[copious.abundance]

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.

Geeze, you're still not getting it.

I suspected I'd have to repeat it, and indeed I do: Why Quantitative Easing Isn't Printing Money.

All they're doing is swapping assets. If you barter a cow with your neighbor for two of his goats, there is no money exchanged. Neither you nor your neighbor need to create, or destroy, or even have any money at all, because the two of you are doing nothing more than swapping assets. The same thing happens when the Fed swaps treasuries with banks in exchange for excess reserves. Technically speaking, the Fed doesn't even need any money at all. This is why, as I pointed out before, they have unlimited capacity to buy (or, should I say, "buy") government debt. If you did not need money to buy/"buy" something, you could "buy" as much of it as you wanted or needed. It just so happens that the Fed's excess reserves are considered to be an asset as valuable as treasuries, so banks are willing to do the swap.

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.

Except for the inconvenient fact that I just pointed out that Repeat After Me: Banks Cannot And Do Not "Lend Out" Reserves. And no, that is not me being condescending, that is the title of the paper.

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.

See reply at top of post.

[MonteQuest]

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.

Geeze, you're still not getting it.

I suspected I'd have to repeat it, and indeed I do: Why Quantitative Easing Isn't Printing Money.

I'm not talking about a QE asset swap. I'm talking about the FED buying Treasury bonds at auction via bond dealers. That money is used by the Treasury to pay govt bills and interest to avoid default. That is newly created money. That's what you are claiming the FED can do to avoid default, right?

Or, are you talking about the FED monetizing the debt forever, buying all the bonds from the banks and putting them on the FED's balance sheet?

Normally the Treasury issues bonds that are sold to banks, foreign investors, citizens. Those are purchased with money already in circulation, the FED buying these is a liquidity swap. FED money used to buy the bonds at auction is not.

Repeat After Me: Banks Cannot And Do Not "Lend Out" Reserves

Of course not. When a loan is made a new deposit is created out of thin air into the account of the holder of the loan. The reserves themselves are not loaned. I already said that. The reserves are used to meet the requirements for fractional reserve bank loans. If one bank has excess reserves it can lend to another bank via the interbank rate.

[MonteQuest]

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.

I'll say it again. Read carefully.

If a bank is not holding the reserve requirement for fractional loans, they can borrow excess reserves from another bank to allow them to meet their reserve requirements and allow them to lend under fractional reserve bank rules. They don't lend the reserves themselves. They create new deposits based upon holding those reserves.

[MonteQuest]

It seems the FED cannot buy Treasury securities directly from the Treasury. The Federal Reserve Act specifies that the Federal Reserve may buy and sell Treasury securities only in the "open market."

[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.

Perhaps, rather than this back and forth, explain the mechanism you feel the FED can use to buy unlimited US govt debt.

[MonteQuest]

When I wrote:

I'm talking about the FED buying Treasury bonds at auction via bond dealers. That money is used by the Treasury to pay govt bills and interest to avoid default. That is newly created money.

That wasn't accurate. As I posted earlier, the FED cannot buy bonds directly from the Treasury, but from bond dealers. What I overlooked was that the dealers first purchased them with money already in circulation. So, no new money is created when the FED buys them.

[MonteQuest]

It appears the original version of the Federal Reserve Act allowed Reserve Banks to buy securities directly from the Treasury. Federal Reserve Banks used their “direct purchase authority” during World War I and for a decade and a half afterward. Direct purchases typically occurred when Treasury cash balances ran low shortly before a tax payment date. The fear was that cash balances could be depleted by an unanticipated shortfall in revenues or a spike in disbursements, an inability to access credit markets on a timely basis, or an auction failure. In 1935 Congress acted to prohibit direct purchases of Treasury securities by Federal Reserve Banks.

However, following the entry into WWII, Congress provided a $5 billion wartime exemption to the prohibition on direct purchases. This was routinely renewed.

In June 1979, Congress renewed the $5 billion exemption to the prohibition on direct purchases, but limited the exemption to “unusual and exigent circumstances” and required approval by a super-majority (five members) of the Board of Governors of the Federal Reserve System.

The US Treasury never issued securities directly to the Federal Reserve under the terms of the 1979 renewal, and the exemption was not renewed in 1981. Since that time, the Treasury has lacked a safety net that would allow it to meet its bills and debt obligations in the event of an unforeseen depletion of its cash balances or an auction failure.

However. it appears that the FED is considering direct bond purchases from the Treasury once again.

Link

Our whole monetary system is so complicated, it is easy for discussions to get mired in the details and for people to end up talking past one another.

[AgentR11]

1. If we continue at this course- how long before default?
2. Can the US even default or are we "too big to fail" (other nations pay the price)?
3. What would default look like, in terms of daily life?

The US can not default, by definition. There is no limit to the amount of treasury bills that the federal reserve can buy; and to be blunt, the congress can just flat out print a 1,000 trillion dollar note and deposit it. (with certain unpleasant consequences as a by product....)

Can the FED buy 1 billion USD in treasury bills? Yep, and have long since bought much more than that.
Could they buy 1 trillion USD in treasury bills? Yep.
Could they buy 1,000 trillion USD in treasury bills? Yep.

The only question that is relevant, is if there is a point, where the folks redeeming said treasury bills try to take the USD proceeds and turn them into real assets and consumables. That could create some inflation; but at this point in time, its both unlikely, and the result would be welcome anyway. Inflation is in no way dangerous, its at most a nuisance. Inflation only punishes those who try to save money in a way that does not create new economic value.

Inflation is a problem, when you have paper money and coins that you have to drag around to buy bread. I haven't used paper money to buy bread in years. To me, the only thing that matters is that the process is vaguely uniform (as it would be for me), such that my plastic card swipes through the reader, and that the sum of my mortgage, utilities, and food is less than the number used to express my income. Its irrelevant whether that total is written as $50 or $50 billion; because its just bits in a computer that allocate purchasing power; express that purchasing power in bread, 2x4s, and gas; it'll work out pretty much the same.

As things are right now, the dollar is ridiculously strong, and has tendencies towards more strengthening, and that is very, very bad for our exporters. That the strengthening is a result of folks looking for financial safety, as opposed to folks looking to take risk and create value is a serious long term problem.

[MonteQuest]

There is no limit to the amount of treasury bills that the federal reserve can buy.

But as I pointed out, someone else must buy them first as the FED cannot purchase bonds directly from the Treasury.

If the bond dealers won't buy, the FED cannot. The Federal Reserve Act prohibits it.

If Goldman Sachs or Morgan Stanley, or any other bond dealer is insolvent, or lacks the necessary capital in excess reserves to purchase bonds, then what?

[AgentR11]

There is no limit to the amount of treasury bills that the federal reserve can buy.

But as I pointed out, someone else must buy them first as the FED cannot purchase bonds directly from the Treasury.
If the bond dealers won't buy, the FED cannot. The Federal Reserve Act prohibits it.

You are confusing the "state of current law" with "can / could". They most assuredly, right now, have the capacity to buy and sell treasuries direct, or indirect, with new money, or currently circulating money. If the congress says, "buy up to $1,000 trillion.."; they can, and will comply.

People try to see these suggestions as someone proposing the FED do something not authorized. I suggest nothing of the sort. It shouldn't be thought of as in opposition to, or operating without the consent or direction of congress, but rather, that in whatever situation evolves, congress can provide the appropriate direction to the FED that would prevent a default by definition.

Basically, if people stopped buying USD bonds, the FED would be authorized to buy whatever "slack" there is. I think such an event is a long way off, and may only occur as the finale of industrial civilization. Not as cause, but as simple dead canary.

[MonteQuest]

They most assuredly, right now, have the capacity to buy and sell treasuries direct, or indirect, with new money, or currently circulating money. If the congress says, "buy up to $1,000 trillion.."; they can, and will comply.

Fair point. Congress could, once again, allow the FED to purchase debt directly from the Treasury. But what happens to the currencies value under such as scenario? Wouldn't there be a huge capital flight out of dollar denominated assets? That exit door could get real small.

I think everyone is betting that the Fed will never lose control of interest rates and the US Treasury will never have a failed auction. But what if they do?

[copious.abundance]

I'm not talking about a QE asset swap. I'm talking about the FED buying Treasury bonds at auction via bond dealers.

Geeze, this is unbelievable ... *sigh* ...

The Fed buying Treasury bonds is QE. QE is an asset swap. Period. End of story. I have no idea why and how you thought they're something different.

That the logistics of Fed treasury purchases ("QE") briefly involves a middle-man is nothing more than a technicality, because the time those middle-men actually hold the Treasuries is usually going to be, particularly in this day and age with computerized trading, vanishingly brief. So if Goldman Sachs buys $1 billion in 2-year notes at an auction at 9am, and then turns around and sells them to the Fed at 10am, whatever money GS had to shell out at 9am they quickly get reimbursed for at 10am.

Perhaps, rather than this back and forth, explain the mechanism you feel the FED can use to buy unlimited US govt debt.

I already did. Re-read comment that mentioned cows and goats, for starters.

[C8]

I'm not talking about a QE asset swap. I'm talking about the FED buying Treasury bonds at auction via bond dealers.

Geeze, this is unbelievable ... *sigh* ...

The Fed buying Treasury bonds is QE. QE is an asset swap. Period. End of story. I have no idea why and how you thought they're something different.

That the logistics of Fed treasury purchases ("QE") briefly involves a middle-man is nothing more than a technicality, because the time those middle-men actually hold the Treasuries is usually going to be, particularly in this day and age with computerized trading, vanishingly brief. So if Goldman Sachs buys $1 billion in 2-year notes at an auction at 9am, and then turns around and sells them to the Fed at 10am, whatever money GS had to shell out at 9am they quickly get reimbursed for at 10am.

Perhaps, rather than this back and forth, explain the mechanism you feel the FED can use to buy unlimited US govt debt.

I already did. Re-read comment that mentioned cows and goats, for starters.

Are you saying that their is no danger posed by deficits and debt since the US controls the world currency? Am I reading you correctly?

[copious.abundance]

If Goldman Sachs or Morgan Stanley, or any other bond dealer is insolvent, or lacks the necessary capital in excess reserves to purchase bonds, then what?

There are more than just one bond dealer (the ones authorized/mandated to sell to the Fed are called "primary dealers"). If one of them went insolvent there will always be others who can take up the slack. In the vanishingly small chance every single primary dealer suddenly went insolvent the Fed and Congress could simply authorize some non-insolvent entity to become a primary dealer.

[copious.abundance]

Are you saying that their is no danger posed by deficits and debt since the US controls the world currency? Am I reading you correctly?

No. You're way off topic, actually.

[MonteQuest]

The Fed buying Treasury bonds is QE. QE is an asset swap. Period. End of story. I have no idea why and how you thought they're something different.

Because the FED used to be able to buy bonds directly from the Treasury. No asset swap. This was what I thought you were referring to when you said the FED could buy all the govt debt if no one else would. Then I learned the FED can longer buy direct and have to use the open market.

[MonteQuest]

Perhaps, rather than this back and forth, explain the mechanism you feel the FED can use to buy unlimited US govt debt.

I already did. Re-read comment that mentioned cows and goats, for starters.

So, endless monetizing of the debt? That's what you mean?

[MonteQuest]

If Goldman Sachs or Morgan Stanley, or any other bond dealer is insolvent, or lacks the necessary capital in excess reserves to purchase bonds, then what?

There are more than just one bond dealer (the ones authorized/mandated to sell to the Fed are called "primary dealers"). If one of them went insolvent there will always be others who can take up the slack. In the vanishingly small chance every single primary dealer suddenly went insolvent the Fed and Congress could simply authorize some non-insolvent entity to become a primary dealer.

I know this. I mentioned two and implied more. You think there wouldn't be a capital flight out of dollar denominating assets if it got that bad? The stock, bond, and currency markets would go nuts.

[copious.abundance]

So, endless monetizing of the debt? That's what you mean?

Huh??? This reply made no sense.

[copious.abundance]

I know this. I mentioned two and implied more. You think there wouldn't be a capital flight out of dollar denominating assets if it got that bad? The stock, bond, and currency markets would go nuts.

If things got so bad that every single primary dealer suddenly went belly-up, I have a feeling the last thing we'd be worrying about would be about flights out of dollar-denominated assets. Needless to say, I'm not worried about such a scenario. If you think a scenario like that could unfold, then go ahead and build your bunker and stock up on ammunition to fend off the inevitable zombie hoards. But when 10, 20, 30 and 40 years pass by without such a scenario unfolding, don't say you weren't forewarned.