Debtor's are beholden to the owner of the debt.
The Federal Reserve, despite it's name, is a private bank controlled by appointees from major banking interests. Thus a private bank decides how much money we have in circulation.
As long as the Federal government owes trillions of dollars to this private bank, those banking interests control and can dictate policy to our government.
THAT is reason enough. :coffeepap:
Now imagine that you could pay your debts by writing dollar denominations on a little piece of paper and depositing them at your bank. How could you ever run out of dollars?
What's that you say? The government doesn't create dollars it creates bonds. Ok, so take your pen, draw up bonds and deposit them in your bank. Your bank holds the bond, dollar for dollar as an asset and deposits the cash in your account. An extra step, but the result is still the same.
What's that you say? What if the bank decides not to accept the bond you create? Well, if we are being analogous to the US Federal Government (the Treasury), the bank has to accept your bond as part of its relationship with you.
In the same way, primary dealers are obligated to purchase bonds from the Treasury as part of their relationship....
Effective November 9, 2016, the Administration of Relationships with Primary Dealers has been superseded by the Federal Reserve Bank of New York Policy on Counterparties for Market Operations and specific eligibility criteria for primary dealers.
The primary dealers serve, first and foremost, as trading counterparties of the Federal Reserve Bank of New York (The New York Fed) in its implementation of monetary policy.
This role includes the obligations to: (i) participate consistently as
counterparty to the New York Fed in its execution of open market operations to carry out U.S. monetary policy pursuant to the direction of the Federal Open Market Committee (FOMC); and (ii) provide the New York Fed’s trading desk with market
information and analysis helpful in the formulation and implementation of monetary policy.
Primary dealers are also required to participate in all auctions of U.S. government debt and to make reasonable markets for the New York Fed when it transacts on behalf of its foreign official account-holders.
https://www.newyorkfed.org/markets/pridealers_policies.html
Ok, but what if foreign nations refused to purchase bonds from the Primary dealers, surely the system would break down, right?
The reality is that the Fed rolled over something like $94 trillion dollars in debt last year. Nations all over the world are dependent on US dollars to keep their economies afloat. The only way to stop purchasing US debt is to stop selling to US consumers. Can you imagine a nation like China saying that it was no longer going to peg it's currency to the dollar and instead let it free float? This is the only way it could stop buying debt (unless it just wanted to hold trillions more in FOREX reserves, $800 billion more each year). Breaking the peg would cause Chinese goods to skyrocket in price making American goods more affordable.
It would drop a bomb on both nations (the whole world really) as they would run short on demand and we'd run short on supply, but I'd rather be in our shoes than theirs. There are lots of nations that would be happy to take China's place in trying to create more supply and while we'd likely suffer high temporary inflation, that inflation would be driven by shortages in demand, shortages that US companies would be happy to meet. However, in China's case, there is no nation willing or able to purchase the volume of goods that the US purchases today.
