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A simple Fiscal Question

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February 05, 2013 – Comments (15) | RELATED TICKERS: D , E , BT

In light of Bernanke's commitment to QEinfinity the question of concern is what will be the ultimate exit strategy.  My thinking is if the Fed keeps buying Tbills and MBSs why not use the income off those to pay off the federal debt?  What am I missing here?  The debt has already been factored in and spent.  Paying it off with QE income resolves a twofold issue.  First, the money is removed from circulation, and second it pays off old debt.

15 Comments – Post Your Own

#1) On February 05, 2013 at 7:13 AM, ChrisGraley (29.69) wrote:

LOL!

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#2) On February 05, 2013 at 7:35 AM, rd80 (97.59) wrote:

My thinking is if the Fed keeps buying Tbills and MBSs why not use the income off those to pay off the federal debt?

The Fed already returns all its profits to the Treasury, or uses them to buy more paper - mostly federal debt.  All the income is already being used to pay off the federal debt, or more accurately, slow the expansion in debt by a miniscule amount.

What am I missing here?

The money you want to use to pay down the debt is already being used to pay down the debt.

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#3) On February 05, 2013 at 10:46 AM, awallejr (79.68) wrote:

I thought he was still doing the twist too.

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#4) On February 05, 2013 at 11:29 AM, awallejr (79.68) wrote:

By the end of things the Fed will probably be holding 5-6 trillion dollars so that is a good chunk of change.  The more I think about it the more I think Binve is right.

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#5) On February 05, 2013 at 1:53 PM, somrh (77.42) wrote:

I guess I'm curious about what the Fed paying down debt would even amount to.

Do you mean that the Fed will write off the debt that we "owe" to the Fed? I don't see any reason why it couldn't do that as that "debt" is irrelevant anyway. Ron Paul even suggested doing that.

Do you mean the Fed will take money and buy up all the China debt, effectively forcing them to hold dollars instead of treasuries? I'm not sure what purpose that would serve. The Chinese have US debt because they insist on running trade surplusses with us. And holding a US govt stamped piece of paper that pays interest makes more sense (cents?) than holding a US govt stamped piece of paper that doesn't pay interest.

So I guess I'd be interested in the mechanics of what you're proposing.

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#6) On February 05, 2013 at 2:07 PM, ryanalexanderson (< 20) wrote:

Perception - that's pretty much the only reason. Any mechanism where the Fed will directly make the federal debt get smaller sends a direct and scary message to bondholders: explicit debt monetization. If you keep the bonds (and any profits resulting from them) in the limbo-zone of the Fed balance sheet, you can keep up the illusion that someday you can unwind the balance in the open market (snigger). 

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#7) On February 05, 2013 at 4:48 PM, ChrisGraley (29.69) wrote:

So the plan here is that we borrow money from ourselves with interest and we'll prosper because we can use that money to pay back the money we shouldn't have borrowed to begin with?

Is that the plan?

Please tell me that's not the plan. 

 

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#8) On February 05, 2013 at 8:32 PM, awallejr (79.68) wrote:

Of course it wouldn't Chris.  My issue is with this whole "debt ceiling" cliff that we constantly seem to be facing.

But when all is said and done the Fed will be sitting on around 6 trillion in Tbills and MBSs.  They would be crazy to unwind by selling them off in the open market. So sit on it and eventually be repaid in full with interest and  then they would be sitting on say 7 trillion in cash.  What then do they do with the cash?  Give it back to the Treasury and burn it?

And Somrh China is eventually going to get dollars for all the Tbills they are holding because that is how bonds work, they get paid principal and interest over time depending upon what term Tbill they are holding.

Some great Binve links on the subject here and further links inside that one:

http://caps.fool.com/Blogs/just-eliminate-the-debt/726157

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#9) On February 05, 2013 at 9:44 PM, NOTvuffett (< 20) wrote:

Hey, I have an idea... I am going to get a big loan, and have no plan or inclination to pay anything toward the principal.  Since money is cheap to borrow now, it should stay this way forever, right? lol.

Some people worry about credit ratings, but don't worry about me, I print this stuff in my basement!

B-52's Legal Tender:   http://www.youtube.com/watch?v=v_aue48BbpI

Oh, I forgot to add that I will be borrowing large sums on a regular basis in the future, lol.

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#10) On February 06, 2013 at 10:32 AM, rd80 (97.59) wrote:

They would be crazy to unwind by selling them off in the open market

But that's exactly what happens no matter how they unwind.  The Fed either sells the bonds into the open market and gets cash or the Treasury has to sell enough new paper into the open market to redeem the Fed's maturing paper. Note that Treasury ultimately needs to raise money by issuing new paper either way- either to pay off the Fed's maturing paper or to pay off whoever bought the paper from the Fed.

In order to unwind, bonds get sold into the open market, just a matter of who's selling them.  

And, yes, it is crazy. Which leaves the Fed with two crazy choices - don't unwind or have lots of gov't paper dumped on the market.

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#11) On February 06, 2013 at 2:17 PM, somrh (77.42) wrote:

awallejr:

From the sounds of it you have in mind simply writing off the debt. When the Fed buys an asset the obligation isn't eliminated, it's written down as owed to the debt. Gratned, debt owed to the Fed is kind of irrelevant.

Regarding China, sure the cash flows come in but China rolls that debt over. They don't want to spend dollars but they do want to earn interest. So they buy treasuries.

If you demand that China stop buying treasuries (or the treasury stop producing treasuries) they will have to find some other asset to buy (unless of course they want to end their trade surpluses with us.)

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#12) On February 06, 2013 at 6:06 PM, awallejr (79.68) wrote:

Correct me if I am wrong Russ but didn't/won't the Treasury already "print" the money the Fed used/will use in buying all these bonds?  If so why the need to force the Fed to dump all these bonds at any future time?  They are self liquidating, just might take 30 years to unwind them but so what.

I suppose if there was nasty inflation the Fed might want to pull money out of service quicker but so far so good.

And Somrh basically some of it (the amount ultimately printed with QE and repaid to apply towards debt owed by the US to itself).

Oh as an aside heard on Bloomberg that China actually is decreasing their Tbill holdings and Japan will replace them as the #1 foreign holder.

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#13) On February 06, 2013 at 9:15 PM, rd80 (97.59) wrote:

If so why the need to force the Fed to dump all these bonds at any future time?

By definition unwinding is reducing the balance sheet.  That can be done either by selling bonds or letting them run off.  If they run off, then Treasury needs to sell new bonds in the open market to raise cash to redeem the ones being run off.  Either way, bonds are hitting the market - either because the Fed is selling them or because Treasury is selling new ones to redeem the old ones.

Of course, no one's forcing the Fed to unwind.  But when they do, the supply of bonds hitting the market increases one way or another.

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#14) On February 06, 2013 at 9:56 PM, awallejr (79.68) wrote:

Except if they let the bonds "run off" by them having been paid off over time through amortization then all that is left is the printed cash plus interest sitting at the Fed.  The printing had already been done at the initial purchase points.  Now what do you do with the redeemed cash?  Burn it or apply it to a "ledger" debt owed by the Federal  government to itself.  A charade in the end it seems.

 

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#15) On February 06, 2013 at 10:41 PM, rd80 (97.59) wrote:

A charade in the end it seems.

Exactly!

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