Mike sent me an email asking about the legality of a proposal Joe Weisenthal wrote about, for the Fed to tear up the T-bonds it holds (instantly reducing the Public Debt by that amount). I was dubious whether either the Fed or Tsy had the legal authority. But on second thought, who’s going to stop them? Why not tee it up, there is no third party with legal standing to challenge what would essentially be an intergovernmental transaction (and its rather unlikely the US Government would prosecute… the US Government).
As a political matter, I would frame the matter as the Fed governors altruistically donating the bonds back to American people instead of just “ripping up the debt”. One sounds civic-minded, like something Jimmy Stewart would do; the other sounds nihilistic, like something they’d do back in Mad Max-era Australia.
In any event, the Fed would just book the written off debt as a “negative liability” to Treasury and then never think about it again (in legal terms, this would place the debt in a rocket and then shoot it into the Sun). For his part, the Secretary of the Treasury would gratefully accept this gift on behalf of the American people (and maybe send the Fed governors a cheese wheel or something to say thanks).
“To provide the people of the United States with an opportunity to make gifts to the United States Government to be used to reduce the public debt… the Secretary of the Treasury may accept for the Government a gift of… an obligation of the Government included in the public debt made only on the condition that the obligation be canceled and retired and not reissued.” 31 USC 3113(a)(1(B)
Naturally I think it’d be better for Tsy to exchange a Trillion Dollar Coin or two for Fed-held debt. It’d be an asset swap that simply scales up existing coin seigniorage procedures without requiring the Market to wrap its hive-mind around the idea of trillion dollar “gifts to the United States Government”. On the other hand, the TDC would rob Ben Bernanke of the opportunity to look like the greatest philanthropist in history, so there’s that. Without a looser fiscal stance, I don’t think this or any other monetary policy will make much of a difference. However, there is an expectations channel to consider– if by use of TDG (or TDC), Tsy can shrink the Public Debt by trillions of dollars (without austerity!), we can expect it will be more likely Congress and the President will embrace more aggressive fiscal policy.
Calling it a gift is a good idea. The exercise may have a signalling/encouraging impact as you note.
But it’s worth noting as most people do not that in today’s credit-economy with a liquid repo market, this exchange by itself has no impact. Past government bonds are already equivalent to money as they can be repoed for money if anybody needs money and they’re already nominally risk-free.
So long as the state doesn’t abuse its ability to create nominally safe assets, it can maintain a level of government debt ad infinitum – obviously what this level is differs from country to country. Some fiat currency issuers have a lot more leeway than others – e.g., the US has a lot more leeway than Hungary for example. But still the question to ask is not ‘What is the maximum level of government debt is that can be plausibly paid back?’. It is ‘What is the maximum level of government debt that can be plausibly serviced on a permanent basis?’
http://www.macroresilience.com/2012/10/17/monetary-and-fiscal-economics-for-a-near-credit-economy/
“Whether the central bank monetises government debt or not is almost irrelevant (except from a signalling perspective) because the private sector can monetise government debt just as effectively.”
(commented on your blog as well).
Ashwin,
Nice points.
Although I am not sure why this “repo” argument keeps coming. Households do not repo and firms also do not repo to finance working capital and to finance investment. Even if they are involved in repos, they are sophisticated enough to borrow elsewhere if the repo market wasn’t developed.
Also it is simply not true that governments can spend ad-infinitum. You mention Hungary and it shows exactly what the constraint is – it is one of the biggest debtors of the world and fiscal policy has a “balance of payments constraint”
Thanks Ashwin.
One factor I didn’t mention is the issue of the independence of the Federal Reserve (at least until the Supreme Court gets around to overruling Humphrey’s Executor v. United States on “unitary executive” grounds).
http://www.volokh.com/posts/1207512634.shtml
The Trillion Dollar Gift puts the Fed in the driver seat; the Fed governors are the benefactor, the Secretary of the Treasury (on behalf of “the people of the United States”) is the beneficiary. On the other hand, the Trillion Dollar Coin makes the Secretary the shot caller. Even if the Fed agrees this time, he can always come back and put jumbo coins to the Fed anytime in the future (all US coins are legal tender, after all).
Agree that the TDC has a better ‘vibe’ to it for sellability. There’s enough misconception about the Fed and its ‘independence’ that it may not be beneficial in the long run for it to be seen that the US Government needs gifts from (what many perceive to be) a non-US government entity to ‘service the debt’. The TDC would do a better job of showing the general public A) Treasury is in charge & B) that the US monetary system does not rely on the Fed to stay solvent, and may even help a few people come around on the idea that solvency is never an issue.
Re: Who might challenge the Fed and Treasury.
I would imagine there will be some insane Texans willing to fund a challenge to simply tearing up the debt, or perhaps one of the many Koch outfits. Pete Peterson probably has something to say on this as well.
The beauty of the combination of 31 USC 3113(a)(1(B) and the TDC is that these are written into law already. This is the path to tearing up debt in the United States.
“I would imagine there will be some insane Texans willing to fund a challenge to simply tearing up the debt, or perhaps one of the many Koch outfits. ”
Unless the plaintiff can show that they have suffered a harm, they won’t be granted standing to challenge a government action unless they’ve, “alleged such a personal stake in the outcome of the controversy’ as to warrant His Invocation of federal-court jurisdiction and to justify exercise of the court’s remedial powers on his behalf.” Reuss v. Balles, 584 F.2d 461, 465 D.C.Cir.1985).
Yes, but what about bondholders, you ask. Doesn’t financial repression sounds like something Amnesty International would be against? Alas, federal courts aren’t as sensitive to human rights as you and Peter Gabriel.
“Even if appellant could allege a more concrete injury, he would have difficulty establishing that the injury was caused to a sufficient degree by the challenged actions of the appellees. The actions taken pursuant to decisions of the FOMC are but part, albeit an important part, of the forces that determine the value of one’s financial holdings. Therefore, even if one considers the FOMC to be the most important component of the Federal Reserve System, it does not necessarily follow that the actions of its members and the Reserve Banks can be singled out in suits seeking to counter perceived declines in the nation’s economy… We hold, therefore, that appellant lacks standing to sue on his bondholder theory.” Reuss, 469-80.
I just wrote a song about a single man who is harmed by the tearup of our national debt.
“oh Bill Gross, Bill Gross, Bill Gro-o-oss, Bill Gross”
“31 USC 3113(a)(1(B)”
Nice points Beowulf.
Ashwin’s comment has good logic but I think what you mean to say is that a reduction in the public debt may make the government “feel” it has less debt and hence do a fiscal expansion – so psychologically helpful in using 31 USC 3113(a)(1(B)
For JKH:
In case you haven’t seen:
New article by Sinn:
http://www.voxeu.org/article/target-losses-case-euro-breakup
The new Buiter article referred to is here:
http://willembuiter.com/unsinn3.pdf
What about phrasing it like this? Let’s talk about taxing the bonds and the interest.
Here is something from Matt Y on the topic:
http://www.slate.com/blogs/moneybox/2012/10/22/central_bank_debt_cancellation_a_potentially_promising_idea_that_might_not.html
“”An awful lot of pixels and column-inches have been spilled on the obviously false (somehow by coincidence the threshold is invariably found to be a round number in a base-10 system, presumably the economics of Tau Alpha C, where people have three fingers on a hand work differently) idea that there’s some magic debt-to-GDP ratio threshold at which point economic growth slows. Bond burning would put us further away from the arbitrary threshold and thus perhaps increase political tolerance for budget deficits. Alternatively, right now expansionary monetary policy often faces a lot of political resistance, some of which may be due to the opaque nature of its operations. Direct monetization—Fed gives Treasury money in exchange for bonds, Treasury gives money to taxpayers, Fed burns the bonds and says the point is to raise present and expected nominal income levels—might be a clearer way of communicating to nonspecialists what’s going on and why it’s supposed to work.”
There is nothing in here about the actual process required to tear up the debt. This is where the Trillion Dollar Coin comes into play. Tearing up the debt is the idea, the TDC is the legal pathway to do so.
More crazy fear mongering in the mainstream with this ad I just saw on CNN: http://defeatingthedebt.com/
Of course the above video are Chinese actors, not China – but how about we announce a one time $1T penalty on the Chinese for currency, trade practices or whatever, Viola, we don’t owe China anything, and they can start a new pile of greenbacks. We can explain their other choice is ongoing tariffs that crush their exports. And everyone can stop saying “we owe most of it to China” despite it being only 7% of the total
Every single detail of that commercial is wrong beginning with “2030 AD”. Anno Domini (in the Year of Our Lord) goes before the date, not after.
interestingly their website manifesto says “technically the US can’t go bankrupt” but then goes on to be as misleading as the video.
Hi!
In this article, on FTalphaville, a credit suisse analyst, William Porter, is quoted saying :
“Any financial problem can be solved at a stroke if double-entry book-keeping can be ignored as a constraint. The problem is, it cannot. So debate in the private-sector financial community about “solutions” to the UK’s financial challenges based on ignoring it worry us.”
http://ftalphaville.ft.com/2012/10/29/1235631/two-plus-two-equals-four-even-at-the-bank-of-england-2/
Reading the reste of the article, I tried but wasn’t able to understand his point. Can you ?
Yeah, it was curious that after he wrote that Porter goes on to make the point the math works after all. Since the British govt owns the Bank of England, the transaction is a wash, like writing an IOU to yourself– whether you redeem it or cancel it is irrelevant.
Porter’s (who works for Credit Suisse) real problem with this plan is it destroys the illusion that governments must obey the bond market. As James Carville put it (after Greenspan had backed newly elected President Clinton into making deficit reduction his top priority), “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.” Its the loss of this intimidation power that Porter grieves.