Could we just default on the "debt" to Fed Res?

[Butchie]

I saw this article on Yahoo, kinda intersting:

http://finance.yahoo.com/news/biggest-holders-of-us-gov-t-debt.html

Makes me wonder, what if we just said to the Fed, "We're not paying that 6.3T back", what recourse would the Fed Res have against us?

[jkr]

they would sick the imf & bis on our contry...now isnt that nice!:D

[sailingaway]

Ron already has some of that calculated in his budget since it won't balance for 3 years and he has no intention of raising the debt ceiling.

His point is that the 'interest' on new money, the only value in which is dilution of already issued money, is interest paid on no new value at all.

Failure of consideration.

[IDefendThePlatform]

I think Ron actually suggested that or something similar a few months ago.

[Barrex]

LOL Original post made me laugh.

[InTradePro]

I think Ron actually suggested that or something similar a few months ago.

^this

[69360]

None, there is nothing to stop it.

[InTradePro]

http://www.nashuatelegraph.com/newsstatenewengland/938282-227/paul-would-cut-federal-departments-forgive-debt.html


Paul said he would continue solvency of the government while opposing attempts to raise the federal debt ceiling by writing off the government’s $1.7 trillion borrowing from the federal reserve.

[Liberty1789]

The Fed is a group of bank. It has $54bn of equity. So a $6tn loss would sink it (the $1.7tn mentioned by InTradePro as well).

It would be unprecedented and the repercussions are difficult to assess.

The US government would have to declare a "default event" as well. The reasonable consequence would likely be an utter collapse of the dollar and its end as an international reserve/transaction currency.

Those things are very difficult to frame with confidence though.

[socal]

The $6.3 trillion includes securities held by the Fed as well as intragovernmental holdings. Intragovernmental holdings is mostly money owed to the Social Security Trust fund.

As long as the Fed keeps the Treasuries it owns, these Treasuries are effectively retired debt already, because the Fed sends back the interest it receives from the Treasury. It would be like me "borrowing" money from you, and never having to pay you back the principle and never making interest payments.

[smithtg]

the entitlement programs are shell games except there is nothing under the shells

Think about it, the politicians have ALREADY spent the money in Social security. Why pay 'interest' on these intragovenmental holdings? Its kind of like paying yourself interest for money you "loaned" yourself and already spent. These programs should run year to year and balance year to year. Wipe the slate clean, start over and dont 'save' when income is higher than expenses because someone else will want to 'borrow' that money. The excesses in SS should just pay debt (which is in effect what they do, because if they didnt 'borrow' it from there, they would borrow it from china)

As for the money we owe the FED, screw them. They have nothing to back what they loaned the US. Again a shell game. The FED balance sheet is so out of whack, who give a eff about them. When they come to buy more debt, the treasury should REFUSE!

[JohnGalt23g]

We could. The problem is that you then need to way to be able to sop up the excess money supply eventually, which probably means requiring banks to raise their reserve requirements. That will shrink the macro-economy.

[socal]

The Fed is a group of bank. It has $54bn of equity. So a $6tn loss would sink it (the $1.7tn mentioned by InTradePro as well).

It would be unprecedented and the repercussions are difficult to assess.

The US government would have to declare a "default event" as well. The reasonable consequence would likely be an utter collapse of the dollar and its end as an international reserve/transaction currency.

Those things are very difficult to frame with confidence though.
The Federal Reserve made an accounting change about a year ago that effectively makes a default impossible. To summarize, the losses it's going to take on the mortgages it purchased are not going to reduce their equity account, but a liability account, so equity will never be less than zero. The liability account is the amount of money it owes to the Treasury (interest rebates). This liability account can go negative if the Fed's losses are big enough,

Ac-cent-tchu-ate the Positive: The New Accounting at the Fed
February 21, 2011
http://mises.org/daily/5057

Even without this change, the whole question of the Fed becoming insolvent is bogus. This article was written before the accounting change described above,

Can the Fed Become Insolvent?
November 29, 2010
http://mises.org/daily/4869

Although our central bank appears to be insolvent, in practice what would hinder its continued operation? Its liabilities consist in the legal-tender fiat money of the land. If someone walks into a branch of the central bank, hands over a $20 bill, and says, "I want to redeem this!" the teller can calmly reply, "Do you want that as two $10 bills, or four $5 bills?"

[Brian4Liberty]

Makes me wonder, what if we just said to the Fed, "We're not paying that 6.3T back", what recourse would the Fed Res have against us?

1. They would declare the President a Dictator.
2. The UN would declare a no fly zone over the US.
3. They would foment revolution in the US, and arm anyone who they think would fight against the Administration.

But no worries, we would probably never go to step 2, as step 1.5 is to arrange for a relatively bloodless coup, and a new "President" would be chosen from Goldman Sachs.

[chadhb]

No it's the NeoCons job to start wars and constantly tell Americans that our kid's will have to pay off this debt. Sorry but this is not my debt or my kid's debt, so whom it may concern, kiss it. We don't need the $, nor will it effect anything when it's gone. Everyone will use whatever reserve currency they come up with and thats the end of the story. If you have $, you obviously should have converted what you are not using to metals, if you didn't then who cares.

[socal]

the entitlement programs are shell games except there is nothing under the shells

Think about it, the politicians have ALREADY spent the money in Social security. Why pay 'interest' on these intragovenmental holdings? Its kind of like paying yourself interest for money you "loaned" yourself and already spent. These programs should run year to year and balance year to year. Wipe the slate clean, start over and dont 'save' when income is higher than expenses because someone else will want to 'borrow' that money. The excesses in SS should just pay debt (which is in effect what they do, because if they didnt 'borrow' it from there, they would borrow it from china)

As for the money we owe the FED, screw them. They have nothing to back what they loaned the US. Again a shell game. The FED balance sheet is so out of whack, who give a eff about them. When they come to buy more debt, the treasury should REFUSE!
The Fed does not purchase Treasuries from the U.S. Treasury directly, it purchases them in the open market, hence the term Federal Reserve Open Market Operations, or OMO. The Federal Reserve gets this money by literally creating it out of nothing, it's not like Ben Bernanke mows lawns over the weekend to get the money to buy bonds.

The Treasury pays the Federal Reserve interest on the bonds it owns, but then the Fed sends the interest back to the Treasury, less expenses. So it is like a shell game, but the whole process facilitates excessive government spending.

[rpwi]

Like the idea...but this will become more and more difficult to pull off. The Fed is swapping high quality treasury bills to banks and other institutions for near worthless mortgage loans... THIS is one of the credit thefts that has occurred under the bailouts and I wish Paul would make a bigger deal about it (he has brought it up in a debate...but very briefly).

[rpwi]

The Fed does not purchase Treasuries from the U.S. Treasury directly, it purchases them in the open market, hence the term Federal Reserve Open Market Operations, or OMO. The Federal Reserve gets this money by literally creating it out of nothing, it's not like Ben Bernanke mows lawns over the weekend to get the money to buy bonds.

The Treasury pays the Federal Reserve interest on the bonds it owns, but then the Fed sends the interest back to the Treasury, less expenses. So it is like a shell game, but the whole process facilitates excessive government spending.The open market is very corrupt. Bankers have vastly consolidated the primary dealer market (only certain institutions can deal with the Fed) such that is is much less competitive now and there is a lot more gaming of the Fed going on.

[socal]

The open market is very corrupt. Bankers have vastly consolidated the primary dealer market (only certain institutions can deal with the Fed) such that is is much less competitive now and there is a lot more gaming of the Fed going on.
true.

[goldpants]

Wouldn't the competing gold backed currency Ron is advocating for deal some of this issue?

[sailingaway]

The $6.3 trillion includes securities held by the Fed as well as intragovernmental holdings. Intragovernmental holdings is mostly money owed to the Social Security Trust fund.

As long as the Fed keeps the Treasuries it owns, these Treasuries are effectively retired debt already, because the Fed sends back the interest it receives from the Treasury. It would be like me "borrowing" money from you, and never having to pay you back the principle and never making interest payments.

except that when it goes to the Treasury it supports more spending rather than retiring debt.

[sailingaway]

We could. The problem is that you then need to way to be able to sop up the excess money supply eventually, which probably means requiring banks to raise their reserve requirements. That will shrink the macro-economy.

Yeah, Ron spoke of raising reserve requirements.

[dcjones]

Raising the reserve requirements and higher interest rates would help this economy. It would help to liquidate all the malinvestment and create an oppertunity for savings and capital formation to flourish.

[socal]

except that when it goes to the Treasury it supports more spending rather than retiring debt.
I meant the approx $1.6 trillion in Treasuries on the Fed's books are effectively retired debt, not that the interest the Fed sends back to the Treasury can be used to retire debt. Here's the Fed's balance sheet,

http://www.federalreserve.gov/releases/h41/current/

RP is on the same page, here's the proposal he made,

Ron Paul’s Surprisingly Lucid Solution to the Debt Ceiling Impasse
http://www.tnr.com/article/politics/91224/ron-paul-debt-ceiling-federal-reserve

Representative Ron Paul has hit upon a remarkably creative way to deal with the impasse over the debt ceiling: have the Federal Reserve Board destroy the $1.6 trillion in government bonds it now holds. While at first blush this idea may seem crazy, on more careful thought it is actually a very reasonable way to deal with the crisis. Furthermore, it provides a way to have lasting savings to the budget...

[outspoken]

Fortunately, the FED doesn't have an army but probably can lease out the US Armed Forces if it wants. Actually, if the US defaulted that would make us very risky and no one would loan us a dime... at least the ones made out of silver and gold. That means we'd have to live within our means. It would be painful because we wouldn't get to slowly ween our citizens off of our govt dependency.

[TheTexan]

The Fed does not purchase Treasuries from the U.S. Treasury directly, it purchases them in the open market

By "open market" you of course mean "primary dealers" - a very strict list of companies the Fed does business with http://www.newyorkfed.org/markets/pridealers_current.html



Bank of Nova Scotia, New York Agency
BMO Capital Markets Corp.
BNP Paribas Securities Corp.
Barclays Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Daiwa Capital Markets America Inc.
Deutsche Bank Securities Inc.
Goldman, Sachs & Co.
HSBC Securities (USA) Inc.
Jefferies & Company, Inc.
J.P. Morgan Securities LLC
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Mizuho Securities USA Inc.
Morgan Stanley & Co. LLC
Nomura Securities International, Inc.
RBC Capital Markets, LLC
RBS Securities Inc.
SG Americas Securities, LLC
UBS Securities LLC.


The Federal Reserve has a printing press and can print free money. They only do business with that list of companies above. So they can call it "open market" all day long, but in reality they're just giving those companies free money.

[socal]

By "open market" you of course mean "primary dealers" - a very strict list of companies the Fed does business with http://www.newyorkfed.org/markets/pridealers_current.html


The Federal Reserve has a printing press and can print free money. They only do business with that list of companies above. So they can call it "open market" all day long, but in reality they're just giving those companies free money.
Here's an article showing how the Primary Dealers (PD) made hundreds of millions by flipping Treasuries, and is the kind of thing poster rpwi above probably referred to as them "gaming" the system,

Blatant Treasury Churn At The Fed: Entire POMO Consists Of Just Auctioned Off 3 Year As FRBNY Launches "Flip That Bond" Program
http://www.zerohedge.com/article/blatant-treasury-churn-fed-entire-pomo-consists-just-auctioned-3-year-frbny-launches-flip-bo

Someone ... in Congress has to look into the blatant bond churn-cum-flip ... which has the Fed paying Primary Dealers billions in commissions for a trade that has absolutely no value added. And while we have been complaining about this for months, today just takes the cake. Below we present the entire list of permitted issues to be monetized by Frosty-Sack. Note that there were 29 CUSIP eligible for buybacks. What happened - the Primary Dealers flipped virtually the entire operation in the form of the just auctioned off 3 Year PQ7! This is half the entire Primary Dealer allocation in the bond auction that was completed on January 11 ... One more 3 Year POMO, the next of which is on January 31, in which PDs flip a like amount, and the Fed will have monetized the entire auction, but in the process having paid at least a few hundred million of taxpayer capital to the PDs for absolutely no value added! This is a daylight robbery and has to stop...


Probably the PDs get a bigger subsidy by the low interest rates they can borrow at, however,

The Fed Does It Again: $80 Billion Secretive "Bank Subsidy" Program Uncovered, Providing Bank Loans At 0.01% Interest
http://www.zerohedge.com/article/fed-does-it-again-80-billion-secretive-bank-subsidy-program-uncovered-providing-bank-loans-0

[PatriotOne]

Could we just default on the "debt" to Fed Res?

You have stumbled upon my daydream of RP's action of his first day in office. Then he encourages all the other countries indebted to the world bank/IMF to tell them to take a hike also and we will back them up militarily. Then RP orders the arrest of the Rothchilds and Rockefellers and if they don't go quietly he sends a drone. Then he double dog dares the queen of england to send their troops to america and we have the second revolution freeing us from the tyranny of England.

[dillo]

Doesn't the fed proliferate profits on loans back into the government? Aren't these loans held in government bonds? Wouldn't defaulting on said bonds fuck us over internationally?

[dillo]

You have stumbled upon my daydream of RP's action of his first day in office. Then he encourages all the other countries indebted to the world bank/IMF to tell them to take a hike also and we will back them up militarily. Then RP orders the arrest of the Rothchilds and Rockefellers and if they don't go quietly he sends a drone. Then he double dog dares the queen of england to send their troops to america and we have the second revolution freeing us from the tyranny of England.

America is owned by the Rothschilds, they would win and have for the past 500 years

[rpwi]

Here's an article showing how the Primary Dealers (PD) made hundreds of millions by flipping Treasuries, and is the kind of thing poster rpwi above probably referred to as them "gaming" the system,

Blatant Treasury Churn At The Fed: Entire POMO Consists Of Just Auctioned Off 3 Year As FRBNY Launches "Flip That Bond" Program
http://www.zerohedge.com/article/blatant-treasury-churn-fed-entire-pomo-consists-just-auctioned-3-year-frbny-launches-flip-boTerrific articles. As long as you have an artificial interest rate like government does, you're always going to have games like these (pegged currencies face similar problems in the FOREX market with artificial churning).

Someone ... in Congress has to look into the blatant bond churn-cum-flip ... which has the Fed paying Primary Dealers billions in commissions for a trade that has absolutely no value added. And while we have been complaining about this for months, today just takes the cake. Below we present the entire list of permitted issues to be monetized by Frosty-Sack. Note that there were 29 CUSIP eligible for buybacks. What happened - the Primary Dealers flipped virtually the entire operation in the form of the just auctioned off 3 Year PQ7! This is half the entire Primary Dealer allocation in the bond auction that was completed on January 11 ... One more 3 Year POMO, the next of which is on January 31, in which PDs flip a like amount, and the Fed will have monetized the entire auction, but in the process having paid at least a few hundred million of taxpayer capital to the PDs for absolutely no value added! This is a daylight robbery and has to stop...


Probably the PDs get a bigger subsidy by the low interest rates they can borrow at, however,

The Fed Does It Again: $80 Billion Secretive "Bank Subsidy" Program Uncovered, Providing Bank Loans At 0.01% Interest
http://www.zerohedge.com/article/fed-does-it-again-80-billion-secretive-bank-subsidy-program-uncovered-providing-bank-loans-0Would love for Ron to go into more detail on the Fed (like what we've been talking about). We know negative campaigns work...so why not campaign against the Fed in TV ads. Use the black and white pictures, graphs, fact bombs and other exposes to education the ignorant public. At the end of the end have Ron Paul come on and say he is for ending this abuse of power once and for all...I think that would be very powerful.

[rpwi]

Doesn't the fed proliferate profits on loans back into the government? Aren't these loans held in government bonds? Wouldn't defaulting on said bonds fuck us over internationally?We wouldn't default on treasury securities owed to external entities (like foreign governments or private individuals)...but rather only those owned by the Fed.

Sure...this means less revenue from the Fed...but much of that revenue passes through Fed expenses first. The biggest advantage of defaulting on debt owed to yourself is that prevents manipulation of such assets (like the horrible one-way swap the Fed did to bailout the banks) and manipulation of the income on those assets (all taking part in a black box).

[Liberty1789]

Thanks socal, your links are fantastic!

[Slacker]

We would need Argentine sized balls.