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Peter Schiff: We Will Never Pay It Back, We Can't Pay It Back, That's Why We Raise The Debt Ceiling!

After the Bell | Fox Business Network | December 10, 2012


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Fox News

"But the dollar is up against the Euro." The Euro is a fiat currency. It doesn't matter, the value of all fiat currencies has declined. The purchasing power of the US Dollar in 1913 was $0.99. The purchasing power of the dollar today is $0.04. Do we have to wonder why gas and food prices have increased?

To purchase a $1.00 item in 1913, now takes $23.37.

The annual rate of inflation change? 2236.5%


How to Avoid Raising the Debt Ceiling

The $16 trillion national debt is partly an ILLUSION because the Federal Reserve owns $1.6 Trillion of it which it purchased through its QUANTITATIVE EASING (QE) operations.

The Fed has been earning about $80 billion a year in interest income from these Treasury holdings and will earn more like $100 to $110 billion this year which will simply be remitted back to the Treasury.

In other words, this is debt that the Government owes itself! Our children and grandchildren aren’t even involved and they will not be saddled with this debt as long as the Fed holds on to it. This raises the question about why this $1.6 Trillion of Treasury debt held by the Fed should apply to debt ceiling.

After all, what difference is there between the Treasury issuing debt only to have the Fed buy it back, and theTreasury not issuing that debt in the first place?

Is there any good reason why the Treasury and Federal Reserve couldn’t simply wave a magic wand over this $1.6 Trillion debt and in effect cancel it? This would reduce the outstanding debt to about $14.6Trillion which is well below the current statutory debt ceiling of $16.394 Trillion.

This idea of canceling some portion of sovereign debt held by central banks is actually gaining traction in part because it is an idea that finds support on both the left and right.

Some Post-Keynesians of the Modern Monetary Theory (MMT) school of thought see the advantage of debt cancellation as a way to defuse the fiscal cliff time bomb. Here’s MMT economist Mike Norman’s take on the issue.... http://www.youtube...atch?v=-BKiIflAr-4

Meanwhile, at the other end of the political spectrum Austrian school champion Ron Paul sees government debt cancelation as a means to bring lasting savings to the federal budget.


Instead of driving off the fiscal cliff like Thelma and Louise, the Treasury and Fed could give Congress the means to slam on the breaks. This would buy policy makers another year or so of valuable breathing space to formulate sensible fiscal policy for economic growth rather than hastily causing a self inflicted wound on the economy and millions of American workers and businesses.

Mr. Bernanke, if you seek transparency and accountability for the Fed…. If you seek prosperity for the American people then come to Congress and tell our law makers that the Treasury debt held by the Fed should not apply to the debt ceiling. Mr. Bernanke TEAR UP THIS DEBT!

Ed Rombach

They can't

do that.

In a technical sense they can, because you're right, in effect the govt. owes itself. But they can't do it politically. Here's why:

If they cancel the debt the Fed bought they are eliminating the middle man, and the market sees this. So it means the govt. is in effect no longer issuing bonds... it is DIRECTLY printing the money. So law makers can no longer present the illusion that we are "borrowing" with REAL intent to pay back.

Right now they can argue credibly that "hey we are fiscally okay because look, we offer bonds to the market and people buy them! Yes, the Fed buys them too, but they are allowed to! The "debt" is available for anyone to buy!" If they did as you suggest then they draw a line between issuing "debt" and simply printing money at their own whim. It doesn't sound like a big difference, but perception means a lot (especially to Ponzi schemes).

How to Avoid the Debt Ceiling

Agreed. Quantitative Easing appears to be nothing more than a fig leaf for plain and simple money printing. However, contemplate this. When the Treasury issues debt, it doesn't collect anything. Sales of Treasury debt and payment of taxes do not "fund" the government even though it is accounted for as if it does fund government spending. The only thing that Treasury debt sales and tax collections do is extinguish currency reserves. The law that requires the Treasury to sell debt when the federal government runs a deficit is a carry over from when the US operated on a gold standard. How do you think the federal reserve notes that you carry around in your pocket got there in the first place? The government had to spend them into existence via the fiscal channel. The Fed simply clears the checks. If you have doubts about this then consider that if you bought a Treasury bond and paid for it with folding cash i.e. federal reserve notes, or paid your tax bill to the IRS with folding cash, upon receipt the Treasury would shred it. It took me a long time to get my head wrapped around this concept.

Ed Rombach


dollars come into existence via debt, and not all of it from government debt (spending it into existence). When you take out a $10,000 bank loan that money is "created from thin air" and this is limited only by bank reserve requirements.

Bank money vs. reserves

Yes. Banks create what can be called bank money out of thin air by originating loans. Econ 101 states that loans create deposits. This bank money is self liquidating as loans are paid off and/or defaulted on. Under lagged reserve accounting rules, banks have about 30 days to come up with the reserves they need to place with the fed for the loans they have written. These reserves may come from deposits or bank capital but are usually borrowed in the fed funds market from other banks that have more reserves than they need. Note the difference between bank money and reserves. The Fed can temporarily reduce available reserves in the commercial banking system by selling Treasury securities from its balance sheet and the Treasury can extinguish reserves by way of tax collections and by selling newly issued Treasury bills, notes and bonds. Point is that conventional wisdom perceives that the government must first either tax and/or borrow before it can deficit spend, but in fact it spends non-stop 24/7 and then periodically taxes and/or borrows after the fact to extinguish reserves that might otherwise be inflationary if allowed to slosh around n the banking system. Of course most reserves are simply digital electronic in nature, while banks only hold enough paper federal notes to clear checks and cover anticipated cash withdrawals.

Ed Rombach

The scary truth...

Let's imagine a person puts $100.00 in their savings account. I believe the reserve is 10%. The bank loans out the $100.00.

$100.00 loaned, $10.00 in reserve
$90.00 loaned, $9.00 in reserve
$81.00 loaned, $8.10 in reserve
$72.90 loaned, $7.30 in reserve
$65.60 loaned, $6.56 in reserve
$59.04 loaned, $5.90 in reserve

and so on...

The only loan that is funded with dollars in circulation is the first loan. The rest is money created out of thin air.

Let's say a month from now, this person goes to the bank and withdraws $100.00 from their savings account. What happens to all these loans?

This is called the Fractional Reserve Ponzi Scheme.

The Money Multiplier Myth

uastudy - Your understanding of fractional reserve banking has the causality backwards. Back on July 1 the Daily Paul featured a video on “Fractional Reserve Banking Explained”.


The problem with the video about the fed study “Modern Money Mechanics” (MMM) is that it was originally published by the Chicago fed in 1961 and most recently revised in 1992 and printed in a final edition in 1994. The narrative in the video is all about what is commonly called the fed “Money Multiplier Model” which has been taught in standard economics 101 textbooks for decades as gospel but in fact is sorely out of date. Recent up to date research from the fed suggests that this standard money multiplier model is wrong because it has the causality backwards. There is no statistical evidence to show that there is a transmission belt from fed interest rate targeting, to changes in bank reserves, to new loan origination. I refer to “Money, Reserves, and the Transmission of Monetary Policy: Does the Money Multiplier Exist?” by Seth B. Carpenter and Selva Demiralp 2010.


The standard money multiplier model creates the impression that the fed pushes money out into the commercial banking system which then leverages it up to ten times the original amount based on the 10% reserve ratio requirement.

Common wisdom perceives that fed injection of cash reserves via open market operations always ends up getting re-deposited and thus re-levered over and over again as you illustrated in your tables of loans and reserves. But if this is true, how is it that $1.6 trillion of in excess reserves injected into the commercial banking system as a consequence of fed purchases of Treasury debt and mortgage backed securities from its QUANTITATIVE EASING operations lies idle on account at the fed as overnight excess reserves earning a mere 0.25%?

It is true that banks only have to hold 10% of a loan amount on account with the fed as reserves, but the causality begins with loan origination. After booking a loan, a convention known as “lagged reserve accounting” gives banks about 30 days to deposit the 10% reserve with the fed. In other words, the loan comes first and the 10% reserve requirement with the fed comes subsequently.

This means that the existence of $1.6 trillion in excess reserves held on account at the fed has absolutely no material impact on the ability or willingness of banks to make loans. Banks can make as many loans as they want to credit worthy borrowers regardless whether there are $1.6 trillion in excess reserves or $1. This issue was addressed in a the Financial Times / Alphaville article.


In other words, the process is based on loan demand pulling reserves out of the Fed as a consequence of the Fed's interest rate targeting mechanism, which in normal times means adjusting the fed funds rate. If loan demand is strong and a lot of banks are making loans, they will need reserves to deposit with the fed which they can borrow in the fed funds market from other banks that have more reserves on hand than they need.

However, if there is a net reserve deficit in the commercial banking system, competition among banks bidding for reserves can drive up the fed funds above the fed’s target. If so, then the fed will conduct open market operations to buy Treasury securities from primary dealers in exchange for cash reserves until the fed funds rate comes back down to target.

This means that by targeting the fed funds rate, the fed relinquishes control over the money supply. The fed cannot control interest rates and the money supply simultaneously any more than one can hit two birds with one arrow.

Fractional reserve banking is a hot button issue for many and clearly too much leverage is definitely not a good thing, but too little leverage may not be so good either. It may be that leverage is ingrained in in human nature as a function of risk taking. "I'll Have Another", the winner of the Kentucky Derby was rated at 15 to 1. Long before the creation of the fed, goldsmiths during the Renaissance realized that they could lend out 90% of the gold placed on deposit with them because it would be a rare event that more that 10% of gold depositors would come to claim their gold holdings at any one time. If the commercial banking system reformed itself along the model of full reserve banking, it makes me wonder how would an outright ban on leverage would be enforced?

Ed Rombach

This might

all be interesting if the whole system wasn't about to come crashing down.

None of it will matter once we return to sound money aka REAL money, like gold and silver, instead of money that only exists because of someone else's debt.

Money and debt

One man's borrowing is another man's asset.

Ed Rombach

We COULD Pay it back

Get that 2.3 Trillion the Pentagon lost back. Look into that 43 trillion dollar lawsuit to find if anything is credible (hell 10% of that is 4 trillion). Why do we fuss over spending 1.6 trillion less on a fiscal cliff plan that's spread out over 10 years when we can get so much back from either of these 2 immediately. Also, why is the dailypaul not looking more into this 43 trillion dollar suit, or putting it on the front page. There is a lot of coincidences surrounding that.