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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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They can do all the cancelling they like , the curent/future liabilities will remain the same, as has been pointed out. The fact that a couple of different .gov departments can play rob-peter-to-pay-paul & pffff the 'debt' out of existence just means one more arrow in the anti-hyperflationary quiver goes pfff too, as that 'asset' can no longer pull inflationary fiat out of the system, when/if required. It seems like they're willing trying every trick in the book to make it appear like printing isn't their only option.
Wouldn't such a cancellation of debt as per the Chicago plan just simply be tantamount to direct monetization of said debts? It sounds effectively the same as what we currently have, only the numbers might look a bit prettier while the international debt purchasers, whatever is left of them, will probably get kind of spooked about it. Not that they aren't already spooked.
Bingo. It takes away Ben's argument that he is not monetizing because he will eventually retire the debt he bought with printed dollars.
The more one looks at that IMF plan, the stranger it sounds ... Seems one of those 'magic money' theories from some of the schools of 'greenbackers' and 'MMT' and so on. Very odd from the IMF ... it may be a sign of how desperate things are at the IMF these days.
Though it does have one favoured ZeroHedge sub meme, 'ending fractional reserve banking' in part
If I understand this grand IMF plan by IMF authors Benes and Kumhof correctly, according to the summaries -
(1) the Fed and central banks print up large boatloads of new 'debt-free' fiat money - we'll call them 'fiatscos'
(2) all the private banks involved in lending of any kind, then must rush to obtain '100% bank reserves' for all their loans outstanding, and to do this they then borrow fiatscos from the central bank
(3) and somehow (2) above includes the 20 - 30 trillion in 'shadow banking' entities, like Cayman Islands hedge funds engaged in 'repos' (repurchase agreement) lending, they play along too
(4) Then, the central bank, having printed up boatloads of money, and now also owning boatloads of 'assets' which are loans of that printed money to private banks, then uses these 'assets' to 'buy' and thus 'pay off' national debt
In summary we print trillions of fiatscos and the national debts all get paid off and we are all off on a jolly holiday with no worries ...
Am no economic expert but this rather feels to me a revised Gideon Gono - Central Bank of Zimbabwe plan, except that he didn't try to involve the Cayman Islands hedge funds ...
Well I am told you might still get '1 trillion Zim dollars' in change on the Zimbabwe bus lines after you pay with an SA rand or US dollar
With all due respect, shouldn't this be even simpler from the "banker" point of view?
How real is "the Full Faith and Credit of the USA" when it chooses to use a shredder as a means of reducing its debt load?
Wouldn't any prudent bank or purchaser of UST's DEMAND a higher rate of return as additional risk premium associated with the debt instruments of the United States of Zimbabwe?
I think all this is centrally planned malarkey myself. The salient point is "the Fed threatens purchases and the market goes crazy for the paper." (MBS being the latest example.) I say "the Oddball method" remains the best: "have a little faith, the Bridge will be there." I really don't see the need for panic with the US Navy ready to blow up half the planet "for whatever."
Military personnel won't continue to back the government when their pay is being delivered in the form of worseless scrip and they can no longer use it to take care of the needs of their families. What happened to the Roman empire's military when it debased its currency? GONE.
Brillinant. Simply brilliant.
Just like the EU/Euro/etc. morass/abyss.
Don't address the problem of spending more than is feasible, out of balance, impractical, irresponsible and downright criminal.
Instead, just cancel the debt
Which is a default, BTW, despite nice sounds like Jubilee, Moratorium, whatever...
So once the debt is cancelled, the problems persist, behavior changes not and the cycle starts all over again.
The Problem Remains Unaddressed
Like putting Band-aids on cancerous lesions and declaring it all healed.
Minus the discipline of deleveraging cycle...
Some twerp from the OECD (?) was in the telly this morning talking about how everything is in place, the problems are solved, let's just do it!
Do fucking what?
Pretend some more?
What is surely criminal is the arrogance and incompetence of these people... seriously disturbing.....
spending that is "more than feasable, out of balance, impractical, irresponsible and downright criminal"
a good list, but I would order them differently