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I think that it's likely that the Fed will buy bonds, creating money, and we'll inflate away at least some of the debt. I agree that this has various undesirable consequences, but they're still going to pay out something for social security (e.g., the 75% number - either in an acutal reduction, or in an inflated-away valuation, per scoutingagain's post.)


Yes, not increasing the debt limit would trigger a very bad result. Hence the debt limit will increase.


One thing's for sure, something's going to have to give.

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Yah, I think yeh all forget that bankruptcy happens when yah dont have da funds to pay off all of your obligations, eh? When a company goes bankrupt, it still has considerable income and cash, just not enough. This triggers a chaotic feedin' frenzy of competing creditors, some of which will be in financial disaster themselves if not paid in full. It can be pretty ugly, eh?


Failure to meet all da obligations is catastrophic, whether for Social Security or da sovereign debt.


Can someone explain to me why da Republicans don't huts adopt da Obama Deficit Commission Plan outright? It'd be da perfect coup, foisting him on his own pitard. A 4 trillion debt reduction in 10 years sure beats anything they're proposing, and sure beats da 7.7 trillion debt expansion Obama is proposing.



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Oooooohhhh, a multiple choice question. I like it.


a. They don't have the cojones to do it (cowardice)

b. They'd rather have the political ammunition (hypocrisy)

c. They helped create the problem, DUH!!! (deception)

d. all of the above

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Beavah asks:


Can someone explain to me why da Republicans don't huts adopt da Obama Deficit Commission Plan outright?


It may have something to do with the fact that the commission report included such popular proposals as: eliminating mortgage interest deduction and replacing it with much more restricted tax credit; capping exclusion from personal income of value of employer-provided health benefits; eliminating tax exemption for state and municipal bonds (for new bonds); taxing capital gains as ordinary income; increased gasoline tax; additional health care reform including either a public option or single payer system; increasing Social Security payroll tax and increasing the retirement agent; and closing one third of overseas military bases. It may be that some people would favor one or more of these proposals, but together it's tough to envision the public clamoring for this package of proposals. It's even tougher to envision the Republicans voting for even more far-reaching health care proposals than the rather watered-down one that passed last year and which they are currently trying to repeal. I don't think President Obama has endorsed the commission report, at least not all of it, and even the commission itself could not muster enough votes to approve it. (I think it needed something like 14 votes out of 18 members to pass, and it got something like 11.) The whole idea of the commission was to take the heat off of both political parties and both the president and Congress by having the unpopular proposals come from a bipartisan commission. It doesn't look like it's worked. The proposals are there, but it doesn't appear that they are going anywhere.

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bankruptcy happens when yah dont have da funds to pay off all of your obligations


So here's the difference. Unlike any person, or any company, the US government has the ability to create money. Therefore I view it as very unlikely that the government would ever technically become bankrupt.


It's true that other countries have effectively gone bankrupt, but from my understanding, that's roughly because they owed dollars and just printing more of their own currency doesn't fix that. With the US being the dominant economy on the globe and with many/most obligations stated in dollars, I think that inflation is a much more likely concern than bankruptcy.


It's true that we could get to bankruptcy eventually. Other countries that hold US bonds might stop buying reissue of the debt, or they might demand that the interest be paid in Euros. But the government really can't go bankrupt just because it owes too many dollars to someone. When the Federal Reserve writes a check, it's good. By definition.

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Oak Tree said " Unlike any person, or any company, the US government has the ability to create money. Therefore I view it as very unlikely that the government would ever technically become bankrupt. "


Yes, they have the ability to create money. What the government does NOT have is the ability to create wealth. (The two are not the same.) If they create more money and the total wealth stays the same, then the money is simply devalued. It's called inflation.

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The proposed fix to FICA of removing the cap on taxes doesn't come with removing the cap on disbursements.


Next, the government indirectly does create wealth, by securing or expanding opportunity. For example, if they eliminate the corporate income tax and capital gains tax, or military spending which guarantees the dollar's status as the reserve currency. They've created the conditions by which more wealth will be created.



Beavah, the GOP won't adopt the deficit commission plan because among other things, it includes a 150 billion cut in defense spending, and there's nothing the GOP likes more than beating the dems with the "soft on defense" stick. Did you not see the Speaker fighting to buy F35 engines which NOBODY in the DOD actually wanted? Same reason they don't want to be the first party to "throw granny under the bus" by reforming FICA. When it comes to real fixes for the budget, this GOP will prove to be big on talk, small on testicular fortitude.

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Unlike any person, or any company, the US government has the ability to create money


Not really, or we could just fiat da deficit away.


The government runs on a budget, eh? Revenues and expenses. It doesn't create money, it pays its bills with tax revenues and fees or by selling bonds.


Da Central Bank can introduce more money to the system in several ways, typically by making bank loans or intervening in da financial markets through da Open Market Committee as buyer or lender of last resort to keep some interest rates within their targets. They've gotten a lot more creative lately, with da purchase of Treasuries being the most "raw" introduction of new dollars direct to da government in the way you suggest. Da Fed's mandate is not government solvency, however, it's dollar stability and general economic security. It doesn't have to buy Treasuries. And even a bit of dithering could lead to insolvency.


We can also go bankrupt in da way the Tea Party Republicans seem to want, eh? Just by refusing to raise the debt ceiling. In da present environment, cash flows cannot be maintained without borrowing, because revenues don't come in uniformly in sync with obligations coming due. So that would lead to sovereign default.


This is an interestin' experiment, eh? Which will break first when da worldwide reserve currency goes under? If yeh keep up with da bubble in Treasuries, yeh can anticipate an eventual crash in a few ways. Da Fed can keep buying to keep the yields low, until it's balance sheet is worthless and the dollar crashes. Or the bubble will just burst and yields will rocket higher, imposing crushing interest rates on da U.S. Government and economy and leading to deflation. Or we can go like Japan and ride da edge of that, and just keep selling U.S. Dollars so people can use 'em to buy commodity dollars like Canadian $ in an ongoing carry trade, leaving the government solvent but da domestic economy impoverished.


It'll be a fascinatin' train wreck to watch. Saddest thing is that da one thing we'll still have is da world's biggest military, so da temptation to get out of our troubles by taking resources from others by force will be hard to avoid.




We can


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Beavah, while I tend to agree with your 'Jeremiah-like' apocalyptic assessment, I also caution myself by remembering that I am way out of my field when it comes to the labyrinthine world of the OMB. But I saw two words in the quote that you started with, words that could be interpreted in different ways: 'create' and 'money'.

Without going into details, my puzzlement arises from having read many articles that seem to contradict what you said about that particular quote. Here's a short section of one example (http://www.dallasnews.com/business/columnists/cheryl-hall/20101109-What-is-Fed-s-QE2-6107.ece):

The columnist called her contacts in the field to ask about the QE2.

Start Quote

"Three former high-ranking Fed insiders, two university business school deans and three investment fund managers answered the call.


"The book has not been written whether QE2 is a good idea or a bad idea," said Sam Manning, general partner of the Blagden Fund in Dallas. "There are many highly educated, brilliant minds on both sides of the argument."


But here are some basics about quantitative easing that just about everybody I talked with agreed on:


Turning government bonds into circulating money is called monetizing the national debt.


Quantitative easing is a euphemism for creating money out of thin air. In the vernacular, we call it "printing money," even though it really has nothing to do with the U.S. Bureau of Engraving and Printing.


The way it's supposed to work is that the Fed buys securities in the open market, paying with a government "check." (That's how the money is created.) The sellers deposit those checks into their banks. The banks redeploy those deposits as loans to consumers and business. The money supply expands and, in turn, so does the economy.


Or so the theory goes.


The money supply hasn't increased over the last two years from the first round of quantitative easing. The trillion-plus the Fed paid for mortgage-backed securities is still sitting in vaults as bank reserves.


"The system is clogged" is how Bob McTeer, former president of Federal Reserve Bank of Dallas, described it.


Loan demand from creditworthy borrowers remains weak. Banks are still smarting from previous bad loans. And they are leery of lending money so cheaply when higher rates may be in the offing.


Almost no one thinks QE2 will send folks scurrying to the banks to borrow.


"It is not as though you read the headline 'Fed to do $600 billion of QE2' and think, 'Oh, good, this will be good for our business,' " says Cece Smith, a retired venture capitalist and former chairman of the Dallas Fed bank.


"They are not going to add jobs based upon interest rates being lower. They will add jobs based upon increased demand for their products or services."


The likely - and intended - effect is inflation."

End Quote


Again, in one of the first bullets, there are two words, 'creating money', that were the focus of your reply, apparently in contradiction. The columnist claimed that this was one of the points that all of her respondents agreed on. And now, having thought about your reply, I'm confused (and that's ok because confusion is something I have come to accept as a general condition of life - I wish others were willing to be as honest about it). But if you'd clarify, or at least make an attempt, I'd appreciate it.


P.S. keep in mind that I continue to share your sense of horrified fascination with regard to the way things are being managed by our elected and unelected officials. I guess I'm hoping I'm just too stupid to be able to see the genius of their intricate plans.

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Yah, packsaddle, I agree with all your bullet points, eh?


Yeh just need to make a distinction between da Federal Reserve and the "government" to get clarity. Da Federal Reserve is just creating money, eh? That's its function. Loosely speakin', the central bank needs to create more money as the economy expands. Da bigger the economy, the more money yeh need in circulation to support it. That's the problem with da gold standard, eh? Gold is a limited commodity, so it can't expand with economic growth, which causes deflation which in turn reduces economic growth. So all those rubes who yearn for a return to da gold standard are just a bunch of fruitcakes.


But that is just da Federal Reserve, eh? Not the "government". The U.S. government debt has been, (until now) independent of da creation of dollars. That independence is important to investor confidence and security. So da government can't create dollars just to finance itself. And because of da delays in the system resulting from that independence, da Federal Reserve can't necessarily prevent a default or bankruptcy of da government just by printing money. One can argue even if it should try.


Now, when da central bank creates more money and injects it into da broader system through its bank loan and OMC actions, that works well, eh? To my mind, it works best when they do it in a predictable way that matches economic growth and bond yield spreads. Da federal reserve accepts payments in different asset classes... gold, foreign currencies, etc. which form its "reserves". Da central bank's reserves are used when it has to go da other direction, and reduce money supply or stabilize the dollar buy buying dollars back in exchange for reserves. Again, that works well if it's done predictably based on underlyin' economic activity and bond yield spreads.


Da problem is ever since their mandate was changed to a general economic one they tend to be pushed to respond to the swings in da market rather than the underlyin' economics of wealth generation, and when they do that they're always too slow. So they create bubbles which make da system less stable, rather than more. Each of da last 3 crashes yeh can trace to that in some way.


Now it's a different beast with QE2, where they're just creatin' money and givin' it to the government, rather than the general economy. That is, as yeh say, "monetizing" the debt. That's crossin' a big line.


Da reason all of their money printing isn't havin' any effect is as you say. It's just goin' into bank reserves, replacing one fictional bubble asset (mortgage-backed CDOs and derivatives) with another (rapidly devaluing dollars backed by da Central Bank's "reserves" of increasingly dubious Treasury Bonds). Bubble assets work for a while, eh? Yeh can party like it's 1999 or 2006, so long as da majority of folks believe they have value.


That's why what they're doin' with Treasury Bonds is so ultimately terrifying, eh? They're creatin' a bubble in Treasuries, which are used by everybody as a "risk-free" reserve asset. We created a catastrophe for a lot of investors when da stock bubble crashed in 2000. We almost took out da world economic system when supposedly "safe" mortgage-backed bonds crashed in 2008. Now we're pumpin' up a bubble in the one asset that's built into worldwide financial models as absolutely risk-free. That's so deeply embedded in thinking and computer models that yeh can't even tell the assumption is there.


They're creatin' the bubble da same way they did with da mortage bubble, eh? By printing dollars over and above what is necessary to meet da need of economic expansion. In this case, to prop up Treasury Bond spreads. In da process, they're doin' the unthinkable. In da middle of the Tulip Bubble, the Federal Reserve is buying Tulips for its own reserves. So if yeh keep this up, when da bubble bursts this time, both da government and the central bank are goin' with it.



(This message has been edited by Beavah)

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