There are three fairly radical ideas floating around the monetary policy world right now. The first is economist Ellen Brown’s belief that governments should stop borrowing money and simply create the currency they need, thus bypassing central banks and government bond markets. The second is Australian economist Steve Keen’s debt jubilee, in which governments give newly-created money to individuals with which to pay back their debts, in the process resetting the system with lower leverage. The third is that trillion dollar platinum coin thing, where Washington just conjures that much money out of thin air and uses it to evade statutory debt limits — which looks like an ad hoc mash-up of the first two ideas.
Until yesterday these proposals seemed like provocative curiosities, fun to think about but too far off the mainstream radar screen to become official policy anytime soon. Then reader Bruce C responded to a DollarCollapse post about the impact of rising interest expense on the US and Japanese budgets:
All of the Treasury bonds owned by the Fed are at effectively zero interest because all interest payments from the Treasury to the Fed are returned to the Treasury. That actually means that total net interest expenses for the Treasury are currently decreasing with time as the Fed buys about $85 billion worth of Treasuries each month (which is about 90% of all new issuances). As long as the Fed is willing to do this the current deficit spending by the US can continue for a lot longer than most analysts think possible (I mean for decades).
I don’t know if Japan’s central bank (the BOJ) reimburses the Japanese Treasury of its income from government bonds but if it does then there won’t be any need to sell JGBs to outsiders who may demand higher interest rates. For the same reason explained above the Japanese government could literally enjoy decreasing debt servicing costs despite rising price inflation. Again, that can’t last forever but I wouldn’t hold my breath.
This got me to thinking about the way in which the Fed buying bonds and returning the interest payments resembles the three proposals above – and wondering if they’re all really the same thing accomplished with different mechanisms. In the Fed interest repayment, debt Jubilee, and trillion dollar coin strategies, the money is filtered through various intermediaries, while in the Brownian scenario it is just created and spent. But in each case, the government simply conjures up money and spends it, without reference to the bond market or budget deficit or anything else.
Read More at dollarcollapse.com . By John Rubino.