Question about treasury yields

8 posts / 0 new
Last post
Lemonyellowschwin's picture
Lemonyellowschwin
Status: Platinum Member (Online)
Joined: Apr 22 2008
Posts: 547
Question about treasury yields

This two-part question will probably display great ignorance.  So be it . . . .

1.  The yield on treasuries is near an all time low.  It is basically zero.  So long as the yield is so low, does that mean the government is basically borrowing money for free or close to it?  If the answer to this question is "yes" please proceed to part 2 of this question.

2.  I have always understood that the main evil of government debt is the interest that has to be paid back (particularly if it has to be paid back to foreign holders).  But if the interest being paid is exceptionally low, does the debt matter so much?

Thanks.

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Question about treasury yields

Hello Lemonyellowschwin:

IF people and foreign governments WERE BUYING them. They aren't. The Fed is buying them. Surprised 

 

GDon's picture
GDon
Status: Bronze Member (Offline)
Joined: Apr 2 2008
Posts: 86
Re: Question about treasury yields
Lemonyellowschwin wrote:

 

1.  The yield on treasuries is near an all time low.  It is basically zero.  So long as the yield is so low, does that mean the government is basically borrowing money for free or close to it?  If the answer to this question is "yes" please proceed to part 2 of this question.

First, "the government" is YOU, the US Taxpayer.  YOU are making a promise of future labor, for the borrowing of "something".  In this case, YOU are making a promise of your future labor (now about 40% already claimed), so that the large international Banking corporations can make a legitimate claim of not being "bankrupt".

Second, the "something" you are borrowing, and for which you promise to give you labor, is NOT money in the sense that it already has inherent value.   You are borrowing your own DEBT.  Each FRN (Federal Reserve Note, or $USD) is first, a promised debt.

Third, the Federal Reserve System takes the "promise" of your future labor, offered by your Congressmen (wasn't that generous?), and then prints out 10x the value of your promised labor, as FRNs, so that the money supply continues to grow.   It MUST show positive growth, because otherwise the impossibility of paying the actual interest would be apparent, and the whole "house of cards" would come crashing down.

Lemonyellowschwin wrote:

2.  I have always understood that the main evil of government debt is the interest that has to be paid back (particularly if it has to be paid back to foreign holders).  But if the interest being paid is exceptionally low, does the debt matter so much?

The "main evil of government debt" is that it requires a claim on your future labor - a soft "enslavement".   The greater evil, is that the Federal Reserve System, in complicity with your Government, receives interest on 10x the amount borrowed, all the while requiring inherent inflation, or a silent theft of the currency value, so as to pay the overall interest.

Were the debt incurred for a perceived "investment" that returns greater value (let's say a bridge across the river, so that your community can engage in easier and cheaper trade...), an "honest money" system could pool the resources of all the local citizens, so as to build the bridge.

Of course, in theory, there is nothing stopping this from being done as, a) a "prepaid" pooling of already existing resources, b) the US Treasury from using taxed money, WITHOUT requiring interest to be paid to private Banking investors from overseas. 

Between 1837 and 1913, the US Government was funded WITHOUT paying interest to a private Central Bank for issuance of currency.   But since 1913, the US Government (YOU the Taxpayer) wants to borrow money, it issues Bonds.  The Bonds are exchanged to the Federal Reserve, who then issues "Federal Reserve Notes (also called $USD).   These dollars are then put into the Fed Banking Sytem, where they are then multiplied between 50 and 100 times, as loans out into the market, all of which requires interest payment to the private Banks.

All of which is created "out of thin air", but which must be paid back via a claim on the Taxpayer's future labor...

Apart from Chris' Crash Course videos, I would also suggest you watch this Google Video - "Money As Debt",  for an understanding of where money comes from, who benefits, and how it gets paid back:

http://video.google.com/videosearch?q=money+as+debt&hl=en&emb=0&aq=f#   

srbarbour's picture
srbarbour
Status: Silver Member (Offline)
Joined: Aug 23 2008
Posts: 148
Re: Question about treasury yields

Lemonyellowschwin:

Quote:

1.  The yield on treasuries is near an all time low.  It is basically
zero.  So long as the yield is so low, does that mean the government is
basically borrowing money for free or close to it?  If the answer to
this question is "yes" please proceed to part 2 of this question.

Yes, but remember interest rates are in constant flux.  Just because today interest rates are zero, doesn't mean that next year they won't be 10+%.

For those interested, during the 1970s bond interest, touched as high as 15%.   So don't think for a second that high rates aren't possible, or that extreme changes cannot happen in very short periods of time.

 

Quote:

2.  I have always understood that the main evil of government debt is
the interest that has to be paid back (particularly if it has to be
paid back to foreign holders).  But if the interest being paid is
exceptionally low, does the debt matter so much?

There is nothing evil about government debt.   There are associated irresponsibilities with government debt.   In general, the most recent problem with our debt is that the government was running a debt in good times.   In general, a government should strive to run a surplus during good times, so that it can run a debt in bad times.

There's absolutely nothing wrong with the USA running a debt, so long as it does so in a responsible and thoughtful manner.  

The problem is that the USA has been going into debt in a way that can be no means described as thoughtful or  responsible.

 

Davos:

Quote:

IF people and foreign governments WERE BUYING them. They aren't. The Fed is buying them.

The Fed isn't buying it yet.  Though, the yield may have already been influenced in anticipation of the Fed's quantitative easing.

In any case, the concern here isn't the Fed buying Treasury bonds.  Its that the Fed is buying Treasury bonds to manipulate the price.  A situation I, incidentally, described in Currency: An examination thereof.

Since some of it bears repeating, I'll quote myself:

Snip from the above link:

Quote:

Manipulation via Currency
Expansion:

The other big thing that should be watched with the eyes of a hawk,
is the Fed attempting to manipulate the value of T-bonds --
and hence its primary asset base -- by means of currency
expansion
. Be careful there though, there are plenty
of signs that the dollar and many other currencies are actually
touching on a currency shortage even to the degree of inducing
a ceasing event. (Yikes!)

However, the Fed could well soak up T-bonds to prevent the
market for realizing its being saturated in government debt.
Because of this, the declining value of T-bonds (by virtue of there
being more T-bonds), could be disguised from the prying eyes
of the people. This may shuffle away inflation by declining
assets
for a while, but reality has a way of setting in
eventually. It may take years to catch up though.

Basically, just remind yourself -- the deeper the US debt, the worse
the dollar. Unless, of course, the Fed pulls an really
interesting card from out of its hat and either switches the
assets backing our dollar or pads existing assets with more
than the normally expected number of T-bonds. That is, it
counters: inflation by declining assets with deflation by
increasing assets.

 

Continuing with Davos...

Basically, by manipulating up the price, the Fed is virtually guaranteeing that it is buying the bond at above market value.  Since it'll have to eventually sell these bonds at market value, the Fed must take a loss.  Since the value of all dollars must, in the end, always be equal to the total summation of all of the Fed's assets, this means the dollar must become weaker.

The eventual inflation from this, however, may not be apparent for many years.

 

GDon:

Much of what you presented has errors or is mistakes in it, and I don't know where to begin.  I'll just suggest that you read my link on currency, and that you take some time to study the Fed. 

Here's an okay discussion on the Fed.  Not everything is 100% accurate (including some of the stuff in my early posts in that thread Frown).  However, it does serve as a bit of an education.   There is a lot of false claims and misinformation floating on the web about the Fed, first and foremost that it generates profit for the private banking system -- When in reality, it turns over most of its profit to the Treasury (and hence, taxpayers).

http://www.peakprosperity.com/forum/who-owns-federal-reserve/7319 

--

Steve 

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Question about treasury yields

Hello Steve:

I think what I was driving at is China has 2 trillion or so in reserves and is directing its stimulous inside its borders as indicated by it's .5 trillion + stimulous.

Holding the yeild at 0%, or close to, I don't think will motivate China, or any other foreign country for that matter, to run out and buy our bonds. Asia, I believe has been our biggest buyer in the past?

My personal belief is that as they "monitize" it will, if nothing else, weaken our currency.

I think, from what I read, this is your take as well? - If so: I pray you are correct when you say years!

Take care 

PS from a bank/fed/consumer front my take on inflation on this front is, as of this moment:

 

  1.  The banks are hoarding, smart enough to know who to loan to, or who not to
  2. Looks like the Fed is sopping up some of the cash it dispursed in exchange for it's pawn shop behavior by having banks buy Tresuries in exhange for cash paid for trash. It looks like 1/2 of cash for trash is out there being hoarded. Rough guess. http://research.stlouisfed.org/fred2/release?rid=19&soid=1

 

http://4.bp.blogspot.com/_wM5Pj6NF0jA/STWb14Spo4I/AAAAAAAAAOk/FRo5Uz2K0C4/s1600-h/Borrowings+and+Reserves+1929-Nov+2007.JPG 

Borrowings+and+Reserves+1929-Nov+2007.JPG

GDon's picture
GDon
Status: Bronze Member (Offline)
Joined: Apr 2 2008
Posts: 86
Re: Question about treasury yields

Steve

I can understand that you disagree with my comments. but I would appreciate what is incorrect about the core of my comments.  I have recapped them here:

a) Non self-liquidating borrowing by the "Government" (the vast majority), is actually a claim on labor of Taxpayers -   true?

b) Loans provided by The US Treasury, (in a deficit status),  as "Bailout" funds for Fannie & Freddie, AIG, etc., are being provided to insure against, and/or bolster their flirt with insolvency -   correct?

c) When a borrower "takes out a loan" (including the Gov't), from a "first-tier" Federal-Reserve-System Banking lender, through fractional-reserve policy, the Bank can then "loan" (against reserves) approximately 10x that original loan, all of which require repayment with interest - correct?

d) Each of those subsequent loans, as market capital, when provided "in purchase" for goods and services, typically then also gets deposited at another Reserve-system Bank, each of which can then loan 10x times that (smaller) deposit, and on and on.  Repeated stepwise at each "next Bank", with each smaller deposit, the market has then received in "debt currency", somewhere between 30 and 90 times the original "borrowed" amount (from c, above), ALL of which requires repayment with interest.   Little of this total interest (perhaps only a part of the original FED loan) is "returned" to US Treasury.  You agree?

e) There is insufficient currency from the "closed-system" currency-generation process in c and d, above, to cover the total "closed-system" interest - i.e., there is insufficient currency generated through the "loan" process to cover BOTH the principal and interest  - is this correct?

f) There is no conceptual reason that funds which the Government takes through taxes, need be "paid-back" with any interest.   Funds which are borrowed "above and beyond" tax revenues, ARE however, essentially promissory notes taken out by Taxpayers, which indeed, MUST be paid back to private lenders (often banks) with Taxpayer principal + interest.  Is this correct?

g) When the Government wants to borrow above-tax revenues, it issues Bonds/Bills - i.e., debt instruments.   The Federal Reserve is (often) a primary buyer (among others) for these instruments.   The Federal Reserve System, monitoring currency levels (M1 - M3), then returns $USD (Federal Reserve Notes) in exchange.    As a result, these FRN $USD's are "debt-instruments - i.e., each $1 represents an owed debt.     You agree?

h) Where did the money which the FED purchased the USTreasury debt-instruments come from?  Must it always previously exist, or, is the FED balance sheet, as stated by one of their former Presidents stated, "infinite", and the monies are created "out of thin air"? 

I agree there is a log of misinformation regarding the FRS.  However, I am not sure whether this is by design or folly, and/or whether this isn't actually of benefit to the benefactors within the FRS.  

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Question about treasury yields

Steve:

Hey, check this out. China, by my math is about 1/4 of ALL foreign financing!!!

 http://www.treas.gov/tic/mfh.txt Sep Aug Jul Jun May Apr Mar Feb Jan Dec Nov Oct Sep

Country               2008    2008    2008    2008    2008    2008    2008    2008    2008    2007    2007    2007    2007------  ------  ------  ------  ------  ------  ------  ------  ------  ------  ------  ------  ------China, Mainland       585.0   541.4   518.7   503.8   506.8   502.0   490.6   486.9   492.6   477.6   458.9   459.1   467.7Japan                 573.2   586.0   593.4   583.8   578.7   592.2   600.7   586.6   586.9   581.2   590.9   601.7   591.9United Kingdom 2/     338.4   308.1   291.5   280.4   272.5   247.8   201.1   181.1   161.9   158.2   174.3   155.0   120.3Carib Bnkng Ctrs 4/   185.3   148.9   133.7   122.4   104.7   115.4   107.1   103.0   108.1   116.7   107.4   105.6    99.1Oil Exporters 3/      182.2   180.6   173.9   170.4   164.3   153.9   150.8   146.1   140.9   137.9   138.7   141.6   137.1Brazil                141.9   146.2   148.4   151.6   151.4   149.5   149.1   146.6   141.7   129.9   121.7   113.9   110.5Luxembourg             91.8    77.5    75.8    88.6    80.4    84.8    92.7    83.1    68.4    69.7    68.3    63.3    58.4Russia                 69.7    74.4    74.1    65.3    63.7    60.2    42.4    38.4    35.2    32.7    33.5    33.6    31.8Hong Kong              60.9    61.3    60.6    61.2    61.4    63.2    60.6    57.5    54.4    51.2    51.7    51.3    52.6Norway                 52.2    41.3    41.8    43.3    47.1    45.3    44.5    34.0    33.6    26.2    27.6    25.5    22.9Switzerland            49.0    45.2    45.0    44.4    42.1    42.5    41.2    39.4    39.3    38.9    38.1    37.8    37.0Germany                41.4    41.5    41.1    40.9    45.0    43.7    42.2    42.2    42.7    41.7    39.1    41.8    41.8Taiwan                 37.4    40.6    42.3    40.9    40.1    42.6    41.2    38.8    38.9    38.2    37.1    40.7    39.9Korea                  36.1    38.0    35.3    36.5    38.5    40.5    40.7    41.4    42.1    39.2    37.8    37.0    39.4Mexico                 34.2    34.3    36.0    42.7    40.4    38.0    38.8    36.5    35.6    34.5    32.0    30.5    30.0Turkey                 31.3    34.0    32.4    30.3    28.9    31.1    28.7    28.5    28.2    25.6    25.6    28.1    28.3Singapore              30.9    30.5    31.4    30.4    30.6    33.5    33.3    33.5    38.6    39.8    40.2    38.8    36.6Thailand               28.6    31.7    31.8    32.4    32.8    27.9    25.7    30.5    28.9    27.4    27.5    22.8    24.7Ireland                27.3    13.2    11.2    14.2    15.8    18.5    17.8    15.6    15.6    18.7    17.5    17.0    16.3Canada                 20.6    28.1    26.9    28.4    30.3    25.9    22.0    22.7    24.4    18.7    24.1    15.9    17.3India                  14.2    14.2    13.0    11.7    10.3    10.5    11.8    14.4    14.6    14.9    14.8    14.9    10.8Egypt                  13.8    12.8    13.4    12.3    12.8    12.7    12.7    12.0    11.6    10.4    10.6     9.9     9.9Netherlands            12.9    14.2    15.1    15.1    15.7    15.5    15.1    14.1    15.9    15.2    14.2    14.8    15.1Chile                  12.9    12.5    13.1    11.7    11.1    10.1     9.7     8.6     9.0     8.7     8.5     7.5     6.8Belgium                12.3    11.8    12.0    12.4    12.4    12.5    12.8    13.2    13.1    13.2    14.2    14.6    14.6Poland                 12.1    13.7    13.9    13.3    12.4    12.5    11.6    10.2    10.3    12.9    11.1     9.8    10.6Sweden                 11.6    12.7    12.4    12.4    13.2    13.1    13.2    13.6    13.4    13.7    14.1    14.5    14.8Italy                  10.9    12.1    10.2    10.6    11.7    10.6    11.3    11.3    12.7    14.6    15.5    14.1    13.4All Other             142.4   142.9   136.2   134.8   136.0   138.0   144.1   144.3   145.1   146.0   142.2   138.0   136.0Grand Total          2860.5  2749.9  2684.6  2646.1  2611.2  2594.1  2513.8  2434.1  2403.8  2353.7  2337.1  2299.2  2235.3Of which:For. Official       1821.7  1785.5  1767.6  1751.7  1743.9  1743.4  1706.6  1681.6  1688.0  1641.1  1619.1  1613.8  1607.7Treasury Bills      276.8   245.6   232.5   226.6   220.0   215.7   201.3   204.3   207.1   196.3   185.3   180.4   178.3T-Bonds & Notes    1544.9  1540.0  1535.1  1525.0  1523.9  1527.6  1505.3  1477.3  1480.9  1444.8  1433.8  1433.4  1429.4Department of the Treasury/Federal Reserve BoardNovember 18, 2008
srbarbour's picture
srbarbour
Status: Silver Member (Offline)
Joined: Aug 23 2008
Posts: 148
Re: Question about treasury yields
Quote:

I can understand that you disagree with my comments. but I would
appreciate what is incorrect about the core of my comments.  I have
recapped them here:

Fair enough.  I'll do my best.

Quote:

a) Non self-liquidating borrowing by the "Government" (the vast majority), is actually a claim on labor of Taxpayers -   true?

 

Yes.  

Indeed, all spending by the government, via borrowing or existing revenue (taxes), is a claim on labor/wealth.   The only way that labor won't be taxpayer labor, is if the government is spending stores of foreign debt/currency --- in which case it is at best, a claim on somebody else's taxpayers labor.

Presuming of course, that foreign country doesn't just say: "Screw it, we absolve all our foreign debt.  Have a good day!"   As has happened many times in history.  Foreign government debt is, after all, the most unsecured debt of all.

So, correct, but not complete.

Quote:

b) Loans provided by The US Treasury, (in a deficit status),
as "Bailout" funds for Fannie & Freddie, AIG, etc., are being
provided to insure against, and/or bolster their flirt with insolvency
-   correct?

Very close but not quite. 

The Loans to Fannie and Freddie are to prevent their insolvency and hence eventual collapse.  Though we haven't so much loaned them money, as to say that their debt is our debt.  Which arguably, was always true.

The loans to AIG were, at least initially, designed as though to allow  AIG to unwind (liquidate) in an orderly fashion.  Hence why the original loan ran at 8.5% + LIBOR.  The revamping of the loans just stinks of cronyism.

Various other loans take slightly different forms, and have slightly different flavors of effects as well. 

Quote:

c) When a borrower "takes out a loan" (including the Gov't), from
a "first-tier" Federal-Reserve-System Banking lender, through
fractional-reserve policy, the Bank can then "loan" (against reserves)
approximately 10x that original loan, all of which require repayment
with interest - correct?

 

Here is were things get confusing.  My understanding here might be a bit erroneous itself, but I'll do my best.

The Federal Reserve System does many things.  I'll mention only two of them:  

* Loaning

* Creating Currency

When it loans, it exchanges existing assets (say Treasury bonds, or Gold)  for collateral, an interest rate, and the promise that they'll get what they lent back.

When the Fed creates cash, it adds the purchased 'asset' to its sheet of assets, and spawns an amount of cash that is roughly equal to that asset's perceived value.   This new cash exists until the Fed sells the said asset at which point, if the Fed valued correctly in the first place, the created cash goes poof and the item returns to the market.

The Government (e.g. the Treasury) does not take out loans through the Federal Reserve System.  It issues debt directly as Treasury bonds -- and denominates them in whatever it feels like denominating them in be it dollars or oak leaves.   The Federal Reserve can then 'buy' these and create money.  It doesn't have to though.

These T-bonds disappear when the government pays the holder the requisite payment (payment is obtained by means of taxes), whatever that payment may be.   At which point the government takes back the bond and 'destroys it'.   If the Fed has the bond, both the bond and the corresponding money is destroyed.   

The Federal Reserve enters into the equation only because currency is a  convenient basis for debt.

...

Now to address the next part. 

Saying that banks can loan '10x' is obscuring the issue.   What a fractional reserve bank says is that a bank must hold a specific fraction of their deposits in a reserve.   

That is, if Bob the farmer gives $100 to Joe the banker, Joe must put a specified proportion in a reserve.  :Lets say: 10% or $10.   This regulatory requirement exists so that no matter what stupid thing Joe does with the rest of the cash, Bob is guaranteed to get back certain percentage.

Bob hopefully is aware of all this.  

Joe, at this point, however, cannot lend out more than the money left over. That is $90.  In order to lend more, somebody else must deposit more money with Joe.   Through this means, the 10x factor can eventually be reached (assuming 10% reserves) after an infinite number of transactions.   

The mathematically important thing to remember though, is it doesn't matter how many banks are involved in this,  that 10x remains.  

If the reserve limits change, so does the 'maximum' multiplier.   That is if reserves are 5% then it is 100/5 = 20.   If required reserves are 50% then it is 100/50 = 2. 

...

Now onto the more complex side.   What isn't conveyed here is that fractional reserve banking is hardly the most important debt multiplier.    There are easy ways to skip past this whole shambang.

For instance, Bob could buy $100 of bank debt.   No fractional reserve rules apply, hence the maximum debt multiplier is infinity.   Fractional reserve requirements apply to deposits only  after all.

(There are, however, other regulations that do apply).

..

Another way to get a larger multiplier is to have these loans have interest.    Lets take a 3 person transaction:

Bob deposits with Joe the Banker $100,  Joe loans to  Sam $90 at 5% interest.   

10 years go by:  [1.05%^10y * $90]  and Sam owes ~$145.   The total proportion has risen!

The inverse  can happen as well, if Bob gets interest (say 4%). [1.04%^10y * $100]  and Bob has ~$145 dollars as well.    Interestingly, because Bob's deposit is bigger,  Joe must have a $14.5 in reserve now instead of $10.   This can act as a force causing 'wound up' systems to 'unwind'.

...

As a final point, I'll say that a 'higher reserve' (be it 20% or 100%) ratio in theory makes the system more stable.   The price is lower returns -- less interest or even negative interest rates on deposits.

Likewise, in theory, lower reserve rates are more risky and provide higher returns.  

I say 'in theory', because in practice a society can heap on infinite sums of debt even in a 'full reserve -- 100% on reserve' banking system.  It is just all too easy to squeeze around the limits.    Similarly, there are no guarentees of returns no matter the system.

Personally, being more conservative with my finances, I'd prefer a higher reserve rate.   I do, however, like to earn interest on my deposits, and would hate to pay for the 'privilege' of having my money held. 

Quote:

d) Each of those subsequent loans, as market capital, when provided "in
purchase" for goods and services, typically then also gets deposited at
another Reserve-system Bank, each of which can then loan 10x times that
(smaller) deposit, and on and on.

The total multiplier remains the same, no matter how many intitutes the money passes through...

... unless it passes through a lender in a form other than a deposit.   In which case fractional reserve rules no longer apply.

Quote:

ALL of which requires repayment with
interest.   Little of this total interest (perhaps only a part of the
original FED loan) is "returned" to US Treasury.  You agree?

 

Once currency is in the hands of a private institutions, be that institution a bank, a farmer, a manufacturer, a thief, or Ghandi II,  profits are no longer the Fed's arena.  Instead, the IRS steps in.

So, yes, interest earned on lending by private banks is kept by private banks.  Interest earned by the Federal Reserve itself (semi public-private) -- and its direct regional branches -- is mostly turned  over to the treasury.

However, any claim that the Fed somehow allowed the banks to 'earn this money' is absurd.   We'd likewise have to give it credit for the earnings of every American on Earth is we were to propose such a notion.   The reality is that the Fed isn't really part of the system once the money leaves the Federal Reserve's hands.

Quote:

e) There is insufficient currency from the "closed-system"
currency-generation process in c and d, above, to cover the total
"closed-system" interest - i.e., there is insufficient currency
generated through the "loan" process to cover BOTH the principal and
interest  - is this correct?

There is always sufficient currency to pay all debts, no matter how large they become.   This is because currency is a 'flow through' medium that isn't destroyed.   However, to explain this, we first need to create an 'economy'

 

We have Bob the apple farmer, he produces 20 apples per a year, every year.  We have Sam, who runs a apple cider factory.    He produces 1 cider per every apple. We also have Joe the Banker.

Apples always cost $1 and Apple Cider always costs $2 

Bob deposits with Joe $100 (no interest to keep it simpler).   Joe then lends $90 (5% interest) to Sam.   Sam takes the money and buys 10 apples ($10) and then spends the next ten years building his factory (this costs him $80, which somehow ends up back in Joe's hands to keep this simple).

Sam then produces 10 apple ciders,  and Joe who can never have too much apple cider is happy to buys them all.   He uses half the money to pay back Joe, and the other half to buy apples from Bob -- Bob as always, deposits the money.  In other words, every year Sam pays down his debt $10

-- accounting: 

R = cash in reserve

J = cash held by Joe

B = cash held by Bob 

Ba = Account balance of Bob

Sa = Account balance of Sam

----

Start: 

    10y: [R $10][J $90][B $0 : Ba $110][Sa:  -145]

    12y: [R $13][J $87][B $0 : Ba $130][Sa:  -139]

    14y: [R $15][J $85][B $0 : Ba $150][Sa:  -133]

    16y: [R $17][J $83][B $0 : Ba $170][Sa:  -126]

    18y: [R $19][J $81][B $0 : Ba $190][Sa:  -118]

    20y: [R $21][J $79][B $0 : Ba $210][Sa:  -110] 

    25y: [R $26][J $74][B $0 : Ba $260][Sa:  -85]

    30y: [R $31][J $69][B $0 : Ba $310][Sa:  -54]

    35y: [R $36][J $64][B $0 : Ba $360][Sa:  -14]

    37y: [R $38.5][J $61.5][B $0 : Ba $380][Sa:  5.3]

--

In other words,  Sam is able to pay back his entire debt.  Now however, Joe is going to have to make enough of the right kind of loans so that he'll eventually  be able to pay back Bob, if Bob tries to withdraw his money.

I assure you though, it is quite possible to create a full closed loop system where it all goes back to the raw cash in the end.   The example required is more complex than I'd really like to conjure up in my spare time.

In other words, in the end it is never the sum of currency that is relevant to paying back debt.   It is instead the scale of the debt as compared to real productivity.   If real productivity is too small, then debt become impossible to pay back.  (Alternatively, if no productivity exists to encourage spending by the 'savers' it can also become impossible to pay back everyone.  This is part of a larger issue best described as the Saving Problem)
Quote:

f) There is no conceptual reason that funds which the Government takes
through taxes, need be "paid-back" with any interest.   Funds which are
borrowed "above and beyond" tax revenues, ARE however, essentially
promissory notes taken out by Taxpayers, which indeed, MUST be paid
back to private lenders (often banks) with Taxpayer principal +
interest.  Is this correct?

Government debt, does yield interest.   The taxpayers are in the end responsible for all Government expenditures and borrowing -- unless the government defaults.

So, fully correct here.

Quote:

g) When the Government wants to borrow above-tax revenues, it issues
Bonds/Bills - i.e., debt instruments.   The Federal Reserve is (often)
a primary buyer (among others) for these instruments.

Incorrect.  Until recently the Federal Reserve held about 10% of all government debt.  So while it is an influential buyer, it can't be called primary. 

Quote:

The Federal
Reserve System, monitoring currency levels (M1 - M3), then returns $USD
(Federal Reserve Notes) in exchange.

Currency levels don't really enter into the equation.  The Fed though, does issue dollars for any Treasuries it buys.   It also issues dollars for any gold it buys.  The Fed buys everything with dollars.

Quote:

 

As a result, these FRN $USD's
are "debt-instruments - i.e., each $1 represents an owed debt.     You
agree?

 

In the very strictest sense you can argue that dollars represents a debt.   However, they more accurately represent a swap.   That is, much like a deed to a house, it is something that represents a claim to an actual asset held in trust. 

It is best not to confuse the issue, and just call the dollar a 'currency'.    

Quote:

h) Where did the money which the FED purchased the USTreasury debt-instruments come from?

 

All currencies come from thin air.   Just like the deed to your house comes from thin air.   What is important in the end, is that there is a house for every deed.

Likewise, what is important for the Fed is that there is an asset for every dollar. 

 

Quote:

Must it always previously exist, or, is the FED balance sheet, as
stated by one of their former Presidents stated, "infinite", and the
monies are created "out of thin air"?

The Fed's balance sheet is not really infinite.   That's because people will only give the Fed a thing, so long as the dollar is more useful to them right then, than the item they are giving.  Visa versa if they have dollars and the Fed is holding an asset they desire. 

Think of it like this.   Say you are a bank.   You've got a lot of T-bonds, but now a big depositor wants to withdraw money.   So, you take all your T-bonds and give them to the Fed.   The Fed creates a corresponding number of dollars (poof!  new dollars).

You then pay that man.

Later, you get back all that cash.  Now, you'd like to earn interest.   So what do you do?  Walk over to the Fed, and give back the dollars (poof,  dollars disappear).   The Fed, also, now has less T-bonds.

In otherwords, each dollar in the end behaves as a special ticket that gets you "X% of all things the Fed has".

This of course means, that the quality of the Fed's assets -- and how much it pays for these assets vs how much it'll get when it tries to sell them -- is a very very important aspect to long term inflation/deflation. 

Quote:

I agree there is a log of misinformation regarding the FRS.  However, I
am not sure whether this is by design or folly, and/or whether this
isn't actually of benefit to the benefactors within the FRS.

There are certianly parties that benefit from the Federal-Reserve-System.   However, this is true for all systems.

Generally, when someone argues against the Fed, the first question that pops up in my mind is:  "What are we going to replace it with?"  The Fed is far from perfect,  but it'd be easy to create a much worse system.

Not that I wouldn't be delighted if someone did put forward a full and thoughtful description of an alternative system.  I may even endorse it.

Personally, the reforms I'd like to see:

1) Absolute transparency reguarding the Fed's balance sheet.

2) Direct and clear legal repercussions for all high level bureaucrats that participate in any decision/action that they knew, or should have known, would cause damage to the dollar.

3) Higher reserve requirements. 

That's on the top of my head.   I'd also like to see more control and better defined limits on Fed rate setting,  and punishments for using the Fed to manipulate prices.  If we want to manipulate prices, we can pass a price manipulating law like a proper democracy!

-- 

Steve 

 

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments