World Debt

[psionl0]

If rates rise and the Fed gets the bonds at a discount that differential too is remitted to Treasury eventually when the bond matures.

Changes in interest rates don't affect the face value of the bond nor the coupon rate (the amount treasury pays the bond holder every 6 months). It only affects how much the bond is worth in the open market.

If the coupon rate is 5% then on a $100,000 bond, Treasury would pay you $2,500 every 6 months. At the end of the 10 years, you would also get back $100,000 for the bond. If the expected rate of return was also 5% then the bond would be worth $100,000 at the start. The situation would be analogous to investing $100,000 in a fixed term bank account and collecting the interest every 6 months. At the end of the 10 years, the bank would return the $100,000 to you.

If the expected rate of return or effective interest rate were only 4%, then since you would need to invest more than $100,000 to get $2,500 every 6 months, the bond would be worth more than $100,000 on the open market. Similarly, if the effective interest rate was 6% then the bond would be worth less than $100,000 on the open market.

Just to get real, according to this SOURCE, the current coupon rate on 10 year bonds is 1.75% and the price of the bond is 93% of its face value. This equates to an effective return of 2.56%.

It is important to realize that Treasury pays the bond holder no matter who holds the bond. Even if it is the Fed that holds the bond, paying what is owed on the bond when it falls due and collecting the Fed's profits at the end of the year are two entirely separate operations so the churn must go on. If the Fed were to buy mortgage backed securities instead of bonds, then the Treasury would still be paying the same amount on the bonds it sold and still be getting the same amount of profit from the Fed (assuming the rates of return were the same).

 

[Tippit]

I know bond holders have the option of holding to maturity, but it's different when the Fed holds them because the Treasury is effectively no longer paying interest at that point. Like I say I dunno quite what I'm getting at, it just strikes me as a quasi-buyback. If rates rise and the Fed gets the bonds at a discount that differential too is remitted to Treasury eventually when the bond matures. <shrug>, I need to cogitate on it some more.

When the Fed monetizes US government debt, since it remits its bond revenue (less its own expenses of course) back to the Treasury, it is essentially as if the government is monetizing its expenses directly - aka, the inflation tax. The interest and principal payments become more or less shell transactions (although it's important to remember the Fed does take its cut, and it has private stockholders).

On the other hand, when the Fed provides cheap credit to private entities based on the public's right to create money ex nihilo, that represents theft (a public subsidy of a private entity). This is true whether or not that money is then flipped into government bonds, stocks, or any other asset class or commodity. When the money is flipped into government bonds and interest starts crowding out legitimate government expenses and then I have to hear false dilemma-debates about "austerity" versus "profligacy", it's particularly heinous.

 

[Tippit]

I dunno what Tippit is saying, I'm just not sure if I can consider a 10yr bond to be a 10yr bond when the Fed can buy the bond after any amount of time after which Treasury is no longer paying interest on it. Not sure where I'm going with this, it just seems like the duration is being fiddled with.

I'm saying, lending counterfeit money to select private entities only to be flipped back into government bonds, serviced by hard working taxpayers is a big, big problem, even if the process is glorified and legitimized, and the money isn't technically "counterfeit". The way that the Fed manipulates duration is with programs like "Operation Twist", which monetize longer duration securities and sells shorter duration securities, in an attempt to herd investors into riskier long term bonds, which is problematic in and of itself, just like all of the Fed's manipulations.

 

[Tippit]

I know bond holders have the option of holding to maturity, but it's different when the Fed holds them because the Treasury is effectively no longer paying interest at that point. Like I say I dunno quite what I'm getting at, it just strikes me as a quasi-buyback. If rates rise and the Fed gets the bonds at a discount that differential too is remitted to Treasury eventually when the bond matures. <shrug>, I need to cogitate on it some more.

Since the Fed bought the bonds, someone had to sell them. So while the private bond seller doesn't enjoy the government interest payments anymore, he also received an inflation-subsidized capital gain (in all likelihood, with the Fed perpetually suppressing rates downward).

It's important to understand that anything the Fed buys, or lends, is based on money created ex nihilo, that is, on nothing other than the Fed's right delegated by congress to create money. So in this sense nothing purchased by the Fed is done so at a legitimate market price, and virtually everything sold to the Fed represents an illicit profit for the seller, which is subsidized by diluting everyone's currency.

 

[mhaze]

In an environment of lagging and latent inflation due to years of money printing, all bonds are bad.

 

[psionl0]

According to Bernanke's testimony yesterday, it's buying $40 billion worth of agency mortgage-backed securities, and $45 billion worth of Treasuries per month. But that is simply their open-market activity, it doesn't account for loans, swaps, and all the other transactions that happen on a routine and daily basis, which are not transparent.

I'm saying, lending counterfeit money to select private entities ...

So which is it? Is the Fed printing money and giving it to its cronies or is it using the money to buy bonds and mortgage backed securities?

When the money is flipped into government bonds and interest starts crowding out legitimate government expenses and then I have to hear false dilemma-debates about "austerity" versus "profligacy", it's particularly heinous.

Now you are trying to blame the Fed for the interest government pays on its debts again. The opposite is the case. If the Fed is bidding up the price of bonds (or enabling its "cronies" to do so) with its printed money then it reduces the government's interest bill - not to mention devalues the government's debt through inflation.

The blame for government debt lies solely with the politicians and the people who vote for them.

 

[Tippit]

So which is it? Is the Fed printing money and giving it to its cronies or is it using the money to buy bonds and mortgage backed securities?

You're really turning into quite the troll. It's obviously both. The Fed does both. But I don't assume that all the money the Fed counterfeits on behalf of politicians does me the taxpayer any good either. I assume the vast majority of that money is squandered and stolen as well.

Now you are trying to blame the Fed for the interest government pays on its debts again. The opposite is the case. If the Fed is bidding up the price of bonds (or enabling its "cronies" to do so) with its printed money then it reduces the government's interest bill - not to mention devalues the government's debt through inflation.

The blame for government debt lies solely with the politicians and the people who vote for them.

You're an idiot. You routinely and completely miss the point, which is that creating money ex nihilo is a surreptitious form of theft. The US government and the politicians who are running it will borrow, beg, or steal every possible dollar they can get for a very long time now. It's long past being out of control.

And now, apparently, without any understanding of it, you're arguing in favor of financial repression. You are simply clueless. Please, in your infinite wisdom, tell me which of the two clowns I should have voted for in the last election. I'm just trying to stop the theft, and make people aware of what's happening. I don't know what the **** you're trying to do, other than post stupid trolls.

 

[psionl0]

You wouldn't be so easily rattled if you knew what you were talking about.

It's not surprising that you won't deal with the link between ex nihilo money creation and the cost of servicing government debt. You simply don't understand how it works and you don't want to know because it is a moral issue for you. (That's why you don't care about interest rates). I have long argued that politicians can't be trusted with the national credit card but you seem to think that it would be more honorable to default on government debts.

I don't care what names you call me. I will call you out on it every time you post something that doesn't make sense.

 

[Tippit]

You wouldn't be so easily rattled if you knew what you were talking about.

I'm not rattled. I sincerely think you're an idiot. You've proven it time and time again.

It's not surprising that you won't deal with the link between ex nihilo money creation and the cost of servicing government debt. You simply don't understand how it works and you don't want to know because it is a moral issue for you. (That's why you don't care about interest rates).

Here's a link describing it. It's called Financial Repression. I'm certain you won't understand what you read. And yes, it is a moral issue. Theft is a moral issue.

I have long argued that politicians can't be trusted with the national credit card but you seem to think that it would be more honorable to default on government debts.

I don't care what names you call me. I will call you out on it every time you post something that doesn't make sense.

Defaulting on dishonorable debts funded by stolen property is entirely honorable, and in fact, necessary for any real economic recovery. The fact that you can't distinguish these debts from all government debts despite me making it abundantly clear, repeatedly, is itself dishonorable.

You've long argued that politicians can't be trusted with the national credit card, but apparently quasi-private central banks can be trusted with the power to legally counterfeit money and loan it to friends who loan it to governments that can't be trusted with the national credit card.

And yet you claim that I am the one who doesn't make sense.

 

[Sceptic-PK]

quasi-private central banks can be trusted with the power to legally counterfeit money

Because central banks in other countries work so differently, right?

 

[psionl0]

I'm saying, lending counterfeit money to select private entities only to be flipped back into government bonds, serviced by hard working taxpayers is a big, big problem, even if the process is glorified and legitimized, and the money isn't technically "counterfeit".

This is just stuff and nonsense. There is no causal link between the amount of money the Fed prints and how much money the government borrows.

The number of dollars borrowed increases with inflation (and more besides) but inflation also devalues government debt and in this way, acts like the tax you always claim it is. Giving it a scary name like "financial repression" doesn't make it a tool to oppress the masses. Since inflation devalues the holdings of the bond holders you could also call it a form of "default".

Low interest rates might encourage greater profligacy by the government but that is a rather dubious claim since politicians are not interested in the long term problem of servicing government debt.

 

[Emperor_Gestahl]

Low interest rates might encourage greater profligacy by the government but that is a rather dubious claim since politicians are not interested in the long term problem of servicing government debt.

While that may be true, when punting I think the goal is to get the ball as far away as possible. Could mean the difference between getting reelected once and getting reelected twice. As a Browns fan I know all about punting, so I can safely appeal to my own authority here.

 

[kblood]

In other news:
http://www.thenewamerican.com/econo...r-blows-whistle-on-corruption-federal-reserve

 

[psionl0]

http://www.thenewamerican.com/econo...r-blows-whistle-on-corruption-federal-reserve

If the Fed is doing anything other than attempting to regulate the US economy then we need to know about it.

Unfortunately, this link isn't the one that is going to expose it all. It is bigger on scaremongering than it is on detail. It makes claims like, "Central bankers have also been manipulating gold prices" but gives nary a detail about how this is being done. That makes the claim baseless.

There is little doubt that the international banking system is not in any nation's interest but we need facts - not opinion pieces if we are to find a solution.

 

[Tippit]

If the Fed is doing anything other than attempting to regulate the US economy then we need to know about it.

Those of us with a brain and a conscience already do know about it.

Unfortunately, this link isn't the one that is going to expose it all. It is bigger on scaremongering than it is on detail. It makes claims like, "Central bankers have also been manipulating gold prices" but gives nary a detail about how this is being done. That makes the claim baseless.

You have insider testimony. How is that baseless? What else do you expect given an organization that is not transparent? It's not like I can figure out how much money the Fed is creating for its cronies, and which markets it is manipulating other than after the fact.

There is little doubt that the international banking system is not in any nation's interest but we need facts - not opinion pieces if we are to find a solution.

Without sunlight, we can't get all the facts. But some of us can deduce that it's not operating in the public interest even with the information that we have.

 

[Sceptic-PK]

In other news:
http://www.thenewamerican.com/econo...r-blows-whistle-on-corruption-federal-reserve

Do you really find that link credible? Really?

 

[kblood]

Do you really find that link credible? Really?

YES... because I actually did my research BEFORE posting it. Now try to do the same. No offense... boy, that does not even help me does it?

 

[Sceptic-PK]

It's OK, having just read your posts in the CT sub-forum, I can see you're off your rocker. No surprises you never met a conspiracy you didn't like.

 

[kblood]

It's OK, having just read your posts in the CT sub-forum, I can see you're off your rocker. No surprises you never met a conspiracy you didn't like.

Thats what most people think about the real conspiracy theorists, especially when they are right. Ask Ian Crane, amongst many. Or watch a movie:

http://www.youtube.com/watch?v=xAWf3F8_zQk

Our mind expands as we learn stuff. So does the Universe. You are stopping your own growth by choosing to be skeptic, without doing your own research first. Especially when you already have been given nuggest of golden information, and yet you ignore it because your spider sense tells you to. Excuse me if I got personal there. I see no other way to put it.

 

[Sceptic-PK]

Haha. Argument by youtube. Now THERE'S a surprise!!