On Wed, Dec 8, 2010 at 3:59 PM, Sabri Oncu <[email protected]> wrote: > raghu: > >> If the Fed simply bought newly issued bonds from the Treasury worth >> $600B, then the Treasury could have simply turned around and spent it > > This is what the Treasury will do. The Treasury pays only the > interest, not the principal. The Treasury never pays the principal > since the begining. The US Treasury can keep rolling, and, indeed, > increasing, the principal as long as there is no bank run on the US. > > I don't think such a bank run on the US will happen any time soon.
But here's the thing that you are ignoring: the Treasury is not allowed to increase the amount of debt it can issue without permission from the Congress. So, yes they can keep rollong over debt forever, but political factors prevent the Treasury from effectively exploiting this advantage. I don't know what the legal aspects of this are: but imagine if the Treasury issued $600B worth of new debt directly bought by the Fed and basically put in a vault for perpetuity? That would give the Treasury essentially $600B cash for free - cash that the Fed wanted to print anyway. This would have been a whole lot more stimulative than the QE that we actually got. -raghu. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
