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| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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Why the Fed Should Destroy Government Bonds |
ISN Insights - July 5, 2011 - By Dean Baker
The US Federal Reserve Board should destroy the government bonds it holds to resolve the impasse over the debt ceiling. This maverick move could allow the government to generate the demand needed to push the economy back toward full employment, without creating a major debt burden for future generations.
Ron Paul is a long-serving representative in the US Congress. He is a committed libertarian who is now embarking on his third presidential campaign. He has built up a devoted political following over the years.
While many of his ideas are outside of the mainstream, that doesn't mean that they do not deserve to be taken seriously. As a solution to the impasse over the debt ceiling in the United States, Paul suggested that the Federal Reserve Board destroy the $1.6 trillion in government bonds that it currently holds. This act would put the government far below its $14.3 trillion debt ceiling, providing perhaps two more years before any action would need to be taken to raise the ceiling again.
Destroying $1.6 trillion in government debt might seem far-fetched, but it actually makes a great deal of sense. The Fed acquired this huge stock of debt through its policy of quantitative easing. This was an effort to try to provide further stimulus to the economy after the short-term lending rate had already been pushed to zero. Since the short-term rate could not go any lower, the Fed bought up several trillion dollars of mortgage-backed securities and government bonds in order to directly lower long-term interest rates.
While the mortgage-backed securities are debt from private parties to the Fed, the bonds the Fed holds are literally money that the US government owes itself, since the Fed is a government agency. In fact, each year the Fed refunds back to the Treasury the interest earned on its assets in excess of its operating costs. This means that the interest that is paid on the bonds held by the Fed is effectively interest that the government is paying itself.
In this context, it is very difficult to see any downside to what would be no more than eliminating a bookkeeping entry. While the Fed would lose $1.6 trillion in assets, the government would lose $1.6 trillion in liabilities - and be suddenly far below the debt limit.
In addition to the short-term benefit of resolving the standoff over the debt ceiling, this move also has the great long-term benefit of reducing the government's future interest burden. While the bonds do not create any net interest burden as long as they are held by the Fed, the plan is for the Fed to sell them off as the economy recovers. The Fed would do this to pull reserves out of the banking system, limiting its lending ability and thereby preventing inflation.
Once the bonds are in the hands of the private sector, they do create an interest burden for the government. While the Fed is currently expected to refund $80 billion to the Treasury in 2011, in 2017 it is projected to refund just $33 billion. The difference, of $47 billion, is lost revenue to the government.
However, if the Fed destroys the bonds that it currently holds, the interest on this debt can never be a burden to the government. The bonds would cease to exist.
This would mean that the Fed would not be able to sell bonds to pull reserves out of the banking system. However, it can accomplish the same result with a different tool. It can simply raise the reserve requirement, forcing banks to hold a larger fraction of their deposits on reserve.
Raising the reserve requirement can be just as effective as reducing the quantity of reserves in limiting lending. If the amount of reserves in the banking system is doubled, and the reserve requirement is also, then the banking system will just be able to make the same amount of loans. The big difference between these two paths is that the government would not have to pay as much interest on its debt, in the case where the volume of lending is limited by higher reserve requirements.
For the complete article.
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