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View Diary: How to Knock Two-Trillion Dollars Off the National Debt, Ending the Debt-Limit Crisis (40 comments)

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  •  Cute. Post again when you have a real solution. nt (3+ / 0-)
    Recommended by:
    JeffW, LHB, erush1345

    "We are stardust, we are golden, we are caught in the devil's bargain, and we got to get ourselves back to the garden." - Joni Mitchell

    by shaggies2009 on Mon Jun 27, 2011 at 07:49:48 PM PDT

    •  So detail the flaw, if you have one. (0+ / 0-)
      •  Ok (2+ / 0-)
        Recommended by:
        VClib, erush1345

        Fed already monetized this debt when they purchased the treasuries under QE 1 & 2. Under this scheme, they would be monetizing the whole two trillion again. Even if they promised to lock up this coin with their favorite cufflinks, they would still have carry the value of it on their balance sheet.

        It would immediately debase the currency because it would show up as M1, cash. Markets would not hesitate to sell their treasuries sending interest rates skyrocketing. It may not be a "default" in the purest sense but the effect would be the same.

        "We are stardust, we are golden, we are caught in the devil's bargain, and we got to get ourselves back to the garden." - Joni Mitchell

        by shaggies2009 on Mon Jun 27, 2011 at 08:42:30 PM PDT

        [ Parent ]

        •  According to the St. Louis Fed ... (0+ / 0-)
          Ml includes funds that are readily accessible for spending. M1 consists of: (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler's checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts. Seasonally adjusted M1 is calculated by summing currency, traveler's checks, demand deposits, and OCDs, each seasonally adjusted separately.

          This  deposit would immediately be swapped for the Fed's Treasury bonds. at which point it would fall into none of these four categories.

          The value of this coin would wind up on the Fed's books, replacing $2T of the Treasury bonds they are now sitting on.

          •  This must be one magic coin (0+ / 0-)

            because it cannot be both currency issued by the treasury and at the same time not currency. M1 includes M0 which is hard currency.

            Your basic problem is that you assume the Fed can do one sided accounting entries. It does not operate that way. In order for the Fed to create money, there has to be demand for money, and something to offer the Fed in exchange for the money. In most cases this exchange is simply the promise to pay it back with interest.

            The Fed also is mandated to manage inflation. The thing about QE is that even though they are creating more money, they have the treasury bills in exchange for it. This works to assure they can pull money out of circulation by selling these bills to the open market. The risk for the Fed is that interest rates increase and thus the power of their t-bills goes down.

            What you are proposing is that they give up their t-bills in exchange for a magic money coin that is not money. This means they can no longer redeem through exchange the two trillion they issued. If the coin is money, that's even worse -- they only have more money with which to control the money supply!

            Feel free to reply, but I won't be coming back to this thread. I've seen you had a similar exchange with LHB in a similar diary. LHB's points were very similar to mine. You don't seem to get it, and I doubt I will be able to change that.

            "We are stardust, we are golden, we are caught in the devil's bargain, and we got to get ourselves back to the garden." - Joni Mitchell

            by shaggies2009 on Tue Jun 28, 2011 at 01:32:42 AM PDT

            [ Parent ]

            •  Please re-read the definition of M1. (0+ / 0-)

              Note that M1 specifically excludes currency inside "the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions."  Per the St. Louis Fed:

              Ml includes funds that are readily accessible for spending. M1 consists of: (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler's checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts. Seasonally adjusted M1 is calculated by summing currency, traveler's checks, demand deposits, and OCDs, each seasonally adjusted separately.

              With respect to your parting comment:

              Feel free to reply, but I won't be coming back to this thread. I've seen you had a similar exchange with LHB in a similar diary. LHB's points were very similar to mine. You don't seem to get it, and I doubt I will be able to change that.

              LHB insisted that the debt gets repudiated but couldn't identify who fails to get paid.  Similarly, you have claimed that this coin would increase M1 but have not identified which of the four categories of M1 it falls under.
    •  asdf (1+ / 0-)
      Recommended by:
      shaggies2009

      This is at least the second or third time I've read virtually this exact diary on the subject.  What the diarist seems to not comprehend is while it might by legal to do this (and there would most likely be legal objections to it), doing this will do absolutely nothing besides destroy our economy and perhaps our nation as a whole.

      In other words, I'd rather NOT read this again...

      "It has been said that politics is the second oldest profession. I have learned that it bears a striking resemblance to the first." - Ronald Reagan

      by erush1345 on Mon Jun 27, 2011 at 10:05:34 PM PDT

      [ Parent ]

      •  Perhaps you could explain how and why. (0+ / 0-)
        ... doing this will do absolutely nothing besides destroy our economy and perhaps our nation as a whole.

        The Fed has already monetized $2T of the nation's debt, and the consensus of economists is that it has help a bit, and certainly not destroyed the country.  Fixing the books to accurately reflect that fact is unlikely to have any impact other than to end the debt-crisis kabuki in Washington.
        •  asdf (2+ / 0-)
          Recommended by:
          bwintx, shaggies2009

          Shaggies2009 above did a pretty good job of explaining it above.

          Basically the reason is that writing off our debts with accounting tricks will cause investors in the American currency (thus the financers of our debt) to no longer offer to lend to us.  You would wind up in a never ending cycle of 'printing' more money, thus driving up inflation.  Eventually, we're Wymar.

          I can't say that I was completely for QE1/2, but at least both of those created money that was able to be removed from circulation, thus it did not spook the financers of our debt nearly as much as your plan would.

          "It has been said that politics is the second oldest profession. I have learned that it bears a striking resemblance to the first." - Ronald Reagan

          by erush1345 on Tue Jun 28, 2011 at 04:44:00 AM PDT

          [ Parent ]

          •  This is a one-time transaction between agencies .. (0+ / 0-)

            ... a branch of the government, the Treasury, and a quasi-governmental agency, the Fed.  I'm explicitly not proposing "a never ending  cycle."

            Secondly, QE1 and QE2 exchanged credit in accounts at the Fed, the most liquid asset there is, for Treasury bonds.  That credit has not been revoked and cannot be revoked.

            By contrast, this coin would sit in a vault at the Fed or wherever.  It would not get circulated because the Fed has no motive to put it into circulation.  Their mission after all is to keep inflation down.   And, when they want to increase the amount of money in circulation, they have easier ways of doing so, e.g., QE1 and QE2.

          •  What makes you think that (1+ / 0-)
            Recommended by:
            wigwam

            deficit spending without debt issuance is any more inflationary than deficit spending with issuance. In fact, it's less inflationary because bond have more leverage in the market than bank reserves. See here on this point.

            In addition, if the bond market doesn't want any more bonds because they lack confidence, then the Treasury can use more coin seigniorage to back Congressional appropriations. That will be deflationary because less interest income will need to be paid to bond holders. In fact, if we ceased issuing debt altogether the debt would eventually be paid down to zero and all interest costs would be saved. Why would that be inflationary? What is the mechanism of inflation, provided the deficit spending involved doesn't drive the economy beyond full productive utilization?

            It's not enough to say that this or that will cause inflation and then mention Weimar and Zimbabwe. You also have to show why the US's situation is like the situation of those nations. See this one for an analysis of why our situation is not like theirs. See also this one on the "printing money" thing.

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