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Debts that have not been incurred yet...

Social Security, Medicare, Federal Retirement payments, etc. are debts which HAVE been incurred, not all of which are currently due. By minting a number of coins, which do not yet need to be deposited, all question of the ability to meet these obligations are answered.

But what would all the rich people who get interest for funding Govt. debt do if Obama simply paid them all off?

Perhaps they and their bought and paid for representatives in Congress should turn their 'minds' to that issue. It would be a 'Put up or shut up!' statement.

 

the importance of managing inflation expectations

But I believe that paying off the national debt would constitute a profound contraction of the money supply and thus deflationary. Federal stimulus would be what would be needed. Else Congress could behave sufficiently responsibly that they could be entrusted with a national debt in a time of historically low interest rates. Plus, it is about time some of these 'expectation' theories be put to the test.

Hence my very specific proposal to fund a very specific and known past expenditure

That would constitute paying off over two thirds of the national debt at present, but is quite acceptable to me as a start.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jan 10th, 2013 at 06:10:10 PM EST
[ Parent ]
ARGeezer:

the importance of managing inflation expectations

But I believe that paying off the national debt would constitute a profound contraction of the money supply and thus deflationary. Federal stimulus would be what would be needed. Else Congress could behave sufficiently responsibly that they could be entrusted with a national debt in a time of historically low interest rates. Plus, it is about time some of these 'expectation' theories be put to the test.

I think one needs to break this down.

Today, the government creates money by paying, then borrows from banks that then borrow from central bank, resulting in a chain of debts going back to the central bank.

If coin(s) are minted and deposited with the central bank and then expenses are drawn from that, the thing that is removed is the chain of debts (and their associated interests). And that is only for the borrowing that otherwise would have been needed (current government bonds are not removed). Even if so many are deposited that their sum is larger then the current national debt all that means is that for the forseeable future there will be no new government bonds. This removes a subsidy to the banks in the same way as if the government borrowed directly from its central bank but has the added feature of removing the scary national debt.

This is deflationary in that expected government payout to banks over the next years will be lower, but only slightly so as the interest is very low and the banks are not very good at spending their money into the rest of the economy.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Fri Jan 11th, 2013 at 07:10:08 AM EST
[ Parent ]
I agree, but supper was calling. :-) There could scarcely be a better time to eliminate the unnecessary hocus pocus step involving the public bond auction, along with the resulting savings from eliminating the bond interest, than when the Federal Reserve interest rate is at or near the zero bound. The current situation presents an auspicious conjunction of circumstances favoring such a move, if only we had a president who did not worship the ground upon which the wealthiest bankers walk.

 

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Jan 11th, 2013 at 10:32:54 AM EST
[ Parent ]
Come, come ARG, everyone knows those guccis glide far above the common ground we peons navigate.
They know no such friction. Especially from regulators.  
;)

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
by melo (melometa4(at)gmail.com) on Fri Jan 11th, 2013 at 10:48:11 AM EST
[ Parent ]
This is deflationary in that expected government payout to banks over the next years will be lower, but only slightly so as the interest is very low and the banks are not very good at spending their money into the rest of the economy.

Technically correct, but will be more than offset by having the reference interest rate at longer maturities drop to zero, which will mean that investments which were unprofitable on yesterday's interest rate will become profitable tomorrow.

And expanding the domestic capital plant is (shock, horror) inflationary (though only very slightly in the present state of demand).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Jan 11th, 2013 at 11:07:38 AM EST
[ Parent ]
It would certainly be a boon to a project to construct windmills along the front range of the Rockies and a transmission infrastructure to tie them into both the Eastern and Western US grids. Texas also if they agree.

Undertaking any 'self liquidating' project that promoted the general welfare would be like printing money. Oh, wait....

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Jan 12th, 2013 at 10:58:43 AM EST
[ Parent ]
So when up against the zero bound, the central bank needs to borrow directly to the state in order to further lower real interest rates?

Wean the banks of their government subsidies and force them to find private projects to finance!

(Then of course there is the option of having stimulus spending through the treasury.)

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Sun Jan 13th, 2013 at 02:53:39 PM EST
[ Parent ]
Long version:
So when up against the zero bound, the central bank needs to borrow directly to the state in order to further lower real interest rates?

If you insist on using open market operations in government bonds to conduct your interest rate policy, yes. Then the CB will have to buy tsys until the interest rate on tsys drops to where the CB wants it to be. This is what QE does for you.

But the CB doesn't have to do this by buying and selling tsys (though if the CB actively refuses to treat tsys at least as well as private bonds, or to lend directly to the state on the same terms it offers private banks for rediscounting tsys, you will most likely have a constitutional crisis on your hands).

The CB can simply offer private banks the option to borrow at longer maturities against suitable collateral. This is what LTRO would do for you if it had not been a one-off event. And the CB can offer banks longer maturity deposit facilities. This is already routine in the Eurosystem.

What happens today is that the bank grants you a mortgage, and then it posts the mortgage as collateral with the CB for an overnight loan (neglecting the interbank market, which can be done without loss of generality under an interest rate targeting CB). Instead of this, the CB can offer to let the bank post the mortgage as collateral for a loan with the same maturity as the mortgage. Basically, the CB can offer the bank a fixed-rate loan, as opposed to the variable-rate loan it gets today.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jan 13th, 2013 at 03:18:09 PM EST
[ Parent ]
ARGeezer:
That would constitute paying off over two thirds of the national debt at present, but is quite acceptable to me as a start

My understanding is that the Afghan/Iraq/Pakistan wars have cost about 3-4 Trillion whereas total US debt is about $14 Trillion so we are talking, at max, of c. 25% of total debt.

A reasonable start IMO.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Jan 11th, 2013 at 11:11:11 AM EST
[ Parent ]
I didn't check the sums in question and probably included a top of the head estimate of the total of the current national debt added as a result of actions under Bush 43, which included debt resulting from authorized spending not covered by the tax cuts for the wealthy and the expenses incurred late in that administration and continuing into Obama's administration necessitated by the response to the GFC/GCF - the economic dump that was the outcome of the fecklessness that came to a head in the late summer of 2008.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Jan 11th, 2013 at 12:49:43 PM EST
[ Parent ]
Call it the cost of following behind the elephant and cleaning up after it.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Jan 11th, 2013 at 12:50:34 PM EST
[ Parent ]
I'm a bit of a self proclaimed expert on elephant dung having spent a little time tracking elephants in Tanzania/South Africa so I would suggest NOT cleaning it up! The problem with the Bush abuses is that they are now consolidated into one seamless National debt which the Republican are now trying to dump en masse on Obama. The beauty of the Trillion $ coin is that it re-fertilizes the dung heap and gives the Fed the task of recycling it among the "investor class".

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Jan 11th, 2013 at 01:21:17 PM EST
[ Parent ]
To me a deeper beauty is that, by merely getting the topic into general circulation sufficiently that those devoted to the 'money as a physical thing' have to engage in order to defend their beliefs, their minds are subtly poisoned by the very thought they are trying to suppress. If they have to attempt to make such a thing illegal they have already acknowledged its potential reality.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Jan 11th, 2013 at 10:28:03 PM EST
[ Parent ]
Do these guys not have credit cards? Have they never seen a $10 bill consisting of a piece of paper  saying/claiming it is worth $10? And what is $10 anyway in itself? Cue angst ridden existentialist inquiry on Fox: Obama has stolen "our" money!

I am reminded of the Pharisees trying to compromise Jesus by asking him whether Jews should pay taxes to Caesar.  Taking a (Roman) Coin from his pocket Jesus asked "Who's head is on it? - you are only paying them with their own money"

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Jan 12th, 2013 at 06:02:52 AM EST
[ Parent ]

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