Gyroscopic Investing

The trillion dollar coin is a bit gimmicky, but hardly damaging. The real question is, is having a debt ceiling just as if not more gimmicky or dangerous. One could argue that the debt ceiling tends to serve as a second check/balance on improper fiscal management and therefore serves a valuable purpose. Others would say it is far, far too clumbsy and dangerous a way of doing so.

If I thought the federal debt levels were a problem, I might actually agree with the debt celing as a backstop, but I don't like built in provisions that cause massive disruption in government or the market. However, I see the debt ceiling as being a tool of a very gimmicky side of the debate claiming that we have a debt/deficit problem that will blow up in our face when every sign in the market is pointing to the exact opposite.

So I say go ahead. Fight gimmick with gimmick.  If our cash is Monopoly money, so is our national debt.  You can't look at one as a worthless piece of paper and the other as a constraining liability.

Would this proposal destroy the monopoly that the Fed has on our currency? Isn't this essentially going back to the Constitution that only Congress issue and coin money? Which power they delegated to the banking cartel (aka Federal Reserve).

Isn't this similar to Lincoln issuing Greenbacks and JFK ordering up silver certificates (which were destroyed after his assassination)?

I smell a Hollywood action flick in which a group of ragtag criminals plot to steal the $1 trillion coin.

Can you imagine trying to buy something with a $1 trillion coin?

The entire debt limit is a scam anyway. Every few years we go through this and it is always raised and stops nothing. If there is no political will to control spending then spending shall continue.

I have been wondering something that is kind of related to this in regards to the national debt to the federal reserve.

Here is what I think I understand so far:

The treasury sells bonds to the federal reserve and this money gets deposited into the treasuries bank account at the federal reserve to be used as payments however they need. These bonds are then considered outstanding debt that is being held by the federal reserve.

My question is:

What happens when these bonds are either sold by the federal reserve or mature while the federal reserve is holding them?

Surely the federal reserve doesn't collect this money as their own profit. I would assume that this goes back to the treasury.

So, when it matures, nothing would be owed at all since it is owed to themselves?

craigr wrote: If there is no political will to control spending then spending shall continue.

Why should they decrease/stop spending--they don't see it as a problem.  In fact given the correct understanding of fiat money as I've learned on this board I'm not sure I understand enough to be able to justify why they can't keep spending.

Clearly Krugment, Obama, etc see nothing wrong with continuing to spend (not that many/most on the rigth are much better) and will continue to do so by any means necessary.

Benko wrote:

craigr wrote: If there is no political will to control spending then spending shall continue.

Why should they decrease/stop spending--they don't see it as a problem.  In fact given the correct understanding of fiat money as I've learned on this board I'm not sure I understand enough to be able to justify why they can't keep spending.

The problem is that in this idiotic monetary arrangement we have, the moral value of government spending and the operational necessity of providing liquidity have been joined together. So when the private sector banks stop lending, or people stop borrowing or default en masse, the money supply falls and the only thing that can prevent severe deflation is more government spending. Unfortunately, government typically spends wastefully on things that are stupid or even harmful (foreign wars, predator drones, more prisons, Obamaphones, etc).

If government spending weren't occasionally necessary to plug a hole caused by less private indebtedness, I'd be right along with Craig championing less government spending.

Benko wrote:

craigr wrote: If there is no political will to control spending then spending shall continue.

Why should they decrease/stop spending--they don't see it as a problem.  In fact given the correct understanding of fiat money as I've learned on this board I'm not sure I understand enough to be able to justify why they can't keep spending.

Yeah, you don't hear me saying that stuff though!

Clearly Krugment, Obama, etc see nothing wrong with continuing to spend (not that many/most on the rigth are much better) and will continue to do so by any means necessary.

"If something cannot go on forever, it will stop."

Long-term I have no doubt that continued expansion of government spending is going to end very badly. Each year the ratchet tightens up more and more.

What backs the value of our currency is the demand for green pieces of paper that government creates when it taxes, and the government's continuation of supporting and facilitating the creation of wealth for higher incomes.  Since wealth continues to flow more and more to the few, it's hard to argue that the government is creating horrible moral hazard hazard that leaves the private sector with little motivation to work to create wealth.

Eventual hyperinflation will be much more the result of non-monetary factors than "printing money," IMO. 

whatchamacallit wrote: I have been wondering something that is kind of related to this in regards to the national debt to the federal reserve.

Here is what I think I understand so far:

The treasury sells bonds to the federal reserve and this money gets deposited into the treasuries bank account at the federal reserve to be used as payments however they need. These bonds are then considered outstanding debt that is being held by the federal reserve.

My question is:

What happens when these bonds are either sold by the federal reserve or mature while the federal reserve is holding them?

Surely the federal reserve doesn't collect this money as their own profit. I would assume that this goes back to the treasury.

So, when it matures, nothing would be owed at all since it is owed to themselves?

Not quite.  The Treasury sells bonds to primary dealers, who resell them to other institutions (including foreign governments) and the general public.  The proceeds of the sale are deposited into the Treasury's account at the Fed.  The Fed holds the proceeds from the bond auctions, but not the bonds (which start at the primary dealers, but then end up in the hands of whoever ultimately buys them).  Any taxes that are collected are also deposited into the Treasury's account at the Fed.  Between taxes and proceeds of bond auctions, the Treasury's account at the Fed always shows a positive balance.  In particular, the "federal deficit" does not correspond to a negative balance in the Treasury's Fed account but rather to the total face value of all outstanding bonds - i.e. the debt is not loaned to the government by the Fed but by whoever buys the bonds.

Interest payments on the bonds (and everything else the government pays for) are paid out of the Treasury's Fed account.  When a bond matures, the bond holder receives the face value of the bond (from, you guessed it, the account at the Fed).  So, as long as the government can sell more bonds than are currently maturing (increasing the debt) it can spend more than it receives in taxes. 

Rickb...I think what he's talking about are bonds owned directly by the Fed. Like those the Fed is buying in the QE iterations (except Twist). In those, the Fed collects interest payments as it is the owner of the bond.

TennPaGa wrote: Of course, (i.e. I know you know this PS), money could be injected into the system via tax cuts as well.  FWIW, I think that the proper stimulus in the environment we are currently in would be a huge payroll tax cut .  For example, I would have (i) extended the payroll tax holday along with (ii) made the magnitude of the employee cut even larger, and (iii) given employers a similar payroll tax cut.

Agreed. Heck, I'da done away with it entirely. It's a terribly regressive tax compared to income taxes, which are not only progressive, but easy to dodge and reduce through judicious use of exemptions, credits, deductions, and retirement accounts. There's no reducing the payroll tax unless you make more than 102k per year.

murphy_p_t wrote: Rickb...I think what he's talking about are bonds owned directly by the Fed. Like those the Fed is buying in the QE iterations (except Twist). In those, the Fed collects interest payments as it is the owner of the bond.

Yes. Thank you murphy_p_t, I am referring to any securities held directly by the FED.

Here is an ownership estimation graphic I found.

http://en.wikipedia.org/wiki/File:Estim ... y_year.gif

I would think that the interest payments would go back to the treasury as well?

For all our banter about spending on government expansion, I think a stimulus that consisted of a massive payroll tax cut would have been a great way to have A great recovery stimulus that most people on both sides to get behind. It's really more about repairing private sector balance sheets and after-tax incomes than building better freeways when they're at their least-travelled and the like.

by law, the Fed remits some portion of its profits to the Treasury.

The real benefit to the Wall Street bankers (which is accrued thru their cartel aka the Fed) is controlling policy, not the nominal profits generated by their shares in the Fed.

Do these banks really own "shares" in the fed?

Interesting....

from that link, my interpretation is that they openly confirm that this central bank is a cartel, complete w/ the protection of the gov't to enforce actions on behalf of the cartel

whatchamacallit wrote:

murphy_p_t wrote: Rickb...I think what he's talking about are bonds owned directly by the Fed. Like those the Fed is buying in the QE iterations (except Twist). In those, the Fed collects interest payments as it is the owner of the bond.

Yes. Thank you murphy_p_t, I am referring to any securities held directly by the FED.

Here is an ownership estimation graphic I found.

http://en.wikipedia.org/wiki/File:Estim ... y_year.gif

I would think that the interest payments would go back to the treasury as well?

Yes.  The shares held directly by the Fed are purchased on the open market with newly created Federal Reserve Notes.  The interest that is earned on the bonds held by the Fed is returned to the Treasury after the Fed covers its expenses.

Pointedstick wrote: The problem is that in this idiotic monetary arrangement we have, the moral value of government spending and the operational necessity of providing liquidity have been joined together. So when the private sector banks stop lending, or people stop borrowing or default en masse, the money supply falls and the only thing that can prevent severe deflation is more government spending. Unfortunately, government typically spends wastefully on things that are stupid or even harmful (foreign wars, predator drones, more prisons, Obamaphones, etc).

Here is the solution: http://gyroscopicinvesting.com/forum/in ... 1.msg54750

the practical effect of your solution is the same as Bernanke's, currency debasement, under the theory this will spur economic activity? no?

whatchamacallit wrote: I would think that the interest payments would go back to the treasury as well?

The Fed returns 95% of its income to the Treasury each year.

murphy_p_t wrote: the practical effect of your solution is the same as Bernanke's, currency debasement, under the theory this will spur economic activity? no?

Yep, but at 0% rates of interest, no excess, no manipulation and no cartel.

MediumTex wrote: I smell a Hollywood action flick in which a group of ragtag criminals plot to steal the $1 trillion coin.

Can you imagine trying to buy something with a $1 trillion coin?

I keep a $1trillion Zimbabwe note around to remind me that no matter what's happening, dollars are pieces of paper whose value can change drastically.