Author Topic: How to reduce the debt by 4 trillion dollars  (Read 3181 times)

rukawa

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How to reduce the debt by 4 trillion dollars
« on: September 09, 2017, 05:20:40 PM »
Currently the FED has a balance sheet with 4.5 trillion dollars. This means the banks have reserves of 4.5 trillion and the Fed as assets of 4.5 trillion. Presumably the Fed could pretty easily over time swap all non-government debt on its assets side with government debt.

Instead of then unwinding their balance sheet the Fed could simply NOT unwind and rip up 4 trillion of the debt. Presumably they would want about half a trillion to conduct monetary policy. And that is it. Not sure why this wouldn't work. In fact I suspect the Fed will never unwind its balance sheet....so basically other than the tearing up..this is kind of already happening.


shalab

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Re: How to reduce the debt by 4 trillion dollars
« Reply #1 on: September 09, 2017, 05:36:20 PM »
Yes, essentially pay the dividend to the treasury to reduce debt - this is the best way to resolve this situation. They have been paying about 100B in dividends a year.

https://bankingjournal.aba.com/2017/01/fed-pays-92-billion-to-treasury/

Currently the FED has a balance sheet with 4.5 trillion dollars. This means the banks have reserves of 4.5 trillion and the Fed as assets of 4.5 trillion. Presumably the Fed could pretty easily over time swap all non-government debt on its assets side with government debt.

Instead of then unwinding their balance sheet the Fed could simply NOT unwind and rip up 4 trillion of the debt. Presumably they would want about half a trillion to conduct monetary policy. And that is it. Not sure why this wouldn't work. In fact I suspect the Fed will never unwind its balance sheet....so basically other than the tearing up..this is kind of already happening.
« Last Edit: September 09, 2017, 05:38:55 PM by shalab »

Tim Eriksen

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Re: How to reduce the debt by 4 trillion dollars
« Reply #2 on: September 09, 2017, 08:23:29 PM »
How does this not end up the same?  The federal gov't debt goes down by 4 trillion, but the Fed now has 4 trillion of debt (owed to banks).  Currently 4 trillion of assets and 4 trillion of debts and is earning the spread, thus the 100 billion of income.  Rip up the assets, now they have no assets, 4 trillion of debt and either wind up the fed (sorry Sen. Paul not happening) or operate at a loss. 

rukawa

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Re: How to reduce the debt by 4 trillion dollars
« Reply #3 on: September 10, 2017, 08:17:52 PM »
How does this not end up the same?  The federal gov't debt goes down by 4 trillion, but the Fed now has 4 trillion of debt (owed to banks).  Currently 4 trillion of assets and 4 trillion of debts and is earning the spread, thus the 100 billion of income.  Rip up the assets, now they have no assets, 4 trillion of debt and either wind up the fed (sorry Sen. Paul not happening) or operate at a loss.

Yes I have been thinking about this. Debt for what exactly? Cash. No, I guess treasuries. So the banks would take excess reserves and demand treasury bonds which the FED would not have because they ripped them up. And they would do this as interest rates increased since they would be getting higher interest on treasuries than the Fed would pay them on reserves. Yes your right this would not work.

What I am saying works perfectly if you transition to a 100% reserved system because then you basically just increase the reserve ratio. You could could it now by increase the reserve ratio so its equal to the excess reserves held by banks. In which case banks would never be able to collect on the debt because they would need to hold all the reserves to conduct operations.