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Established in 2006 as a Community of Reality

Welcome to the Neno's Place!

Neno's Place Established in 2006 as a Community of Reality


Neno

I can be reached by phone or text 8am-7pm cst 972-768-9772 or, once joining the board I can be reached by a (PM) Private Message.

Established in 2006 as a Community of Reality

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Established in 2006 as a Community of Reality

Many Topics Including The Oldest Dinar Community. Copyright © 2006-2020


    Are Federal Reserve Notes And Treasury Debt The Same Thing?

    Neno
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    Are Federal Reserve Notes And Treasury Debt The Same Thing? Empty Are Federal Reserve Notes And Treasury Debt The Same Thing?

    Post by Neno Tue Apr 02, 2013 4:02 pm

    Are Federal Reserve Notes And Treasury Debt The Same Thing?




    My respected friend pgl at Angry Bear dumps on Charles Krauthammer for saying this:
    <blockquote>2042
    is the fictional date for the fictional bankruptcy of a fictional trust
    fund. Let's start with basics. The Social Security system has no trust
    fund. No lock box. When you pay your payroll tax every year, the money
    is not converted into gold bars and shipped to some desert island, ready
    for retrieval when you turn 65... These pieces of paper might be useful
    for rolling cigars. They will not fund your retirement. Your Leisure
    World greens fees will be coming from the payroll taxes of young people
    during the years you grow old. That is why 2042 is a fiction. The really
    important date is 2018.
    </blockquote>pgl trots out a pretty clever argument.
    <blockquote>If there are Federal Reserve notes in your wallet, I’ll gladly buy you a cup of coffee if you give them to me.


    If you really believe piece of paper called financial assets are
    worth nothing, I’ll gladly take all of your cash, funds in your bank
    accounts, and other financial assets. In turn, I’ll even buy a week’s
    worth of groceries.
    </blockquote>Clever, but not apt, I think,
    because modern institutions really do imply different expectations about
    the liability represented by a Federal Reserve note compared to that
    represented by a Treasury security.


    Here's what I mean. I think it useful (and appropriate) to think of
    my economic relationship with the government in terms of the totality of
    our financial interactions. In other words, my net tax burden does not
    just consist of my social security taxes, or my income-tax payments, or
    what I remit in Medicare "premiums", etc., etc., etc, but the present
    value of all my payments to the government less all the payments they
    make to me. (This is the fundamental idea behind the concept of generational accounting, of which I am a very big fan.)


    Suppose I hold a Treasury security. That, of course, is a payment the
    government owes to me, and I have every expectation that it will be
    made. But if, for some reason, there has been a miscalculation, a
    change in economic circumstances, a change in policy, the government may
    find that it has to raise my taxes to obtain the revenues to honor
    those payments. In doing so, it has effectively reduced the return on
    that security. Distortionary price effects aside -- granted, a major
    qualification -- why should it matter to me how it happens? Lower my
    social security benefits, raise my income taxes, whatever. It all
    amounts to a haircut on that Treasury payment to me.


    Because the distributional aspects of these things can matter,
    blanket haircuts are probably a pretty bad idea -- foreigners, for
    example, finance a good chunk of our collective borrowing, and they
    aren't likely to appreciate the opportunity to finance our fiscal
    imbalances on an ongoing basis. Changes in tax and transfer policies
    are the way we go because they can be targeted (which gets us to
    positive versus normative questions, which I'll address below.) But the
    basic economic distinction is one without a difference.


    Why are Federal Reserve notes different? At some level, they aren't,
    as pgl has reminded me on numerous occasions. One way to truly
    implement a haircut on government debt is to reduce the purchasing power
    of the currency in which the debt is paid -- by employing, in other
    words, the so-called inflation tax. But the United States, and almost
    all developed countries, have worked hard to ensure people that this
    won't happen. This is why the Fed is largely independent of the
    Treasury. In essence, we have guaranteed that fiscal imbalances won't
    be addressed by reducing the value of Federal Reserve notes. Despite
    protests to the contrary, no such promise is made for the return to
    Treasury notes, as the ever-changing tax rate on interest income makes
    abundantly clear.


    Now to Krauthammer's point. Here we, again, we have the unfortunate
    confluence of positive and normative assertions. I think Krauthammer is
    making the positive point that private debt and equity supports investment. In many cases, public debt supports consumption,
    and there is a big difference between these two situations. Of course,
    you may want to argue that, at the margin, the bulk of public
    expenditure is actually investment (and more productive than private
    investment). That is an assertion that can be adjudicated by evidence,
    and I'll listen But there is no fallacy in Krauthammer's assertion.


    Then there is the normative question -- whether is right to
    renege on the government payments promised (and planned for) by retirees
    and near-retirees. On this, pgl and I (and President Bush) agree that
    the answer is "no."


    http://macroblog.typepad.com/macroblog/2005/02/are_federal_res.html

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