So here's a bit of mad economics for you

[solarbird]

Okay, so, I haven't been posting econ lately, and I'm not going to post any links right now. There are things you should read, but I'll get to those later.

No, instead, I've been sitting here trying to figure out how the hell the US gets out of its debt spiral. I've been churning on that for months. And then today, I had this bit of mad economics¹ bullshittery pop out:

What do you think happens if the Fed "buys" the next few years of T-bills issuances (printing to do it), as it looks like it's going to do and has already been doing... and then gets shut down by Congress and assets nationalised? With existing Federal Reserve Notes and such recognised by a simultaneously-created NewFed, of course. This is legal. The Fed is a private bank, or, more correctly, a set of private banks. Any private bank can be shut down for a whole variety of reasons.

What happens? The Treasury suddenly owns an assload of its own T-bills (previously issued T-bills, not new ones) which it then sells back to itself in a zero-sum transaction². This results in a huge cut in outstanding theoretical government debt, without external defaults. The dollar is already devalued by the inflationary printing process you used to get total outstanding credit back up³.

Nobody "loses" except the Fed, in theory. There are no T-bill "defaults." There's no new currency. The actual monetisation will have already happened, so it's not inflationary; suddenly the US debt level drops back down by, who knows, several trillion - back to considerably more than now, but still dramatically lower than then, and possibly denominated in a much lower-value dollar (from the prior printing). How much debt gets magically erased depends upon how much debt can be racked up by the Fed - will it start buying already-extant T-bills, maybe to "support the market" as people flee USD debt? - before people catch on.

I KNOW IT'S MAGIC AMIRITE

There are a billion ways this can and probably will go wrong⁴, but it also kinda/sorts fits a lot of patterns I've been seeing. So shoot it down. Tell me this isn't the plan and why. Because it's one hell of a gamble, and if it fails, well, it'll take down ... a lot ... with it.

Tell me why I'm wrong. Please.

---

¹: It's like mad science, but with less electricity and more boring.

²: ...or which it could resell for cash(!) on the private market(!) to raise money(!) but this is one of those ways This Shit Goes Srsly Wrong OMG and then everything assplodes.

³: Which leads to the only link I'll include here, please follow it: See total fungible credit. See total fungible credit fall for the first time since records started in 1952. This is not good.

⁴: See footnote².

Comments

[maellenkleth]

well, yeah ^_^ it actually would work, but **only** if done swiftly and without prior dithering.

edited for clarity and english

[bradhicks.livejournal.com]

The entire Social Security trust fund is invested in T-bills. If the government tried buying out the SocSec trust fund ... well, with what? Printed cash? The dollar crashes. Some new financial instrument? Nobody's going to fall for it; the dollar crashes. And if they zero it out without finding some way to pre-fund the Social Security trust fund, you just zeroed out, erased, both Social Security and Medicare. Hundreds of wealthy Republicans cheer; hundreds of Republican voters cheer until they find out that now that they've fulfilled their purpose, their owners have no intention of ever letting them so much as sleep indoors, let alone see a doctor, ever again.

Right now, the reason that the government CAN borrow money at nearly zero interest rates is that in over 200 years, we've never defaulted on a government debt and never inflated our way out of a debt. That advantage is worth a lot more to us than any tax savings would be.

No, if our ability to borrow disappears, there is only one way to balance the budget and pay down the debt we have: zero out everything on the left side of the chart at www.deathandtaxes.com, and then raise taxes on the upper middle class and the wealthy on top of that. Other than deliberately crashing our own currency and going completely without any imports of minerals, energy, or food (the US is now a net importer of food, gods help us), nothing else would produce the order of magnitude of savings it would take.

[solarbird]

No, you don't understand - the printing already happened with the initial sale to the Fed, when it bought these things without any backing whatsoever. There's no new printing if they do this.

[pentane.livejournal.com]

I'm with Brad (above). We could probably do this, but it would be such complete shenanigans that no one would touch US debt... ever.

So, if we could live within a budget, which neither party had been remotely willing to do this century, we could magically erase the debt and live within our means (I've done it, you can't get credit afterwards, but since I don't need credit, I don't care).

[solarbird]

We could probably do this, but it would be such complete shenanigans that no one would touch US debt... ever.
Why?

It's not erasing all debt. It's not defaulting on any T-bills - not even the ones owned by the Fed and bought with printed money, they're reconciled to zero. All the other T-bills remain outstanding.

[pentane.livejournal.com]

In my opinion (and I'm not a banker), it would show a willingness to mess around with the spirit of the T-bills (debt) enough that people would start to wonder if maybe defaults wouldn't be next, and maybe taking on that US debt isn't such a good idea after all.

In the same way, my accounts were all considered to be legally settled, but it was done in such a way I can't get more credit, because of the perception of risk.

[llachglin.livejournal.com]

The way to deal with debt is the way we always dealt with it in the past: renewed economic growth and the normal effects of inflation over time, allowing us to pay down enough debt to get the debt ratio at a manageable level.

That's not easy to do, but it's possible, and has been done before. No mad economics needed.

The big economic mystery right now is where the sustained growth can come from when consumers have lost trillions in paper assets and are overburdened by debt, housing and commercial real estate are in massive oversupply, banks aren't lending much money, and businesses have excess inventory. Even making stuff for export isn't a great proposition because China is willing to keep its own currency artificially low to prevent that.

I still think the answer is massive jobs-creating infrastructure spending, sparked by additional short-term government debt. Instead excessive fear of inflation and mistimed fear of debt means that we're likely to slow down spending when we should be doing the opposite, killing the technical recovery before it really has a chance to get going and making unemployment worse.

[solarbird]

The way to deal with debt is the way we always dealt with it in the past: renewed economic growth and the normal effects of inflation over time, allowing us to pay down enough debt to get the debt ratio at a manageable level.
Have you got a decade of 8% annual growth above current projections to pay for just the new debt projected over that period? It's never happened in the history of the US, but that's how the numbers work out. That's what you need to tread water in total debt. (That does reduce in terms of percentage of GDP, however.)

[llachglin.livejournal.com]

You don't need to erase the debt. You just need to make it smaller relative to GDP, as you mention.

8% annual growth in real GDP (on average) occurred from 1934-1944 (using BEA.gov numbers). (Thanks, FDR!) There were two years with less than 8% growth, more than matched by several double-digit years. The low years occurred when the government shifted to lowering the short-term deficit before a recovery in employment had occurred. We're unlikely to duplicate that this time, particularly since it's those same policies that have the most political traction right now. But a strong bounce back that eliminates the structural deficit problem in a similar way over time is possible if we weren't so obsessed with short-term deficits amid the worst unemployment crisis in decades.

[solarbird]

Let me clarify: in the private economy. Sure, government deficit spending creates numerical GDP, and that's fine when you aren't in crushing debt. But we are, here. So FDR-like deficit spending could add to GDP but would also add to debt at or near the same rate. (That's using recent borrowing to GDP numbers, and that ratio changes mostly by getting worse ad you add debt. In FDR's day, the US was not entangled in the debt explosion in the way it is now, so his return on new borrowing was very good. It's not very good at all right now, and seems to be trending worse.) So that approach is actively self-defeating; you need that growth in the private, taxable economy. Good luck with that.

[ankh-f-n-khonsu.livejournal.com]

I think this would just side-step the dilemma, and would resolve none of the fundamental flaws in capitalism.

It won't work, because the foreign debt- holders aren't idiots...

[saladofdoom.livejournal.com]

Printing more money for reasons other than an expanding economy is inflationary. Foreign investors in T-bills have been absorbing the shock of it so far, possibly to maintain the exchange rate.
So long as the Chinese are sure they can get their money back, the overvalued dollar will fuel their own growth. They don't have a local consumer base to match the US. Once they realize that it will cost more to prop up the dollar than they are getting from it, they'll pull their support (and may have started that already..) and find another market. The EU and/or Russia looks good, but Africa has a huge potential for a tiny fraction of the investment they have here, and it won't be hard to compete with the world bank considering the problems that those loans created.
I'm not sure how they were convinced to take up the development path they did, but it probably has to do with corruption (U.S. firms offering overt and covert bribes, then roping the officials into helping them stay afloat...) It really does seem odd that China should be so interested in treasury bonds while U.S. corporations invest in infrastructure there. It may also have had something to do with U.S. recognition and diplomatic relations...
Technically, a drop in price of T-bills doesn't harm the treasury, but it forces interest rates up unless more money is printed. There's a limit to the amount of time that the treasury can print money to hold interest rates low to control inflation, and we passed that long ago...

Re: It won't work, because the foreign debt- holders aren't idiots...

[solarbird]

Printing money is definitionally inflationary (monetary inflation) when done for any reason. Price inflation is a different phenomenon.

So long as the Chinese are sure they can get their money back
They aren't that stupid. Everybody there realises the dollar will devalue. The only question is now much against which currencies.

There's a limit to the amount of time that the treasury can print money to hold interest rates low to control inflation
Except total fungible credit has continued to decline even with this vast expansion. (See that link I asked everyone to follow.) The overall picture is still deflationary, right now.

[peristaltor.livejournal.com]

Unless I've completely mis-read both your proposal (and ellenbrown's, for that matter), this looks a lot like what she's been saying for quite some time.

She blogs over at Web of Debt (http://www.webofdebt.com/).

[solarbird]

Oh, I'm not proposing this. I'm just wondering whether this is the plan.