If Greece's currency colaspes

I just feel we are all disgusted by what is happening. You have to admit most coin collecters are usually fiscally conservative. Our disagreements or agreements here will not solve anything if there are 200 million Americans oblivious to the issues. Right?

To me, if I can individually be responsible for my fiscal situation, and not get tied into relying on any government to "take care of me", that is the best I can hope for I guess. Once the majority of a population becomes reliant on the government to "take care of them" I simply do not see how Liberty can truly exist.

Well, this makes a depressing end to a week.

Chris

 

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Okay, I'm finally starting to see what you mean by "debt" and "not debt". You're using these words in a way that doesn't agree with the dictionary, but we've been through that already. You're calling the USNs "not debt" because there's no requirement to pay them off, or make interest payments, at any particular time, unlike Treasury bonds which have a fixed maturity date. The dictionary still calls them "debt", but in this certain sense they don't create the "debt bondage" you were talking about.

The USNs do still involve a lender (the public), a borrower (the Treasury), and an interest rate (zero is a perfectly legitimate number). But you're correct that they don't have a scheduled repayment. People are perfectly content to hold small quantities of zero-interest paper money for convenience, because it's easier to have a wallet full of paper than a pocket full of heavy silver dollars. As long as the total quantity of USNs in circulation stays reasonable (and as long as the people trust the government to *keep* it reasonable), there's unlikely to be any pressure to redeem them all quickly. (Historically, there *was* such pressure after the Civil War, but it can be considered the result of a lack of trust in the government's willingness and ability to keep the issue from getting too large. Once the Treasury had a few decades' track record of managing the money supply well, resistance to the USNs largely vanished.)

But...none of that has any bearing on your larger point. First, in all of these respects, FRNs differ from USNs only in technical details. The government pays no interest to the bankers on the USNs, true. But for FRNs, the government pays interest only to the central bankers at the Fed--and that interest, as I explained above, becomes profit to the Fed, which is transferred to the U.S. Treasury. Paying interest to yourself is just as good as paying no interest.... Also, as you said, the USNs need not be redeemed or retired at any particular time. But the same is true of FRNs. And while the Treasury bonds which back the FRNs do have maturity dates, there's no doubt about the Treasury's ability to "roll over" these bonds when they mature, as the Fed will then need new bonds to back the existing FRNs. On the whole, the FRN-based system is exactly like the USN-based system, except with one additional layer of separation between the politicians in Congress and the day-to-day monetary policy. That layer is the whole point of the Federal Reserve--it serves as one more check to keep the politicians from succumbing to short-term self interest, and thus it helps to maintain the people's trust in the currency, which is vital to the stability of the whole system.

Second, the need to keep the total value of outstanding USNs within reasonable limits, which you acknowledge, is precisely what prevents us from using USNs to pay off the (interest-bearing) debt. Under our present system, the quantity of FRNs in circulation is not decided by the Fed; it's decided by the individual private banks who daily order currency from the Fed to meet their needs, and return currency to the Fed when they have excess. Thus, the quantity of FRNs in circulation is exactly sufficient to meet the public's demand for zero-interest paper money. (Another benefit of the Fed system, by the way. In the old days, Congress decided how many USNs would be issued, and problems could arise if they willfully or inadvertently picked a number too high or too low.)

What this means is that, if the Treasury started using USNs to pay off the debt, there'd be an excess of paper currency in circulation. The first $1T of the excess would be offset by the retirement of the FRNs. After that, we'd be stuck. The remaining $13T of interest-bearing debt couldn't be replaced by USNs without massively devaluing the USNs. This is the problem you're ignoring: there's a limit to deficit spending, and there's a limit to USN issues, but those limits are not the same. The government can get away with issuing far more interest-bearing Treasury bonds than zero-interest USNs, because the interest payments are what motivate investors (financial institutions, foreign nations, &c.) to want the bonds in the first place. From observing the current position, we can see that the market will bear at least $14T in Treasury bonds (possibly much more, though I wouldn't like to bet on it), but no more than about $1T in non-interest-bearing FRNs/USNs.

We *may* be able to go deeper into (interest-bearing) debt without collapsing the whole system. We *may* be able to cut spending and/or raise taxes enough to pay off the (interest-bearing) debt without sinking the entire economy. We *certainly* can't replace the (interest-bearing) debt with zero-interest USNs (what you call "not debt") without destroying the value of the currency. Now do you see why people keep arguing against your plan?

 

Regarding (1), my larger point is that the nation would be better off with no national debt and no interest payments on the debt. And the government doesn't only make interest and principal payments to the Fed. It makes most of them to foreign goverments and institutional investors. So it isn't just money going in a circle.

Regarding (2), there would be an excess of currency for a short time. It is highly probable that most of the money invested now in US treasuries would be reinvested in other securities, but with the system so incredibly damaged by high debt levels, you are correct that the transition to debt free status would not be pain free. That's dreaming at this point.

Regarding (3), I hear this often but never with an explanation. There is no good reason in the world why an FRN is a "better" paper dollar than a USN. Both are fiat. And if the government called in FRNs and replaced them with USNs, I doubt that anybody would notice or care. Many people would probably be happy when it is explained that by using them, the nation gets out of debt dollar for dollar. So no, I don't understand why you think that. Also, keep in mind that this "plan" would never in practice be a flash cut to a new currency. It would be phased in over years as the national debt is reduced. It may even be desirable to keep some debt outstanding and FRNs in circulation along side of USNs so that institutions have a AAA rated bond to purchase. It's very flexible.

 

You think we save money by replacing FRN with USN, but the largest percentage of the profits of the Fed comes from the seignorage from issuing US currency. Take that away from the Fed, (easily enough to do), and the Fed remittances decrease drastically. It would simply be taking it out of one pocket and putting it into another, either way the US gets the seignorage, (or the interest free loan and profit from lost bills).

I agree on your point one its not a zero sum game for the US, which just gets us back to hwo to get out, and the fact that every option is in fact a bad one, including status quou. Personally, there needs to be discipline, Fed spending limits, massive spending cuts, and a line item veto to check overspending. I am dreaming though, I think the US is like ancient Rome, too far down the entitlement state sinkhole. When half plus 1 voters rely on the government for their livelihood, things go downhill fast.

 

You guys, on the FRN vs USN arguments are making one big, and I do mean big, fundamental flaw in your reasoning. You are assuming the USN $= FRN $ in value. They don't and haven't since 1971 when they were removed from circulation. If you take the values of these notes in 1971 and extrapolated forward, then at a minimum 1 USN = 37 FRNs. USN s are going to be limited to the direct taxing authority of the USA. This may mean that a USN might be worth $5000, $25,000, in FRNs, nobody knows because nobody knows the full extend of how many FRNs have been created and sent to other central banks, liabilities of the TBTF banks, etc.

In any case, the USA doesn't have to follow any existing rules except those stated in the US Constitution. If they were to dump the FRN, they can simply state that everyone can redeem their FRNs 1 to 1 for the USN up to say $250,000. After that, a diminishing conversion factor kicks in. This preserves the accounts of the masses, but destroys the big investors at the cost of eliminating federal debt. Don't think they won't do this, it's already been done.

This is why you hold bullion.

 

I generally agree with you but keep in mind that about half of the US debt is held by the US Government itself through the Fed, SSA, Fed Retirement Funds and etc. Of this half -1T has been assigned to the general public through FRNs. Yes foriegn governments hold massive amounts of US Treasury debt but we also have to keep in perspective that the US Government also hold signifcant amounts of foriegn govenment debt. Certainly there are some washes here.

 

My point was that use of USNs would save money because no interest or principal payments would be required for holders of the debt other than the Fed. I don't disagree that a good portion of the money collected by the Fed is returned to the Treasury. I haven't checked, but I'll bet they manage to spend most of what they collect on generous employee salaries, bonuses and first class airfare.

I've got bad news for you on the spending cuts and other checks on overspending. If the federal government managed to cut spending and begin paying down the debt, the nation would be plunged into a deep depression. You see, when the money is the debt and the debt is the money, any reduction in debt has the same impact as reducing the money supply. Clinton more or less proved this when he came close to balancing the budget for one year. The nation quickly plunged into recession. And when the Fed decreased the money supply in 1930, they took a fairly ordinary recession and turned it into the Great Depression. So debt reduction is 0 for 2. The debt can never be reduced unless a new currency like the USN is introduced. Whenever I see a politician talk about balancing the budget and reducing the debt without eliminating the Federal Reserve, I instantly know that the guy is either being intentionally deceptive or just doesn't understand our monetary system. But you can bet the international bankers do.

 

There is no reason why USNs and FRNs won't trade 1:1 and this could easily be made so by law. The flaw is in imagining that a new USN would somehow trade at a premium. It doesn't even have to be called a USN. It could be called "congress cash," "debtbuster dollars" or any other name that suits the US Treasury Dept. And any conversion would probably, out of necessity, only involve the use of USNs for new deficit spending and possibly some payments of debt that comes due. It wouldn't be a flash cut and there isn't any reason to shortchange the wealthy.

 

Ahh, but the only reason to eliminate the FRN would be to eliminate the debt associated with it. Sure they would do a 1:1 match for the FRN, but they will cap the amount that each household, person, etc can convert at 1:1. Any amounts above that will be subject to diminishing returns. Most likely there will be an amount they simply won't convert. On your other point, the US Treasury isn't allowed to issue dollars like the Federal Reserve as the Constitution gets in the way. This was the entire reason for creating the Federal Reserve in the first place.

IMO, this isn't going to happen anytime soon. The status quo will use every tactic available to them to prevent it from happening. We are talking about a STHF event, revolution, etc. IMO, you won't want to be in the USA when this trick is pulled.

 

A serious question as I am convinced that the US would be among the last 5 standing, and I don't include any of the BRIC nations. Patriotism is not my reason, financial recovery is. So where would you be ( which country)? Not being sarcastic, I really see these comments a lot, and can't determine which nations the posters think will be better off financially in 2-5 years.

Jim

 

Thank you for this most informative post. It appears that all the "End the Fed" talk is a bit misdirected. Though it wouldn't be a bad thing IMO.

Regarding to the other line of discussion about money being debt, I don't think it's so important what the definition of debt is as that when you take out a loan from a bank that money is created for the purpose of the transaction. The same is done when a bank takes out a loan from the Federal Reserve. It is not coming from existing savings, so it's increasing the money supply which devalues all the other dollars (in a free market). This even happens when you use a credit card. This is one major flaw of fractional reserve banking, notwithstanding being able to conjure money from nothing, a skill most anyone would like to have. Loans should come from money earned. Of course under this scenario interest could not be repaid without someone else's wealth decreasing (which could be, but doesn't have to be by going into debt) so you could attain the needed funds. That is unless new money is created to account for the interest and placed into circulation, but then there is the issue of who gets to have that free money. I suppose it could go toward government spending, but I wonder whether interest should even exist at all since there is still the issue of devaluation. It seems perfectly logical to me that a loan can come with mandates for how much you must have it paid back by such and such a date, as well as a one-time fee involved to make it attractive to the lender (chosen by the lender based on whatever criteria they like to use, which also promotes more the skilled lenders to profitability as well as widens the market), with no need for interest. The fee would need to be paid from profits, just as the loan came from profits. This would certainly provide strong support for the faster rats instead of the fatter ones, and go a long way in preserving buying power even without a gold standard. Once upon a time usury was not only considered immoral, but was illegal, yet today it is commonplace. Why anyone would expect such practices not to undermine the system is beyond me.

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I felt obligated to add that some of this information has been obtained from YouTube, and I cannot guarantee 100% accuracy since I am not a banker, and do not fully understand the differences between local, national, and international banking structures. As with all things, doing your own research is important. I expect to be corrected if necessary. :yes:
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If I had to pick somewhere, I would go with Sweden. Blonde girls and good beer is an added bonus I have also been impressed with some of Germany's decisions, but they are tied to the Euro and Sweden isn't.

 

Well, you still haven't explained why there would be a cap. Besides, I doubt that your way would be used anyway. There wouldn't be a conversion, at least not at first. It would be much easier to phase it in by having the Treasury stop borrowing. And with the Constitution already giving the federal government the power to coin money, it is simply a Supreme Court decision away to determine that this clause extends to the modern fiat equivalent.

I agree that it won't happen. The people on this forum are probably in the upper percentiles of knowledge about money, and almost nobody here can conceive of money without the Fed. So we're going down with the ship.

 

Good reasons, but Wiki says they have one of the highest tax rates in the world, and a large amount spent on social services. One has to wonder if that can continue. But most of the Norwegian countries are austere.

Jim

 

On (1), I completely agree with you. We'd be better off if we weren't using billions of our tax dollars to pay interest to China et al., and we should work on getting out of that situation we're in. But doing away with the Fed/FRNs would not help us eliminate our foreign debts.

On (2), you say that the excess of currency would only last a short time, but you don't seem to have given any mechanism by which the excess could be removed.

Under our current system, if there are too many FRNs in circulation, then banks that end up with excess FRNs will ship them back to the Fed, and the Fed will credit their accounts with an equal dollar amount. The banks can then use those non-paper dollars to make loans, invest in other securities, or whatever.

Under your proposed system, there's no Fed to perform that function, and the Treasury won't do it because your USNs aren't redeemable. So if there are too many USNs in circulation, then they'll stay in circulation, devaluing USNs. You say that USNs will be accepted for tax payments--and if USNs are somewhat devalued, then people will certainly prefer to pay their taxes that way than using other payment methods--so at first it looks like that process will remove the excess USNs from circulation. But there's a catch here: When the Treasury receives these USNs in tax payments, will the Treasury spend them again? If so, then they go right back into circulation, and the excess of USNs doesn't diminish. But if not, then the Treasury will be short of spendable money, and will have to either reduce spending or increase taxes to keep from going back into debt.

In other words, reducing the debt using your USN system winds up looking just like reducing the debt under the FRN system: We've got to either tax more or spend less if we want the debt to decrease. Issuing USNs doesn't make debt reduction any easier or more painless.

Finally, on (3): the reason why FRNs are better than USNs is precisely that, when we're using FRNs, Congress can't attempt to do the exact thing you're proposing: Increase spending (or decrease the debt) by printing more money. History has repeatedly shown that doing this (to excess) causes the value of the currency to collapse.

The supply of FRNs is elastic, is self-regulating: thousands of daily shipments of FRNs from the Fed to private banks, and vice versa, ensure that the overall supply of FRNs is always kept equal to the demand, so that the value of the notes remains constant. (Inflation can still happen, of course, but a $1 FRN is always worth one dollar, while a $1 USN has historically been worth less than a dollar at times.)

The supply of USNs, on the other hand, is whatever Congress declares it to be, and it's dangerous to have our politicians playing with that kind of fire on a regular basis. As long as the Fed is running the paper-money show, there's one less way for Congress to get us all into trouble. (There are still plenty of other ways, though...see the debt to China again....)

If you told people that "by using [USNs], the nation gets out of debt dollar for dollar", then yes, I'm sure people would be all for them. The trouble is that, as I've been explaining for several posts now, that statement is false.

 

and it's so much better for a private, self-serving entity to do the exact same thing?? at least with congress, we can vote out the problem. not that the average american would be smart enough to do this, but in theory, it could happen.

 

As I pointed out above, that's exactly why your plan doesn't work. Ask yourself the question: Why do these "holders of the debt" choose to hold the debt? Obviously, a big reason is that they like getting those interest payments. If we replaced their interest-bearing bonds with USNs, very few of them would choose to hold on to those USNs the same way they hold on to the bonds. They'd all want to exchange those new USNs for some other assets that *do* bear interest. That leads to a huge glut of USNs on the market, and their value plummets.

If we tried to retire the whole debt with USNs in one go, they'd instantly become near-worthless: for all practical purposes, we'd be defaulting on the debt, paying it off with currency that's not worth the paper it's printed on. If we tried to do the same thing gradually over time, then the USNs would lose their value gradually over time, instead of all at once--so the lucky folks who got the first batch of USNs might just make out okay. But as I explained in the previous post, if we wanted to stop the USNs from losing value, we'd have to retire the excess from circulation at roughly the same rate we were using them to pay off debt--and that'd require huge spending cuts or tax increases, exactly the same as would be needed to pay off the debt *without* using USNs. Again, the use of USNs doesn't make the process any less painful for the American taxpayer or the American economy.

I don't disagree with your general point here. Clinton's tiny budget surplus wasn't nearly big enough to have triggered the recession on its own, but the large budget surpluses we'll need to put a serious dent in the debt probably will be. IMHO, the debt is a bad enough problem that it's *worth* a recession (or more likely several) to get out from under it. Most people don't agree, which is why we still have the debt.

Where you're wrong is in your assertion that, by using USNs, we can escape that problem. That's what I've been explaining for the past few posts: the USNs will not somehow allow us to eliminate the debt without exactly the same pain. Let me summarize it all one more time:

Under our current system (no USNs), we basically have two ways to get rid of the debt. First, we can cut spending and/or raise taxes to create a substantial budget surplus, and then maintain that surplus for enough years that the whole debt is paid off. (Or just most of the debt is paid off, if we decide to keep some around.) This is very likely to knock the economy for a loop, and could even get us into Great Depression territory if we tried to be too aggressive about it. We'd have to be careful to go slowly enough to keep things at "fairly severe recession" at the worst. (Even then, once the people realized just how bad things were going to get, I strongly suspect they'd vote in a new Congress that would just go back to deficit spending again.)

Second, we could just repudiate the debt, default on it. People don't usually discuss this option seriously where the U.S. is concerned, because it'd seriously wreck not only our economy but the global economy. Look at what chaos is being caused by the possibility that a small country like Greece might default, and then multiply that by several orders of magnitude. This would make the Great Depression look positively cheery by comparison. Clearly this is *not* a viable option.

Now, under your USN system...we have essentially the same two options. We start paying off the debt using USNs, and an excess of USNs begins to build up in circulation. Our first option is to retire them through tax payments; to do so, we need spending cuts and/or tax increases to keep the government functioning while a substantial fraction of tax receipts are arriving in the form of USNs that can't be spent again. This will be just as painful for the economy as it would be under the existing system--we'd have to be careful not to cause a Depression by doing it too quickly, and even if done slowly it'd likely cause enough of a recession that the people wouldn't allow it to go on for long.

Our second option is to allow the excess USNs to build up in circulation without retiring them. This avoids the need for tax increases or spending cuts: if somebody pays their taxes using USNs, the government just spends those USNs again in the course of its ordinary spending. But wait--before long, the USNs lose much of their value because of the great excess of supply. This greatly annoys all the countries whose Treasury bonds we're paying off in USNs, and in the end has pretty much the same awful consequences as the default scenario above, though perhaps the collapse takes longer to unfold. Not only that, but the government soon finds itself unable to spend those near-worthless USNs that it's taking in as tax receipts: if government contractors and employees are legally required to accept them, then no one will choose to do business with the government. We're right back to needing massive spending cuts or tax increases to get the government enough funds to function.

My point is that there are no easy solutions to the debt. There are no easy solutions while the Federal Reserve exists, and there are no easy solutions once the Federal Reserve is eliminated. There are no easy solutions if we don't introduce a new currency, and there are no easy solutions if we do introduce a new currency. Playing around with the Fed and/or the currency will not make debt reduction any easier, any less painful, or any more politically palatable; it's just a distraction.

Earlier I explained why FRNs are better than USNs. But I'll admit that, in relative terms, they're not all that much better. If we switched to USNs and *didn't* try to reduce the debt, then we probably wouldn't be much worse off than we are now. It's only when we seriously try to reduce the debt that the pain happens--no matter what currency we're using.

Good grief, it's depressing explaining this stuff. Can we talk about sunny days and cute fluffy bunny rabbits for a while, or something?

 

But the Fed doesn't do exactly the same thing. It can't, really, because it doesn't have anything to spend all that money on.

Congress routinely spends large amounts of money, but (now that there are no USNs) Congress doesn't print currency. Meanwhile, the Fed routinely prints currency, but, relatively speaking, the Fed doesn't spend very much money (its operating expenses are on the order of a few billion dollars a year, a mere speck next to the multi-trillion-dollar federal budget. This division of responsibility helps to keep everybody honest.

If Congress could print currency (i.e., if there were USNs), then it'd be very easy, and entirely legal, for them to print extra currency and spend it on whatever would get them re-elected. In the extreme case, they could even print up some currency and hand it out to everyone for free (though in practice they'd probably be more subtle about it). This would be bad for the economy (see my above posts about what happens when an excess of USNs is in circulation), but at least in the short term, it might not cause *enough* economic harm to come back and bite the Congressmen's re-election prospects (especially if the people knew the free money came from Congress, and didn't know enough economic theory to realize that the bad economy was Congress's fault). So we have a conflict of interest here.

That conflict doesn't really exist for the Fed. Let's say the boys at the Fed print up a bunch of extra currency and want to use it to benefit themselves, never mind what it does to the country or the economy. What exactly are they supposed to do with it? They can't use it to pander to the voters; they're not up for election. They can't stick it directly into their own pockets; they'd be caught and jailed for embezzlement in short order. They might be able to give their friends in the banking industry some sweetheart deals on the business that those banks do with the Fed; but the total volume of all such business is very small compared to the volume of money Congress handles, and anyway the Fed's business practices are somewhat regulated by Congress to prevent this.

In a nutshell, that's why we have the Fed. It separates the power to print currency from the power to spend money. The Fed isn't in the Constitution, but it springs from the same separation-of-powers philosophy that motivated many provisions of the Constitution. And the Fed officials are unelected for exactly the same reason that federal judges are unelected: because the separation of powers works better when some of the powers are held by people who are worried about winning elections, and some of the powers are held by people who aren't. If *every* decision was made according to the will of the voters, that'd be mob rule, not democracy.

 

Had a nice sunny day here, only 113 so I mowed the lawns and went to the gym and lazed in the whirlpool wondering how much a cute fluffy bunny rabbit would cost in FRNs :dead-horse:

 

Greece was one of the first European countries to need a bailout, and now there are rumors that they may need even more assistance. Currency Crisis!:devil: