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The Treasury still needs to issue Treasuries to finance its deficit and needs to go above the limit imposed by the debt ceiling.
It still needs to selectively default on the Fed’s holding (Yves Smith’s way of putting it) or have the Federal Reserve Board destroy the $xyz trillion in government bonds it now holds (Ron Paul’s way of putting it).
The Fed had no legal obligation to rebate interest on Fed-held Treasuries when it began to do so in 1947 (apparently Texas Congressman Wright Patman was starting to understand banking operations a little too well), but it began the Tsy refunds anyway on a voluntary basis.
Does any American need an excuse to make a civic-minded donation of property to the People of the United Stats of America? Of course not! The FRB could announce (in a dramatic policy shift) that, fair is fair, the Fed would rebate interest on any T-bond issued through the Federal Reserve system, which is to say, all of them. So even as Fed debited Tsy for net interest payments, it would instantly credit Tsy the same amount (and those IOR payments, no worries!).
I have no idea how the Fed would book that (that’s the FRB’s problem) but if nothing else, taking net interest off-budget would cut $5 trillion off CBO’s projected deficits this decade and tens of trillions more in out decades, and that’s not nothing. :o)
An excerpt: “Scientists at Rensselaer Polytechnic Institute have found that when just 10 percent of the population holds an unshakable belief, their belief will always be adopted by the majority of the society. The scientists, who are members of the Social Cognitive Networks Academic Research Center (SCNARC) at Rensselaer, used computational and analytical methods to discover the tipping point where a minority belief becomes the majority opinion. The finding has implications for the study and influence of societal interactions ranging from the spread of innovations to the movement of political ideals.
“When the number of committed opinion holders is below 10 percent, there is no visible progress in the spread of ideas. It would literally take the amount of time comparable to the age of the universe for this size group to reach the majority,” said SCNARC Director Boleslaw Szymanski, the Claire and Roland Schmitt Distinguished Professor at Rensselaer. “Once that number grows above 10 percent, the idea spreads like flame.”
The Tea Party proved the point. When do we get to 10%?
The Fed already holds a ton of Treasuries from QE 1,2 etc. Can they not simply pass a bill to subtract existing Fed holdings from total Federal debt? I do not mean destroy the Fed holdings a la Ronnie Paul. Just subtract them. Net debt.
Have some thoughts.. since the Fed would anyway have to tear up the bonds, they can do it directly.
More practically, the operation could lead to a technical default.
Normally, the Treasury also guarantees that once the issue matures, the holder who would have given their bank account details have the funds transferred to the account.
The Federal Reserve on the other hand in plan QE0, in practice can offer to purchase all bonds maturing but cannot send a payment request to accounts by itself of the bond holder. So if someone doesn’t know of this offer, or is travelling etc., or has requested that the redemption be paid by cheque (like an old retail investor) cannot be paid by the Federal Reserve.
The plan will work only if all holders of the issue volitionally are able to sell their securities to the Federal Reserve on a timely manner. There is an operational risk involved in this game.
“Yeah I agree, the Fed holds it and receives no principal or interest at least on time, so both of us seem actually in sync. ”
If the bondholder “receives no principal or interest at least on time”, it’s called a default. In the current arrangement, with Feds as the bondholder, the default would occur. Does not matter who is the bondholder, your grandma or the Feds.
Remember, the Feds do not “not receive interest on bond holdings”. They do, they just remit excess (minus expenditures) back to the Treasury.
The above looks rather elementary, so I surely must be missing something in “the Feds not receiving principal or interest” — in the current reality.
If you propose to change the existing rules of the shell game, that’s another matter.
“I doubt it, wrt. longer maturities, what with alternative securities of similar tenor, but that’s another discussion altogether.”
Yes, another discussion altogether, but the Fed has indeed such operations in the past… but anyways 1947 … 25 year was pegged to 2.5% annual yield and the Fed had to sell bonds because bond prices started to rise.