Instead of Monetizing the Debt, we can Economize the Debt

[gerryb]

http://www.ronpaul2012.com/the-issues/ron-paul-plan-to-restore-america/
http://www.govtrack.us/congress/bill.xpd?bill=h112-2768

I was just wondering, with the Restore America plan and HR 2768 - Ron Paul is not doing anything about the debt other than eliminating the money created from thin air that the Treasury owes the federal reserve.

I had this thought for phase 2, and perhaps it is already an unsaid part of the plan?(It could be spun to be unpopular):
What if we don't reduce the debt? Interest rates may rise, increasing borrowing costs and further impacting the amount of money being used to provide gov't services.

When countries/groups bought Treasury bills, allowing the government to increase the debt ceiling, they enabled the government to put the US in a position of debt slavery.

What if instead of rolling over debt and reissuing it to new buyers at whatever interest the market is bearing potentially leaving less money for actual governance.... We do not allow Treasuries to be redeemed at maturity.. but instead reissue new bonds to the holder with a new term including a new interest rate if the maturing bonds rate is higher than the rate of GDP/economic growth? If the holder wishes to redeem for cash, they will have to sell them on the market as usual, with whatever discount is necessary.

I believe this would be a fair way to allow America to grow out of the debt that has been immorally accrued. Our debt level stays the same and our economy increases in size.. In a decade or two our economy will eclipse the debt load and we can begin to eliminate maturing treasuries.

It would mean the lenders who enabled the debt addiction, and the American public, who both share responsibility for allowing the situation to occur would both share some of the pain in solving the problem, but neither would bear the full brunt.

Instead of Monetizing the Debt, we would be Economizing the Debt. If everyone knew what monetization was, maybe that would be an effective marketing slogan?

[Seraphim]

FWIW, once the matured bond is sold on the open market - where will that bond go? No one will buy them because they will receive nothing and lose the money they use to purchase the coupon.

The US Government must be the one to pay out the matured debt.

The best way is a simple default. Haircuts all around for the bond holders. Value of the dollar goes up substantially (along with the real purchasing power of wages).

[gerryb]

Treasury would be re-issuing new bonds and giving them to the holders of matured ones. Instead of giving dollars at maturity, they would give a new bond with a new term and possibly a new interest rate to keep interest paid at or below GDP growth.

[Seraphim]

I got that part.

my concern was this:

If the holder wishes to redeem for cash, they will have to sell them on the market as usual, with whatever discount is necessary.


Treasury would be re-issuing new bonds and giving them to the holders of matured ones. Instead of giving dollars at maturity, they would give a new bond with a new term and possibly a new interest rate to keep interest paid at or below GDP growth.

[Seraphim]

By the way;

I like the way you're thinking...But I think that instead what should be done is a default on portions of the debt - write down the size of CURRENT bonds and up the interest rate to compensate.

This achieves a lower debt level while also forcing the government to act rationally and allocate capital in an efficient manner (which is is not even coming close to doing).

While the higher interest rates up the cost of the debt, it also limits how much more debt can be taken on, while the write down of the debt mitigates both and dampens the effects of the higher rates.

[gerryb]

I got that part.

my concern was this:

If the holder wishes to redeem for cash, they will have to sell them on the market as usual, with whatever discount is necessary.

Gotcha. Yes, just like now if you need cash before your bond reaches maturity, you sell it on the market at a discount(or premium).

The only thing this is eliminating is it takes Treasury out of the job of finding new buyers for the new debt issuance and instead reissues it to the original holder/whoever holds the matured bond. It's a soft default, and is up to the existing bond holders to find buyers.

So if real interest rates are at 7% in the reformed economy, and treasury is issuing its new notes back to bondholders @ 3%... it would be a 4% haircut.

[The Free Hornet]

The best way is a simple default. Haircuts all around for the bond holders. Value of the dollar goes up substantially (along with the real purchasing power of wages).

Huh? How can they give haircuts without selling off the ICBMs and the Grand Canyon? If you have assets, the bond holders have a right to collect even if it is only pennies on the dollar. All assets should be sold off before any haircuts are mandated by a bankruptcy judge.

Now, I am not suggesting the above (selling ICBMs but maybe the Grand Canyon). The notion that the government will not pay the debt is possibly as bad as the debt itself. We would have lots of options to raise cash:

- Billions of acres and related real estate.
- Pretax options could be offered to raise cash (pay next year's taxes at ninety-five cents on the dollar, the year after at ninety-cents on the dollar)
- tariffs could be raised

My favorite idea: Every government issued check for social security or employees or most contractors should have a special "We Fucked Up Tax" to pay for any shortfalls in revenue that year plus 5% of the accumilated debt. Alternatively, we could cut salaries by 50%. If they are in a pension plan, make it 75%. If they quit - great! Hire more at a fraction of the cost and don't give a pension.

NOW, one area where we can and should "default": those pesky pensions! We should outlaw the government from having these plans. Employees should be dissuaded from seeking these by seeing millions get burnt by the practice.

[Steven Douglas]

Huh? How can they give haircuts without selling off the ICBMs and the Grand Canyon? If you have assets, the bond holders have a right to collect even if it is only pennies on the dollar. All assets should be sold off before any haircuts are mandated by a bankruptcy judge.

The idea propounded that fiat dollars are somehow "backed by assets" is an accounting fiction only. There is no provision or clause that gives you, China or anyone else title to any of the assets claimed by virtue of money creation. That was always one way process in the long term, because no asset was used as collateral in the first place. That would require a title transfer (like the bank which takes title to the house or car you buy).

The thing to be remembered here is that the currency itself, and interest on any debt related to that currency, is only redeemable in more of the same currency. That is the only promise. That applies equally to the irredeemable currency creators (like China) who are buying up our irredeemable currency and using it to "back" their own. Theirs isn't literally "backed" (collateralized) by anything either. If you have 1 RMB, you own Chinese debt. If the RMB fails, which Chinese asset can you then claim as your own? If you sue China (assuming they let you), they can theoretically take in your 1 RMB and simply replace it with another. There. Debt paid. Want to do it again? They can repay that debt indefinitely.

If you wanted to go through the real formality of the fictional money as a mental exercise, no bankruptcy or default is required. You could just keep the printing presses alive, and continue to print all the interest payments you want - infinitely even - without even the fiction of "buying" a single bond or having anyone owe another debt to the system. Just write a check on yourself, in exchange for nothing - create free money, free interest payments forever - on a currency that nobody will use, or buy, or considers of any value whatsoever. You can continue the ruse of making payments out of thin air forever. No default required.

Governments recognize this, and while they may wring their hands about the net effects, the mechanism by which such an infinite stalemate happens with all of them was never a secret to any of them, as they gather up their real marbles and move onto a new system.

[gerryb]

If you wanted to go through the real formality of the fictional money as a mental exercise, no bankruptcy or default is required. You could just keep the printing presses alive, and continue to print all the interest payments you want - infinitely even - without even the fiction of "buying" a single bond or having anyone owe another debt to the system. Just write a check on yourself, in exchange for nothing - create free money, free interest payments forever - on a currency that nobody will use, or buy, or considers of any value whatsoever. You can continue the ruse of making payments out of thin air forever. No default required.



I believe that is what the system I explained would do -- but instead of increasing the money supply(thus stealing from those who have not been able to liquidate thaeir dollars), we would be having those who enabled the debt to settle it.

[Steven Douglas]

I believe that is what the system I explained would do -- but instead of increasing the money supply(thus stealing from those who have not been able to liquidate thaeir dollars), we would be having those who enabled the debt to settle it.

We have problem at home based on legal tender laws, because as of now, only foreigners have the option of actually liquidating their dollars. Our system taxes and punishes all such liquidations, even as it forces acceptance of payments of debts in the same currency. The biggest problem, however, is the fact that the currency supply, and our entire inherently insolvent debt system, was designed to implode on itself should that currency supply stop expanding for any substantial length of time. That is the end game for the Ponzi scheme, as there is still no way possible for current domestic debts to EVER be repaid in the aggregate without an infinite expansion, because the interest to pay that debt has yet to be created. And even if principle was created as "interest free" debt, that only provides the means to pay that particular principle, and will have no effect on the outstanding aggregate.

The point I never lose sight of, and that is the original "debt" that was never acknowledged in the first place. The Fed and commercial banks had nothing to lend. All of the value of their "loans" was siphoned directly from the originally seeded currency (which really did have intrinsic value), and all the real productivity, including labor, that was subsequently siphoned in the process. If there ever was a "debt", it is that the Fed and commercial banks OWE the very money pool all of the real value that was siphoned therefrom - WITH INTEREST. Without a full acknowledgment of that debt, I don't want to hear about the debt created as one side was played against the other. The one debt they could never possibly repay, assuming it was ever acknowledged (and it won't be), IS MASSIVE in the scores of trillions, in comparison to any MINOR outstanding "debts" owned by foreigners, including the Chinese. None of that debt can ever be repaid, but even if it could, everyone can just get in line as we do a truly FULL accounting, and learn just who the real creditors and debtors are in the first place.

[The Free Hornet]

The idea propounded that fiat dollars are somehow "backed by assets" is an accounting fiction only. There is no provision or clause that gives you, China or anyone else title to any of the assets claimed by virtue of money creation. That was always one way process in the long term, because no asset was used as collateral in the first place. That would require a title transfer (like the bank which takes title to the house or car you buy).

I agree there is no title or legal mechanism but is this (selling assets) not a route to get dollars back which would not be printing more dollars or a default?


Governments recognize this, and while they may wring their hands about the net effects, the mechanism by which such an infinite stalemate happens with all of them was never a secret to any of them, as they gather up their real marbles and move onto a new system.

I can't disagree with this or any of your points. However, could you explain what Ron Paul means by "liquidating the debt"? I do not believe he means default. Further, I am not sure it is in our best interest to print out way out of it. Is it possible to smoothly and fairly transition from a fiat to a backed currency?

Thanks for your post above.

[Steven Douglas]

I agree there is no title or legal mechanism but is this (selling assets) not a route to get dollars back which would not be printing more dollars or a default? ...could you explain what Ron Paul means by "liquidating the debt"? I do not believe he means default.


It's kind of a take on what I thought Roosevelt should have done instead after declaring the bank holiday. Acknowledge the insolvency of the banks, and revalue the dollar so that people could get their gold at fractions of gold on the dollar, rather than back up the banks, confiscate the gold and pay out at fractional dollars on the gold. Or, even better, leave the value of gold where it was, but localize the damage to the banks and customers themselves - liquidating the banks and paying out the depositors (in gold) with whatever remained. Then fix the fractional reserve nonsense that started it all.

Dr. Paul means that debt should be sold at market prices without backing all the bad debt carried by all the banks. Let all the debt instruments fall until they reach levels that finally attract bids (NOT worthless government or Fed bids) from the actual market.

In other words, let the debt find its own value, take it in the shorts, and sell it for whatever it's worth. Kind of what you were worried about with selling assets at pennies on the dollar, only we'd be selling the debt at pennies on the dollar instead. A fire sale for short term liquidity.


Further, I am not sure it is in our best interest to print out way out of it.

Is it possible to smoothly and fairly transition from a fiat to a backed currency?

These two go hand in hand in my mind; the transition, followed by the printing once the dollar is finally dead. In this way it more protects USERS of the currency rather than massive holders of currency debt. The users of the currency, especially Americans, have long been the biggest victims of the Fed Ponzi scheme. It was their blood, sweat and tears that kept it from free-falling completely after all these decades. The foreign buyers of debt are latecomers to the game at a fraction of the value, having USED the currency only to lend an air of legitimacy to their own Ponzi schemes.

Whomever is the last out of the currency stands to lose the very most - under ANY plan. That's the nature of all the inverted pyramids - rewards those at the top, and crashes down on those at the bottom when the pyramid can no longer expand (no more new pogies will enter to pass the buck).

Legal tender laws are tantamount to blocking all fire escapes and exits and locking everyone into a building that will inevitably burn. It was only done to block competition and channel everybody into the pyramid - which took accountability away. It really is a criminal thing to do.

Abolishing the legal tender laws and eliminating taxes on specie would allow people to transition out of the sinking dollar ship on their own, but it will also increase the rate at which the ship sinks. Note that NOTHING will prevent the ship from sinking anyway - it really is a Ponzi scheme that does not have the ability to expand indefinitely. The idea is not to "save the currency", but to at least provide a mechanism whereby many can escape.

The printing (as I stated it, just as a fictional exercise) would come after, not during that transition. As people transition out of the Fed dollar ("liquidate the debt") it would cause the dollar to fall further on its own. Printing more would only exacerbate that, with the risk of earlier hyperinflation as a result. But hyperinflation is the end game for such a currency anyway. There is no way around that - only delaying the inevitable and passing it on to others, just as it was passed on to us.

AFTER the dollar hyper-inflates, like a dying sun about to go supernova, any debts remaining (whomever is left holding all the foreign and domestic debts that can no longer be liquidated because nobody is buying at any price) could technically be paid with freely printed dollars - assuming anyone cared to receive them...which they wouldn't, since both the debt and the interest payments would be equally worthless at that point.