So what happens if the government just defaults on amounts owed to FED?

[SoyUnGanador]

I understand a ton of the U.S. government bonds are bought by the Fed. Hence the Fed (one indirect part of our government) owns bonds in a more direct part of our government. And out more direct part of government has to pay on those bonds to the Fed. Hence the government owing the government is a huge part of our debt. So, what if the U.S. government simply told the Fed, yo dawg, I like you and all, but you ain't getting paid yo.

What would happen then? Wouldn't that just wipe out a huge part of the U.S. government debt?!

 

[piezoe]

So, what if the U.S. government simply told the Fed, yo dawg, I like you and all, but you ain't getting paid yo

Won't happen. All net fed earnings flow back to the Treasury. The U.S. can "wipe out" as much of its so called "debt" whenever it wants to by simply buying it back. That's what QE is doing. But QE does not eliminate Treasury liability, it simply substitutes one liability for another. Also QE has been small compared to the total of Treasury Securities outstanding. The Treasury does not issue securities for the purpose of raising money. Treasury securities have another use. FWIW, Japan, not long ago, bought back about 50% of its JGBs.

 

[S2007S]

This will never never never never neverrrrrrrr happen. Don't even take time to fathom it because the idea of this ever happening is literally non existent.

By now there should have been major major situations unfolding in our financial structures worldwide, but the fed is always there to rescue any inkling of a threat. Let's see how they handle the next financial collapse!!!!

 

[countryBoy641]

The Treasury does not issue securities for the purpose of raising money. Treasury securities have another use. FWIW, Japan, not long ago, bought back about 50% of its JGBs.

I beg to differ on that.
The U.S. Treasury has mountains of obligations that fall into three categories. and these are giant promises made by elected Washington officials (past and present) who would have a ton of explaining to do if these failed:

1) Social Security
2) Medicare
3) Department of Defense

In fact, if any of these ran short of monthly cash, I think large scale civil unrest would breakout.

 

[Pricechange]

I understand a ton of the U.S. government bonds are bought by the Fed. Hence the Fed (one indirect part of our government) owns bonds in a more direct part of our government. And out more direct part of government has to pay on those bonds to the Fed. Hence the government owing the government is a huge part of our debt. So, what if the U.S. government simply told the Fed, yo dawg, I like you and all, but you ain't getting paid yo.

What would happen then? Wouldn't that just wipe out a huge part of the U.S. government debt?!

Most studies of this event happening include a transition to socialism and a nationalizing of debt along with wages, health insurance, social security and education. The national debt would be part of nationalizing existing wealth through some kind of immediate wealth tax of 50% upon people with above a certain level of wealth as per past examples (Vietnam and others). So both existing wealth and existing debt would be brought into the fold and redistributed. I haven't found a good example to study that includes a capitalist country mass defaulting on National Debt without full socialism being brought in (you can look at the Argentina example, but it was pretty socialist prior to defaulting and its a pretty small country in the scope of things). Mid 1970s UK is a better socialist example.

And yes...there was sometimes mass unrest...including major wars. The war usually comes first to supposedly unite the people toward an agreed foreign enemy in order to prevent civil unrest.

 

[tiddlywinks]

The U.S. Treasury has mountains of obligations that fall into three categories. and these are giant promises made by elected Washington officials

Focus on the mention of elected WASHINGTON officials... On the other end are STATE and LOCAL economies that also made giant promises, many based on actions of WASHINGTON officials, but without the ability to control the elasticity of the state and local economy.

The bottom line is Keynesian Economics never considered government to be the largest borrower, where interest rates affect only the citizenry, with no affect on WASHINGTON. Fiscal Policy and Monetary Policy are 2 distinctly separate things.

"Default" does not need to occur. Inflation produces the same result.


btw, there are more than 3 obligatory debt "categories".

 

[FreeGoldRush]

This will never happen. Treasuries and cash serve almost exactly the same function and both are very liquid. Thinking of treasuries as debt is not the proper context.

 

[countryBoy641]

Focus on the mention of elected WASHINGTON officials... On the other end are STATE and LOCAL economies that also made giant promises, many based on actions of WASHINGTON officials, but without the ability to control the elasticity of the state and local economy.

"Default" does not need to occur. Inflation produces the same result.


btw, there are more than 3 obligatory debt "categories".

Nobody has to focus on "elected officials". FDR and LBJ are in the same Pantheon of ex-Government officials.
Now their combined election gimickry (SocSec. and Medicare) is set to bankrupt the country.
And everybody who has a job can see that deduction in their pay-stub.
What a legacy that is!

This is not 1921 Germany. Many investors will have read about that era, and will see the FED's slight of hand coming.

Voters who register above room temperature can figure this out.
Maybe for the CBs (awash in debt). But not the investor class.
That's why we will likely see huge unrest.

 

[piezoe]

I beg to differ on that.
The U.S. Treasury has mountains of obligations that fall into three categories. and these are giant promises made by elected Washington officials (past and present) who would have a ton of explaining to do if these failed:

1) Social Security
2) Medicare
3) Department of Defense

In fact, if any of these ran short of monthly cash, I think large scale civil unrest would breakout.

Your understanding is incorrect. But it may be of comfort to you that millions of Americans agree with you. The dollar could eventually fail but not an any way at all related to what you envision. As millions do, you are treating the dollar as though somehow it is constrained by the same factors that constrain your own personal spending. That thinking is terribly common but totally absurd at the same time.

 

[piezoe]

There are financial dangers, but the sources of it these are not what the majority of Americans believe they are. Ironically the danger comes fundamentally from Americans ignorance, often wittingly and unwittingly bolstered by politicians, of the true nature of the U.S. Dollar. We think of so called "U.S. debt" in the same way we think of State, City and personal debt. But this is entirely wrong. I suppose part of the problem comes from the lack of a more accurate vocabulary to describe what we erroneously call "U.S. 'Debt' ".

You can see evidence of Americans' common misunderstanding of the true nature of their money registered right here in this Forum thread. It will go on until a majority of politicians themselves understand our money and find a way to convey correctly the nature of our taxing, spending and issuing of Treasury Securities. In the meantime, we will go on making incorrect decisions because of our deep seated misunderstanding.