Wednesday, May 01, 2013

The path across the Rubicon

I saw a post on Facebook linking to an NPR article about how the US Treasury is paying down $35 Billion dollars of the National Debt. This is the first time in 6 years that they have done this, so before the 2008 crisis. A couple of questions come to mind.

First, how are they doing this? Are they retiring some of the Treasury bonds early? Normal Treasury bonds are 30 year bonds, although they have shorter term bonds out there as well. Which ones are they paying off? Who owns them?

Second, if this was done 6 years ago, sometime in 2007, why don't I remember hearing about it? Is this something that the Treasury does on a semi-regular basis, no matter who the President is? It reminds me of posts in 2009 up to today clamoring for the President to re-install the solar panels on top of the White House that Reagan had removed in 1981. Actually, if you truly pay attention to the news, you would have knows that President Bush reinstalled them through the National Parks Service near the end of his first term in 2003. Not everything is black and white. I wouldn't have expected a Republican President to direct the Treasury to pay down the National Debt, but I guess he must have.

Third question came from another search result that came up when I was looking for more information. It seems that NPR did a story about a government report from the year 2000 talking about the changes that would need to happen if the Federal Government was able to retire ALL of the debt. There are some major foundational aspects of our financial and monetary system that would have to change, and the report talks about them.

First, investors looking for an asset free of credit risk can no longer count on an abundant supply of U.S. Treasury securities, and Treasury securities may no longer provide a reliable benchmark for other interest rates.

Second, the Federal Reserve may have to change the mechanisms by which it conducts monetary policy.

Third, continued surpluses after the public debt has been paid off will require the Federal. government to acquire assets; either directly or though the Social Security Trust Fund. This raises issues about what kinds of assets might be acquired, and the best way to manage this task.

This research brought me back to a concept I've been thinking about for several years, wondering how a government agency could operate without debt. I believe that our monetary system has flaws, and they have been identified many times in many different venues. The most blatant expression of them was in the movie Collapse, which is about the work of Michael Ruppert. He identifies three main issues with the current monetary system.

  • Fiat Money, value set by a promise, not connected to any real commodity like Gold.
  • Fractional Reserve Banking, with banks only required to hold a percentage of their on-book assets in the central bank.
  • Compound Interest, meaning that we pay interest on interest on interest when we take out a loan.

There are solutions for these issues. It's not easy, and it takes a great deal of change in the way we think about money. But it would be possible. If anyone is interested, I can expand on these ideas and continue. But please let me know that you're reading by commenting below.

3 comments:

Unknown said...

I believe that we can work to get rid of Fractional Reserve Banking and
Compound Interest, but not Fiat Money. Basing money on gold would constrict the world's economy. And the whole idea of money, even if it is gold is made up. Think about it. Gold only has value because we say so. We also change the value based on what people can pay. Gold has no more real value than anything else. If we were to base it on a need like water that would be different. So to say that gold as "real" value and money doesn't is a social construct. When humans say that gold has monitory value, gold becomes money.

Bryce Milton said...

How about a "Resource Based Economy"?

Chad Lupkes said...

The solution I see to Fiat Money is to establish a scientifically based "yardstick" for value, and stick with it. It doesn't have to be Gold, it could be energy or life based. That way when someone says they have something of value, they really mean it in more than just economic terms.

The biggest problem I have with a Resource Based Economy is that there is no path from here to there. I've paid attention to the Venus Project and other groups claiming to advocate for such a system, and none of them give any answer about how we begin to follow such an economy other than to say "Well, when the current global system collapses and millions or even billions of people die, then we'll be able to start anew." I'm not willing to deal with groups that dismiss life like that.

I do know the path, but it has to do with reducing the costs of products, services and energy to the point that it just becomes a choice not to turn things off. But we have a lot of infrastructure to build and a lot of corruption to eliminate before we could go there.