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View Full Version : Economics Debt Ceiling: Could Ron Paul's Plan Save Us From Disaster?


BucEyedPea
07-05-2011, 07:39 PM
Debt Ceiling: Could Ron Paul's Plan Save Us From Disaster, twice? (http://curiouscapitalist.blogs.time.com/2011/07/05/debt-ceiling-could-ron-pauls-plan-save-us-from-disaster-twice/)
Okay this is making its way into mainstream news now but it was in The New Republic earlier.
This is far better than defaulting, even if it has a few drawbacks and is viable should Ds and Rs not reach a compromise.

The result of the QE2 is "that the Fed now holds nearly $1.7 trillion in U.S. debt. But that is really phony debt. The Treasury pays the interest on the debt on behalf of the U.S. government to the Fed, which in turn returns 90% of the payments it gets back to the Treasury. Nonetheless, that $1.7 trillion in U.S. bonds that the Fed owns, despite the shell game of payments, is still counted in the debt ceiling number, which caps that amount of total Federal debt at $14.3 trillion.

Paul's plan: Get the Fed and the Treasury to rip up that debt. It's fake debt anyway. And the Fed is legally allowed to return the debt to the Treasury to be destroyed. A trillion and a half dollars is currently about what spending is expected to exceed tax revenue in 2011...."

It buys time but read a bit more about it in the link.

Nightfyre
07-05-2011, 07:56 PM
The ability of the fed to take excess liquidity out of the market may be substantially impaired by this plan. Further, it reduces the pressure on congress to arrive at an actual solution.

Amnorix
07-05-2011, 08:09 PM
This plan makes no sense. Zero. You're acting like the Federal Reserve is a wholly-owned instrument of the US government, which it is NOT.

Second, such "forgiveness" would almost certainly be seen by international credit markets and the rating agencies as a default, in which case we would have a full-on economic collapse.

Just think about how absurd this is -- you're acting like it's literally nothing to make $1.7 TRILLION of debt magically disappear with no repercussions whatsoever. How could that possibly work under any imaginable scenario? It can't.

petegz28
07-05-2011, 08:35 PM
This plan makes no sense. Zero. You're acting like the Federal Reserve is a wholly-owned instrument of the US government, which it is NOT.

Second, such "forgiveness" would almost certainly be seen by international credit markets and the rating agencies as a default, in which case we would have a full-on economic collapse.

Just think about how absurd this is -- you're acting like it's literally nothing to make $1.7 TRILLION of debt magically disappear with no repercussions whatsoever. How could that possibly work under any imaginable scenario? It can't.

Why is that? We printed trillions out of thin air so WTF? The people who printed it own the debt and pay the interest back to the people who owe the debt. As it is stated, it's a shell game.

BucEyedPea
07-05-2011, 09:16 PM
The ability of the fed to take excess liquidity out of the market may be substantially impaired by this plan. Further, it reduces the pressure on congress to arrive at an actual solution.

That's the whole idea of the latter...it gives them time to work out a compromise. On the former, do you mean inflation controlling mechanisms by the Fed?

Chocolate Hog
07-05-2011, 09:16 PM
Mitt Romney will save us.

BucEyedPea
07-05-2011, 09:43 PM
Mitt Romney will save us.

:LOL:ROFLLMAO

KILLER_CLOWN
07-05-2011, 10:53 PM
Yes.

Nightfyre
07-06-2011, 11:54 AM
That's the whole idea of the latter...it gives them time to work out a compromise. On the former, do you mean inflation controlling mechanisms by the Fed?
In response to your question, yes. In response to your statement, I think the pressure to create a sustainable option is a good thing. As long as one is developed...

Stewie
07-06-2011, 01:12 PM
The ability of the fed to take excess liquidity out of the market may be substantially impaired by this plan. Further, it reduces the pressure on congress to arrive at an actual solution.

The Fed can't take excess liquidity out of the market as it is now. That's a fallacy that's lost on most people. It's their strategy that put them in this corner.

FD
07-06-2011, 01:23 PM
The Fed can't take excess liquidity out of the market as it is now. That's a fallacy that's lost on most people. It's their strategy that put them in this corner.

Haven't you been saying for a few months that QE2 couldn't end, that there had to be a QE3 or the country would explode or something like that?

Well QE2 ended, things seem more or less as before. You want to retract some of your predictions?

BucEyedPea
07-06-2011, 01:29 PM
In response to your question, yes. In response to your statement, I think the pressure to create a sustainable option is a good thing. As long as one is developed...

The New Republic article had more in their article to cover this.


I'll post it:

Unlike the debt held by Social Security, the debt held by the Fed is not tied to any specific obligations. The bonds held by the Fed are assets of the Fed. It has no obligations that it must use these assets to meet. There is no one who loses their retirement income if the Fed doesn’t have its bonds. In fact, there is no direct loss of income to anyone associated with the Fed’s destruction of its bonds. This means that if Congress told the Fed to burn the bonds, it would in effect just be destroying a liability that the government had to itself, but it would still reduce the debt subject to the debt ceiling by $1.6 trillion. This would buy the country considerable breathing room before the debt ceiling had to be raised again. President Obama and the Republican congressional leadership could have close to two years to talk about potential spending cuts or tax increases. Maybe they could even talk a little about jobs.

In addition, there’s a second reason why Representative Paul’s plan is such a good idea. As it stands now, the Fed plans to sell off its bond holdings over the next few years. This means that the interest paid on these bonds would go to banks, corporations, pension funds, and individual investors who purchase them from the Fed. In this case, the interest payments would be a burden to the Treasury since the Fed would no longer be collecting (and refunding) the interest.

To be sure, there would be consequences to the Fed destroying these bonds. The Fed had planned to sell off the bonds to absorb reserves that it had pumped into the banking system when it originally purchased the bonds. These reserves can be created by the Fed when it has need to do so, as was the case with the quantitative easing policy. Creating reserves is in effect a way of “printing money.” During a period of high unemployment, this can boost the economy with little fear of inflation, since there are many unemployed workers and excess capacity to keep downward pressure on wages and prices. However, at some point the economy will presumably recover and inflation will be a risk. This is why the Fed intends to sell off its bonds in future years. Doing so would reduce the reserves of the banking system, thereby limiting lending and preventing inflation. If the Fed doesn’t have the bonds, however, then it can’t sell them off to soak up reserves.

But as it turns out, there are other mechanisms for restricting lending, most obviously raising the reserve requirements for banks. If banks are forced to keep a larger share of their deposits on reserve (rather than lend them out), it has the same effect as reducing the amount of reserves. To take a simple arithmetic example, if the reserve requirement is 10 percent and banks have $1 trillion in reserves, the system will support the same amount of lending as when the reserve requirement is 20 percent and the banks have $2 trillion in reserves. In principle, the Fed can reach any target for lending limits by raising reserve requirements rather than reducing reserves.

As a practical matter, the Fed has rarely used changes in the reserve requirement as an instrument for adjusting the amount of lending in the system. Its main tool has been changing the amount of reserves in the system. However, these are not ordinary times. The Fed does not typically buy mortgage backed securities or long-term government bonds either. It has been doing both over the last two years precisely because this downturn is so extraordinary. And in extraordinary times, it is appropriate to take extraordinary measures—like the Fed destroying its $1.6 trillion in government bonds and using increases in reserve requirements to limit lending and prevent inflation.

In short, Representative Paul has produced a very creative plan that has two enormously helpful outcomes. The first one is that the destruction of the Fed’s $1.6 trillion in bond holdings immediately gives us plenty of borrowing capacity under the current debt ceiling. The second benefit is that it will substantially reduce the government’s interest burden over the coming decades. This is a proposal that deserves serious consideration, even from people who may not like its source.

http://www.tnr.com/article/politics/91224/ron-paul-debt-ceiling-federal-reserve

Stewie
07-06-2011, 01:32 PM
Haven't you been saying for a few months that QE2 couldn't end, that there had to be a QE3 or the country would explode or something like that?

Well QE2 ended, things seem more or less as before. You want to retract some of your predictions?

Not at all. Pay attention. There's $300 billion in "new" money to buy treasuries. This money should carry through until September-ish. They're calling it QE 2.5 as a joke because it's so transparent.

Stewie
07-06-2011, 01:39 PM
Just as a point of what's going on. The Fed CANNOT stop pumping money into the system. It might be called "shovel ready" or "We're here to help" or "We're doing the end-around"...... it is on-going. For the Fed to stop doing what they've been doing for years would be suicide.

JohnnyV13
07-06-2011, 01:45 PM
This plan makes no sense. Zero. You're acting like the Federal Reserve is a wholly-owned instrument of the US government, which it is NOT.

Second, such "forgiveness" would almost certainly be seen by international credit markets and the rating agencies as a default, in which case we would have a full-on economic collapse.

Just think about how absurd this is -- you're acting like it's literally nothing to make $1.7 TRILLION of debt magically disappear with no repercussions whatsoever. How could that possibly work under any imaginable scenario? It can't.

Amnorix, I can actually see it happening. The democrats and repubs are in a mexican standoff. This idea gives the dems a way out. If the dems think its less poliically damaging to tear up this debt, than to concede to the repubs, they could very well do it.

I don't know about you, but I've seen plenty of irrational "victory mania" ideas take over in zero sum confrontations.

I really don't know the precise structure of the Fed, nor the articles that govern its operation. I do know some bankers are likely to be VERY pissed off, because its going to kill their salaries, performance bonuses, and the bottom lines of a number of financial institutions. How much profit do banks take on holding federal debt? I don't know.

Will this be seen as a default? That's actually a good question and I don't know the answer. I'm not sure if anyone knows that answer, because I don't know if its been done before. The US is a bit odd with its very mixed private/public central bank.

If you consider the Fed mostly a public institution, (which is actually pretty arguable since this function clearly falls within the Fed's money supply and Treasury regulation mandate), then why can't the government destroy debt that it owes to itself?

The objection here sounds like a contract clause case, but the contract clause pretty much doesn't exist in modern constitutional law. Or, in the problems lie in the governing articles of the Fed. Of course, in a realpolitik sense, you could very well destroy the Fed, since the private bankers won't trust the government not to screw them in future, if they do this today.

Which is why Paul is actually pretty clever with this suggestion.

FD
07-06-2011, 01:50 PM
Not at all. Pay attention. There's $300 billion in "new" money to buy treasuries. This money should carry through until September-ish. They're calling it QE 2.5 as a joke because it's so transparent.

:facepalm:

This is not anything new, these purchases are just reinvesting the maturing securities and has always been a planned and announced part of QE2. If you think this is something "new" then you are just saying you didn't understand what QE2 was in the first place.

Stewie
07-06-2011, 01:52 PM
Amnorix, I can actually see it happening. The democrats and repubs are in a mexican standoff. This idea gives the dems a way out. If the dems think its less poliically damaging to tear up this debt, than to concede to the repubs, they could very well do it.

I don't know about you, but I've seen plenty of irrational "victory mania" ideas take over in zero sum confrontations.

I really don't know the precise structure of the Fed, nor the articles that govern its operation. I do know some bankers are likely to be VERY pissed off, because its going to kill their salaries, performance bonuses, and the bottom lines of a number of financial institutions. How much profit do banks take on holding federal debt? I don't know.

Will this be seen as a default? That's actually a good question and I don't know the answer. I'm not sure if anyone knows that answer, because I don't know if its been done before. The US is a bit odd with its very mixed private/public central bank.

If you consider the Fed mostly a public institution, (which is actually pretty arguable since this function clearly falls within the Fed's money supply and Treasury regulation mandate), then why can't the government destroy debt that it owes to itself?

The objection here sounds like a contract clause case, but the contract clause pretty much doesn't exist in modern constitutional law. Or, in the problems lie in the governing articles of the Fed. Of course, in a realpolitik sense, you could very well destroy the Fed, since the private bankers won't trust the government not to screw them in future, if they do this today.

Which is why Paul is actually pretty clever with this suggestion.

The Federal Reserve IS the big banks. The Treasury is also former Big Bank/Federal Reserve executives. Try busting up that group of thieves.

Stewie
07-06-2011, 02:03 PM
:facepalm:

This is not anything new, these purchases are just reinvesting the maturing securities and has always been a planned and announced part of QE2. If you think this is something "new" then you are just saying you didn't understand what QE2 was in the first place.

But that wasn't supposed to happen. It's Goldilocks!

I bow to your impeccable knowledge.

Rolling over is the play of the day. Let's roll over Greek debt for 30 years and all is golden. Oh wait, that won't work? Ummmm... Well, more money! It's a complete sham.

You don't think there are agents of the Fed buying debt that isn't shown as Fed debt?

FD
07-06-2011, 02:05 PM
I bow to your impeccable knowledge.

Rolling over is the play of the day. Let's roll over Greek debt for 30 years and all is golden. Oh wait, that won't work? Ummmm... Well, more money! It's a complete sham.

You don't think there are agents of the Fed buying debt that isn't shown as Fed debt?

You really think I'm going to take anything you say seriously after months and months of doomsday predictions that never came true, followed by an admission that you don't even understand what QE2 was in the first place?

Stewie
07-06-2011, 02:09 PM
You really think I'm going to take anything you say seriously after months and months of doomsday predictions that never came true, followed by an admission that you don't even understand what QE2 was in the first place?

Whew! I'm glad we're out of the woods. I thought unemployment was really high, but apparently there are jobs galore and housing prices have rebounded!

What was the result of QE2? Tell me, I really want to know.

BucEyedPea
07-06-2011, 02:22 PM
I never said I thought the Fed was a wholly govt institution. I have posted before that it's a hybrid. It does exists solely as a result of govt though. Just getting that assumption out of the way.

Stewie
07-06-2011, 02:31 PM
Since Forward Dante hasn't responded to my post and I have to go... here's the result of QE2:

1) It paid the losses for the losers in Over The Counter Derivative plays.
2) It didn't make credit easier for the common people/small businesses (see #1).
3) It paid foreign banks with US taxpayer dollars.
4) It completely failed.

The Federal Reserve HAS to continue easy money. Whether they call it QE3 doesn't matter. It HAS to be done.... or we're done in the short term.

Stewie
07-06-2011, 02:37 PM
One last note. Can anyone list the offshore entities that buy US debt for the Federal Reserve... or China?

FD
07-06-2011, 02:39 PM
Since Forward Dante hasn't responded to my post and I have to go... here's the result of QE2:

1) It paid the losses for the losers in Over The Counter Derivative plays.
2) It didn't make credit easier for the common people/small businesses (see #1).
3) It paid foreign banks with US taxpayer dollars.
4) It completely failed.

The Federal Reserve HAS to continue easy money. Whether they call it QE3 doesn't matter. It HAS to be done.... or we're done in the short term.

As I said before, its hard to take anything you say seriously after months and months of doomsday predictions that never came true, followed by an admission that you didn't even understand what QE2 was in the first place


For others interested in the effects of QE2, here is some recent work trying to answer that question:

Large-Scale Asset Purchases by the Federal Reserve: Did They Work? (http://www.newyorkfed.org/research/epr/11v17n1/1105gagn.pdf)
by Joseph Gagnon, Matthew Raskin, Julie Remache and Brian Sack

The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment (http://dss.ucsd.edu/~jhamilto/zlb.pdf), by Jim Hamilton and Cynthia Wu

The Financial Market Impact of Quantitative Easing (http://research.stlouisfed.org/conferences/qe/wp393.pdf) by Michael Joyce, Ana Lasaosa, Ibrahim Stevens and Matthew Tong.

Flow and Stock Effects of Large-Scale Treasury Purchases (http://research.stlouisfed.org/conferences/qe/damico_king_Apr11.pdf) by Stefania D’Amico and Thomas King

Stewie
07-06-2011, 02:49 PM
As I said before, its hard to take anything you say seriously after months and months of doomsday predictions that never came true, followed by an admission that you didn't even understand what QE2 was in the first place


For others interested in the effects of QE2, here is some recent work trying to answer that question:

Large-Scale Asset Purchases by the Federal Reserve: Did They Work? (http://www.newyorkfed.org/research/epr/11v17n1/1105gagn.pdf)
by Joseph Gagnon, Matthew Raskin, Julie Remache and Brian Sack

The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment (http://dss.ucsd.edu/%7Ejhamilto/zlb.pdf), by Jim Hamilton and Cynthia Wu

The Financial Market Impact of Quantitative Easing (http://research.stlouisfed.org/conferences/qe/wp393.pdf) by Michael Joyce, Ana Lasaosa, Ibrahim Stevens and Matthew Tong.

Flow and Stock Effects of Large-Scale Treasury Purchases (http://research.stlouisfed.org/conferences/qe/damico_king_Apr11.pdf) by Stefania D’Amico and Thomas King

You're quoting the fucking FED and Dept. of Education!

Keep drinking that bullshit!

Of course the markets go up! It's the fucking point! Make the markets look attractive and bring in money from investors and have them lose another 45%.

JFC! If people listen to this bullshit it's no wonder their investments are in the toilet!

The 10+ year return in the DOW, NASDAQ, S&P is a losing proposition... by ALOT! We used to laugh at the Japanese in 1999 about the dismal fall of 50%. Well, that's the NASDAQ since 2000! We have smart money managers! But it's all about the DOW... you know... we manipulate that and move bad companies out. WE'RE THE DOW. PEOPLE WATCH US!

BucEyedPea
07-06-2011, 03:56 PM
Since Forward Dante hasn't responded to my post and I have to go... here's the result of QE2:
1) It paid the losses for the losers in Over The Counter Derivative plays.
2) It didn't make credit easier for the common people/small businesses (see #1).
3) It paid foreign banks with US taxpayer dollars.
4) It completely failed.


It really bailed out crony capitalists like Paulson, GE etc. Don't know if they have to continue to print. Stockman is right too. Dante is wrong.

<iframe width="640" height="390" src="http://www.youtube.com/embed/GHLjoAI2-iQ" frameborder="0" allowfullscreen></iframe>

Stewie
07-06-2011, 03:59 PM
If anyone, ANYONE, would read Bernanke's PhD thesis you know the road we're going down.

BucEyedPea
07-06-2011, 04:45 PM
If anyone, ANYONE, would read Bernanke's PhD thesis you know the road we're going down.

Do you know where it can be found? Anywhere on the net?

Ugly Duck
07-06-2011, 04:56 PM
Its good for Republis, bad for the middle class. Cost of borrowing will go way up when faith in willingness of the government to pay existing debt is reduced, recovery is stalled, middle class suffers & blames it on Obama. Good strategy to get Republis elected, bad for the struggling recovery.

petegz28
07-06-2011, 05:53 PM
Its good for Republis, bad for the middle class. Cost of borrowing will go way up when faith in willingness of the government to pay existing debt is reduced, recovery is stalled, middle class suffers & blames it on Obama. Good strategy to get Republis elected, bad for the struggling recovery.

the government takes in currently 11 times the amount it would need to continue to fund our debt obligations even if the debt ceiling is not raised.

You are buying the other side of the Paulson coin. You want a recovery? Then do things that actually stimulate job growth, like lowering corporate taxes. Make it cheaper to do business thus cheaper to higher new people.

Printing money and tossing it at a problem doesn't fix anything. Right now people who kept or were hired because of stimulus monies are now losing their jobs because the stimulus monies are going away. The stimulus was nothing more than putting a silk hat on a pig. Meanwhile the excessive printing has driven up the costs of goods that the middle class you so worry about depend on every day.


The Stockman guy in the video is exactly right. Companies should have been forced to deal with the consequences of taking on too much risk.

You want the economy to grow then you have to create private sector jobs and you don't do that by tossing tax payer $'s at the problem. That doesn't last, it isn't organic growth and it will put us in a worse situation in the long run.

Nightfyre
07-06-2011, 05:59 PM
The Fed can't take excess liquidity out of the market as it is now. That's a fallacy that's lost on most people. It's their strategy that put them in this corner.

I didn't say they could right now. I said that it would burn that card for whenever they did it in the future. Also, the fed has been rolling over qe1 so I'm not sure why you are surprised or outraged by the rollover of qe2, beyond the fact that the feds monetary policy has resulted in, moreorless, stagflation.

petegz28
07-06-2011, 06:01 PM
I didn't say they could right now. I said that it would burn that card for whenever they did it in the future. Also, the fed has been rolling over qe1 so I'm not sure why you are surprised or outraged by the rollover of qe2, beyond the fact that the feds monetary policy has resulted in, moreorless, stagflation.

Stagflation? Try inflation. I know, I know, we aren't supposed to count food and energy because that is onlt :temporary" according to The Ben Bernank. Then again all these problems we have were considered temporary by The Ben Bernank.

Ugly Duck
07-06-2011, 07:33 PM
You are buying the other side of the Paulson coin.

No I ain't. I'm buying that if we refuse to pay for the bills that we've already rung up then our credit rating will go down & interest rates will rise. How we handle future debt is another problem - what the Republis are threatening is to welch out on the bills that Congress has already approved & the Senate has already ratified & the President has already signed. That will totally slam our credit rating.

petegz28
07-06-2011, 07:38 PM
No I ain't. I'm buying that if we refuse to pay for the bills that we've already rung up then our credit rating will go down & interest rates will rise. How we handle future debt is another problem - what the Republis are threatening is to welch out on the bills that Congress has already approved & the Senate has already ratified & the President has already signed. That will totally slam our credit rating.

Yes you are. No one is refusing to pay anything. You are buying into this mythical fear that if we don't raise the debt ceiling we will go into default. We won't. You totally ignored everything I said, and did exactly what I accused you of doing. We have 11 times the revenue needed to pay the debt obligations. It is pure BS that if we don't raise the debt ceiling we will go into default. That's simply not true. We have the money to pay. We will pay. Our credit rating will be fine.

BucEyedPea
07-06-2011, 08:02 PM
Its good for Republis, bad for the middle class. Cost of borrowing will go way up when faith in willingness of the government to pay existing debt is reduced, recovery is stalled, middle class suffers & blames it on Obama. Good strategy to get Republis elected, bad for the struggling recovery.

You need to get off the Republicans are bad and the Democrats are good. Really, it's just not logical. There is good and bad in both sides. Well, perhaps a bit more good with the Rs. You merely sound like you're afraid of Rs gaining some edge.

CoMoChief
07-06-2011, 08:58 PM
This plan makes no sense. Zero. You're acting like the Federal Reserve is a wholly-owned instrument of the US government, which it is NOT.

Second, such "forgiveness" would almost certainly be seen by international credit markets and the rating agencies as a default, in which case we would have a full-on economic collapse.

Just think about how absurd this is -- you're acting like it's literally nothing to make $1.7 TRILLION of debt magically disappear with no repercussions whatsoever. How could that possibly work under any imaginable scenario? It can't.

it's fake money.

Calcountry
07-07-2011, 02:48 PM
No I ain't. I'm buying that if we refuse to pay for the bills that we've already rung up then our credit rating will go down & interest rates will rise. How we handle future debt is another problem - what the Republis are threatening is to welch out on the bills that Congress has already approved & the Senate has already ratified & the President has already signed. That will totally slam our credit rating.No, just NOT raise the credit limit.

The debt limit is statutory, congress passed it and the President signed it.

It is law. It takes a legislative act to change it. Deal with it bitch. Swipe that credit card and it comes back deny. We still have the means to pay bills but the president can no longer give trillions to unions to sit around and build roads that fold up as soon as a truck hits them.

Nightfyre
07-07-2011, 06:32 PM
Stagflation? Try inflation. I know, I know, we aren't supposed to count food and energy because that is onlt :temporary" according to The Ben Bernank. Then again all these problems we have were considered temporary by The Ben Bernank.

Stagflation is an economic environment in which inflation is prevalent but growth is absent or negative. The two terms are categorically different, so I'm not sure what you're getting at.

Calcountry
07-25-2011, 05:10 PM
Why is that? We printed trillions out of thin air so WTF? The people who printed it own the debt and pay the interest back to the people who owe the debt. As it is stated, it's a shell game.With Goldman getting 2%

petegz28
07-25-2011, 05:49 PM
With Goldman getting 2%

Goldman is the most crooked company on Wall St. Backed by the Fed and the Fed Gov. They are they Mafia of Wall & Broad St's