Why are we ignoring simple, painless debt solution?

[American Horse]

I believe we can all agree, from right to left, that this debt is in fact phony debt. Even the progressive/leftist ‘The New Republic’ (Ron Paul) agrees that this is a painless solution that would reduce the debt by $1 trillion and would give Congress needed time to address this issue.

Agreed.

In fact, much of this ‘crisis’ is political contrivance.

IMO it's more an attempt at enforcing some fiscal discipline on the biggest spenders the world has ever seen before we begin to be taken no more seriously than Greece.

 

[Toddsterpatriot]

The media has reminded the American people several times throughout this debt limit debate that the national debt currently stands at $14 trillion, of which conservatively $1 trillion is held by the Federal Reserve. The Federal Reserve obtained that debt through its complicated quantitative easing programs (Quantitative easing - Wikipedia, the free encyclopedia) –more specifically QE2-- but it is debt that the government essentially owes itself.

Why?

“The Treasury pays the interest on the debt on behalf of the U.S. government to the Fed, which in turn returns 90 percent of the payments it gets back to the Treasury. Nonetheless, that $1.7 trillion in U.S. bonds that the Fed owns, despite the shell game of payments, is still counted in the debt ceiling number, which caps that amount of total federal debt at $14.3 trillion.” (Debt Ceiling: Could Ron Paul's Plan Save Us From Disaster, twice? - The Curious Capitalist - TIME.com)

Neither Republican, Democrat nor the media, despite all telling Americans that Armageddon will occur if something isn’t done, have brought up the fact that Congress could simply tell the Federal Reserve to dissolve the Treasury Bills it currently holds, effectively reducing the national debt by $1 trillion.

Unlike all other proposals this one doesn’t endanger anyone’s retirement or pension because it is money that was literally fabricated from thin air.

I believe we can all agree, from right to left, that this debt is in fact phony debt. Even the progressive/leftist ‘The New Republic’ (Ron Paul) agrees that this is a painless solution that would reduce the debt by $1 trillion and would give Congress needed time to address this issue.

Of course this isn’t my idea—I wish I were so clever—it is the proposal that Congressman Ron Paul has been pushing since the beginning of this whole debt ceiling debate.

"The result is that the Fed now holds nearly $1.7 trillion in U.S. debt. But that is really phony debt. "

No, it's real debt. The government really borrowed and spent the money.
Later, the Fed bought the bonds. Doesn't change the fact that the government really
borrowed and spent the $1.7 trillion.


"The Treasury pays the interest on the debt on behalf of the U.S. government to the Fed, which in turn returns 90% of the payments it gets back to the Treasury. Nonetheless, that $1.7 trillion in U.S. bonds that the Fed owns, despite the shell game of payments, is still counted in the debt ceiling number, which caps that amount of total Federal debt at $14.3 trillion"

Yes, it's counted in the debt ceiling because it's debt.

"Paul's plan: Get the Fed and the Treasury to rip up that debt. It's fake debt anyway"

Maybe Paul should be honest and call for $1.7 trillion in spending cuts, immediately.

 

[8537]

And who are the stake holders of the federal reserve?

All of the member banks. as shareholders, they get a portion of interest earned.

No they don't.

This is the most simple of basic facts about how our banking system works.

The Fed collects interest on its holdings. The shareholders receive a portion of that interest. The shareholders are the member banks.

 

[Toddsterpatriot]

All of the member banks. as shareholders, they get a portion of interest earned.

No they don't.

This is the most simple of basic facts about how our banking system works.

The Fed collects interest on its holdings. The shareholders receive a portion of that interest. The shareholders are the member banks.

So if the Fed collects $20 billion, the shareholders get twice as much as if the Fed collects $10 billion?

 

[8537]

No they don't.

This is the most simple of basic facts about how our banking system works.

The Fed collects interest on its holdings. The shareholders receive a portion of that interest. The shareholders are the member banks.

So if the Fed collects $20 billion, the shareholders get twice as much as if the Fed collects $10 billion?

That would depend on where the Fed is collecting it from and how much the Fed is paying on deposits.

 

[Toro]

Where were you telling everyone the economic dangers of the QE2 program, which had a much more detrimental effect than this would have.

Um With all due Respect. I was screaming at the top of my lungs. DON'T DO IT. I have been chastising everyone involved for creating money out of thin air ever since they first suggested it.

To Me this shit brings back learning about Pre WWII Germany and the collapse of the wymark republic, and I have been saying so for ever, so please don't ask me where I was on it. I was there.

Okay, that was a poor question on my part.

What I'm failing to understand is how this action would cause the economic effects you say it will. How will it devalue the dollar?

I agree with Charles. It is a bad idea.

First, it is deflationary and contractionary. It would be similar to raising interest rates. Raising interest rates during a weak economy is a bad idea.

Second, it would undermine the value of the dollar. In theory, raising interest rates would be good for the dollar. However, in this case, the market would perceive the stability of the Fed as much less sound than it does today. The value of a currency is dependent upon what backs it. If a central bank has the wherewithal to vapourize nearly $2 trillion of its own balance sheet, that can do nothing but shake investors' confidence. Investors will think "If we can wipe out our own assets, why can't we wipe out China's?"

Finally, its gimmickry. What happens next year? Wiping out the debt just puts this off for another year since the deficit is about the size of the Fed's Treasuries holdings. We'll be right back at the debt ceiling again.

 

[Toddsterpatriot]

This is the most simple of basic facts about how our banking system works.

The Fed collects interest on its holdings. The shareholders receive a portion of that interest. The shareholders are the member banks.

So if the Fed collects $20 billion, the shareholders get twice as much as if the Fed collects $10 billion?

That would depend on where the Fed is collecting it from and how much the Fed is paying on deposits.

Why does the source of Fed income impact shareholder dividends?
What does the rate the "Fed pays on deposits" have to do with what the dividends?

 

[Toro]

Gold is not at record highs because the dollar has lost value - gold is at record highs because it is a substitute for other investments, and those investments scare the shit out of people right now.

Gold prices rising is a flight to safety. The price will fall when the economy stabilizes, whenever that may be.

You're a smart guy but I fundamentally disagree. Gold is a safe haven but it is also a vote against fiat currencies. I strongly believe gold is rising primarily as a vote against fiat currencies. The dollar is being devalued by the Fed and the government. And because the dollar is the anchor of the global monetary system, it drags all other fiat currencies down with it. You just have to look at how silver reacted when it came out of Jackson Hole last August that QE2 was under consideration. It went up 150% in nine months. Nothing changed for silver fundamentally during that time. Note also what happened when the Fed minutes were released a few weeks ago and it became apparent that FOMC members were discussing QE3. Within a minute, gold was up something like $25 and silver $1. If the Fed were to announce tomorrow that they were going to liquidate their Treasuries from QE and normalize interest rates, gold would be down by as much as $500 within a week IMHO.

 

[Toro]

So if the Fed collects $20 billion, the shareholders get twice as much as if the Fed collects $10 billion?

That would depend on where the Fed is collecting it from and how much the Fed is paying on deposits.

Why does the source of Fed income impact shareholder dividends?
What does the rate the "Fed pays on deposits" have to do with what the dividends?

The Federal Reserve banks pay interest of 6% on the share capital of all its member banks within the system. The Fed earns something like $40-$50 billion a year, all of which ~$1 billion is kicked back to the Treasury. The ~$1 trillion is paid to the member banks in the form of a dividend.

 

[Toddsterpatriot]

That would depend on where the Fed is collecting it from and how much the Fed is paying on deposits.

Why does the source of Fed income impact shareholder dividends?
What does the rate the "Fed pays on deposits" have to do with what the dividends?

The Federal Reserve banks pay interest of 6% on the share capital of all its member banks within the system. The Fed earns something like $40-$50 billion a year, all of which ~$1 billion is kicked back to the Treasury. The ~$1 trillion is paid to the member banks in the form of a dividend.

I'm pretty sure you meant $1 billion.

Last year they made over $80 billion and I believe the dividend was $1.6 billion.

 

[Toro]

Why does the source of Fed income impact shareholder dividends?
What does the rate the "Fed pays on deposits" have to do with what the dividends?

The Federal Reserve banks pay interest of 6% on the share capital of all its member banks within the system. The Fed earns something like $40-$50 billion a year, all of which ~$1 billion is kicked back to the Treasury. The ~$1 trillion is paid to the member banks in the form of a dividend.

I'm pretty sure you meant $1 billion.

Last year they made over $80 billion and I believe the dividend was $1.6 billion.

Yes, I did. Thanks.

A few years ago they made $40 billion. I'm stuck in the past.

 

[Contumacious]

Why are we ignoring simple, painless debt solution?
.

Default
No one will ever lend the fuckers any money
Learn to leave within their means ,ie, $200 BBBBillion per month.

.

 

[Big Fitz]

Why are we ignoring simple, painless debt solution?
.

Default
No one will ever lend the fuckers any money
Learn to leave within their means ,ie, $200 BBBBillion per month.

.

Default. Worked SOO well for the Wiemar Republic and Argentina.

 

[Contumacious]

Why are we ignoring simple, painless debt solution?
.

Default
No one will ever lend the fuckers any money
Learn to leave within their means ,ie, $200 BBBBillion per month.

.

Default. Worked SOO well for the Wiemar Republic and Argentina.

America Is the New Argentina!

"God grant me the serenity to accept the things I cannot change, courage to change the things I can, and wisdom to always tell the difference." ~ Kurt Vonnegut, Slaughterhouse-Five

Right now we can't change the direction our nation is heading, but with courage we can still take action now to defend our wealth while we work toward political change. The economic lesson to be learned from the Argentina experience is wealth and resources can be destroyed by big government and financial mismanagement. The United States is following a path similar to Argentina's. Our political and financial leaders are doing the same thing that those in Argentina did and somehow expecting the outcome to be different this time.

The results will not be any different. Protect your wealth, and help us warn and educate the public through your support of the foundations like the Mises Institute and the Foundation for the Advancement of Free-Market Thinking.

This is Part 1, of a speech given in November 2010 on a FreedomFest financial cruise in Argentina. Ron Holland doesn’t want our nation to go Down Argentine Way but urges readers to prepare for the worst, which will make Argentina seem like a holiday picnic in comparison.

Down Argentine Way by Ron Holland

.

 

[Google]

Um With all due Respect. I was screaming at the top of my lungs. DON'T DO IT. I have been chastising everyone involved for creating money out of thin air ever since they first suggested it.

To Me this shit brings back learning about Pre WWII Germany and the collapse of the wymark republic, and I have been saying so for ever, so please don't ask me where I was on it. I was there.

Okay, that was a poor question on my part.

What I'm failing to understand is how this action would cause the economic effects you say it will. How will it devalue the dollar?

I agree with Charles. It is a bad idea.

First, it is deflationary and contractionary. It would be similar to raising interest rates. Raising interest rates during a weak economy is a bad idea.

Second, it would undermine the value of the dollar. In theory, raising interest rates would be good for the dollar. However, in this case, the market would perceive the stability of the Fed as much less sound than it does today. The value of a currency is dependent upon what backs it. If a central bank has the wherewithal to vapourize nearly $2 trillion of its own balance sheet, that can do nothing but shake investors' confidence. Investors will think "If we can wipe out our own assets, why can't we wipe out China's?"

Finally, its gimmickry. What happens next year? Wiping out the debt just puts this off for another year since the deficit is about the size of the Fed's Treasuries holdings. We'll be right back at the debt ceiling again.

The effects of deflation that would derive from the dissolved of debt created by the QE2's purchasing of Treasury bills would be far outweighed by the immediate positive impact of reducing national debt by over $1 trillion dollars.

The effects of the inflation specifically created by the QE2 program had a much more profound effect, adding to the already growing inflation, and devaluing of the dollar.

But you are overlooking to fact that the law stipulates that the FED only keep enough revenue collected on maturing Treasury bills as to off set operating costs, returning the vast percentage of those interest payments to the Treasury. The Treasury receives 90% of the tax money used to pay those T-bills.

Dissolving that debt would not have the profound negative impact that you are suggesting. There is a fundamental difference between the Federal Reserve's QE2 T Bills and the T bills held by foreign countries and Americans alike, in that only the FED returns the profits directly back to the Treasury and only the FED has the ability to fabricate money at will.

The QE program itself resulted in much more devaluing that this action would take.

 

[Google]

So if the Fed collects $20 billion, the shareholders get twice as much as if the Fed collects $10 billion?

That would depend on where the Fed is collecting it from and how much the Fed is paying on deposits.

Why does the source of Fed income impact shareholder dividends?
What does the rate the "Fed pays on deposits" have to do with what the dividends?

It doesn't and this is the central premise of this solution. There is essentially no victims. People on this thread that are insisting that the stakeholders, all of which are member banks, will somehow miss out on profits is simply incorrect.

First, profits obtained for the QE2 purchasing of Treasury bill assets are only used to off set operating costs. That means 90% is returned to the FED, effectively the federal government gives the interest payments to the FED which in turn returns that same money minus 10% back to the Treasury.

Second, there is something fundamentally wrong with allowing banks to profit off of the American tax payer from money that is literally--without question-- simply printed. Money is printed and used to purchase Treasury bills and the American people, my children and grandchildren, must pay interest on those bills. The banks are profiting off of simply fabricating money.

The suggestion that the stakeholders would lose money is absurd once logically assessed.

 

[Google]

Unlike public debt held by foreign countries and Americans alike, the debt held by the FED is not tied to any specific obligations. The Federal Reserve has no obligations that it is required to use these assets for. No one has invested their retirement savings into these Treasury Bills, no foreign country is expecting payment.

Once everyone understands the fundamental concept that no direct loss of income would result in the destruction of these bonds, it becomes quite evident that there really isn't any reason Congress shouldn't/can't take this action. It would essentially be eliminating debt it owes itself.

If anyone believe taking this action is dangerous, they should consider the fact that the QE programs the Federal Reserve began were unprecedented and did little to reassure the markets. (APPARENTLY QE2 IS “DISAPPOINTING”… | PRAGMATIC CAPITALISM) By taking this action Congress is simply repealing a failed program initiated by the Federal Reserve, which is exactly why it isn't being discussed. The FED has made clear that any interference or regulation by the Congress will not be tolerated.

 

[Google]

I said who the shareholders are. Read my post again.

It would have a detrimental effect on the shareholders b/c they would not receive their portion of the interest payments, nor would they have access to the securities held by the Fed.

Would that be worth it? I don't know.

This misconception that taking this action, dissolving the QE2 debt from the books, would have some adverse reaction to the Federal Reserve or its shareholders is completely false.

How can removing interest payment to an entity not adversely impact that entity?

It was addressed in the OP that the FED may only keep revenues generated from interest paid by QE2 Treasury bills as needed for administrative costs, returning the vast majority back to the Treasury. The stakeholders are not receiving profits from the QE2 program.

 

[8537]

So if the Fed collects $20 billion, the shareholders get twice as much as if the Fed collects $10 billion?

That would depend on where the Fed is collecting it from and how much the Fed is paying on deposits.

Why does the source of Fed income impact shareholder dividends?

Because if it's their own deposits the bank is getting paid 1%.

What does the rate the "Fed pays on deposits" have to do with what the dividends?

The rate paid on the deposits determines in part how much the Fed has to pay in dividends.

 

[8537]

Gold is not at record highs because the dollar has lost value - gold is at record highs because it is a substitute for other investments, and those investments scare the shit out of people right now.

Gold prices rising is a flight to safety. The price will fall when the economy stabilizes, whenever that may be.

You're a smart guy but I fundamentally disagree. Gold is a safe haven but it is also a vote against fiat currencies.

I'm not sure we fundamentally disagree. Gold is a substitute for holding dollars - and along with every other investment that scares people at the moment, holding dollars also scares people. They are not holding gold because the dollar has fallen, they are holding gold because they fear the dollar and other substitutes will fall.