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U.S Debt
Old 03-18-2015, 07:12 PM   #1
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U.S Debt

In this Forbes article,
Who Owns The Most U.S. Debt? - Forbes

they make the statement below:

" Social Security owns about 16% of the debt followed by other federal government entities (13%), and the Federal Reserve (12%)."

This amounts to 41% of the U.S. Debt.

Now Economics, especially Macro, is not one of my favorite subjects, I would like to pose the following questions.

What happens If the Federal Reserve just forgives the US debt?

On the SS side, yea the debt may be in the form of bonds, but in reality it all does not come due at once. Could the Government play with this?

Same thing for the other 13% owed to 'other federal government entities'. The governments left hand owes it right. So does it really have to pay it?

If we have an increase in interest rates and the government seems to be lending to itself, couldn't it just lend to itself at a lower rate?

Let's see if we can keep politics out of this. I just wondering what happens if the government bifurcates it's debt to debt owed to foreign countries and direct debt to people from debt owed to itself. My main thrust when thinking of this was the Fed. It seems like the could just forgive it's portion.
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Old 03-18-2015, 07:44 PM   #2
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The majority of the debt o the books of the Federal Reserve was used to shore up the capital reserves of banks. Canceling the debt would wipe out much of those reserves. Creating money is basically done by creating debt, so by suddenly removing that much money from the system would create a new financial crisis.
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Old 03-18-2015, 07:45 PM   #3
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The Fed is forbidden by law to lose any money on the bonds it owns/money it lends. In addition, any earnings the Fed has at the end of the year from its bond holdings, money lending and other stuff it does for pay is dividended up to Congress as something of a slush fund. So the Fed forgiving the federal debt it owns would require a major change in law to be made by people who are directly and heavily incented not to make that change.


So leaving aside that this scenario is about as likely as me having a sex change and winning the NYC marathon while wearing a clown suit, this is what is known as "monetizing" the debt. Basically paying back the debt by creating new dollars out of thin air and diluting the currency. All else being equal, the value of the USD would decline. Hard to say by how much.
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Old 03-18-2015, 07:48 PM   #4
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What happens If the Federal Reserve just forgives the US debt?
The debt, an asset on the Feds books, was bought by the Federal Reserve using the reserves the US banks hold with the Fed, a liability on the Feds books.

By forgiving the debt, the Fed is revaluing an asset on their books to zero. The liability on the Feds books represented by the reserves the banks had on deposit with the Fed are no longer backed by the now-zeroed Fed assets. The Fed can no longer unwind the bank reserves by liquidating the corresponding, now zeroed, Treasury notes and bonds.

Take a look at pages 13-21 here: Bernanke Lecture Four

I suspect that we would see a liquidity crunch for the banks, and a loss of confidence in open-market Treasury notes and bonds reminiscent of September 2008, with perhaps somewhat more intensity.

Oh, and they'd also fail their internal audits, for doing something they're Not Supposed To Do.
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Old 03-18-2015, 09:37 PM   #5
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One of the things that you are missing is fund accounting....

Take SS... it has a separate 'fund'... money comes in and money goes out... some of that money that goes out goes into the general fund... an asset for SS and a liability for the general... at some time the SS fund will need those dollars from the general fund... and expect to get paid... when it comes, the general will not have cash, but it can go and borrow money from the market to pay the money it borrowed from SS...


As mentioned, there are laws preventing the forgiveness of these debts.... but say the laws were changed.... would anything happen

Well, SS would not get paid unless there was another law passed saying that the promised benefits could not be cut.... that any shortfall comes from the general fund... then nothing has really changed....

The FED is different... it is not part of the Treasury....
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Old 03-18-2015, 09:58 PM   #6
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The Federal Reserve balance sheet holds 4 trillion in securities that will be maturing over time. The Fed created the money out of thin air to purchase them. The problem is when these mature the money will disappear from the system. Just as it was created, it will cease to exist. This is a huge problem. They must not allow the balance sheet to shrink. Shrinkage will suck money out of the system.

Yellen stated that they will be replacing the securities as they mature. They have no choice. Conventional wisdom says they will let the balance sheet "run off" over time. But this will cause extreme tightness which will have dire consequences.

We have never had a situation like this in history. Hopefully they can navigate this to some soft landing. I think they are winging it and really have no clue. Scary times.
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Old 03-18-2015, 10:09 PM   #7
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Originally Posted by jim584672 View Post
The Federal Reserve balance sheet holds 4 trillion in securities that will be maturing over time. The Fed created the money out of thin air to purchase them. The problem is when these mature the money will disappear from the system. Just as it was created, it will cease to exist. This is a huge problem. They must not allow the balance sheet to shrink. Shrinkage will suck money out of the system.

Yellen stated that they will be replacing the securities as they mature. They have no choice. Conventional wisdom says they will let the balance sheet "run off" over time. But this will cause extreme tightness which will have dire consequences.

We have never had a situation like this in history. Hopefully they can navigate this to some soft landing. I think they are winging it and really have no clue. Scary times.
I expect they will gradually work the balance sheet down over time as and when circumstances permit. A gradual drain of liquidity won't really hurt anything, and they can always stop or reverse course.
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Old 03-18-2015, 10:58 PM   #8
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...So leaving aside that this scenario is about as likely as me having a sex change and winning the NYC marathon while wearing a clown suit, this is what is known as "monetizing" the debt. ....
After cleaning the pinot off my keyboard, I thought this deserved a slow clap; can't find it, but in lieu of: +
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Old 03-19-2015, 01:30 AM   #9
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Originally Posted by 2017ish View Post
After cleaning the pinot off my keyboard, I thought this deserved a slow clap; can't find it, but in lieu of: +
I had a very vivid mental image, here's what it looks like. No wonder I can't sleep.

http://www.everymantri.com/.a/6a00d8...345f970c-320wi

Thanks Brewer12345, I needed a smile.
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Old 03-19-2015, 04:50 AM   #10
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The intent is that bank profits could be used to replace the capital reserves and paying down the debt held by the Federal Reserve. We'll see if it actually happens.
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Old 03-19-2015, 05:26 AM   #11
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A correction, the balance sheet is 5.4 trillion right now.
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Old 03-19-2015, 05:44 PM   #12
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I had a very vivid mental image, here's what it looks like. No wonder I can't sleep.

http://www.everymantri.com/.a/6a00d8...345f970c-320wi

Thanks Brewer12345, I needed a smile.
Still looks like a guy though....
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Old 03-19-2015, 05:46 PM   #13
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