The immorality of debt

They are creating new "reserves". The fiat money already exists. There isn't "new currency". Their argument is that if it is a permanent holding that banks can use reserves to finance the government permanently. If it's temporary they can't. What is the Fed going to do with $1.8 trillion US Gov't securities? Absolutely nothing. It just sits on its balance sheet.

 

LOL, tell that to the taxpayers. What about all those years when wage earners paid into Social Security and the Disability Fund and Medicare? If the revenue coming in exceeded the payouts, then the gov't spent the surplus and gave those trust funds an IOU. I'm thinking the private sector has had something to do with the financing of gov't.

 

Sorry, I should have clarified that I meant financing it's deficit spending.

 

Wait a minute, the ST Louis fed says that eventually the Fed balance sheet will return to the pre crisis level of gov't debt. So it ain't going to sit there forever, it's gotta be retired. Are you suggesting the Fed merely dissolves it, as though it never existed? So the Fed buys gov't debt, issues credit to pay for it, and then destroys it, and you're telling me that's not monetizing the debt?

 

Yes, that's exactly what I'm saying. Their balance sheet along with the monetary base will decrease. Nonbank public money will have no change to it at all. It's simply high level spreadsheet operations to affect interest rates.

 

Here's Ben Bernanke on 60 Minutes trying to explain to the country that people like you are misinformed at what the Fed is doing...

"Well, this fear of inflation, I think is way overstated. We've looked at it very, very carefully. We've analyzed it every which way. One myth that's out there is that what we're doing is printing money. We're not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way. What we're doing is lowing interest rates by buying Treasury securities. And by lowering interest rates, we hope to stimulate the economy to grow faster. So, the trick is to find the appropriate moment when to begin to unwind this policy. And that's what we're gonna do."

- Ben Bernanke

 

That's hard to believe. So the Fed buys US Gov't debt and pays for it by issuing credit. Which right there IS monetizing the debt, you don't have to have more paper money. That debt is I believe transferable and interest must be paid on it until the debt is redeemed. LOL, and now you're telling me the Fed just wipes away the debt securities as though they never existed, with no more obligation by the US Treasury to service the debt or pay it back. Well hell, why doesn't the Fed just buy up ALL of the outstanding debt and then destroy it? Why don't they just buy up whatever debt is needed to cover the annual deficits we have rung up every year, no sweat. It don't add up, when the US Treasury sells debt securities to ANYBODY, they have to pay interest on it and either pay it off or roll it over. Even if it's to the Fed.

 

It's not monetizing debt in the traditional sense as there isn't new money in the money supply. There is new reserves in the banking system. It's pretty complex stuff.

Yes, when the Fed's sell the treasuries back to the open market (aka back to the Primary Dealers), those reserves are destroyed and the Fed's balance sheet is reduced. During this process, the nonbank publics money supply is not affected.

 

The US Treasury does not sell debt securities to the Fed. They are forbidden to. The Fed purchases the debt on the secondary market. In the past 5-6 years they have been giving back about 93-96% of the profit they make from the interest of these securities back to the Treasury. They do not do these operations to make money. It's specifically to target interest rates.

 

He says the money supply is not changing in any significant way. But it IS changing, when the Fed buys those treasuries in whatever form, they are in effect giving the gov't more money to spend. And that is monetizing the debt. I noticed that in your quote he doesn't specifically say the Fed isn't monetizing the debt, does he. Seems to me that $1.8 trillion dollars is somewhat significant.

 

how about no more war spending until we get the debt paid...

 

He's speaking about the broad money supply. Money used to purchase goods and services in the economy. What is changing is the monetary base. And like I have said numerous times that money already exists in the broad money supply. There isn't any new money in the money supply when the Fed does these operations. That is what he is saying to the American public because it is true. That $1.8 trillion is not significant at all in terms of how much money is in the economy. It is nothing more than a number that sits on the Feds balance sheet.

 

Okay, so there's a middle man in there somewhere. That does not change the fact that the Fed is monetizing the debt when they buy up Treasury debt securities.

 

I think it changes it a lot as the money has already been created. All they are doing is exchanging reserves for this debt in the banking system. That money already exists in the nonbank public regardless of the Fed's actions. If you understand how banks work and their balance sheets you could see what I mean. But if you don't want to understand it you will continue believing in these myths about our system. All the Fed is doing with their policies is targeting interest rates. They are not "monetizing" anything. The money already exists. Like I said earlier, you can potentially make the case for monetization if you are a bank.

 

Okay, let's say a bank somewhere buys $1 million dollars worth of US treasuries. They paid money to the Treasury, right? But that money was and still is in the money supply isn't it, cuz the gov't turns around and spends it on something. No change to the money supply yet, that money just changed hands; but now the Fed comes along and buys the US treasuries from the bank. They put those treasuries away, out of circulation, but now the bank has it's million dollars in credit that it can now spend (loan maybe). Sooooo, don't we now have 2 million dollars out there in fiat money? The gov't is spending it's million and so is the bank, so how is the money supply not up by a million bucks? The Fed's actions took the debt and monetized it, no? Don't we have two million out there rather than one?

 

They paid by transferring reserves. They didn't pay with the money you and I buy things with. And yes, there is an increase in money by the purchase of Treasurys when banks by them as the broad money supply has increased because you are forgetting the transaction that creates the debt in the first place. Government crediting someones account. No different than when a bank makes a loan. Just in this case they are loaning money to the government. Which by virtue of sectoral balances increases the amount of money in the nonbank public. Giving us the money to purchase the debt on the secondary market. You can actually make the case that the Government funds us before we fund the government. It's only logical.

No, banks now have reserves instead of treasuries. They can do the same thing with reserves that they did before.Banks do not lend reserves, QE1/QE2/etc does not give banks any money to "lend". It simply reduces interest rates. There is no change to the available amount of money in our system.

 

If you believe something I said was wrong then please point out what is wrong? Give me some of your numbers?

 

It wasn't necessarily that your numbers were wrong, it was your conclusion... found in this statement here.

at a minimum the next three generations will be paying for our excesses today

The next three generations will pay nothing for our "excesses today" just like we don't pay any of the excesses from past generations.

 

If you work this stuff out on simple T-Accounts it starts making more sense. Tough to grasp at first, but there is a method to the madness.

First step you have to understand in a broad perspective there are 5 entities that make up our system.

1 - Treasury
2 - Federal Reserve
3 - Banks
4 - Foreign Central Banks
5 - Private sector (excluding banks)

So lets say the banks have a balance sheet like

Banks
Assets | Liabilities
Reserves $1000 | Deposits $2000
Loans $1000 |

Private Sector
Assets | Liabilities
Deposits $2000 | Loans $1000
--------------------| Equity $1000

So now the government decides to issue $500 in debt. The banks purchase the debt. Now watch the magic
Banks
Assets | Liabilities
Reserves $500 | Deposits $2000
Govt Debt $500 |
Loans $1000

Now the Government issues $500 to some welfare recipient that conservatives hate

Banks
Assets | Liabilities
Reserves $1000 | Deposits $2500
Govt Debt $500 |
Loans $1000

Say whaaaaaaaaaaaaat??? Now the private sector balance sheet.

Private Sector
Assets | Liabilities
Deposits $2500 | Loans $1000
--------------------| Equity $1500

Wait a second??? So Government debt increases private sector equity? Now the private sector can purchase government debt or pay taxes? Unreal how it works. I know this is the last thing any conservative wants to hear, but the private sector is dependent on the Government funding them not the other way around.

So now let's add in what the Fed is doing. Say they purchase the $500 in debt from the banks. This is why Ben Bernanke says the money supply is not changed in any significant way by their policies.

Banks
Assets | Liabilities
Reserves $1500 | Deposits $2500
Loans $1000

Wait, deposits did not change at all?? What a shocker. Maybe the Federal Reserve and akphidelt2007 knows what they are talking about. By the way this is a very elementary example. There are many rules and regulations of how banks need capital requirements and what not to be able to purchase debt from the govt. But it's at least an example that can get some juices flow in some intelligent minds.

 

And if you understand how banks work and comprehend what is being said here. The banks/federal reserve/treasury can fund the Government to infinity without ever running out of money. We do not need China to lend us our own made up money, we are not dependent on anyone for our money. The only thing that can prevent us from paying our bills or creating debt is Congress. And they are stupid enough to do so.

 

Today WE are paying $450 billion per year in debt interest payments and the debt issue is invasive in all discussions about budgets, etc. Tomorrow, in three generations, THEY will be paying perhaps $700 billion to $1 trillion per year in debt interest payments and the debt issue will continue to plague all budget discussions. WE and THEY are paying for other's excesses plus our own excesses...

 

You are paying whatever your tax rate is regardless of how much goes to interest or not. And your number is misleading as that includes interest paid on intragovernmental debt which the tax payers do not pay for. There is absolutely nothing about interest that is a problem, lol. It is no different than any other transfer payment we make.

 

You believe $450 billion per year is no problem while I believe it is. You have no problem pissing away $450 billion for absolutely nothing while I would prefer to spend the same money on something tangible which benefits all Americans. And the $450 billion number continues to grow yet you have no problem with it? Nothing is free! Lastly, your $450 billion annual payment is a priority budget item...paid before most all other government expenditures...

 

This just not true. The US Treasury has to pay interest on every debt instrument they issue, regardless of who buys it. Example: the Social Security Trust Fund has trillions of US Treasury debt in it's so-called lockbox. What a joke, but anyway the US Treasury must pay interest on that debt. Period.

If you look at the most recent summary report by the SSTF trustees, you will see that currently income is less than outgo. IOW, they're paying out more than they're taking in, and so that gap is currently being paid for by the interest the Fund has in US Treasury debt vehicles. They do not yet have to cash in those things because the interest they're getting from the US Treasury is enough to fill the gap.

" Social Security’s total expenditures have exceeded non-interest income of its combined trust funds since 2010, and the Trustees estimate that Social Security cost will exceed non-interest income throughout the 75-year projection period. The deficit of non-interest income relative to cost was about $49 billion in 2010, $45 billion in 2011, and $55 billion in 2012. The Trustees project that this cash-flow deficit will average about $75 billion between 2013 and 2018 before rising steeply as income growth slows to the sustainable trend rate after the economic recovery is complete and the number of beneficiaries continues to grow at a substantially faster rate than the number of covered workers. Redemption of trust fund asset reserves by the General Fund of the Treasury will provide the resources needed to offset Social Security’s annual aggregate cash-flow deficits. Since the cash-flow deficit will be less than interest earnings through 2020, reserves of the combined trust funds measured in current dollars will continue to grow, but not by enough to prevent the ratio of reserves to one year’s projected cost (the combined trust fund ratio) from declining. (This ratio peaked in 2008, declined through 2012, and is expected to decline steadily in future years.) After 2020, Treasury will redeem trust fund asset reserves to the extent that program cost exceeds tax revenue and interest earnings until depletion of total trust fund reserves in 2033, the same year projected in last year’s Trustees Report. Thereafter, tax income would be sufficient to pay about three-quarters of scheduled benefits through 2087. "

http://www.ssa.gov/OACT/TRSUM/index.html

 

First off you need to use the honest number. We do not pay $450 billion on interest. You are including intragovernmental debt. Once we establish the accurate number than we can talk about it's significance.

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Trust me, everything I say is true. We do not pay interest on intragovernmental debt. It is nothing but a spreadsheet operation that is an asset and liability to the US Government. It means pretty much nothing.