Here's the usual dauly lie from Duh Kang:

http://ap.tbo.com/ap/breaking/MGIKJJ94E4C.html

He's promising to expand health care AND pay off the national debt! Whatta guy!

My question is: Is it possible to pay off the debt? I thought that if you paid off a dollar of debt, that was a thoeretical dollar that was 'destroyed', since it was borrowed into existence in the first place. SO, if we paid off the debt, we would destroy our existing dollar base and induce hyper-DEflation, right?

Any M-supply experts out there to make comment? Most of my dollars have already been taken out of existence, so it won't affect me!

Broke Kook

-- Y2Kook (Y2Kook@usa.net), February 07, 2000

Answers

Every Dollar in our wallets have been borrowed into existance. There is no debt free money in the USA. It is mathematically impossible to pay off the debt with borrowed money. If you tried, you'd run out of money and all our dollars would disapppear. It shows that either Duh Kang has no clue or he's in on the scam and is scamming WE THE PEOPLE!!! Either way it shows he's an IDIOT!!!

-- ... (...@...com), February 07, 2000.

>> My question is: Is it possible to pay off the debt? I thought that if you paid off a dollar of debt, that was a thoeretical dollar that was 'destroyed', since it was borrowed into existence in the first place. SO, if we paid off the debt, we would destroy our existing dollar base and induce hyper-DEflation, right? <<

The US Treasury gets money in two ways: tax revenues and borrowing. Both sources of money divert pre-existing dollars to the government coffers, where it is then circulated back out into the general stream of economic activity by purchasing goods and labor.

The US Treasury owes its debt to a wide variety of people and institutions. Banks may hold Treasury bonds as part of their reserves (yes - those famous "fractional reserves" we all hear so much about in TB2000). But, AFAIK, banks do not loan money to the US Treasury in the same way as they loan money for you to buy a car or a house. Instead, T-bonds or T-bills are considered to be cash equivalents.

Paying down the national debt would not destroy money. It might slow down the velocity of money, since the government tends to spend its money very quickly. That would tend to be somewhat deflationary, but not hyper-deflationary.

What is confusing to most folks is the relationship between the Federal government and the Federal Reserve banks. The US Treasury can only work with the amount of money in circulation already. The Federal Reserve banks have the power to create new money and circulate it out where the Treasury can get its hands on it.

-- Brian McLaughlin (brianm@ims.com), February 07, 2000.

Brian - Appreciate the refresher explanation, thanks

-- Guy Daley (guydaley@bwn.net), February 07, 2000.

Actually, repaying any loan destroys "money", whether at the FED level or the local credit union. As loan creation adds "assets" to a bank's ledger, repayment of loan principal adds "liabilities" to the same ledger, which then cancel each other out. If everyone paid off their loans and refused to borrow further, the economy would quickly collapse into depression due to a paucity of circulating funds. There is no danger of everyone paying off their loans anytime soon, but, finding themselves all tapped-out, the current generation of borrowers could easily retrench from additional borrowings at this time, which in itself could have deflationary consequences among the private sector. In that case, look for a rampant increase in borrowings in the public sector. The money spigot must remain wide open at all times in order to support the inflation distributed throughout the equity and real estate markets.

-- Nathan (nospamwh@tsoever.moc), February 07, 2000.

>> Actually, repaying any loan destroys "money" <<

The big question, then, is whether a transfer of money to the US Treasury in exchange for a T-bill or T-bond is treated on a bank's ledger as a loan, or as a movement of assets from one cash equivalent to another.

The distinction is important because a bank only needs to carry enough cash reserves to cover a *fraction* of a loan outlay. So, if a bond purchgase is carried on the books as a bank loan, then paying down the national debt destroys money, as you indicate. If a bond purchase is carried on the books as a cash equivalent (as I believe it is), then it is only a cash transfer, not a loan - kinda like an interbank transfer.

Leastwise, this is my understanding of how it all works.

-- Brian McLaughlin (brianm@ims.com), February 07, 2000.

For the most part, the commercial banks don't lend money to the US Treasury directly, only the Fed does, which is the whole point of the Fed in the first place - a ready source of funds for whatever the US Government thinks it needs to do whenever it thinks it needs to do it. In exchange for creating a loan to the Treasury from squat, the Fed is given a nicely engraved bond in return, which the FED then keeps for it's own account as an "asset" or sells on the primary market to whomever through designated government-paper market-makers on behalf of both the Fed and (indirectly) the US Treasury.

All debt in the banking system is treated as assets, until paid-off by the borrower. These "assets" can be sold (transferred) back and forth, and, throughout the life of the loan, may be used as a reserve basis for additional loans by both the Fed and the commercial banks.

The borrower of US Treasury debt is the US Government (well, the taxpayers, anyway), the lender is the Federal Reserve, and the debt- holder is also the Federal Reserve, unless it turns around and "sells" the note, bill, or bond, in which case, the purchaser, which may be a commercial bank, becomes a "proxy" for the original debt- holder but not the original lender. Normally, on maturity of the debt, the face value is returned to the current "proxy", if any, and the instrument is ultimately returned to the Fed, the original lender, who was already "paid" when the bond was transferred to the (a) "proxy" as an "asset" purchase, and the debt, having matured, is finally extinguished by the Fed.

The Fed may also "purchase" various maturities on the secondary market that it has issued but has not yet matured and extinguish this stuff as well if it feels like it or if the Treasury asks it to in exchange for tax receipts credits at the Fed or shorter-dated paper the Treasury has recently borrowed (sort of like it's doing right now).

-- Nathan (nospamwh@tsoever.moc), February 07, 2000.

>> ...the lender is the Federal Reserve, and the debt-holder is also the Federal Reserve... <<

While what you are saying is essentially true in detail (for example, the Fed can and does buy and hold US government debt), you are *far* overestimating the percentage of US government debt that is held by the Federal Reserve, as opposed to private parties, corporations like insurance companies, commercial banks, and other central banks. You are talking as if the Fed held the lion's share of this debt. It doesn't.

-- Brian McLaughlin (brianm@ims.com), February 07, 2000.

What over-estimate? Said no such thing. You're probably correct, though, in the amounts of US Government debt the Fed normally retains.

Did you know that the Fed also underwrites the debt of other entities as well, including other the debt of other governments, and then uses these as part of its "assets" as a basis for expanding the dollar monetary base?

-- Nathan (nospamwh@tsoever.moc), February 08, 2000.

>> Did you know that the Fed also underwrites the debt of other entities as well, including the debt of other governments ... <<

Yes, I know the Fed buys foreign debt. When it does this, it is mainly to manipulate the exchange rate between the dollar and whatever currency the foreign debt is denominated in. In some ways, our ability to dump foreign bonds on the market would hold those countries hostage to Fed policy, except they repay us the favor by buying and holding US debt.

>> ... and then uses these as part of its "assets" as a basis for expanding the dollar monetary base? <<

AFAIK, the assets of Fed are not *required* for expanding the monetary base. As I understand it, in the same way that the US Congress has no theoretical limit on its borrowing or spending, there is no theoretical limit on the Fed's ability to create dollars, since the Fed's authority derives from the unlimited powers of Congress to borrow and to coin money.

-- Brian McLaughlin (brianm@ims.com), February 08, 2000.

Actually, Congress has no authority to either create debt or to implement the debt-based version of "money" now in wide circulation. That's why they've "partnered" with the private banking industry via Federal Reserve. The trough of free dough for the Feds is just too tempting to pass up. The banks make a buck or two, and "everybody" is just too happy for words.

Y2Kook, you are correct. Repayment of the national debt would throw the country into a severe depression, all things being equal. However, if the private sector can be induced to continue to expand its debt load (doubtful), or if Federal Reserve can accelerate its underwriting of foreign debt (less doubtful), then perhaps the overall debt load may be balanced without contracting the total money supply. however, as the private sector is close to being tapped-out, the next recession/downturn will likely reverse the debt allocation flows back to the US Gov (a la 1990's Japan). The national debt will never decrease, much less ever be repaid in full - pure rhetoric.

-- Nathan (nospamwh@tsoever.moc), February 09, 2000.