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Comments

The fed buying T Bills seems to me, in my uninformed position, to be a way to infuse cash into the economy.

Any one have comments?

ilsm:

you need to read Steve's "Money Series", all 6 parts. Its in the "popular Posts" bar on the right side at the top. very well written and informative.

Steve,

If i read the data correct, the estimated for debt holdings link shows that foreign officials onlt own about 1300 of the 2300 billion $. I assume that means individuals/institutions hold the rest? Doesnt that further cut into the argument that we are "owned" by foreign powers?

ilsm: Yes, the money supply must grow at approximately the same rate as the economy to prevent deflation or inflation. The Fed's goal is to supply just enough new money to keep the Fed Funds rate from rising past their target, and they do that by purchasing publicly-held T-securities.

Patrick: That's correct, but it's good to keep in mind that these breakouts are estimates by the Treasury, and *not* the result of an elaborately detailed international accounting system.

Your chart is misleading---of the 5 trillion dollars of debt held by the public 45% is owned by foreign governments. The Intragovermental debt-(IOUs) 3.8 trillion is kept off the public markets because it would not be marketable unless it unless it was backed by something other then the dollar. Bottom line is that the 3.8 trillion of IOUs is worthless other then it is owed to government accounts and the taxpayer is on the hook for them in the form of future payments. The Intragovenmental debt scam is the greatest con of the last 1000 years!

gun: You must have missed two previous articles. The first exposes the shell game played by fear peddlers on the subject of debt and who owns it; the second exposes the myth of the trust fund "raid."

http://www.optimist123.com/optimist/2006/03/three_card_mont.html
http://www.optimist123.com/optimist/2006/06/the_social_secu.html

I am looking forward to the day when I can issue debt to my self and call it my social security trust fund. LOL

Fan of Ron Paul:
If you put some gold coins in your lockbox, you'd be issuing debt to yourself. That's because *all* money, even gold, is "IOUs" (or you-owe-me's, depending how you look at it). LOL.

I presume you and the real Ron Paul are shorting the dollar and buying up all the gold you can get(?). Good luck.

Believe me if the govenment tried to peddle the Intragovermental debt of 3.8 trillion dollars into bonds for public consumption golds would be at $2,000 oz the next day and the dollar would be cut in half, also the 90 day
T-Bill would shoot up to about 25%. The only thing that the 3.8 trillion of Intragovermental debt has going for it--is the US tax payer is on the hook for it!

gun: The trust fund debt will start transforming into publicly held debt as soon as the social insurance system surpluses end and deficits begin. It will be gradual. Then, after the trust fund is (gasp!) *empty* (no bonds, no cash, no gold coins, no cowry shells), it will begin borrowing from the general fund, which will then become the fund that is "piling up IOUs".

Why do you think it's such a big deal which fund owes the other one? Why is it so difficult to see that the only thing that really matters is whether our real economy at the time is sufficiently healthy and robust to maintain public confidence in the value of the currency and treasury securities?

Lastly, let's get our facts straight: forget the Fed's boneyard holdings ($0.8T), which will never become publicly held debt again. The amount in question is $3.0 trillion mostly held in the trust funds.

Steve says ...Good luck.

Thanks. Goddess of luck has been smiling upon me.

http://www.chartoftheday.com/20061020.htm?T

Gold is an IOU with 2 critical differences among many. 1) Politicians can't inflate it to fund their big government agenda. 2) Gold is used in

.Textile industry
·Gold flake is used for a radiation-control coating for spacecraft
·In electronic tubes, as gold-plated grid wire, to give high conductivity and suppressing secondary emissions
·Gold powder and gold sheet is used for soldering semiconductors, with gold having a good ability to wet silicon at 371°C (725°F)

·Gold is used as a plating material, where sodium gold cyanide [NaAu(CN)2] is used as a gold plating solution. The plating has good chemical resistance and electrical properties, however the plating lacks wear resistance, in which case gold-indium plate is utilised.

Gold alloys also have a number of applications such as:

·Gold-gallium and gold-antimony are used in electronic industry (primarily as wire)

·Gold is used for dental applications and is rightly termed dental gold, where gold is alloyed with silver, platinum and on occasion palladium. It is sometimes alloyed with iridium for hardening.

Now, where as paper dollars may not even make a good a$$wipe.

http://mises.org/MultiMedia/video/Salerno/Salerno10.wmv

Government holding its own debt reminded me of a joke....

As Mr. Smith was on his death bed, he attempted to formulate a plan that would allow him to take at least some of his considerable wealth with him. He called for the three men he trusted most his lawyer, his doctor, and his clergyman. He told them, "I'm going to give you each $30,000 in cash before I die. At my funeral, I want you to place the money in my coffin so that I can try to take it with me." All three agreed to do this and were given the money. At the funeral, each approached the coffin in turn and placed an envelope inside. While riding in the limousine to the cemetery, the clergyman said "I have to confess something to you fellows. Brother Smith was a good churchman all his life, and I know he would have wanted me to do this. The church needed a new baptistery very badly, and I took $10,000 of the money he gave me and bought one. I only put $20,000 in the coffin." The physician then said, "Well, since we're confiding in one another, I might as well tell you that I didn't put the full $30,000 in the coffin either. Smith had a disease that could have been diagnosed sooner if I had this very new machine, but the machine cost $20,000 and I couldn't afford it then. I used $20,000 of the money to buy the machine so that I might be able to save another patient. I know that Smith would have wanted me to do that." The lawyer then said, "I'm ashamed of both of you. When I put my envelope into that coffin, it held my personal check for the full $30,000."

to Fan of Ron Paul:
Correct, gold money is an IOU. But gold renders impossible neither inflation nor deflation, because both overproduction and underproduction of gold are possible.

Gold has other uses, that's true, and that's a drawback to using gold as money. That's an advantage Federal Reserve Note has over gold: it is not used for anything else *besides* money. Although it can be overproduced and underproduced, just as gold can, its production (unlike gold's) is under the complete control of US citizens charged with maintaining its value as money.

I'm glad your speculation in commodities has been working out so far, however. But why would you call it "luck"? I assume you think it will continue forever due to inflationary government greed(?).

All are myths steve. Here is why?

http://mises.org/MultiMedia/video/Salerno/Salerno10.wmv

Murray Rothbard has written extensively about it.

I guess I should take that as a "yes."

I assume you think it will continue forever due to inflationary government greed(?)

Answer is a resounding yes. I don't know if a price of a particular commodity will be up or down the end of this month. But inflation is very safe bet
http://mwhodges.home.att.net/cpi-1800.gif

And we thought commodities were crashing this year. Ain't it?

http://www.crbtrader.com/data.asp?page=chart&sym=BZY0

http://www.crbtrader.com/crbindex/images/crb-b7.gif

I am not a big fan of taxes. But inflation is the most regressive form of taxes.

Great information. Surprised to see little Luxembourg (assume that's what "Lux." stands for) own such a significant portion of our debt.

As a resident of Australia, I'm continually reminded by gold miners why a world that is backed by gold currency needs a continuous supply of new gold as the economy keeps growing.

So a fraction of the worlds effort is used to harvest these "cowry shells" just so that prices of real stuff isn't deflationary. Strikes me as being silly really. Gold is not much more than a promissory note anyway. I'd wager that if we hadn't moved away from a gold-backed currency, the world economy would be generally stagnant, due to the lack of money supply. Or perhaps the wall st would invent new kinds of fiat money based around futures of pork and corn, just to grow the economy.

Wow didn't know Taiwan got so much of it!

This is what matters:

"Why is it so difficult to see that the only thing that really matters is whether our real economy at the time is sufficiently healthy and robust to maintain public confidence in the value of the currency and treasury securities?"

Gold, tulips, or other forms of exchange do not. The world is not going back to gold so get over it.

I've been surfing all over the
place to find meaningful discussion about growth. Solid ideas. Focus on the real problems we have. All I see is hand wringing. Analysis paralysis.

We have stuff hurling through space taking pictures of galaxies a gazillion light years from us and can't even come up with a cohesive energy strategy. All these brilliant minds and research dollars being wasted.

I'm discouraged. Where have all the inventors gone? Why are we afraid of risk? We were humiliated when the Soviets sent up Sputnik. Well, India or China could humiliate us again. Not possible? Think again. Just when any large organization gets slow and fat and
internally focussed some smaller, hungrier and faster organization comes along and cleans its' clock.

Bob,
I personally fault politicians whose priorities lie with redistribution of the existing pie. Makes it a lot easier to attract a large audience. To heck with the growth message; it's too hard to communicate, and "growth just happens" anyway.

My frustration with that was one of the reasons I started this blog two years ago. Since then, I've discovered that one of the hurdles standing in the way of the growth message is a lot higher than I'd anticipated: unfounded fear of the word "federal debt." If we could only think of a different name for it, such as "private assets," it would open the door to the growth message.

For the time being, I think I'll
trust Standard & Poor on this debt thing:
http://djomama.blogspot.com/2006/12/first-world-government-junk-bonds-on.html

As you can see, something is seriously wrong.

Steve,

I also fault some corporations and investors. When a firm is sitting on cash and uses it to buy back stock to gig the price instead of using it to innovate and create new markets or demand I say get rid of management. And a pox on Wall Street for encouraging this type of behavior.

Sorry for the rant today. I had this bottled up for a while.

The 3008 billion portion is not really "owned" by the "government", in that no entity sold any paper to the government. Those are simply unfunded liabilities.

jomama: Europe is headed for trouble, I agree. But I'd like to see S&P's growth rate assumptions for the US before I could agree or disagree with that line on the chart.

reality: Those trust fund bonds are "owned" by the trust funds, and will gradually become publicly held bonds starting when the trust funds go into deficit.

Bob: You and I think a lot alike.

http://www.theviewfromthepeak.net/newsblog/2007/03/no-debt-no-money.html

jomama - According to the blog you link to, the United States is going to go bankrupt. I'm one of its citizens, so that's highly unfortunate. Currently my nation is only spending a tiny portion of its GDP on interest on the debt,* so you are presuming that something will happen to enormously change that situation.

Myself, 300 million other Americans, and (to a somewhat lesser degree) most of humanity have an enormous interest in preventing the USA's fiscal doom (Weimar Republic style hyperinflation, for instance). Therefore, if it appears that a serous financial problem is coming, then we'll have to adjust our policies to prevent that.

*I'm not sure what the debt interest to GDP ratio is (Steve, perhaps you could calculate it for us?), but my guess would be that it's under 5%.

But there's a difference between trust fund bonds and unfunded liabilities. How much of the 3008 billion is trust fund bonds, and how much of the 3008 billion is unfunded liabilities?

Dude - all the money that goes out of the country with our negative current account balance - known to most as a trade deficit - mostly comes back in on the financial account. In other words, all the excess money we send to the Chinese and Japanese to kill our dogs with rat-poison dog food and to build better hybrid vehicles comes back to fund our high-risk adjustable rate and interest-only mortgages on overvalued properties, just so we can pay them back at a high rate or default. That's the foreign-owned debt to worry about.

The Savings and Loan crisis of the 1980s was a wave of savings and loan association failures in the United States in which over 1,000 savings and loan institutions failed in "the largest and costliest venture in public misfeasance, malfeasance and larceny of all time."[1] The ultimate cost of the crisis is estimated to have totaled around USD$150 billion, about $125 billion of which was consequently and directly subsidized by the U.S. government, which contributed to the large budget deficits of the early 1990s. The concomitant slowdown in the finance industry and the real estate market may have been a contributing cause of the 1990-1991 economic recession.

The 3008 billion portion is not really "owned" by the "government", in that no entity sold any paper to the government. Those are simply unfunded liabilities.

Actually the $2T SSTF is monies taxed from wage earners (W2 and the self-employed) up to the FICA annual limit, monies that were then spent by the general fund.

Given that incomes over the FICA limit pay the overwhelming bulk of income taxes, when the SSTF goes net negative, those same FICA-limit+ incomes will be taxed at higher marginal rates to fund the SSTF obligation.

Of course, that is with Grown Up economics.

With Voodoo/Koolaid Republican economics, risk will be socialzed while the profits are privatized. Republicans got spanked in that fight two years ago, but they'll try again some day.

Troy: The 3008B is an accounting entry; it is money owed by the government to itself. Whatever one wants to call the "economics" to make one's political point does not change the mechanics of the money stocks and flows.

The government incurs obligations in its own currency; some of those obligations are held by the public, some by the government itself. The latter will eventually be transformed into obligations held by the public, whether the bonds were originated by general fund "borrowing" from the trust funds, or vice-versa. Those bonds, which are backed by the government, will be redeemed with money, backed by the same government. The government's money will retain its value if and only if the real economy is large enough and vibrant enough to maintain the government's creditworthiness in the eyes of the users of money and the buyers of bonds, given the amount of money and bonds the government has choosen to issue.

How we tax ourselves, and how we supplement taxes with sales of Treasury securities, are political decisions. But how the money and bonds are created and how they flow are financial mechanics, not politics -- although the words one chooses to describe those mechanics ("voodoo" and "raid" for example) almost always depend on one's politics.

Thanks for the pie chart.

But Steve, there's a difference between trust fund bonds and unfunded liabilities.

How much of the 3008 billion is trust fund bonds, and how much of the 3008 billion is unfunded liabilities?

to reality:
The phrase "unfunded liabilities" has more than one possible meaning. In the context of "federal debt" being discussed here, the intragovernmental bonds are an unfunded liability (matched by the fact that it is not necessary that they be funded yet). Another possible meaning is the present value of liabilities that will likely be incurred in the future, tens of trillions worth. Those are not a part of today's "federal debt."

Which unfunded liabilities are you asking about?

I guess I'm just not seeing this "owning" National debt. I owe money but its OK because I took out a loan on the money I owe and it's collecting interest which increases the amount of money I owe myself but also increases the rate of return on the loan of the money I owe myself.

Curiouser and curiouser!!

muirgeo:
I'm not seeing why "owning" federal debt is such a difficult concept to grasp.

Maybe this would help: Go down to your bank and purchase a savings bond for $25. Within a few days, you will receive the bond in the mail. You will be the owner of a tangible, interest-bearing financial asset, a portion of the federal debt.

Now, in your mind's eye, multiply that amount by two hundred billion, and picture it divided up among millions of owners.

Does that help you see it?

interesting way of explaining " why owning federal debt is not a difficult concept to grasp " but still is hard to imagin it in my mind's eye !!

Steve,

For simplicity terms lets say I (each US citizen) owes $20,000 in public debt. So now I go and buy $20,000 dollars worth of US Savings Bonds. Who's paying my interest? Did my debt go away?

You can effectively neutralize your share of interest on the debt (collect the interest you pay for) by owning T-bonds in the amount of a little more than 2 times your tax liability. The interest on the debt takes about 10% of tax receipts, and the debt pays about 5% interest. But the interest is taxable, so you'd have to bump up your T-bond investment enough to cover that.

Others, however, might invest in higher-yielding investments instead of strictly T-bonds; then they'd have a little "left over" after covering their share of the interest on the debt.

Steve I'm a economic novice so I'll have to take your word for it. But it sure seems like we are paying are own interest or at best the federal reserve is just expanding the money supply to pay for it so. Seems a little like a shell game to me.

Anyway I'm much better at climate change/science. I'll proceed to your next post.

Thanks.

"You can effectively neutralize your share of interest on the debt (collect the interest you pay for) by owning T-bonds..."

Don't think so.

Time 1: I've got savings of value $X.

Time 2: The goverment increases the national debt, and the extra interest it must pay on the larger debt results in it dropping a tax increase of $1,000 annually on me.

Time 3: I "neutralize" this tax bill for the share of the interest that falls on me by buying $20k of Treasury bonds paying 5%, which pay $1,000 of interest income to me, offsetting the $1,000 of tax.

To do so, of course, I must first liquidate $20,000 of my original savings (or sell my car or some other asset, or refinance my home, or cut my annual consumption by $20k -- to get the money to buy the T-bonds).

Time 4, April 15th following Time 3: I discover, Yikes, I still owe the IRS a full $1,000 for that new tax to pay the interest!

IOW...

Start: Assets = $X

Then $1,000 tax bill drops on me to cover my share of servicing the increased debt.

Now: Assets = $X, of which $20k is T-bonds, and I owe $1,000 of tax too.

Nothing's been neutralized except my income, which is reduced by $1,000 a year to pay the new tax bill. I'm poorer by $1,000 a year, even after collecting the $1,000 of interest on the T-bonds.

(Actually I'm probably poorer by more than that if I really shifted $20k into T-bonds, since they pay a lower yield than anything else.)

Taxes don't become free by buying T-bonds. If only!

For that to be true, people would have to get the money they use to buy the T-bonds by printing it in their basements, so they could buy T-bonds without reducing any other investments or their spendable income. And that's illegal!

Hi Jim,
You're right, that $x was already there -- and part or all of it was the result of taxes having been lower than necessary to match federal spending for all those years. The fiscal policy of using "other people's money" to supplement tax receipts left extra money in the taxpayer's pocket.

Also, $x is yielding benefits (interest income, for example), which are probably higher than T-bond interest because of the risk premium. In that case, choosing to keep it intact instead of "neutralizing" the interest portion of taxes would yield more residual to the taxpayer.

Most significantly, the higher tax bill need not be funded by an increase in tax rates. It could alternatively be funded by an increase in one's taxable income, so that the government's extra tax receipts came from an increase in the tax base instead of the tax rates. That is what we've been seeing for the last several years, in fact.

"the higher tax bill need not be funded by an increase in tax rates. It could alternatively be funded by an increase in one's taxable income, so that the government's extra tax receipts came from an increase in the tax base instead of the tax rates."

Your theme here that politicians should first focus on fostering faster growth (rather than on divvying up the pie, arguing over who gets how much) is entirely correct, I couldn't agree more.

Keep pounding them on that!

Jim:
Good advice; I think I've overestimated the percentage of people who understand that "growth" means "higher paychecks."

To alter a Bob Dole-ism: "You know it, I know it, but not all of the American people know it."

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