View Full Version : Ron's idea re: the debt ceiling catching fire...
PastaRocket848
07-06-2011, 07:04 AM
hxxp://curiouscapitalist.blogs.time.com/2011/07/05/debt-ceiling-could-ron-pauls-plan-save-us-from-disaster-twice/
It looks like people are starting to stand up and take notice of Ron's suggestion that we should destroy the $1.7t in QE2 t-bonds to get them off of the balance sheets. I'm sure it's been debated here before, and I personally think it's a fantastic idea, but that's not what this post it about.
I want to know, why isn't Ron pushing hard for this? The up-sides are huge. Debt crisis temporarily solved, keeps pressure off the market in the future, etc. But even more importantly, it could benefit Ron massively in the "crazy old kook" arena. If people see "hey, this guy's pretty damn smart. that was a good idea, it got adopted by the mainstream and averted a crisis". that would be HUGE for credibility in the election cycle, while simultaneously exposing to the public exactly how ridiculous and unnecessary paying the fed to print our money is in the first place. It seems like it could be huge, dare I say even "Ron's big idea", the one that vaults him in to the mainstream for real, and shows americans what having someone who understand economics in a leadership position can produce.
it's also an excellent opportunity to highlight how the system works to the advantage of the bankers and how they get paid for nothing. obama wants class warfare? let him defend paying bankers while we talk about cutting benefits for working people.
So why isn't he running with this? He's getting support for it everywhere. Google news "ron paul" this morning and it's hard to find someone making an argument against it except "we dont do that stuff in America". there are articles from every side of the political spectrum endorsing the idea.
I think Ron is missing a golden opportunity here.
harikaried
07-06-2011, 07:47 AM
He's gone about this in two different ways, and yeah it seems like this second approach is gaining more traction. Perhaps people are more concerned when they hear "default on the Fed". Curious, who needs to decide if the US Federal Government will not pay back the Fed's bonds -- US Treasury? And for the Fed to tear up the bonds, it's up to Bernake?
shrugged0106
07-06-2011, 07:57 AM
i've been asked and am unsure how to respond, but are there any negative economic effects if this is done? (I dont see any, but Ima dummy on this stuff sometimes)
harikaried
07-06-2011, 08:12 AM
are there any negative economic effects if this is done?A quick context from my other post from General:
The money has already been created when the Fed purchased the bonds. The quoted $1.7 trillion is the interest the government owes to the bond holder, who right now is the Fed. If the bonds were mature, the government could pay back those bonds which then gets returned to the Treasury. Except most of the bonds mature at a much later date, and the interest cannot be paid back now to clear the debt.
I believe Ron Paul would rather the Fed cancel the future interest payments on the bonds (where the money would have returned to the Treasury) as opposed to letting the Fed sell the bonds to another entity. If another entity holds the bonds, the interest paid by the government would stay in the hands of the bond holder.
Potential economic effects (not necessarily negative or positive):
- Fed is unable to sell the bonds back to 3rd parties
- Fed is unable to take the bond interest/profits to balance other losses
- US Government is able to spend more now
- Depending on the clumping of maturity dates, there could be future unbalanced periods of no/some/lots of bond payments
- Could lead to future Fed purchasing of bonds in order to do this 'bond clearing'
Brent Pierce
07-06-2011, 08:17 AM
I am annoyed with the Times article that has outlined Paul's idea. The first half of this article is great. I'm glad a mainstream news mag is acknowledging Paul. The second half on the other hand reeks like only a Times article on economics can.
"As much as Sarah Palin and the rest of the Tea Party would like to think, the government doesn't have to balance its checkbook in the way that individuals have to. But nonetheless, if the government regularly used the Fed to create money to buy up its debt rather than paying it off, it seems wrong. The optics are bad. "It smacks of the third world," says Allan Meltzer, a Fed historian. "It's what Zimbabwe would do."
It is loaded with contempt and condescension for the Tea Party which is strongly associated with Paul. Lastly they play the ultimate card for all liberals (who worship at the alter of "respectability"). They liken Paul's suggestion to something a third world African country would do as if that is in itself a valuable and insightful analysis.
Ironically it is the worship of "respectability" that leads leftists to discuss third world African countries as the lowest and most uncivilized places on earth and then turn around and insist that their nominee for President come from one of these same countries. (Someone tell them its too late, you've already demonstrated you loath those "lessor" people form those "uncivilized" countries)
I am glad that the first half of the article is so full of praise for the idea. It does seem that the mainstream is at least questioning the role of the Fed now. That is tremendous progress.
PastaRocket848
07-06-2011, 08:40 AM
i'm no economist, so i'm sure there are things to consider that are beyond the scope of my understanding, but from what i've read it doesn't seem to be a bad idea at all.
i'm more interested in the political side of things, and how it could play for the election. i think that if the plan is accepted and implemented it could seriously bolster Ron's financial positions. also, i love the idea that it opens the door to explaining to people how the fed works. once people understand it, it's only a matter of time until they want it gone.
hazek
07-06-2011, 08:52 AM
The only negative effects I can think of is about the pretending that's going on right now about the FED being able to "pull out" all the liquidity they are providing with monetizing the debt would not be possible anymore and it would become very clear to everyone that the new money printed out of thin air is here to stay which would probably raise the inflation expectation in the eyes of the public and eventually raise interest rates.
Basically I think it would speed up our car that's headed for cliff.
Paul Or Nothing II
07-06-2011, 01:35 PM
A quick context from my other post from General:
Potential economic effects (not necessarily negative or positive):
- Fed is unable to sell the bonds back to 3rd parties
- Fed is unable to take the bond interest/profits to balance other losses
- US Government is able to spend more now
- Depending on the clumping of maturity dates, there could be future unbalanced periods of no/some/lots of bond payments
- Could lead to future Fed purchasing of bonds in order to do this 'bond clearing'
You're right on one or two points but not the whole way through
NO, 1.7 T is NOT "interest", it's the "principal". In fact, even the interest on whole of ~14 T can't possibly be 1.7 T, it's the "principal"
Think about it this way. Fed has 1.7 T worth of IOUs that Treasury is to pay them at a later date but since Fed is (seen) as govt entity, it can extinguish all the 1.7 T of IOUs being their current owner, there'd be no third parties involved & no interest involved.
And then the debt would fall to ~12.5 T or whatever, yes, that'd allow government to spend more for a year or so but that's less destructive than raising debt-ceiling & so far as the Fed's expenses go, they're essentially paid by the people anyway because the "profit" it makes through interest on Treasuries comes from the Treasury which comes to the Treasury through taxation.
The only negative effects I can think of is about the pretending that's going on right now about the FED being able to "pull out" all the liquidity they are providing with monetizing the debt would not be possible anymore and it would become very clear to everyone that the new money printed out of thin air is here to stay which would probably raise the inflation expectation in the eyes of the public and eventually raise interest rates.
Basically I think it would speed up our car that's headed for cliff.
While I agree with the obvious fact that it'd curtail Fed's ability to reduce moneysupply to an extent but then one may argue that there are other (be it less efficient) tools for doing that if need be, for example raising the Reserve-Requirements.
But the question worth pondering over is, are markets REALLY expecting Bernanke to "pull out"? I'd say most of the market expects him to carry on with QE3, QE4 & so on as the downturn continues & due to low market-confidence banks continue to be cautious in lending & people don't want to go in debt than they already may or mayn't be, if anything, the moneysupply is shrinking as the money-multiplier is shrinking due to these factors.
So in this scenario, even if the debt held by Fed is extinguished, it doesn't have any REAL impacts on the economy, the only negative impact that MAY take place will be based on factors NOT related to extinguishing of the debt itself, such as whether 1) markets become volatile after seeing this extremely UNEXPECTED move & UNUSUAL move 2) whether they expect Bernanke to keep buying more debt &/or inflate the currency in other ways.
But the inflation expectations would only be higher with higher debt & more QEs than a little less debt & more QEs & as I've said, because of the low market-confidence & the downturn & low lending/borrowing activity, the money that's already out there won't "stretch out" to the optimum extent due to limiting of the money-multiplier & it won't start to "stretch out" until lending/borrowing & the economy starts to pick up, which is unlikely to happen anytime soon, & if there are more QEs then that'll be prolonged even more as the "malinvestment" isn't allowed to be liquidated but QEs themselves may cause more infation but again, that's an extraneous factor to the extinguishing of the debt itself.
falconplayer11
07-06-2011, 01:52 PM
http://townhall.com/tipsheet/nicholasfreiling/2011/07/06/ron_paul_proposes_destroying_the_debt_to_solve_cri sis
Townhall even likes it!
roho76
07-06-2011, 02:19 PM
http://townhall.com/tipsheet/nicholasfreiling/2011/07/06/ron_paul_proposes_destroying_the_debt_to_solve_cri sis
Townhall even likes it!
The only entity that gets hurt by this is the Federal Reserve.
EDIT: I think they removed the article.
harikaried
07-06-2011, 02:29 PM
Townhall even likes it!http://townhall.com/tipsheet/nicholasfreiling/2011/07/06/ron_paul_proposes_destroying_the_debt_to_temporari ly_solve_crisis
They changed the title (and url) to include "temporarily".
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