[MonteQuest]

Not this again ...The reason the US could never be forced to default is that every single bit of the debt is owed in the currency that we and only we can issue: dollars. Unlike Greece, we don’t have to try to earn foreign exchange via exports or beg for better terms. There is simply no level of debt we could not repay with a keystroke.

Keystroke? You do know that to print money you have to issue bonds that people want to buy?

Or, are you suggesting helicopter money?

[ennui2]

Gas is cheap, the US economy is doing better than just about anyone else on the globe, and all Pstarr can do is mock.

"It's not that bad."

[copious.abundance]

Keystroke? You do know that to print money you have to issue bonds that people want to buy?

Or, are you suggesting helicopter money?

Here, read the following and hopefully it will help [emphasis mine]:

Why the USA Isn’t Going Bankrupt….

The USA has an institutional arrangement in which it is a contingent currency issuer. That is, while the Treasury is an operational currency user (meaning it must always have funds in its account at the Fed before it can spend those funds) it has the extraordinary power to tax and issue risk free bonds that the public will always desire to hold so long as inflation is not extraordinarily high. Additionally, in a worst case scenario, the US Treasury can always rely on the Federal Reserve to supply the funds necessary to fund its spending. Imagine having your own bank that would always lend to you. This makes the government quite different from a household.

Even if, for some reason, the US government could not get private investors to buy its debt, it could always sell its debt to the Federal Reserve, which has an unlimited ability to buy US government bonds. If that weren't enough, a common reading of the 14th Amendment (Section 4) says the US must pay its debt obligations before all else, so even if, for some other reason, the US was tight on money, it is (probably) constitutionally obligated to pay its debt above anything else.

Lastly, I'd recommend reading this:

Can a Sovereign Currency Issuer Default?

Here’s how I think of this. Money creation is truly endogenous. We can all create money from nothing. If I go to a bank for a loan I am essentially creating a financial liability that the bank may or may not want to hold. If the bank considers me to be creditworthy they will accept my liabilities. When the loan is created the bank is holding an asset (the loan) and a liability (the deposit). Likewise, I am holding an asset (the deposit) and a liability (the loan). We tend to think of the bank as “creating” the money, but you could also think of the borrower as creating the loan. For all practical purposes, we are both willing to hold eachother’s liabilities. This is the essence of “money” creation. When someone is willing to hold your liabilities you have “credit”. And money is ultimately credit, which comes from the Latin word credere meaning to believe. But you must have credit first. Credit does not merely come from legal authority or the power of the printing press. In fact, as I’ve argued before, creditworthiness is primarily a function of output in a fiat monetary system.

The unique thing about governments is that they have their own banks and they have massive revenue sources. So they tend to have very high creditworthiness since they can tap into the output of the economy. Also, when their liabilities are denominated in a currency they can create it’s unlikely that they will encounter an environment where someone will deem them legally bankrupt.

If MonteQuest had his own currency which was accepted as legal tender everywhere in his own territory, and he had his own bank which was willing to lend to him in any situation (again, in his own currency!), it's hard to imagine a situation in which MonteQuest would have difficulty paying off whatever obligations he incurred to other entities. The only difficulty that would arise is if he started borrowing in other people's currencies. In that case there may be situations that arise when he might have difficultly procuring enough of these other currencies to pay off the debt denominated in those currencies. But since 100% of US government debt is in US dollars, that's not an issue with the US.

[MonteQuest]

Even if, for some reason, the US government could not get private investors to buy its debt, it could always sell its debt to the Federal Reserve, which has an unlimited ability to buy US government bonds.

But not to sell bonds to reign in hyperinflation of the currency. When the Fed buys debt in the market its purchase increases the money supply. The FEDS balance sheet is at 25% of GDP.

The last time the FED bought that much debt was in response to the Great Depression.





You seem to envision the FED can just print money and buy bonds with no reaction from the market or the value of our currency. That's just nonsense.

[C8]

http://www.zerohedge.com/news/2016-02-0 ... rest-rates

Is The Fed "Seriously Considering" Negative Interest Rates?

The Fed may "seriously consider" negative rates after moving rates back to zero, reintroducing forward guidance and making "stronger pleas" to Congress for fiscal policy action as there are complications for money markets, according to BofAML strategist Mark Cabana.

This would not be a total surprise as Mises Institute's Joseph Salerno warns recent Fed commentary suggests they want to test-drive negative interest rates...

In 2016, the Fed's annual stress test on banks will include a scenario in which the interest rate on the three-month U.S. Treasury bill becomes negative in the second quarter of 2016 and then declines to -0.5%, remaining at that level until the first quarter of 2019. According to the Fed, "The severely adverse scenario is characterized by a severe global recession, accompanied by a period of heightened corporate financial stress and negative yields for short-term U.S. Treasury securities." In other words, including this scenario in its stress test is not supposed to signal that the Fed is contemplating adopting a deliberate policy of negative interest rates. It is simply testing the resilience of big banks in the face of a severe recession that precipitates a "flight to safety" which spontaneously drives rates on short-term Treasury securities into negative territory. Or so they would have us believe.

Recent remarks by those associated with the Fed, however, seem to suggest otherwise. For example, former Fed official Roberto Perli, now a partner at Cornerstone Macro LLC, commented "It doesn’t signal anything" about future monetary policy, but then added, it is "another sign that the Fed would not be entirely adverse" to reducing its target rate below zero if economic conditions should warrant. In mid-January, New York Fed President William Dudley denied that policy makers were "thinking at all seriously of moving to negative interest rates." However, he conceded, "I suppose if the economy were to unexpectedly weaken dramatically, and we decided that we needed to use a full array of monetary policy tools to provide stimulus, it’s something that we would contemplate as a potential action." Most tellingly, just this past Monday, Fed Vice Chairman Stanley Fischer gave a talk to the Council on Foreign Relations in New York in which he approvingly discussed negative interest rates in some detail. Because a speech by a Fed Vice Chairman sometimes turns out to be a bellwether of a radical shift in monetary policy--recall Bernanke's infamous speech on deflation and unconventional monetary policy in November 2002--Fischer's remarks are worth quoting:

[W]e believed that we could not get interest rates to go below zero. Well, it turns out that . . . four European and one Asian country have now done that. And how can you do that when currency has a zero rate of return? You can do it because it turns out that holding currency is not so easy. If you’re going to keep your billion dollars in currency, you’re going to have to find a place to store it, you’re going to have to insure it, and you’re going to have to have it guarded. And by the time that’s done . . . zero is no longer the lower bound. All those costs are the lower bound, and those costs seem to be significantly below zero in the sense that we have a Denmark and one other country having a negative 75 basis point interest rate, which worked. . . . So that idea is there. And that’s what they’re pursuing. And, you know, everybody is looking at . . . how that works. . . . [W]e have actual experience of countries that have used negative interest rates. . . . Countries that have used it continue to use it. They haven’t given it up. . . . So it’s working more than I can say that I expected in 2012. . . .
And, lest we forget, Fed Chairman Yellen went on record as conditionally favoring negative interest rates as President of the Federal Reserve Bank of San Francisco in 2010:

If it were positive to take interest rates into negative territory I would be voting for that.
Of course, as we noted previously, NIRP in America is becoming more inevitable...

When stripping away all the philosophy, the pompous rhetoric, and the jawboning, all central banks do, or are supposed to do, is to influence capital allocations and spending behavior by adjusting the liquidity preference of the population by adjusting interest rates and thus the demand for money.

To be sure, over the past 7 years central banks around the globe have gone absolutely overboard when it comes to their primary directive and have engaged every possible legal (and in the case of Europe, illegal) policy at their disposal to force consumers away from a "saving" mindset, and into purchasing risk(free) assets or otherwise burning through savings in hopes of stimulating inflation.

Today's action by the Bank of Japan, which is meant to force banks, and consumers, to spend their cash which will now carry a penalty of -0.1% if "inert" was proof of just that.

Ironically, and perversely from a classical economic standpoint, as we showed before in the case of Europe's NIRP bastions, Denmark, Sweden, and Switzerland, the more negative rates are, the higher the amount of household savings!

This is what Bank of America said back in October: "Yet, household savings rates have also risen. For Switzerland and Sweden this appears to have happened at the tail end of 2013 (before the oil price decline). As the BIS have highlighted, ultra-low rates may perversely be driving a greater propensity for consumers to save as retirement income becomes more uncertain."

Bingo: that is precisely the fatal flaw in all central planning models, one which not a single tenured economist appears capable of grasping yet which even a child could easily understand.

This is how Bank of America politely concluded that NIRP is a failure:


For now, negative rates as a policy tool remain a “work in progress”, judging by the current inflation levels across Europe. But the rise in household savings rates amid so much central bank support is paradoxical to us, and mimics what we highlighted in the credit market earlier this year. Companies in Europe are deleveraging, not releveraging, and are buying back bonds not stock.
One can now add Japan to the equation.

And soon the US, because as the chart below shows, the Fed has likewise dramatically failed in shifting the liquidity preference of US investors. First, here is what Bank of America finds when looking at recent fund flows:

4 straight weeks of robust inflows to govt/tsy bond funds; 19 straight weeks of muni bond inflows; since 2H’15, cash has been the most popular asset class by far ($208bn inflows – Chart 1) vs a lackluster $7bn inflows for equities & $46bn outflows from fixed income (dogged by redemptions from credit)
And here is the one chart which in our opinion virtually assures that the Fed will follow in the footsteps of Sweden, Denmark, Europe, Switzerland and now Japan.

Since the middle of 2015, US investors have bought a big fat net zero of either bonds or equities (in fact, they have been net sellers of risk) and have parked all incremental cash in money-market funds instead, precisely the inert non-investment that is almost as hated by central banks as gold.

To Yellen, this behavior will have to stop, and she will make sure it does sooner rather than later. Just ask Kocherlakota.

Will this crush money markets as we know them, and unleash even more volatility and havoc around the world?

Absolutely. But at this point, when evey other central bank has lost credibility, to paraphrase Hillary Clinton loosely, "what difference will it make" if the Fed joins the party on the central bank Titanic?

[MonteQuest]

[W]e believed that we could not get interest rates to go below zero. Well, it turns out that . . . four European and one Asian country have now done that...And, you know, everybody is looking at . . . how that works. . . . [W]e have actual experience of countries that have used negative interest rates. . . . Countries that have used it continue to use it. They haven’t given it up. . . . So it’s working more than I can say that I expected in 2012. . . .

Here's how well it's working for bank stocks.



European bank stocks are down almost 40% since NIRP were introduced in Europe.



This is why Bank of America politely concluded that NIRP is a failure.

[copious.abundance]

Even if, for some reason, the US government could not get private investors to buy its debt, it could always sell its debt to the Federal Reserve, which has an unlimited ability to buy US government bonds.

But not to sell bonds to reign in hyperinflation of the currency. When the Fed buys debt in the market its purchase increases the money supply.

No it doesn't! Fed purchases are nothing but an asset swap. The Fed gets treasuries and the banks who sell them to the Fed get excess reserves at the Fed. There is no increase in money supply from a swap. Imagine bartering something with someone else - no money changes hands, so no increase in the money supply is required.

If you were right we would see the money supply go through the roof once the Fed began QE - correct? Unfortunately for your theory we see nothing of the kind. The Fed began its large-scale QE late in 2008. But notice from the chart of M2 money supply it's done nothing more than continue rising at the same trajectory it was rising at prior to 2008:



Some people prefer MZN as a better measure of the money supply, but here we see the same thing:



At best we see temporary, small, short-term blips.

You seem to envision the FED can just print money and buy bonds with no reaction from the market or the value of our currency. That's just nonsense.

Since, as I just demonstrated, QE has had no effect on money supply, it is going to have no effect on the value of that money. But as I just linked above, QE isn't "printing money," so the entire claim is irrelevant anyway.

Fed purchases do have some effect on the bond markets, but it's not what you think, and the effects are fairly small.

[MonteQuest]

When the Fed buys debt in the market its purchase increases the money supply.

No it doesn't! Fed purchases [url=http://www.cnbc.com/id/100760150]are nothing but an asset swap

I am well aware of liquidity swaps (QE) and have posted extensively about how that didn't increase the money supply. However, the new reserves can be lent out via the banks through fractional reserve banking. Most FED purchases of new bond debt are used to increase the money supply. QE has been existing bad debt.

Since, as I just demonstrated, QE has had no effect on money supply, it is going to have no effect on the value of that money. Fed purchases do have some effect on the bond markets, but it's not what you think, and the effects are fairly small.

It affects the bond yields and interest rates which affects the value of the currency.

[copious.abundance]

I am well aware of liquidity swaps (QE) and have posted extensively about how that didn't increase the money supply.

Then why did you claim above that, "When the Fed buys debt in the market its purchase increases the money supply?" So now you're contradicting yourself.

However, the new reserves can be lent out via the banks through fractional reserve banking.

Repeat After Me: Banks Cannot And Do Not "Lend Out" Reserves (PDF).

Most FED purchases of new bond debt are used to increase the money supply.

Uhh ... I just explained this to the contrary. And I even showed charts demonstrating the money supply has done nothing different after QE than it was doing before QE. So I wonder how many more times I'm going to have to repeat it?

It affects the bond yields and interest rates which affects the value of the currency.

Yes, that is one mechanism, but it's not as large as you think it might be. There are a lot of other things that effect the value of a currency other than interest rates.

[MonteQuest]

However, the new reserves can be lent out via the banks through fractional reserve banking.

Banks Cannot And Do Not "Lend Out" Reserves

Of course not. But if the banks are not holding the reserve requirement for fractional loans, they can purchase or borrow the excess reserves to allow them to meet requirements and allow them to lend. I understand all this and have posted that pdf myself.

To say it better, the new excess reserves can be used to meet reserve requirements for fractional reserve bank lending.

If you have a question of clarity, just ask. We can do without the condescension.

[MonteQuest]

Yes, that is one mechanism, but it's not as large as you think it might be. There are a lot of other things that effect the value of a currency other than interest rates.

History and the chart I posted says otherwise.

[MonteQuest]

To get back to the actual issue. When the govt needs more money, the Treasury prints bonds which are sold to banks or other foreign banks or investors, some to US citizens. These bonds are purchased with money already in existence. This money goes to the US Treasury to pay the govt's bills.

When the FED buy these new bonds, it does so with new money created out of thin air, thus the money the Treasury gets is newly created money.

When the FED created money to buy the bad debt of the banks, it was a liquidity swap and no new money was put into circulation; for that to happen the banks would have to use the new reserves to meet reserve requirements and then lend out accordingly.

So, when it is said that the FED can just buy all the new bonds with newly created money to avoid a default, it means flooding the money supply with new dollars which could, and will, lead to inflation.

Now, the FEDS ability to sell the bonds they purchased-- to reign in the money supply-- is limited to who will buy them and what the market is for them. If it came to that, there would be a capital flight from the US dollar.IMHO.

[MonteQuest]

Then why did you claim above that, "When the Fed buys debt in the market its purchase increases the money supply?"

Because we were talking about the FED buying new govt debt that no one else would, not existing bonds. In that case, the money supply is increased as I explained above.

[MonteQuest]

Think of it like this. The reason the FED swapped reserves for bad mortgage backed securities to bail out the banks, was because the banks couldn't liquidate (sell) those bad assets to recapitalize. Those bad assets will sit on the FED's balance sheet perhaps forever, unless the default risk changes.

Now, imagine the FED's balance sheet when no one will purchase new govt bonds--in fear the US govt can't pay the interest--except the FED.

Where would you put your money? Certainly not in dollar denominated assets.

[peripato]

Gas is cheap, the US economy is doing better than just about anyone else on the globe, and all Pstarr can do is mock.

"It's not that bad."

The US is the "healthiest" zombie in the pack.

[copious.abundance]

Of course not. But if the banks are not holding the reserve requirement for fractional loans, they can purchase or borrow the excess reserves to allow them to meet requirements and allow them to lend. I understand all this and have posted that pdf myself.

To say it better, the new excess reserves can be used to meet reserve requirements for fractional reserve bank lending.

Once again ... no!! Excess reserves are reserves over and above what a bank needs to meet its reserve requirements. That is why they're called "excess." They have nothing to do with bank lending.

[copious.abundance]

Yes, that is one mechanism, but it's not as large as you think it might be. There are a lot of other things that effect the value of a currency other than interest rates.

History and the chart I posted says otherwise.

Those charts you posted showed fairly small movements in the value of the dollar, which could be little more than noise. And to demonstrate my point, the value of the dollar is about the same now - 96.5 as I write this - as it was five years ago in your second chart, in spite of QE having long since ended and even a Fed rate hike in December. If your theory was correct it would be much higher. Furthermore, the first of your three charts show the dollar rising for several months after QE1 began in November 2008. So once again, the effect of QE on the dollar has been fairly minimal.