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US Treasuries as loans and payback options

JohnfrmClevelan said:
OK, that's what I thought - you were looking at the Fed's books, and not the national debt.

Like I said before, the Fed got that balance sheet from QE - meaning, they bought those treasuries and MBSs from the private sector in exchange for (newly-created) reserves and increased bank account balances. Those treasuries already existed, and were held by private sector parties.

Before QE, the private sector held x in dollar savings, with lots of that in bonds and less in reserves/account balances. After QE, the private sector still held x in dollar savings, but with less of it in bonds and more of it in reserves/account balances. Treasury's financial position did not change.
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Tne deficit is $22Trillion. It has to have come from TBonds. Those are loans. Explain payback.
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JohnfrmClevelan said:
OK, that's what I thought - you were looking at the Fed's books, and not the national debt.

Like I said before, the Fed got that balance sheet from QE - meaning, they bought those treasuries and MBSs from the private sector in exchange for (newly-created) reserves and increased bank account balances. Those treasuries already existed, and were held by private sector parties.

Before QE, the private sector held x in dollar savings, with lots of that in bonds and less in reserves/account balances. After QE, the private sector still held x in dollar savings, but with less of it in bonds and more of it in reserves/account balances. Treasury's financial position did not change.
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What's the difference between a "newly created reserve" and a loan?
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DaveFagan said:
Tne deficit is $22Trillion. It has to have come from TBonds. Those are loans. Explain payback.
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You don't want to extinguish all government liabilities. They are used by the private sector. Bonds are important saving instruments, and they are also used by in international trade. They stabilize a lot of banks, both in the U.S. and in the rest of the world. Reserves are held by commercial banks as assets and settlement funds, and cash is, well, cash. All of those are government liabilities. They are also all private sector assets.

Tell me what you think the problem is with the government simply continuing on, replacing expiring debt with new debt. Bondholders are completely happy holding bonds. That's why they bought them in the first place.

DaveFagan said:
What's the difference between a "newly created reserve" and a loan?
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A reserve is analogous to a dollar in your bank account. Do you consider your bank to be "in debt" to you? Technically, your account balance is a bank liability, so you can call it a debt, but when you opened your account, it was for your benefit, not the bank's. They didn't need your deposit to survive. You and your bank have a mutually beneficial relationship.

You really seem to be stuck on the idea of "payback," as if this is the same thing as you paying back a loan from your neighbor. But those two situations are nothing alike. Without government liabilities, like bonds, there would be no money. Money is created on ledgers; assets on one side, and liabilities on the other. You going into debt to buy your house creates bank account balances that can be used for transactions. Government deficit spending also creates money that can be used for transactions. Eliminate those debts, and you extinguish all of that money.
 
JohnfrmClevelan said:
You don't want to extinguish all government liabilities. They are used by the private sector. Bonds are important saving instruments, and they are also used by in international trade. They stabilize a lot of banks, both in the U.S. and in the rest of the world. Reserves are held by commercial banks as assets and settlement funds, and cash is, well, cash. All of those are government liabilities. They are also all private sector assets.

Tell me what you think the problem is with the government simply continuing on, replacing expiring debt with new debt. Bondholders are completely happy holding bonds. That's why they bought them in the first place.



A reserve is analogous to a dollar in your bank account. Do you consider your bank to be "in debt" to you? Technically, your account balance is a bank liability, so you can call it a debt, but when you opened your account, it was for your benefit, not the bank's. They didn't need your deposit to survive. You and your bank have a mutually beneficial relationship.

You really seem to be stuck on the idea of "payback," as if this is the same thing as you paying back a loan from your neighbor. But those two situations are nothing alike. Without government liabilities, like bonds, there would be no money. Money is created on ledgers; assets on one side, and liabilities on the other. You going into debt to buy your house creates bank account balances that can be used for transactions. Government deficit spending also creates money that can be used for transactions. Eliminate those debts, and you extinguish all of that money.
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Loans. DaveFagan applies at bank for DaveFagan bonding/loan of $10,000. Bank OKs same and deposits $10,000. in DaveFagan Bonding/loan account. Bank carries DaveFagan Bonding/loan as asset and also has Deve's money on deposit while it is used to cover costs. This works because Dave has income/resources to cover principal and interest payments. Coupons AND principal Reduction. Standard Operating Procedure. Bank can sell my loan anytime. Banking regulation friendly.

US Treasury applies at bank for US Treasury bonding/loan of $1 Triillion. Bank/FED OKs same and deposits $1 Trillion in US Treasury Bonding/loan account. Bank carries Bonding/loan as asset and also has US Treasury's money on deposit while it is used to cover costs. This works because US Treasury has income/resources to cover interest only. Coupon and no principal reduction. NOT Standard Operating Procedure. Bank can sell US Treasuries/loan anytime. Banking Regulation friendly???

US Treasury perhaps abuses this option and suddenly owes $22 Trilliion in Bonds/loans, only paying the interest. However, as soon as the paper is written and approved, the Trillions of dollars are credited to the US Treasury, and gives birth to the term, "money from thin air."

Do these paragraphs seem clear, accurate, real World? I can understand why a FED or any bank would want to unload assets that just paid interest and no principal reduction. Especially since the collaterol is the words "full faith and credit" and nothing of intrinsic value.
 
JohnfrmClevelan said:
Tell me what you think the problem is with the government simply continuing on, replacing expiring debt with new debt. Bondholders are completely happy holding bonds. That's why they bought them in the first place.
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The problem is that we're paying interest for no reason. People get interest for doing nothing and we lose money when there's no need to.
 
DaveFagan said:
Loans. DaveFagan applies at bank for DaveFagan bonding/loan of $10,000. Bank OKs same and deposits $10,000. in DaveFagan Bonding/loan account. Bank carries DaveFagan Bonding/loan as asset and also has Deve's money on deposit while it is used to cover costs. This works because Dave has income/resources to cover principal and interest payments. Coupons AND principal Reduction. Standard Operating Procedure. Bank can sell my loan anytime. Banking regulation friendly.

US Treasury applies at bank for US Treasury bonding/loan of $1 Triillion. Bank/FED OKs same and deposits $1 Trillion in US Treasury Bonding/loan account. Bank carries Bonding/loan as asset and also has US Treasury's money on deposit while it is used to cover costs. This works because US Treasury has income/resources to cover interest only. Coupon and no principal reduction. NOT Standard Operating Procedure. Bank can sell US Treasuries/loan anytime. Banking Regulation friendly???

US Treasury perhaps abuses this option and suddenly owes $22 Trilliion in Bonds/loans, only paying the interest. However, as soon as the paper is written and approved, the Trillions of dollars are credited to the US Treasury, and gives birth to the term, "money from thin air."

Do these paragraphs seem clear, accurate, real World? I can understand why a FED or any bank would want to unload assets that just paid interest and no principal reduction. Especially since the collaterol is the words "full faith and credit" and nothing of intrinsic value.
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This part is incorrect: "Bank carries DaveFagan Bonding/loan as asset and also has Deve's money on deposit while it is used to cover costs."

You can't treat both sides of the bank's ledger as assets. Your promissory note for the loan is the bank's asset, but the "money" in your account is the bank's liability, because the bank is on the hook when you want to withdraw that money.

Here's what happens when you take out a loan for $1000: your bank marks up your account by $1000, and counts your promissory note as an asset, worth, say, $1200 (principal + interest). The bank is instantly up $200 on paper.

You use your loan to buy something. The bank marks your account down by $1000, and the Fed transfers $1000 from your bank's reserve account to the reserve account of payee's bank. Both your bank's assets (the reserves) and liabilities (your account balance) go down by $1000, so overall, your bank is still up $200. But the reserves were a hard asset, "cash in hand," of your bank, while your note is a soft asset (not yet paid). If you default, your bank has to write off your note, and it will lose the $1000 in reserves that was transferred when you wrote a check (payee did nothing wrong here). If you instead repay your loan, your bank will end up with $1200 in reserves, and both your $1000 account balance and your note are extinguished - a profit of $200 in hard assets (reserves). That explains why bank debts must be repaid; because the bank takes a very real loss when you default.

Almost all of the money in our bank accounts is the product of open bank loans - mortgages, car loans, business loans, etc. (A small fraction is from government-created money.) We're riding a wave of credit; your debt is my money, and vice versa. Repay all of the principal, and there is no more money. All that is required for this to work is that people continue to repay (usually) their loans. Taken as a whole, it's just servicing the large pile of credit, because the total debt seldom gets any smaller, and normally grows. Which is a good thing - when bank lending decreases and the pile shrinks, we normally go into recession. You could say that banks, too, count on "the full faith and credit" of their borrowers as a whole, because if they default, the whole system falls apart.

The story is similar, but not the same, with Treasury. Treasury issues bonds (promissory notes, if you like), held mostly by people, and spends the proceeds. Treasury has no problem servicing that debt, because they have both income from taxation and perfect credit. Everybody is happy.

Does the government have enough to "pay off" the principle? Yes, they do. But it's in our hands; we are holding it as savings. As government liabilities are extinguished through tax surpluses, the government could tax the crap out of its own economy (us), and ruin the economy in the process.

Does the government need to "pay off" the principle? Of course not. Dollars and bonds are liabilities in the accounting sense only; no real resources were used to create them, no labor was spent, no raw materials were sold.
 
phattonez said:
The problem is that we're paying interest for no reason. People get interest for doing nothing and we lose money when there's no need to.
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It's not satisfying when rich guys earn interest just for holding bonds, but we aren't losing money in the deal. We simply have to create a little more, which the government can do, no problem.
 
JohnfrmClevelan said:
It's not satisfying when rich guys earn interest just for holding bonds, but we aren't losing money in the deal. We simply have to create a little more, which the government can do, no problem.
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Disagree. In fiscal 2018 we spent $371 billion on interest. That's equal to $1139 per American. Instead of paying interest on debt to rich guys who do nothing, we could have sent all Americans a check for $1000. That's a huge cost.
 
JohnfrmClevelan said:
It's not satisfying when rich guys earn interest just for holding bonds, but we aren't losing money in the deal. We simply have to create a little more, which the government can do, no problem.
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Please read Post #3 now regarding a payback scenario, because it seems that only a fool would want to own uncollaterolized debt. I know we have built a "debt" economy and think that the entire scheme is supported by confidence. Nothing else. It does not instill confidence in me at any rate. You finally used the words "promisory note" for TBills and that is what I was seeking. We both understand this economic system, but many words are designed to obfuscate, not intentionally in your case and I am demeaning you in no way. I genuinely appreciate your contributions to the question at hand and acknowledge your expertise. "Money from thin air" was another important acknowledgement to understand this from a layman's perspective and vocabulary. Thanks.
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phattonez said:
Disagree. In fiscal 2018 we spent $371 billion on interest. That's equal to $1139 per American. Instead of paying interest on debt to rich guys who do nothing, we could have sent all Americans a check for $1000. That's a huge cost.
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First, we don't get charged for the debt, per capita or otherwise. You will never get a bill for "your share."

Second, that interest in no way prevents the government from sending us checks, or paying for universal healthcare, or the military, or anything else.

There is no way you can call that a "cost" in the same way that you or I repaying a bank loan is a cost. We have to work to earn money to repay our debts. The government does not. It's just different.
 
JohnfrmClevelan said:
First, we don't get charged for the debt, per capita or otherwise. You will never get a bill for "your share."

Second, that interest in no way prevents the government from sending us checks, or paying for universal healthcare, or the military, or anything else.

There is no way you can call that a "cost" in the same way that you or I repaying a bank loan is a cost. We have to work to earn money to repay our debts. The government does not. It's just different.
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It's an indirect cost. Paying interest on debt prevents us from funding other projects or, if they were funded, we'd need more money, which means more devaluation.

You're trying to get around the fact that interest on debt is a real expense. Just because it's not borne by us directly doesn't mean it's without cost.

Sent from my phone. Instaurare omnia in Christo.
 
DaveFagan said:
Please read Post #3 now regarding a payback scenario, because it seems that only a fool would want to own uncollaterolized debt. I know we have built a "debt" economy and think that the entire scheme is supported by confidence. Nothing else. It does not instill confidence in me at any rate. You finally used the words "promisory note" for TBills and that is what I was seeking. We both understand this economic system, but many words are designed to obfuscate, not intentionally in your case and I am demeaning you in no way. I genuinely appreciate your contributions to the question at hand and acknowledge your expertise. "Money from thin air" was another important acknowledgement to understand this from a layman's perspective and vocabulary. Thanks.
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Money has always been a physical representation of debt, even when it was represented by coins, whether gold or some more common metal. Governments have always created and spent money for their economy's use, and that money has value, if for no other reason, because governments demand tax payments in their own currency.

Put another way - if everybody keeps on producing, they will pay on their loans; then, the economy works. If, for whatever reason, they stop producing, then payments, gold, and collateral will mean nothing anyway.

The world was built on debt. It works.
 
phattonez said:
It's an indirect cost. Paying interest on debt prevents us from funding other projects or, if they were funded, we'd need more money, which means more devaluation.

You're trying to get around the fact that interest on debt is a real expense. Just because it's not borne by us directly doesn't mean it's without cost.
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If there is no devaluation, then there is no cost. So it's on you to demonstrate that interest payments - which just go to buy more bonds - devalue the dollar.

I have challenged a lot of people to demonstrate the same thing, and so far, nobody has been able to do it.


Now, consider regular ol' deficit spending. Is that a "cost"? If the government deficit spends $1 trillion, doesn't the economy produce $1 trillion more (and I'm not even counting any multiplier effects) than it otherwise would have? That's money in our pockets. If the government spends $1 trillion, and we get (considering a modest 1.5x multiplier) $1.5 trillion more production, does that still devalue the dollar? Or does it possibly add value to the dollar?
 
JohnfrmClevelan said:
If there is no devaluation, then there is no cost. So it's on you to demonstrate that interest payments - which just go to buy more bonds - devalue the dollar.
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Of course there's still a cost. Our money would have been worth more. We'd have been able to buy more goods. Instead that benefit goes to bondholders.

Why should the increased productive capacity of an economy go to bondholders and not to society at large?

Now, consider regular ol' deficit spending. Is that a "cost"? If the government deficit spends $1 trillion, doesn't the economy produce $1 trillion more (and I'm not even counting any multiplier effects) than it otherwise would have? That's money in our pockets. If the government spends $1 trillion, and we get (considering a modest 1.5x multiplier) $1.5 trillion more production, does that still devalue the dollar? Or does it possibly add value to the dollar?
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It sure can add value. Now why should we lose that gain by devaluing the currency to pay bondholders? Without that interest payment the currency users, all Americans, would benefit. Instead the bondholders benefit for doing nothing, decreasing the benefit that would have gone to all Americans.

Sent from my phone. Instaurare omnia in Christo.
 
phattonez said:
Of course there's still a cost. Our money would have been worth more. We'd have been able to buy more goods. Instead that benefit goes to bondholders.
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That's a great, big, unsupported assumption you're making there. That's why I asked you to back it up with some data. It's the crux of the whole argument. If there is no devaluation (and there isn't), then there is no cost to the government, there is no cost to the economy, and there is no cost to any of us.

phattonez said:
Why should the increased productive capacity of an economy go to bondholders and not to society at large?
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Society at large does reap the benefit. Deficit spending means that there is production that would not otherwise have occurred, so the people that earn that money do reap the benefit.


phattonez said:
It sure can add value. Now why should we lose that gain by devaluing the currency to pay bondholders? Without that interest payment the currency users, all Americans, would benefit. Instead the bondholders benefit for doing nothing, decreasing the benefit that would have gone to all Americans.
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You're making the same unfounded assumption here. And it's the very same assumption that conservatives (and even Democrats) have used to deny Americans a lot of good stuff that we could have been enjoying - universal healthcare, an increased minimum wage, funds for scientific research, funds for the arts... you had better make a convincing argument that the dollar actually loses value when we pay create new money, because the argument for buying those benefits is very, very strong.
 
JohnfrmClevelan said:
Money has always been a physical representation of debt, even when it was represented by coins, whether gold or some more common metal. Governments have always created and spent money for their economy's use, and that money has value, if for no other reason, because governments demand tax payments in their own currency.

Put another way - if everybody keeps on producing, they will pay on their loans; then, the economy works. If, for whatever reason, they stop producing, then payments, gold, and collateral will mean nothing anyway.

The world was built on debt. It works.[/QUOTE]

Red-Built on USA debt, not World debt. It is the US Dollar that has become the World currency because of OIL sales from Saudi Arabia and Military support of Saudi Arabia in return for OIL sales being only in the US Dollar. This created an imbalance in World currencies and the USA has perhaps abused the World economy to facilitate its' own advantage. Politicized and weaponized the WORLD??? Currency. That is what prompts my curiousity about the status of USA debt and the nature of confidence to support that debt. Abuse of the privileges of our US Dollar may precipitate the demise of the confidence that supports the US Dollar.
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DaveFagan said:
Red-Built on USA debt, not World debt. It is the US Dollar that has become the World currency because of OIL sales from Saudi Arabia and Military support of Saudi Arabia in return for OIL sales being only in the US Dollar. This created an imbalance in World currencies and the USA has perhaps abused the World economy to facilitate its' own advantage. Politicized and weaponized the WORLD??? Currency. That is what prompts my curiousity about the status of USA debt and the nature of confidence to support that debt. Abuse of the privileges of our US Dollar may precipitate the demise of the confidence that supports the US Dollar.
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Well, up until WWII, the English pound was a "world currency," and it's doing just fine, even though it is now a relatively minor reserve currency.

Currencies don't hold their value because of confidence any more than planes fly because of confidence. Currencies hold their value as long as the corresponding economy produces enough stuff to meet demand. You get high inflation (which, I assume, is the problem we are actually worried about here) when there isn't anything on the shelves to buy, especially food.
 
JohnfrmClevelan said:
That's a great, big, unsupported assumption you're making there. That's why I asked you to back it up with some data. It's the crux of the whole argument. If there is no devaluation (and there isn't), then there is no cost to the government, there is no cost to the economy, and there is no cost to any of us.



Society at large does reap the benefit. Deficit spending means that there is production that would not otherwise have occurred, so the people that earn that money do reap the benefit.




You're making the same unfounded assumption here. And it's the very same assumption that conservatives (and even Democrats) have used to deny Americans a lot of good stuff that we could have been enjoying - universal healthcare, an increased minimum wage, funds for scientific research, funds for the arts... you had better make a convincing argument that the dollar actually loses value when we pay create new money, because the argument for buying those benefits is very, very strong.
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I think you miss my point. I'm not arguing against deficit spending altogether. If it builds infrastructure that increases production, for instance, then it's a good thing.

My complaint is about dealing with deficits by selling bonds and paying interest. The interest is a dead weight loss. If we're going to be doing this, then we're better off not paying interest and just printing the money ourselves.

Sent from my phone. Instaurare omnia in Christo.
 
phattonez said:
I think you miss my point. I'm not arguing against deficit spending altogether. If it builds infrastructure that increases production, for instance, then it's a good thing.

My complaint is about dealing with deficits by selling bonds and paying interest. The interest is a dead weight loss. If we're going to be doing this, then we're better off not paying interest and just printing the money ourselves.
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No, I get your point, because I hear it all the time. Most people simply cannot wrap their heads around the idea that money creation, in and of itself, doesn't cause inflation.

Interest payments are not a "dead weight cost," or any other kind of cost. Because a) the government creates money for free, and b) interest dollars just go right back into buying bonds, therefore they don't affect prices, demand, or production.

But even if the interest wasn't plowed back into bonds, even if it was spent, would that be a bad thing for the economy? That's just more demand, and more income for earners. It's like putting money into the hands of SS recipients, or welfare recipients - that money is spent, so it helps the economy, no different than if the government bought those people groceries and paid for their utilities directly. As long as the economy can meet the demand, prices don't go up, so nobody else is adversely affected.

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Nobody is sure what would happen if we decided not to pay interest on bonds (or reserves, which has the same result), but my guess is that there would be a quick devaluation of the dollar, as traders looking for a return sold their dollars for other, interest-bearing currencies.
 
JohnfrmClevelan said:
No, I get your point, because I hear it all the time. Most people simply cannot wrap their heads around the idea that money creation, in and of itself, doesn't cause inflation.

Interest payments are not a "dead weight cost," or any other kind of cost. Because a) the government creates money for free, and b) interest dollars just go right back into buying bonds, therefore they don't affect prices, demand, or production.
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You're thinking too much in the aggregate. I'm thinking about money being concentrated in the hands of bondholders in this process. This process of increased production should be benefiting all of us because our money ought to be worth more. Instead, we're printing more and giving those new dollars to bondholders. The net result is that most Americans lose out and bondholders collect the benefit. That's my complaint.

But even if the interest wasn't plowed back into bonds, even if it was spent, would that be a bad thing for the economy? That's just more demand, and more income for earners. It's like putting money into the hands of SS recipients, or welfare recipients - that money is spent, so it helps the economy, no different than if the government bought those people groceries and paid for their utilities directly. As long as the economy can meet the demand, prices don't go up, so nobody else is adversely affected.
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It's not the money creation that I'm complaining about here. It's the way it's distributed.

Nobody is sure what would happen if we decided not to pay interest on bonds (or reserves, which has the same result), but my guess is that there would be a quick devaluation of the dollar, as traders looking for a return sold their dollars for other, interest-bearing currencies.
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I'm not convinced. You still need dollars to pay taxes. That's the ultimate worth of dollars.

Sent from my phone. Instaurare omnia in Christo.
 
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