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Old 04-10-2011, 07:26 AM
David Newman David Newman is offline
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The debt crisis is all a tragic misunderstanding of our monetary system

The national debt represents the total savings at the Fed.

For background, here is an simplified example of how the system works.

Saudi Arabia has oil and decides they want to sell it to us. We need oil and find that Saudi Arabia is willing to sell us some. We agree to a transaction to purchase 2T worth of oil, they get a reserve account with 2T in USD at the Fed. In a reserve bank, a reserve account is the equivalent of a checking account. Now Saudi Arabia is happy because they have the USD they wanted and we are happy because we have oil, it's a equal value swap.

At this point, SA has 2T sitting in their reserve account and the national debt is still 0.

Now, Saudi Arabia has a couple of choices of what to do with that money. They can use it to buy US goods and services, they can let the money sit there unused, or they can buy treasury bills. So, to continue the example, they decide that they don't want to buy any goods and they want their money to generate a return. Their only alternative is to buy T-Bills. They decided to buy one year US Treasury bills in the amount of 1.5T.

So what happens? Their reserve account is debited 1.5T leaving them with 500B in reserves. The purchases of the t-bills is the equivalent of a savings account, so their savings account is credited 1.5T.

Now, the 2T is still sitting at the Fed, 1.5T in savings, 500B in reserves and now the national debt is 1.5T. So, what happens when the one year is up and Saudi Arabia wants their money back? We move the money back to their reserve account + interest.

If you listened to the media, you'd think we were incapable of paying off the debt where the reality is that paying off the debt is just an accounting transaction at the fed.

If you are worried about insolvency, ease your mind, it can't occur involuntarily. We could, voluntarily declare bankruptcy, but there is no reason to commit financial suicide.
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Old 04-10-2011, 07:57 AM
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BlueStreak BlueStreak is offline
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Hmmmm, interesting.....


Dave
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Old 04-10-2011, 08:38 AM
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finnbow finnbow is online now
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It seems to me that you're mixing up balance-of-payments (i.e., the trade deficit) with the budget deficit. You can have a trade deficit while running a budget surplus or vice versa.
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Old 04-10-2011, 08:43 AM
David Newman David Newman is offline
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I'm not mixing them up, just using one scenario that is popular to bring up in the media about the debt held by other countries.

Maybe my example wasn't clear enough.
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Old 04-10-2011, 08:56 AM
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finnbow finnbow is online now
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Analogies sometimes work to clarify issues. Other times they serve to confuse or manipulate. For example, the common analogy used in comparing a family's household budget to the Federal budget is so overly simplistic as to be laughable.
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Old 04-10-2011, 09:06 AM
David Newman David Newman is offline
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There shouldn't have been anything confusing there.

Agreed on the household finance analogies. Even State and local government analogies are totally inapplicable at the federal level because the is the possibility of insolvency at every other level but the federal level.
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Old 04-10-2011, 09:11 AM
David Newman David Newman is offline
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Is your issue that my example is too simple or that it's an inaccurate operationally?
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Old 04-10-2011, 09:33 AM
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merrylander merrylander is offline
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Forgot to say welcome to the fray!
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Old 04-10-2011, 10:20 AM
David Newman David Newman is offline
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Thanks, Rob!
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Old 04-10-2011, 10:24 AM
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BlueStreak BlueStreak is offline
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I spent no where near $800,000,000,000 on defense this year.

But, the price of gas is killing me.

Dave
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