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How To Eliminate $4.5 Trillion of Debt
Note: It’s dark north of NYC. Only those with generators have lights, heat and the ability to communicate. I counted 27 trees down on my property; the costs to make the damage right will be about $10k. Insurance will not pay a dime. I got off easy.
You’ve seen the pictures by now, big trees hanging on downed wires. What you miss from the pictures is the scope of the devastation; it’s massive. Whatever your estimate for the cost of Sandy, and how long it will take to get back to “normal”, double or triple it. And it’s getting cold. Anyway, allow me a (lengthy) ramble on a somewhat bizarre idea that has been floating around.
Tear Up the Paper
Total global debt is around $200Tn. World GDP is less than $70Tn (300% global debt to global GDP). Advanced economies have a higher percent of total Debt/GDP then developing countries. So the crux of the problem lies with Japan, most of the EU and the USA.
The question of what to do with all this debt has become a topic of discussion of late. The catalyst was (surprisingly) the IMF. Some deep thinkers at the IMF have resurfaced an old idea. Just cancel the debt; make it disappear. FTAlphaville, Ambrose Pritchard, and Zero Hedge have had articles that discussed the IMF paper.
This sounds beautiful. According to the IMF, the mechanism for debt cancellation is already in place. The proposal is to simply eliminate all of the US Treasury debt that is purchased by the Fed (QE). At the end of the day, the citizens “own” both the Treasury and the Fed, so the loss to the Fed from cancellation is the gain of the Treasury. One pocket is full of Assets; the other pocket is full of Debts. Both pockets are emptied; no one is richer or poorer as a result.
Hmmm. What’s wrong with this?
-The Fed would have a loss. Does this matter? I’m not sure. The most important Central Bank in the world would have a negative net worth. But the Fed would still have the Full Faith and Credit of the USA behind it, so the loss is irrelevant.
-If the Fed wanted to tighten monetary conditions at some point in the future it would normally sell the bonds that it had purchased. But if the bonds had been cancelled, the Fed would have nothing to sell, and therefore could not reduce reserves.
Ideas like this scare the crap out of worriers like me. The result of debt cancellation (ala the IMF)is a permanent increase in money outstanding (signorage). But the reality is, the bonds purchased by the Fed ARE permanent. The Fed will never be able to sell the trillion or two of Treasury bonds that it owns, so we might as well just recognize that fact, and cancel the bonds.
-The problem that I see is one of scale. How much additional Treasury debt could the Fed buy and then cancel? They currently have approximately $1Tn that is eligible for cancellation. There is a limit to the purchases that could be accomplished. I don’t think the Fed could buy an additional $3Tn without serious consequence to the government bond market.
-This is a goofy concept. Arbitrarily cancelling publicly issued debt has a bad ring to it. This has the appearance of a desperate act. Destabilizing the Fed might have negative consequences.
The IMF's objective is to reduce debt by a meaningful percentage, and to accomplish that without consequence. If that is the case, I have a an alternative proposal. America could eliminate $4.5Tn of IOUs with the stroke of a pen. Debt to GDP would fall from today’s perilous level of 102%, to a much more comfortable 70%.
That also sounds nice, BUT, I hope to show that there ain’t no free lunch when it comes to tearing up IOUs.
The Plan
The Social Security Trust Fund (SSTF), the Federal Workers Retirement Fund (FERF) and the Military Retirement Fund (MRF) are sitting on a whopping $4.6Tn of Special Issue Treasury Securities. This category of debt is referred to as intergovernmental debt. What would happen if all of this debt was erased? Not a damn thing. That may sound impossible; follow the money.
SSTF, FERF and MERF all have the same operating profile:
-They take in real cash money.
-They pay benefits.
-They have assets in the form of those Special Issue securities.
-They earn interest on their assets. Importantly, interest is not paid in cash, it is paid with more paper.
-The Funds are running annual cash deficits. (Tax receipts are less than benefits paid).
Consider what happens with SSTF. In 2012 they will have an operating cash shortfall of $50Bn. It must have cash in hand to pay the benefits, so it must sell (redeem) an amount of its portfolio of SI bonds to cover the shortfall. It redeems the necessary amount with the Treasury. The Treasury has no cash lying around so it must issue more Debt to the Public. The result:
Pre-SSTF cash shortfall
Debt to Public = 12.0Tn
IG Debt = 4.5Tn
Total = 16.5Tn
Pro-forma a $100Bn SSTF cash shortfall:
Debt to Public = 12.1Tn
IG debt = 4.4Tn
Total = 16.5Tn
Note that Debt to Public (DTP) increases, IG goes down, total debt is unchanged. Now consider what happens when IG debt is eliminated:
Pre-SSTF cash shortfall
Debt to Public = 12.0Tn
IG debt = 0
Total = 12.0Tn
Pro-forma a $100Bn SSTF cash shortfall:
Debt to Public = 12.1Tn
IG debt = 0
Total = 12.1Tn
So there you have it. It doesn't matter at all if the Intergovernmental Account is eliminated and all those Special Issue Treasuries are ripped up. $4.5Trillion of US debt is just a fiction.
I know that there will be some who look at this and say, "But the bonds held by the SSTF are my security that SS will continue to pay monthly checks". There is not one shred of truth to that line of thinking. Congress can alter the benefits paid by SS anytime it chooses. The existence of the SS Trust Fund has nothing to do with that promise to pay.
When you peel back the onion that is the Intergovernmental Account, you find that there are no real assets, just paper and accounting gimmicks.
If the objective is reduce debt, there are cosmetic ways to do it. But eliminating the debt does not eliminate the underlying problem. As long as the SSTF, FERF and MRF run annual cash deficits (they will for the next 75 years) the real debt that America has, will have to rise.
The result of eliminating the IG debt is not unlike the consequences of the IMF's Chicago Plan. It looks like something is being achieved. The result is an immediate reduction in debt. But really that is just a charade. The liability just pops up someplace else. The pain of debt is not eliminated, just hidden so we feel better about it. Sorry IMF, it won't work.
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You're correct that there is corruption, but it has all been legalized. There's no prosecution possible because these acts of plunder are not criminal (although they should be!).
This is just one example:
http://www.fedsmith.com/2011/09/30/looting-social-security-pretaxing-baby-boomers/
BWD - hard to take your math serious with your avatar bouncing her junk at me...
Fuck man... at least get it right...
Even if you were right that would be one plus one plus two plus one, NOT one plus two plus one plus one
500 per tree? That's steep compared to the 200 per tree in my neck of the woods. Do you get to keep the firewood? Could you mill the wood? What happened to the property of the smart-ass jogger who complained about your fence?
I got a good chuckle out of all the "tough guys" laughing at the hype of a CAT 1 storm. I know from experience these can be devastating storms as the eye of Fran went over my house. Took the area over a year running cleanup trucks 24/7 to clean up all the debris from felled trees.
The trees came down in rows. One went, took three more in the process.
I had four come down on top of an outbulding. That will cost me a new roof and other repairs. I figure about $5Gs for that alone.
So the trees will cost me another five grand before I'm done. My generator is running 24/7. About $300 a day.
Like I said, I got off light.
Yes...
But If You Loan ME the $10,000... then Claim that Loan as an asset... and then leverage that with some borrowed money... to $40,000... use the $40,000 to buy distressed Real Estate in your area... from Fannie Mae at their STILL very low interest rates... Sell The Property back to a Big Bank at 1.5 times cost... take $20,000 profit and hire distressed out of work New Yorkers... to get wood removed... then put out Press Release that you are doing that...
take $300 a day Income Tax Deduction on Generator cost... since you needed it to see to WRITE, INVEST and CONDUCT your business...
Hmm. I'm one of those who is subject to the Alterantive Minimum Tax. That means I get no deductions at all. But thanks for the thought.
Today, about 4m people are subject to AMT. If we fall of the fiscal cliff, that number will rise to 25m.
Misery loves company! <3
Isn't the entire fiat monetary system just paper and accounting gimmicks?
they will cancel debt as it will lead to thier next great debt reduction tool, hyperinflation. too easy!
Free Lunch Syndrome.
I'll have my cake, eat it, and it cost nothing. Only at the unicorn ranch.
More like I wanna have my cake, eat it, then shit it out and eat it again cause it was so good the first time. The cost is what it's going to taste like when it goes on the shit sandwich we are all about to take a bite of because of socialism and corporate welfare.
Gosh canceling all that debt would deny the edomite banksters all that money.... that's anti-semetic....
No, we must learn that the behavior we have engaged in to arrive here cannot be continued. Cancelling debt without the change of behavior is pointless. We haven't learned our lesson yet.
The people who work everyday and don't abuse their credit ALREADY KNOW THIS LESSON.... It's the "others" that need to change, and they are unlikely to do so when they can tax you endlessly to buy votes, or the others who can just get welfare and still buy their brand new F150's trucks....
Go deeper - this isn't just about credit bubbles but an abrogation of our responsibilities as citizens of a republic. We must value education more than football, we must understand and actively engage in our nations governance, we must change the fact we are ok with people flouting the constitution. We must make ourselves anew or there is little point in fixing the financial. A nation of daytraders, welfare recipients, SS recipients, eterenal college students...all watching a couple of mexican guys work their ass off as fry cooks in McD's and some smucks trying to create small biz's against all odds...
We, as a nation, have allowed what we have become. We have decided it's easier to go along than protest. "We" have done this...it has not been done to us. We have been lied to and lied to ourselves...so much easier than the painful truths which would neccessitate change needed for a brighter future...
We must value education more than football
That's where I stopped reading.
Not gonna happen.
yeah, I know...I went toooooo far.
Go even deeper. This is about the abrogation of our rights and responsibilities as sovereign individuals.
Spot on. It always comes down to individual responsibilty. You either picked up that from your parents or you didn't. That's why the twin tenets of libertarians are always and forever individual freedom and individual responsibility.
amen brother
OK Don Q, you go ahead and fight the beast. Best of luck to you, I mean it. Be advised however, that he who fights the powers that be whilst participating in their grand charade is on a fool's errand.
Get out. Stand aside and watch the beast fall of its own weight without your support.
Then, and only then, can society be rebuilt on sounder foundations.
My point isn't that it can be saved by creating a magical third party or some such BS...it's just that the majority of American's don't disagree with this enough to do anything about it. This may not have been what "we" wanted but it wasn't ever repudiated.
Interesting that also as we "pull out" of the markets, the economy, the society we only make it that much easier for these entities to be manipulated, marginalized, and controlled...potentially forestalling the change desired?
You forget, the fed is as federal as fedex, it's privately owned and will NEVER go for a loss.
I will take a loss if you renew my charter to counterfeit the currency at will.
But how is it a "private" company remits its interest payments back to the Treasury???
Quasi private?
That's called a bribe.
Croc- You the man dude! +10
Well, obviously, they're a 'charitable organization'.
Eureka ! ....I just love the smell of Zimbabwe first thing in the morning ! Let's burn some non-negotiable IOUs !
But, but Bruce ... Where is our 'Lockbox' money?
33 Liberty.
But isn't hyperinflation equivalent to elimination of debt?
Nutshell version:
When you peel back the onion that is the Intergovernmental Account, you find that there are no real assets, just paper and accounting gimmicks.
Reports of water's ability to flow uphill have been greatly exaggerated.
There are still only three choices: payback, default or inflation.
Perhaps we could get Authur Anderson to audit these plans.Oh wait...
This is a real, live horror show. It's like the IMF has Krugman whispering in their ear.
There was a Night Gallery episode in which a man died a horrible death when someone put a Krugman in his ear and it laid eggs.
"The Federal Reserve will not monetize the debt." --Berskank to Congress.
Then I guess he's a liar.... a real big one.
Nah, just traditional, barbarous behavior
A debt jubilee is exactly what paperbug banksters will propose to save their own ass.
The reason for this "goofy" plan is that the real value of UST's, JGB's, and the various Euro bonds is a substantial fraction of their current market prices. This plan in essence pays the debt back at par, which is absurdly overpriced, which is why the IMF/owner class fucking loves this idea.
Money for nothing and chicks for free...
I want my IMF.....
I'd settle for just "chicks for free". That's where most of mine goes anyway.
Great post, Bruce - there is no free lunch. Shuffling around 1's and 0's on a computer from the left pocket to the right pocket adds exactly zero value.
One thing I would add is that in the economic sense of the word, the Fed can't have a "negative net worth" really. Its biggest asset isn't listed on the balance sheet...sole permission and ability to print USD. Want to sell that intagible asset to me? I'll pay a quadrillion for it (I'll just pay you tomorrow if you don't mind).
Where it matters is the ECB, where the member countries are responsible for "capitalizing" the ECB in the event of a loss. Just listen to Nigel Farage speak about this...it's brilliant.
shuffling around between their pockets is what these guys do best
You think you can cancel the SSTF, the FERF and the MRF with merely the stroke of a pen?
Go ahead and try it.
There was one proposal a while back. (Seems the Treasury still has unlimited coinage rights) so someone suggested that Geithner could mint a few Trillion dollar coins and then hand them to Bernanke. Yeah, that'll do it. Job done. Next?
http://www.slate.com/articles/business/moneybox/2011/07/the_5_trillion_c...
but then there's always this:
http://www.zerohedge.com/contributed/2012-10-31/how-eliminate-45-trillion-debt#comment-2934477