The Treasury Department issues U.S. debt, and lots of it. So you would think that America is deeply indebted to its bondholders. Yet increasingly, it is the U.S. monetary authority, the Federal Reserve, and not private investors, who buys this debt.
So a simple solution to the impasse is as follows: Federal Reserve Chairman Ben Bernanke should simply cancel the Treasury debt that it owns. The government can just forgive the government's debt.
This wouldn't solve the debt problem entirely. The Federal Reserve doesn't own all U.S. government debt; it owns only roughly $2 trillion of it. (Well $2,076,927,000,000.00, as of last Wednesday, but who's counting?)
Yet canceling this debt would give the government substantial room under the debt ceiling to manage its finances. It would end the debt ceiling standoff in Congress, and it would prevent a default.
That's probably not going to happen, though.
Fed Chairman Ben Bernanke could lend to the Treasury Department: That might entail breaking the law, but it could be a better option than Armageddon. As the New York Post noted last week:
Some Washington insiders and Wall Streeters are talking about a second option to avoid a default: looking to Bernanke to lend money to the Treasury.
But, it turns out, under normal circumstances, lending to the US Treasury is illegal under the Federal Reserve Act.
But Cullen Roche, founder of the Orcam Financial Group and an expert on monetary policy, believes that in this emergency Bernanke could play a get-out-of-jail-free card.
“If the options are default or no default then I think the Fed should exercise what’s called the ‘exigent circumstances’ clause [of the Federal Reserve Act] and lend directly to the US Treasury,” said Roche.
“They did this with Bear Stearns and AIG [in the 2007-2008 financial crisis] so I think saving the US government is a bit more important than those two entities.
The Fed could keep lending to banks even if Treasurys plummet: If the Fed can't prevent default, then it can at least soften the blow. The Fed makes short term loans to US banks and takes US Treasurys as collateral. But if Treasurys drop in value, they may no longer qualify as adequate backing. The Fed could choose to continue lending to banks nonetheless, something the Fed considered at the height of the 2011 default scare. As Charles Plosser, the president of the Philadelphia Federal Reserve Bank told Reuters in 2011, "Do we treat [Treasurys] as if they defaulted and don't lend against them?" Or, he asks, "Do we treat them as if they didn't default, in which case we would be saying we are pretending it never happened?"
It could prop up the price of Treasurys: If the federal government hits the debt limit and has to stop paying interest on a portion of it's debt, the value of Treasurys will decline. But as Marcus Stanley, executive director of Americans for Financial Reform explains, "the Fed could support the price of that debt on the assumption that the government would eventually continue to pay it off." That would mean the Fed could buy Treasurys from anyone on the market for a reasonable market price instead of the depreciated price.
As Stanley notes, "When you have power to print money, you really have a lot of things you can do."
Why is kicking the can down the road a couple of months a better option than staving off another government-spending showdown for a half year, as Republicans prefer? It's because the Republican plan would lock in for even longer the $1.2 trillion in budget cuts known as sequestration, which went into effect in March and which Democrats really hate.
Democrats want to replace the economy-crimping sequester with a less austere plan that includes more targeted cuts and higher total spending levels. Reid is okay with extending current sequester-level spending—but only until mid-January, so a broader budget deal that includes Democratic priorities can be worked out before deeper spending cuts go into effect. If the House somehow forces a longer-term deal, it would be much harder for Reid and Democrats to negotiate a substitute for the sequester, say, six months from now because the fiscal year (which began October 1) would be half over. That would mean that the current deep budget cuts, which have already resulted in the loss of hundreds of thousands of jobs, would likely drag on and on.
Reid does not want a deal that un-shuts the government to prevent him from waging a fight over sequestration. In September, he says, he agreed to a temporary continuing resolution that would keep the US government open for two months at the spending levels dictated by sequestration, and considered that a concession to House Speaker John Boehner and the Republicans. He did so with the expectation that he could still try to undo some of the consequences of sequestration in the 2014 budget. And with the House Republicans now on the ropes in the dual shutdown/debt ceiling crisis, he has seen his leverage increase and has pushed for the chance to wage another battle over sequestration.
As my colleague Tim Murphy and I reported earlier this year, below are some of the sequester's initial impacts on programs that help struggling Americans. The harmful cutbacks explain why Reid and Democrats desperately want a way out of Sequester Land. (Exact numbers will be different for 2014, because sequestration was not in effect for the entirety of 2013, and Congress could restructure the cuts).
Public housing subsidies:$1.9 billion in cuts hit 125,000 low-income people who lost access to vouchers to help them with their rent. The housing authority in Rochester, New York, cut 600 vouchers after losing $2.5 million in funding. In Dubuque, Iowa, new Section 8 housing vouchers were put on hold. And in New Orleans, the housing authority recalled 700 Section 8 vouchers for low-income families.
Foreclosure prevention:75,000 fewer people received foreclosure prevention, rental, and homeless counseling services.
Title I Funding: The Department of Education's Title I program, the biggest federal education program in the country, subsidizes schools that serve more than a million disadvantaged students. It was cut by $725 million.
Rural rental assistance:Cuts to the Department of Agriculture resulted in the elimination of rental assistance for 10,000 very low-income rural people, most of whom are single women, elderly, or disabled.
Social Security: Although Social Security payments themselves were not scaled back, cuts to the program resulted in a backlogging of disability claims.
Unemployment benefits:More than 3.8 million people receiving long-term unemployment benefits saw their monthly payments reduced by as much as 9.4 percent, and lost an average of $400 in benefits over their period of joblessness.
Veterans services: The Transition Assistance Program was forced to cut back some of the job search and career services it provides to 150,000 vets a year.
Nutritional Assistance for Women & Children: The government's main food stamp program is exempt from cuts, but other food programs took a whack. Some 600,000 women and children were cut from the Special Supplemental Nutrition Program for Women, Infants, and Children, which provides nutrition assistance and education.
Job training programs:$37 million was slashed from a job retraining and placement program called Employment Services Operations, and $83 million was cut from Job Corps, which provides low-income kids with jobs and education.
If House Republicans don't agree to raise the nation's debt ceiling and a default ensues, the economic effects would be "catastrophic," in the words of Treasury Secretary Jack Lew. The nation's borrowing costs would spike, as would interest rates for average Americans, and the stock market would plummet. But not everyone will lose if a default causes an economic catastrophe. Here's who could profit from a financial calamity:
1. Short sellers: Most folks invest in stocks and bonds hoping the value of their investments will increase. But there's also money to be made by short selling—betting that the value of a stock or bond will drop. Short selling is an investment strategy that's typically employed by sophisticated investors and financial firms, but technically anyone can do it. Investors who bet that the value of US Treasury securities will dip would likely profit. Because a default could cause the US stock market to crash, shorting almost any US stock could make you money. In fact, you can even invest in specific mutual funds that specialize in short selling. "It's a very powerful and disillusioning feeling to know that smart rich people can make money even when America goes over Niagara Falls in a barrel," says Jeff Connaughton, a former investment banker and White House lawyer during the Clinton administration.
2. Investors in gold and silver: Gold and silver typically rise in value when when the stock market is volatile, because they hold their value better than paper money or other assets. The price of both metalsrose this week as default fears heightened.
3. Bitcoin investors (maybe): The value of this untraceable virtual currency has tracked closely with gold over the past year, suggesting that it could serve as a more stable investment during a financial crisis.
4. Currency traders: Traders who bet that the US dollar will decrease in value relative to foreign currencies stand to profit off of a US government default.
5. Pawn shops: If the effects of a default are catastrophic, stocks will plummet, pension funds could dry up, credit card interest rates will rise, and jobs will be lost. Though credit markets may freeze up, as they did in the wake of the 2008 meltdown, pawn shops ought to do well, as they did following the last crisis.
6. Bankruptcy lawyers: See above.
7. Mortgage servicers: Mortgage rates typically rise and fall along with Treasury rates. If a default causes a spike in interest rates, home owners could see their monthly mortgage bills soar, causing some homeowners to default on their loans and wind up in foreclosure. You'd think this would be bad news for all parties involved—families, lenders, investors, mortgage servicers. But the latter actually turn a good profit by foreclosing on people; investors take the losses, while servicers make back all the money they're owed in a foreclosure sale, plus all sorts of fees borrowers have to pay on their delinquent loans.
8. The canned and freeze-dried food industries:Doomsday preppers are already getting ready for the collapse of civilization that could result from a financial meltdown by stocking up on pork and beans and freeze-dried meals.
The United States is the wealthiest country in the world, in terms of GDP. But which country is the richest in terms of median wealth per person? Australia. The median wealth of adults there is $219,505, according to the Credit Suisse 2013 Global Wealth Report, which was released on Wednesday. In the US, the median wealth is only $45,000, compared to an average wealth per person of more than $250,000. Here are some other chart-tastic findings from the report.
Global wealth reached an all-time high of $241 trillion, up about five percent since last year. If all the money in the world were spread out evenly, it would amount to $51,600 per person. And here is a map of what it would look like if countries' GDP were spread out evenly among their populations.
Global inequality remains high. The richest 10 percent of people in the world hold 86 percent of the world's wealth—with just 0.7 percent owning 41 percent of global riches. Meanwhile, the bottom half of adults own one percent of the world's wealth, with more than two thirds of people worth less than $10,000:
Here's what the tip top of that pyramid looks like. About 10,000 people have more than $50 million:
About half of those people live in the US:
Here is the percentage of millionaires by country:
Over the past year, the US made greater gains in wealth than any other country. Meanwhile, we have persistent record levels of poverty and stagnant wages.
In recent weeks, politicians on both sides of the aisle have been fundraising off of the government shutdown and possible default. On Monday, the Democratic Congressional Campaign Committee blasted out an appeal to raise $2.5 million in order to stand up "against Republican hostage-takers." Sen. Elizabeth Warren (D-Mass.) has used the occasion to make a bigger point about the ideology of those tea party hostage takers. On Friday morning, she sent out a missive to her supporters, not to ask for money, but to slam the hypocrisy of "anarchist," "extremist" GOPers who rage constantly about the ills of big government, and then beg for it when it's gone. Warren made similar remarks in a speech on the Senate floor on Thursday.
"[N]ow that the House Republicans have shut down the government—holding the country hostage because of some imaginary government 'health care boogeyman'—Republicans almost immediately turned around and called on us to start reopening parts of our government," Warren says. And this is nothing new: "After the sequester kicked in," she adds, "Republicans immediately turned around and called on us to protect funding for our national defense and to keep our air traffic controllers on the job."
Here's more Warren debunking the myth of "boogeyman government":
When was the last time the anarchy gang called for regulators to go easier on companies that put lead in children's toys? Or for inspectors to stop checking whether the meat in our grocery stores is crawling with deadly bacteria? Or for the FDA to ignore whether morning sickness drugs will cause horrible deformities in our babies?
When? Never. In fact, whenever the anarchists make any headway in their quest and cause damage to our government, the opposite happens.
Why do they do this? Because the boogeyman government in the alternate universe of their fiery political speeches isn't real. It doesn't exist.
Government is real, and it has three basic functions:
1. Provide for the national defense.
2. Put rules in place rules, like traffic lights and bank regulations, that are fair and transparent.
3. Build the things together that none of us can build alone – roads, schools, power grids – the things that give everyone a chance to succeed.
We are alive, we are healthier, we are stronger because of government.