not only on perception, but also on the Fed's job - it is our central bank. What else are they going to do, but follow the government? Lay it out, and give me some hypothetical scenario that you think would illustrate your point.

I'm not arguing that there aren't checks and balances, or that the Fed is powerless. No matter what the laws say, there isn't a bunch of case law to fall back on at this level. Yellen could certainly dig in her heels and refuse to do this or that - her exact powers and limitations are not as well-defined as they could be. But what is written doesn't favor the Fed - there is clear language in the FR Act that gives Treasury the edge in disputes. If the Fed strangely decides to go maverick, I'm sure it would get wrangled out pretty quickly, either politically or in a quick court ruling. And my guess is, the Fed is going to lose that battle to the executive/Treasury either way.

But this is all getting far more theoretical, and uniquely American (process-wise), than I intended. The point was, the govt. can make money without cost. Govt. bonds themselves are adequate collateral. So it's really all just accounting now. The govt. creates bonds out of thin air, and more dollars are created. The govt. could (probably) mint a trillion-dollar coin, and $1 trillion new dollars are created. In the future, maybe the govt. changes a few laws so they can issue dollars directly, then does so. It's all the same thing in the end, because all of the hoops they make themselves jump through are self-imposed, and they really don't change the final outcome anyway. Governments sovereign in their own currency can issue that currency in any way they please. I don't know the exact details of how the Japanese create yen, or how Canadians or Australians create dollars, etc., but I do know that, like all fiat currency regimes, you can distill it down to the government creating currency at no cost. And none of those sovereign bonds that only promise more soft currency are true debt.

It's a simple concept, and you have to be obtuse to continue ignoring it.

The motivation behind the setup if the Federal Reserve is that monetary policy is too important of an issue to leave to the government.

Thus your idea that the fed will just follow the government flies in the face of its entire design. Can it? Yes. Does it? Quite often. Does it have to? No.

Can you give any examples in the past where the Fed has acted in that way (i.e. not buying the gov't bonds/supporting the spending)? Isn't a majority of the board members gov't officials (I thought it was 7-5) and so likely to act as the gov't does/wants?

I know the Fed "could" do all kinds of things, but I haven't seen you say where you think they WILL, just continue to argue that they could. I don't think anyone is arguing that they "could", just that it is extremely unlikely they will act differently than they have so far.

The fact that they could is HUGE. There really is no other purpose for the design of the Federal Reserve System than to keep government from doing exactly what JohnfrmCleveland is proposing they should do.

The only thing that keeps government from abusing its ability to create money (via the notes of debt process) is the natural result that interest rates on their bonds would rise to ridiculous levels as a result of said abuse. If the Federal Reserve existed to support such abuse, the interest rates would never rise, because the fed would just keep issuing band new federal reserve notes to buy the brand new US Treasury Notes the US Treasure keeps issuing. With a constant buyer, the interest rates on the bonds wouldn't rise, and the US Treasury would just keep on issuing more and more and more "free money". This is called "monetizing the debt" and private banks would collapse from the negative effects of such.

The design of the Fed makes sure that the private sector (private banks) has enough voice to never allow this to happen. So the fact that this has not happened yet is a moot point. The purpose of the design is for the moment that government thinks it can. And JohnfrmCleveland thinks it can.

7 of the 12 board members are appointed by the POTUS. However the POTUS is provided a list of candidates to "choose" from when making an appointment. If you've ever looked at a list the POTUS chooses from, it looks like a whose who from the banking industry. Even with 7 appointees it would take a miracle for the POTUS to get the majority of the Federal Reserve Board of Governors to support the government monetizing the debt.

That being said, the fact that the US Dollar is the world's reserve currency (a status the Federal Reserve to not choose the dollar to be), it is year after year after year becoming a burden of the US government to move closer and closer and closer to a "monetize the debt" situation in order for the dollar to keep its world's reserve currency status. Currently two thirds of the what the government deficit spends accounts for our trade deficit. If the government cut it's deficit spending in half, our trade deficit would then be a drain on our private domestic spending. The more the world economy grows, the more it needs US dollars for reserve levels needed for international trade, increasing the need for the government to deficit spend to insure this does not negatively impact private domestic spending. As this continues, the fed ends up with less and less ability to do what it is chartered to do, which is throttle inflation and interest rates with monetary policy. Even JohnfrmCleveland has pointed it out numerous times that the Fed has lost it's impact. This is because the dollars worlds reserve currency status, and government deficit spending to keep it as such, is suplanting the fed as the dollars source of monetary policy. The one benefit of JohnfrmCleveland's proposal is that it would just push it to its eventual destination, and the bursting of the bubble will occur sooner than later. In some parts of my mind, I would prefer that, as dragging out the process to the eventual bursting of this bubble isn't going to be a plesent ride. Perhaps it would just be better to get it over with sooner than later, and start over with the new system earlier.

 

[JohnfrmCleveland]

Let me make it as simple as possible:

At a growth rate of 3%, the U.S. GDP grows $510 billion a year.

The government collects ~18% of GDP in taxes, or $92 billion off the increase in GDP.

Yearly interest on our debt is $354 billion.

You guys figure it out.

The govt. can run a surplus (more taxes come in than they spend) or a deficit. We run a pretty big deficit. So (govt. spending (G) minus taxes (T) = new money in the economy. I think it was somewhere around $700 billion last year, so the world had $700 billion more net dollars than it did the year before. A $700 billion surplus for us, and a matching deficit for the government.

Now break that surplus up into America and the rest of the world. The rest of the world gets, to a close approximation, (imports - exports), our trade deficit. That was about $470 billion last year. So Americans ran a $230 billion surplus, and the rest of the world ran a $470 billion surplus.

The important thing is to make sure that our domestic economy has enough dollars to run smoothly. Our trade deficit meant that $470 billion left our economy and didn't come back, so to prevent a shortage of dollars, the government has to create some new ones.

Interest on the debt doesn't really cost anything. The govt. creates it at no cost, pays it out, and most of it just gets rolled over into more bonds.

It comes at the cost of a weaker dollar and it's also $340 billion that gets spent on paying interest expense instead of things that would improve the country.

If we are going to print the money then is it not better to spend on R&D, infrastructure or even health care rather than interest?

The fact that we can print money doesn't change the fact that it's a tremendous drain on the country.

If the government printed up $5 trillion tomorrow, then stuck that $5 trillion in a vault somewhere, it wouldn't affect the economy, right? Nobody is spending it, so why would it? So the mere fact that more money exists doesn't bring the value down.

If they gave that $5 billion to Bill Gates, and Bill Gates (who already has more than he can spend) just buys U.S. bonds with it and saves it, it still doesn't affect the economy, because he's not spending it, and he's not investing it - it's just sitting there.

This is actually what happens with a lot of dollars - once people/countries/businesses buy bonds, those dollars are pretty much retired. The (net) pile of bonds almost never gets any smaller, so there is always a net flow of dollars into bonds. And you buy bonds because you want to sit on your dollars, not because the investment is attractive. And when they get the interest, it usually just gets rolled over into more bonds.

So the interest isn't preventing the government from spending money on infrastructure, because the only limit on how many dollars they can create is inflation. It might be a drain on real resources if it was getting spent on American goods, but then again I'm sure American businesses would welcome the extra demand.

 

[JohnfrmCleveland]

The only thing that keeps government from abusing its ability to create money (via the notes of debt process) is the natural result that interest rates on their bonds would rise to ridiculous levels as a result of said abuse. If the Federal Reserve existed to support such abuse, the interest rates would never rise, because the fed would just keep issuing band new federal reserve notes to buy the brand new US Treasury Notes the US Treasure keeps issuing. With a constant buyer, the interest rates on the bonds wouldn't rise, and the US Treasury would just keep on issuing more and more and more "free money". This is called "monetizing the debt" and private banks would collapse from the negative effects of such.

I still don't know what it is you think I am "suggesting" the government do. I'm pretty much describing what happens now.

"Monetizing the debt" is simply exchanging dollars for bonds. You think this would be a catastrophe, I don't. It wouldn't change the financial position of either the bondholder or the government - you have $1 million in bonds today, you have $1 million in dollars tomorrow. And the government's total liability remains the same either way. Do you think this would result in all of those dollars immediately being spent? Do you think that sweet 1-2% return is what is keeping current bondholders from cashing in and buying everything in sight? Anyway, I am not suggesting that we abandon bonds. I'm just trying to explain that they aren't really debt. I'm also trying to explain why they probably aren't as necessary as many people think they are.

Why would interest rates rise? The government controls interest rates. The only way interest rates rise is if the Fed goes completely rogue and fails to do its job.

 

[Politician Spock]

The only thing that keeps government from abusing its ability to create money (via the notes of debt process) is the natural result that interest rates on their bonds would rise to ridiculous levels as a result of said abuse. If the Federal Reserve existed to support such abuse, the interest rates would never rise, because the fed would just keep issuing band new federal reserve notes to buy the brand new US Treasury Notes the US Treasure keeps issuing. With a constant buyer, the interest rates on the bonds wouldn't rise, and the US Treasury would just keep on issuing more and more and more "free money". This is called "monetizing the debt" and private banks would collapse from the negative effects of such.

I still don't know what it is you think I am "suggesting" the government do. I'm pretty much describing what happens now.

"Monetizing the debt" is simply exchanging dollars for bonds. You think this would be a catastrophe, I don't. It wouldn't change the financial position of either the bondholder or the government - you have $1 million in bonds today, you have $1 million in dollars tomorrow. And the government's total liability remains the same either way. Do you think this would result in all of those dollars immediately being spent? Do you think that sweet 1-2% return is what is keeping current bondholders from cashing in and buying everything in sight? Anyway, I am not suggesting that we abandon bonds. I'm just trying to explain that they aren't really debt. I'm also trying to explain why they probably aren't as necessary as many people think they are.

Why would interest rates rise? The government controls interest rates. The only way interest rates rise is if the Fed goes completely rogue and fails to do its job.

The bolded is why the fed is designed the way it is. It can go "completely rogue" when the government begins to behave like you want it to.

 

[JohnfrmCleveland]

The only thing that keeps government from abusing its ability to create money (via the notes of debt process) is the natural result that interest rates on their bonds would rise to ridiculous levels as a result of said abuse. If the Federal Reserve existed to support such abuse, the interest rates would never rise, because the fed would just keep issuing band new federal reserve notes to buy the brand new US Treasury Notes the US Treasure keeps issuing. With a constant buyer, the interest rates on the bonds wouldn't rise, and the US Treasury would just keep on issuing more and more and more "free money". This is called "monetizing the debt" and private banks would collapse from the negative effects of such.

I still don't know what it is you think I am "suggesting" the government do. I'm pretty much describing what happens now.

"Monetizing the debt" is simply exchanging dollars for bonds. You think this would be a catastrophe, I don't. It wouldn't change the financial position of either the bondholder or the government - you have $1 million in bonds today, you have $1 million in dollars tomorrow. And the government's total liability remains the same either way. Do you think this would result in all of those dollars immediately being spent? Do you think that sweet 1-2% return is what is keeping current bondholders from cashing in and buying everything in sight? Anyway, I am not suggesting that we abandon bonds. I'm just trying to explain that they aren't really debt. I'm also trying to explain why they probably aren't as necessary as many people think they are.

Why would interest rates rise? The government controls interest rates. The only way interest rates rise is if the Fed goes completely rogue and fails to do its job.

The bolded is why the fed is designed the way it is. It can go "completely rogue" when the government begins to behave like you want it to.

Like I want it to? You mean, spending money? You've got to be more specific here.

 

[Politician Spock]

The only thing that keeps government from abusing its ability to create money (via the notes of debt process) is the natural result that interest rates on their bonds would rise to ridiculous levels as a result of said abuse. If the Federal Reserve existed to support such abuse, the interest rates would never rise, because the fed would just keep issuing band new federal reserve notes to buy the brand new US Treasury Notes the US Treasure keeps issuing. With a constant buyer, the interest rates on the bonds wouldn't rise, and the US Treasury would just keep on issuing more and more and more "free money". This is called "monetizing the debt" and private banks would collapse from the negative effects of such.

I still don't know what it is you think I am "suggesting" the government do. I'm pretty much describing what happens now.

"Monetizing the debt" is simply exchanging dollars for bonds. You think this would be a catastrophe, I don't. It wouldn't change the financial position of either the bondholder or the government - you have $1 million in bonds today, you have $1 million in dollars tomorrow. And the government's total liability remains the same either way. Do you think this would result in all of those dollars immediately being spent? Do you think that sweet 1-2% return is what is keeping current bondholders from cashing in and buying everything in sight? Anyway, I am not suggesting that we abandon bonds. I'm just trying to explain that they aren't really debt. I'm also trying to explain why they probably aren't as necessary as many people think they are.

Why would interest rates rise? The government controls interest rates. The only way interest rates rise is if the Fed goes completely rogue and fails to do its job.

The bolded is why the fed is designed the way it is. It can go "completely rogue" when the government begins to behave like you want it to.

Like I want it to? You mean, spending money? You've got to be more specific here.

What is happening now is not normal. Essentially what the fed is doing is like hospital keeping a patient on life support. So describing what is happening now is a description of crisis behavior.

When the economy is healthy, and the govenrment wanted to continue the same behavior, the fed would pull back to stop it.

 

[lod01]

The U.S. govt. is the only entity with the ability to create U.S. dollars. They are also the only entity with the ability to create U.S. bonds. When they trade bonds for dollars, or dollars for bonds, it's not costing them anything to do so, because either way, they have created their instrument out of thin air. Yet people insist on calling sovereign bonds "debt" and running the economy as if we were $17 trillion in the hole.

What do you think?

Been saying this for over a decade. Our debt will only increase. We will keep rolling along and thus I come to the conclusion that our debt is meaningless.

 

[lod01]

Well you've made this point in several threads. Let me turn it around by asking you a question: under which of the following conditions would our national economy be better off?:

1. No debt.

2. 5 trillion in debt

3. 15 trillion in debt

4. 25 trillion in debt

5. 250 trillion in debt

Doesn't matter as we have over 3 decades of data proving it.

 

[JohnfrmCleveland]

The only thing that keeps government from abusing its ability to create money (via the notes of debt process) is the natural result that interest rates on their bonds would rise to ridiculous levels as a result of said abuse. If the Federal Reserve existed to support such abuse, the interest rates would never rise, because the fed would just keep issuing band new federal reserve notes to buy the brand new US Treasury Notes the US Treasure keeps issuing. With a constant buyer, the interest rates on the bonds wouldn't rise, and the US Treasury would just keep on issuing more and more and more "free money". This is called "monetizing the debt" and private banks would collapse from the negative effects of such.

I still don't know what it is you think I am "suggesting" the government do. I'm pretty much describing what happens now.

"Monetizing the debt" is simply exchanging dollars for bonds. You think this would be a catastrophe, I don't. It wouldn't change the financial position of either the bondholder or the government - you have $1 million in bonds today, you have $1 million in dollars tomorrow. And the government's total liability remains the same either way. Do you think this would result in all of those dollars immediately being spent? Do you think that sweet 1-2% return is what is keeping current bondholders from cashing in and buying everything in sight? Anyway, I am not suggesting that we abandon bonds. I'm just trying to explain that they aren't really debt. I'm also trying to explain why they probably aren't as necessary as many people think they are.

Why would interest rates rise? The government controls interest rates. The only way interest rates rise is if the Fed goes completely rogue and fails to do its job.

The bolded is why the fed is designed the way it is. It can go "completely rogue" when the government begins to behave like you want it to.

Like I want it to? You mean, spending money? You've got to be more specific here.

What is happening now is not normal. Essentially what the fed is doing is like hospital keeping a patient on life support. So describing what is happening now is a description of crisis behavior.

When the economy is healthy, and the govenrment wanted to continue the same behavior, the fed would pull back to stop it.

Stop it from what? Spending? Deficit spending? Keeping interest rates low? Be specific about what, exactly, our country is doing wrong here, and what it should be doing. Do you want a balanced budget? "Natural" interest rates? What is this norm that we should be returning to, if this is crisis behavior?

 

[jon_mx]

If I were setting up the norms, I would think we would want to limit our debt to approximately our GDP. Would not require a balance budget to maintain, but keeping the deficit spending below the amount of economic growth. Not always possible in bad economic times, but you can catch up when the economy is stronger.

 

[Politician Spock]

The only thing that keeps government from abusing its ability to create money (via the notes of debt process) is the natural result that interest rates on their bonds would rise to ridiculous levels as a result of said abuse. If the Federal Reserve existed to support such abuse, the interest rates would never rise, because the fed would just keep issuing band new federal reserve notes to buy the brand new US Treasury Notes the US Treasure keeps issuing. With a constant buyer, the interest rates on the bonds wouldn't rise, and the US Treasury would just keep on issuing more and more and more "free money". This is called "monetizing the debt" and private banks would collapse from the negative effects of such.

I still don't know what it is you think I am "suggesting" the government do. I'm pretty much describing what happens now.

"Monetizing the debt" is simply exchanging dollars for bonds. You think this would be a catastrophe, I don't. It wouldn't change the financial position of either the bondholder or the government - you have $1 million in bonds today, you have $1 million in dollars tomorrow. And the government's total liability remains the same either way. Do you think this would result in all of those dollars immediately being spent? Do you think that sweet 1-2% return is what is keeping current bondholders from cashing in and buying everything in sight? Anyway, I am not suggesting that we abandon bonds. I'm just trying to explain that they aren't really debt. I'm also trying to explain why they probably aren't as necessary as many people think they are.

Why would interest rates rise? The government controls interest rates. The only way interest rates rise is if the Fed goes completely rogue and fails to do its job.

The bolded is why the fed is designed the way it is. It can go "completely rogue" when the government begins to behave like you want it to.

Like I want it to? You mean, spending money? You've got to be more specific here.

What is happening now is not normal. Essentially what the fed is doing is like hospital keeping a patient on life support. So describing what is happening now is a description of crisis behavior.

When the economy is healthy, and the govenrment wanted to continue the same behavior, the fed would pull back to stop it.

Stop it from what? Spending? Deficit spending? Keeping interest rates low? Be specific about what, exactly, our country is doing wrong here, and what it should be doing. Do you want a balanced budget? "Natural" interest rates? What is this norm that we should be returning to, if this is crisis behavior?

If the government continues the same behavior after the crisis is over, and the fed pulls back, interest rates on US Treasury bonds would skyrocket. The Treasury isn't making the decision to issue more bonds. It is forced to do so when tax revenues fail to match expenditures. So with the fed pulling back, the only way government can keep their bond rates from spiraling out of control is to get tax revenues closer to expenditures, thus reducing the amount of new bonds the US Treasury is forced to issue. How they accomplish that (increased tax revenues, reduced spending, etc, etc..) is up to congress to decide. This is why the fed has continued to warn congress to get its fiscal policies in order.

 

[JohnfrmCleveland]

If I were setting up the norms, I would think we would want to limit our debt to approximately our GDP. Would not require a balance budget to maintain, but keeping the deficit spending below the amount of economic growth. Not always possible in bad economic times, but you can catch up when the economy is stronger.

I used to think that there was some kind of direct correlation between these two as well, but I have since changed my mind. I used to look for a lot of those types of correlations. Now, I'm very skeptical of any easy explanations, like the Debt-to-GDP ratio, etc.

A lot of the Eurozone's rules are based on this kind of stuff, and after only 25 years it's all starting to unravel badly. If the rules are based on faulty reasoning (and I believe they are), Eurozone nations pretty much doomed themselves economically when they signed on, and confined their economies to hard(ish) limits on debt.

 

[JohnfrmCleveland]

Stop it from what? Spending? Deficit spending? Keeping interest rates low? Be specific about what, exactly, our country is doing wrong here, and what it should be doing. Do you want a balanced budget? "Natural" interest rates? What is this norm that we should be returning to, if this is crisis behavior?

If the government continues the same behavior after the crisis is over, and the fed pulls back, interest rates on US Treasury bonds would skyrocket. The Treasury isn't making the decision to issue more bonds. It is forced to do so when tax revenues fail to match expenditures. So with the fed pulling back, the only way government can keep their bond rates from spiraling out of control is to get tax revenues closer to expenditures, thus reducing the amount of new bonds the US Treasury is forced to issue. How they accomplish that (increased tax revenues, reduced spending, etc, etc..) is up to congress to decide. This is why the fed has continued to warn congress to get its fiscal policies in order.

So you want lower government spending and lower deficits. (Why didn't you just say that?)

Again, your whole premise rests heavily on the idea that the government buying its own debt is inherently harmful somehow. I say that it's just an accounting operation. When people/banks buy or sell bonds, it's not a forced thing. If they want to hold dollars, they are free to do so. And when the government buys its own bonds, it doesn't change anybody's financial position in any way.

Why would the Fed "pull back," and what would they be pulling back from? Do you want them to stop participating in bond auctions? It sounds to me like you want to apply the old gold standard rules to today's fiat currency regime, and try to effect policy by controlling the number of dollars out there.

 

[Politician Spock]

Stop it from what? Spending? Deficit spending? Keeping interest rates low? Be specific about what, exactly, our country is doing wrong here, and what it should be doing. Do you want a balanced budget? "Natural" interest rates? What is this norm that we should be returning to, if this is crisis behavior?

If the government continues the same behavior after the crisis is over, and the fed pulls back, interest rates on US Treasury bonds would skyrocket. The Treasury isn't making the decision to issue more bonds. It is forced to do so when tax revenues fail to match expenditures. So with the fed pulling back, the only way government can keep their bond rates from spiraling out of control is to get tax revenues closer to expenditures, thus reducing the amount of new bonds the US Treasury is forced to issue. How they accomplish that (increased tax revenues, reduced spending, etc, etc..) is up to congress to decide. This is why the fed has continued to warn congress to get its fiscal policies in order.

So you want lower government spending and lower deficits. (Why didn't you just say that?)

Because I didn't say that. Congress has options. They can decide what to do. I don't have to pick a preference.

Again, your whole premise rests heavily on the idea that the government buying its own debt is inherently harmful somehow.

You can keep saying it over and over again, but that doesn't make it true. Other than government entities, such as the Social Security Trust Fund, using tax surplus to buy US Treasuries, the government does NOT buy it's own debt. The 12 Federal Reserve banks are the entities that buy US Treasuries when the Federal Reserve system decides to buy government debt. The 12 Federal Reserve banks are private entities, owned by stock holders. Unless you can present an argument not based on the false premise that government buys it's own debt, then you are just

I say that it's just an accounting operation. When people/banks buy or sell bonds, it's not a forced thing. If they want to hold dollars, they are free to do so. And when the government buys its own bonds, it doesn't change anybody's financial position in any way.

When, for example, the Social Security Trust Fund buys goverment bonds, this is true. The balance sheet of the fund doesn't increase or decrease after the transaction. However, when the 12 Federal Reserve banks buy government bonds, their balanace sheets increase. So your claim that it doesn't change anybody's financial position in any way is flat out wrong.

Why would the Fed "pull back," and what would they be pulling back from? Do you want them to stop participating in bond auctions? It sounds to me like you want to apply the old gold standard rules to today's fiat currency regime, and try to effect policy by controlling the number of dollars out there.

It has nothing to do with what I want. This isn't about me. This is about the fed being designed to limit the government from monetizing the debt via wreckless borrow/spend.

Ben Bernanke said as much in his final press conference as Federal Reserve chairman: http://www.theguardian.com/commentisfree/2013/dec/19/ben-bernanke-legacy-calling-out-congress

 

[JohnfrmCleveland]

Again, your whole premise rests heavily on the idea that the government buying its own debt is inherently harmful somehow.

You can keep saying it over and over again, but that doesn't make it true. Other than government entities, such as the Social Security Trust Fund, using tax surplus to buy US Treasuries, the government does NOT buy it's own debt. The 12 Federal Reserve banks are the entities that buy US Treasuries when the Federal Reserve system decides to buy government debt. The 12 Federal Reserve banks are private entities, owned by stock holders. Unless you can present an argument not based on the false premise that government buys it's own debt, then you are just

The Fed does not operate to make a profit. The "dividends" are statutorily mandated, and anything extra goes to the government. It's chair and most of the board are govt. appointees. You and I can't own stock in the Fed, and it's stock can't even be traded. We also can't open up accounts there. And finally, the Fed's web address is www.federalreserve.GOV, which, to my knowledge, is reserved for government entities. So when the Fed buys U.S. bonds, directly or indirectly, that is the government buying its own debt. To rely on the argument that the Fed is only a quasi-government entity, or even a private entity, is to completely avoid the whole argument and all of the reasoning behind it. My argument doesn't even rely on the Fed being part of the government. If it looks, walks, and quacks like a duck, I really don't care if you insist on calling it a chicken, because it has all the important properties of a duck.

I say that it's just an accounting operation. When people/banks buy or sell bonds, it's not a forced thing. If they want to hold dollars, they are free to do so. And when the government buys its own bonds, it doesn't change anybody's financial position in any way.

When, for example, the Social Security Trust Fund buys goverment bonds, this is true. The balance sheet of the fund doesn't increase or decrease after the transaction. However, when the 12 Federal Reserve banks buy government bonds, their balanace sheets increase. So your claim that it doesn't change anybody's financial position in any way is flat out wrong.

The private sector's overall balance sheet doesn't increase. Private banks don't become richer, nor do private citizens.

When you buy a bond, your balance doesn't change. You had $1000 in cash, now you have $1000 worth of bonds. The only entity that can create money from thin air is the government, who can print up cash or bonds.

Why would the Fed "pull back," and what would they be pulling back from? Do you want them to stop participating in bond auctions? It sounds to me like you want to apply the old gold standard rules to today's fiat currency regime, and try to effect policy by controlling the number of dollars out there.

It has nothing to do with what I want. This isn't about me. This is about the fed being designed to limit the government from monetizing the debt via wreckless borrow/spend.

Ben Bernanke said as much in his final press conference as Federal Reserve chairman: http://www.theguardian.com/commentisfree/2013/dec/19/ben-bernanke-legacy-calling-out-congress

You obviously have a preference, because you think we are on the road to ruin.

That's an interesting take on what Bernanke said, because it sure sounded to me like he wanted Congress to take more fiscal action to address unemployment. Which means more of that reckless spending. I think after so many attempts at QE failed to move the needle, Bernanke was starting to understand the limits of monetary policy.

 

[Politician Spock]

The Fed does not operate to make a profit.

But private banks do. If you and I decide to form a bank, we buy stock in one of the local Federal Reserve banks. If that stock cost us $1,000,000 then our bank will receive $60,000 in Federal Reserve bank stock ownership dividends each year. If our bank is profitable overall, that $60,000 is part of our profit. The Federal Reserve bank we own stock in however is non-profit, as will be addressed in my next response.

The "dividends" are statutorily mandated, and anything extra goes to the government.

Exactly! The stock holders get a guaranteed 6% return on their investment in buying stock of a Federal Reserve bank. After the 12 banks have paid all their employees, utilities and other operating expenses, and paid out the guaranteed dividends, all remaining interest (or other income) they've earned on the government bonds they own (or other assets they own) is returned to the US Treasury. Thus income minus expenses at each of the 12 banks results in $0 each year. Thus each bank of the 12 banks are "non-profit". However the stockholders profit from their ownership of it.

It's chair and most of the board are govt. appointees.

Correct. 7 of the 12 board members are government. 5 of the 12 board memebers are NOT government.

You and I can't own stock in the Fed, and it's stock can't even be traded.

That doesn't make it government. There are lots of corporations that are not publically traded, nor willingly to privately sell you some of their stock. That doesn't make those corporations "government".

We also can't open up accounts there.

Again, that doesn't make it "government".

And finally, the Fed's web address is www.federalreserve.GOV, which, to my knowledge, is reserved for government entities.

The entire Federal Reserve system is a mix of government and private entities, so it makes sense to have a .gov website. That doesn't mean the 12 banks are government entities.

So when the Fed buys U.S. bonds, directly or indirectly, that is the government buying its own debt.

The bonds are owned by the 12 private banks, who's privately owned stock pays what the bonds earn in interest to its private stockholders. Only what is left over, goes to government. If the government was buying it's own debt, no private entity would get a dime from the government owned debt, much like all interest earned on bonds in the Social Security Trust Fund goes to the Social Security Trust Fund. There are not private owners of the Social Security Trust Fund earning guaranteed dividends on the fund, and leaving the rest of the interest earned for the fund to keep.

To rely on the argument that the Fed is only a quasi-government entity, or even a private entity, is to completely avoid the whole argument and all of the reasoning behind it.

To ignore the truth leads you to logical fallacies.

My argument doesn't even rely on the Fed being part of the government.

In order to make the argument that the government buys it's own debt, it absolutely does rely on that.

If it looks, walks, and quacks like a duck, I really don't care if you insist on calling it a chicken, because it has all the important properties of a duck.

Well you keep calling it a duck, and I keep showing you it has all the important properties of being a chicken.

 

[Politician Spock]

The private sector's overall balance sheet doesn't increase. Private banks don't become richer, nor do private citizens.

Private banks are private entities. Private banks are the stock holders of the 12 Federal Reserve banks. In the scenario I gave you earlier, our balance sheet increases $60,000 per year. As owners of our bank, you and I become richer.

When you buy a bond, your balance doesn't change. You had $1000 in cash, now you have $1000 worth of bonds. The only entity that can create money from thin air is the government, who can print up cash or bonds.

The Federal Reserve is the only entity that can create money from thin air. They are called Federal Reserve Notes and they are issued by the Federal Reserve banks. Under Lincoln, the US Treasury issued $450 million in US Treasury Notes issued by the US Treasury and used them to pay the northern army. They were traded as dollars just like Federal Reserve Notes are traded today. The Banking Acts of 1863 and 1864 ended that practice, and made only chartered private banks the source of notes exchangable as legal tender (the US Treasury still had the right to coin money as that is a right it is given in the US Constitution). It would take a new act of congress to give the US Treasury the right to issue notes as legal tender again. In 1913, the Federal Reserve act made the 12 Federal Reserve banks the only banks chartered with the ability to make money from thin air.

You obviously have a preference, because you think we are on the road to ruin.

The ruin is not a result of the Federal Reserve system. It is a result of the world using our currency for international trade for the past 70 years. As long as they keep using it, we can keep doing what we are doing. If/when they move away from using the dollar, it will ruin us, as we spend decades unraveling what being the worlds reserve currency allowed us to do.

That's an interesting take on what Bernanke said, because it sure sounded to me like he wanted Congress to take more fiscal action to address unemployment. Which means more of that reckless spending. I think after so many attempts at QE failed to move the needle, Bernanke was starting to understand the limits of monetary policy.

Bernanke's point is that government needs to deploy money in the right ways, not wrecklessly. The ways congress spends today does too little to help the economy. They are wreckless ways. Increasing wreckless spending doesn't help. There are ways the government could deploy money that helps the economy, but there are too few of these ways being used.

 

[sublimeone]

If you add all the tax revenue (federal, state, local, property, SS, sales etc..), fees, licensing, tolls, fines, etc and all the revenue generated through debt issuance (federal, state & local) and then add all the $$$'s printed that increases the money supply.... what is that number as a % of our GDP?