Tuesday, September 27, 2011

And then there was $500 bln more



On Thursday, the government’s checkbook increased by $500 billion. Just like that.

Where did it come from?

Was a tax levied on people and businesses in that amount?

No.

Did they find it laying around in some gov’t warehouse?

No.

Did we dig it up out of the ground? Perhaps a quantity of gold in that amount?

No.

It came from nowhere. We just said, we now have $500 billion more.

That’s it. By decree, which is exactly where all fiat money comes from.

And that’s where all fiat debt comes from, too.

And fiat debt is paid with fiat money so there is no debt per se, or at least not in the sense that most people imagine.

Is it inflationary?

No. Just ask gold traders who bought on that belief. Or forex traders who’ve been selling the dollar on that belief.

That $500 bln allows the government to keep writing the checks.

And it’s all about who writes the check.

9 comments:

Neil Wilson said...

It all boils down to this line which was kindly supplied to me by one of the 'sound money' crowd:

"Debt is a promise of repayment with future work and energies"

Which is true if it is real debt, ie a debt denominated in a liability you don't have monopoly control over.

Otherwise its an accounting journal.

Matt Franko said...

Mike,

BTW no return calls this week from Treasury as of yet.... (of course I am not holding my breath)...

Unless I hear differently from Treasury, looks like wrt the next 1.2T of ceiling, once Treasury gets within 100B of this newly increased ($500B) ceiling, a 50 day clock starts and then if Congress doesnt act against it within that time, Treasury just marks up the authorized amount by 1.2T...

a key thing to watch is how fast treasury closes in on using the last 100B. If they are using ceiling at a rate that is faster than that last 100B in 50 days, then we could face fiscal drag right at the end of the 50 day period as Treasury has to stop "paying the bills" till the end of the 50 days...

Mike Norman said...

Yes, Matt, we know how to game this now.

You won't hear from Treasury.

Tom Hickey said...

Neil: "Which is true if it is real debt, ie a debt denominated in a liability you don't have monopoly control over."

Debt is always an accounting expression that is the nominal counterpart of a legal obligation. How "real" the obligation is depends on the nature of the contract.

There is a big difference between collaterized and uncollateralized , secured and unsecured, recourse and non-recourse, for example. In some cases the creditor has the stronger hand, and in others the debtor.

Government debt is a special case, since no contract is involved that commits a government that is sovereign in its currency to deliver anything more than the nominal obligation in its currency, which it creates by fiat. Therefore, such a government can never be under any real obligation unless it specifically commits to it, e.g., by entering into convertibility at a fixed rate.

Matt Franko said...

Once they update this schedule for into the new FY (October ->), we may be able to estimate when the 500B will run out...

http://www.treasurydirect.gov/instit/annceresult/press/press_cashpydwn.htm

Just take the "net new cash or (pay down)" amounts and net them out till you get close to the 500B....

We'll monitor this as Treasury releases new info as per their auction schedules for next fiscal year here...

(PS Mike good long call for the open on Monday)

& 'Twist' looks like it is setting up to at least cap if not lower the longer bond prices (ie raise interest rates) here....

Mike Norman said...

Matt:

"(PS Mike good long call for the open on Monday)"

Yes, my brokers are loving it, as am I! ;)

beowulf said...

Unless I hear differently from Treasury, looks like wrt the next 1.2T of ceiling, once Treasury gets within 100B of this newly increased ($500B) ceiling, a 50 day clock starts

For the $1.2T tranche, its a 15 day shot clock.

Matt Franko said...

Beo, Sorry my mistake then.

If it is 15 days that should be no trouble at all. 1/2 of a month. Prior to the summer's debt ceiling debacle, deficit was running at about 110B/mo. rate when the system was unconstrained. So even at that rate, in 15 days we should not come close to the 100B that would be left....

so as long as Congress doesnt do something stupid, it looks like clear fiscal sailing thru well into next year.

Resp,

beowulf said...

Agreed, at least until the FY 2013 auto-cuts kick in (FY13 starts on Oct 1, 2012). Let's see, $1.2T in cuts (over 10 yrs) of discretionary spending would be approx $100B in FY13. Of course since income support spending and tax receipts are no more subject to discretionary spending caps than are the waxing and waning of the tides, the fiscal impact will be much smaller than the political impact (there's a general election a month into FY13).