Something to do about the debt that the Catfood Commission refuses to consider.

[eridani]

http://www.truthout.org/overcoming-debt-trap60202

There is a simple way to avoid a sharp rise in the interest burden associated with a higher debt. The Federal Reserve Board can buy and hold the debt that is currently being issued by the Treasury to finance the deficit. The logic of this is straightforward. If the Fed holds the debt, then the interest on the debt is paid to the Fed. The Fed then returns the interest to the Treasury each year, meaning the net cost to the government is zero.

This is not slight of hand. The point is that the economy has a huge amount of idle resources in the form of unemployed workers and excess capacity. In this situation, the increased demand created by government spending does not have to come at the expense of existing demand. The economy can simply expand to fill the additional demand created by larger deficits. While that may not be true in five or ten years, assuming the economy is again near full employment, right now deficits need not lead to either higher interest rates or higher inflation.

In fact, the financial markets and the "bond market vigilantes" should even support the decision to have the Fed purchase and hold the government debt being issued now to finance the deficit. This practice will lessen the future interest burden on the Treasury. In fact, interest should be seen as an entitlement like Social Security and Medicare since it is paid each year without new authorization by Congress. If the deficit hawks had any integrity they would be insisting that we should require the Fed to hold the government debt issued during this downturn. It is a sure fire way to substantially reduce entitlement spending.

Of course, no one ever accused deficit hawks of being consistent. Not only do they not advocate having the Fed buy and hold the debt, they don't even want this policy discussed in their "everything is on the table" sessions. Keeping this simple solution off the table makes good sense if your concern is not deficit reduction, but rather cutting Social Security, Medicare and other important social programs.

[Pab Sungenis]

1. Where would the Fed get the money to buy these debt obligations?

Only one way: print more money, which would be prohibitively inflationary.

[Statistical]

2. Exactly.

The idea that there is a free lunch is silly.

If that worked then why would anyone ever issue private debt for any reason.

Furthermore why even issue debt:
Issue debt -> Print money -> Use money to sell debt to yourself

Simply print money:
Print money

[eridani]

3. Continued jobless recovery is not an option either. n/t

[Statistical]

4. That is a strawman.

Doesn't change the fact that the idea in the OP is silly.

Of course so far govt deficit spending hasn't changed the recovery from jobless recovery to real recovery.
Even if it were you can't get something for nothing.

I mean why stop at deficits. Lets take it to the logical conclusion. If what is proposed in the OP worked why not just do this:
The federal reserve could simply print $14 trillion take that $14 trillion give it to the Treasury.
The treasury will then pay off every outstanding T-bond.

TADA!!!! magic just like that 200 years of federal debt gone. Why can't we do that? Once you figure that out it becomes obvious the OP is simply a smaller version of the same "wealth from nothing" silliness.

[eridani]

5. Real wealth is our human and natural capital

If the financial system does not allow everyday people to use these things in their own interest, then it has to be changed.

[Statistical]

6. Once again a strawman.

Imagining away debt isn't a solution though.

[girl gone mad]

9. It's not a strawman.

The goal of our government should be full employment. In an era of high unemployment and underemployment, debt should be a tertiary concern.

[Statistical]

10. Never said it wasn't.

I simply said the "get something from nothing" scheme in the OP was stupid.

1) issue debt
2) use debt to fund social programs

pretty simple.

[truedelphi]

13. But aren't you overlooking the fact that some of the fourteen trillions has been

printed up by Bernanke over at the Fed, and then handed out to his buddies on Wall Street? (And since Sanders "Audit the Fed" act was watered down, ain't no way we are ever gonna know much about that. We will possibly never know how much and more importantly, WHOM this money was given to.)

Then those Wall Street banks and financial centers buy the Treasury bonds from Treasury.

What the OP suggests is that we cut out the middle man. As the Federal government's interest rate to the Wall Street Inner Circle is close to zero, but the amount they will be charging the government back is staggering.

[girl gone mad]

8. Why would anyone issue private debt, or why would any sovereign currency issuing government..

issue private debt?

Big difference, you know.

[girl gone mad]

7. Printing is not "prohibitively inflationary".

Inflation requires multiple specific factors.

Unless demand grows faster than the real capacity of the economy there will not be generalized inflation. The size of the public debt ratio is completely irrelevant when making this analysis. See Japan, for example. Decades of high debt levels, decades of deflation.

[econoclast]

11. Girl gone mad ..... A question

Given your assertion that printing money is not inflationary unless demand outstrips productive capacity I take it then that you do not believe Greenspan's "easy money" policies contributed to the housing bubble.

Low interest rates induced increased mortgage lending by banks. Bank lending creates money. So we had lots of virtually free money created for housing. The US was not at full employment, so there was certainly capacity to produce additional housing. Your conditions are met. Free money yet excess capacity. Ergo the easy money policy did not contribute to the hyperinflation of home prices in the period 2002 - 2007.

Right ?

[girl gone mad]

12. I'm talking about generalized inflation..

not speculative manias driven by investor demand for mortgage backed products.

[econoclast]

14. You are making my point

When you talk about "manias driven by investor demand for mortgage backed products" you are spot on. You are playing all the right notes but not hearing the music. The " investor demand for mortgage backed products" SUPPLIED the virtually free money that fueled the hyperinflation of housing prices!

A more general point regarding generalized inflation... If it were indeed true that inflation is impossible unless demand outstrips the economy's productive capacity that the historical fact of Stagflation must somehow have been an illusion.

[jtuck004]

15. I think I heard a discordant note in that tune...

the inflation in the 70's came about with collapse of the fishmeal for cattle feed from Peru and the artificial reduction in oil by OPEC while we were still increasing our demand.

So to my untrained ears, it sounds like the point is still valid, because greater demand was being placed on a system that could not, or would not, deliver the supply.

[econoclast]

16. Tone deaf maybe?

(sorry ... Couldn't pass up the tone deaf crack ... )

re inflation in the 70's. The nice folks in the UC Berkley economics dept would disagree with your assertion. From Brad De Long:

"... it is hard to sustain the argument that the root of the U.S. inflation problem in the 1970s was the interaction of one-shot upward supply shocks with a backward-looking wage-price mechanism. The baseline inflation rate was some five percent per year in the early 1970s before there were any supply shocks..."

The data from the UK illustrating DeLong's point is even clearer and more dramatic. There is a wonderful table from a lengthy piece from the St Louis Fed detailing this. Unfortunately it is in a PDF file and I don't know how to insert it here.

A December 1970 cover of Time magazine featured the growing inflation problem in the US. So inflation already was a serious issue and part of the mainstream discussion well before the oil shock.

DeLong estimates that the supply shocks contributed about 2% to the already extant inflation issues.

More generally, You asserted that ...

"Unless demand grows faster than the real capacity of the economy there will not be generalized inflation. "

I think that the layman's thumbnail definition of inflation is useful here. Inflation is too much money chasing too few goods.

ONE reason for "too few goods" is that the economy has reached full capacity and can't produce more. Unfortunately, it isn't the only one. Witness Germany in the Great Depression. Hyperinflation and widespread unemployment.

Fun discussion. Have a nice weekend.