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Jim MillsteinWhile safe-haven flows will likely persist in the near term given Europe’swoes, the Federal Reserve’s willingness to monetize fiscal deficitswill likely not. First of all, the Federal Reserve is getting less bangfor its buck. The federal funds rate has been close to zero for fouryears, and the Federal Reserve has engaged in three rounds of quantitativeeasing. Yet growth remains weak. Moreover, according to thecentral bank’s Senior Loan Officer Opinion Survey on Bank LendingPractices data, access to credit is still constrained. Small businesses—which are most sensitive to changes in bank lending practices—overwhelminglypoint to poor sales, taxes, and government regulations asthe most important problem they face, not credit. 4 In short, an accommodativemonetary policy unprecedented in scope and durationis having at best only a muted impact on the US economy.155Second, the threat of inflation and of currency depreciation fromthe Federal Reserve’s expanding balance sheet is significant, at leastin the medium term. While the Federal Reserve insists that it hastools to contract the money supply when the economy begins torecover—selling Treasury securities, increasing the rate of interest onreserve balances, offering term deposits, engaging in reverse repurchaseagreements 5 —the sheer amount of stimulus it must withdrawis massive, and the reduction in money supply likely necessary toavoid inflation down the road is unprecedented. It will be nothingshort of miraculous if the transition from an accommodativemonetary policy of unprecedented proportions to a contractionarymonetary stance can be effectuated without a significant increase inFederal borrowing costs.Moreover, for the dollar to remain a viable reserve currency over thelong run, interest rates in the US must exceed expected inflation.Confidence that the dollar can achieve that equilibrium over thelong run is waning. Its trade-weighted value has fallen roughly 20percent over the past 10 years, and its share of official reserves andforeign currency transactions has gradually declined.4 Dunkelberg, W., Wade, H., NFIB Small Business Economic Trends, p. 18, Jun.2012.5 Bernanke, B., Testimony Before the House Financial Services Committee, Feb.10, 2010.
156Burning the Furniture to Heat the House – The Potential Role of Asset Sales in Funding the Federal Government’s DeficitsFigure 3: The Federal Reserve Cannot Defy Economic Gravity Forever2006 = 100400300200100Federal Reserve AssetsNominal GDP01980 1985 1990 1995 2000 2005 2010Sources: Federal Reserve; Bureau of Economic Analysis.Figure 4: U.S. Dollar Losing ValueU.S. Dollar Losing Prominence and ValuePercent1009080706050The Federal Reserve CannotDefy2006 = 100Economic Gravity Forever400Sources: Bank for International Settlements; International Monetary Fund; Federal Reserve.300200100Share of Global FX Transactions (LHS) 2001 = 100Share of Offical Global FX Reserves (LHS) 105Trade-Weighted Value (RHS)1002001 2004 2007 2010095908580Declining confidence in the dollar (itself a by-product of our fiscalstalemate) and Federal Reserve actions to reduce its balance sheetand contract the money supply will create significant headwinds forUS government financing. Sales by the Federal Reserve of its nowsubstantial portfolio of Treasury securities will reduce prices and increaseTreasury borrowing rates; the offering of term deposits willcompete with demand for Treasury bills; 6 the offering of higher rates6 Goodfriend, M., Central Banking in the Credit Turmoil: An Assessment of FederalReserve Practices, Journal of Monetary Economics, pp. 1-12, Jan. 2011.
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ivPublished by FIC Press2405 Ste
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viContents8 Thoughts on Debt Sustai
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viiiContents
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The Contributors Anna GelpernAme
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The Contributors Howell E. Jacks
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The Contributors School, as well
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The Contributors Zoltan PozsarIn
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The Contributors Richard SyllaNe
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xxiAcknowledgmentsWe would like
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xxiiiPREFACEThe Law School and t
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PREFACE academic circles. A sove
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Richard Sylla 11U.S. Government Deb
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Richard Syllasigned from office in
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Richard Syllalike the United States
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Richard SyllaAfter 1815, a generall
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Richard Syllapurchase to back their
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Richard Syllational debt and reduce
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William W. Bratton 132A World Witho
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William W. Brattonwould go from a c
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William W. Brattonthe system, than
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ConclusionWilliam W. Bratton19At th
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Richard J. Herring 213Default and t
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Richard J. Herringpay is seldom in
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Richard J. HerringFigure 2: Archety
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Richard J. Herring27Figure 4: The R
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Richard J. Herring29Figure 6: Deman
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Richard J. HerringGovernment bonds
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Richard J. HerringDuring August 201
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Zoltan Pozsar 354A Macro View of Sh
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Zoltan Pozsartions, forming an inte
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Zoltan Pozsarfunding for safe, shor
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Zoltan Pozsarfor the reduction in t
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Zoltan PozsarWhile increased rollov
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Michael W. McConnell 455Origins of
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Michael W. McConnellAlthough the Co
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Michael W. McConnellvene? Who would
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Michael W. McConnell(Social Securit
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ConclusionMichael W. McConnell53Whe
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Howell E. Jackson 556The 2011 Debt
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Howell E. Jacksonloss in liquidity.
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Howell E. Jacksonand provides resou
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Howell E. JacksonWhile assertions o
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Howell E. Jacksonof those payments.
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Howell E. Jacksonwhich payments to
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Concluding ThoughtsHowell E. Jackso
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Richard Squire 697A Market for End-
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Richard SquireSo far, there is litt
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Richard Squirethat the reference en
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Richard SquireIn fact, the gross no
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Richard Squireto only 22.6%. Thus i
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Richard Squirewill default. An econ
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Richard Squireannounced that in liq
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Richard SquireCDS on USA and Correl
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Richard Squiremean, however, that t
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Peter R. Fisher 878Thoughts on Debt
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Peter R. Fishernot really an insura
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Peter R. FisherU.K. prospered great
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Peter R. FisherSources of income be
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Peter R. Fisherlead to greater comp
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Peter R. FisherCentral bank mytholo
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Peter R. Fisherboth sides of their
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Deborah Lucas 1019The Federal Debt:
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Deborah LucasProjected Size of Defi
Page 132 and 133: Deborah Lucasrevenues. In fact, man
Page 134 and 135: Deborah Lucasly from the global des
Page 136 and 137: Deborah Lucas109Figure 2: Primary S
Page 138 and 139: Deborah Lucas111Figure 4: Medicare
Page 140 and 141: James R. Hines Jr 11310The Tax Reve
Page 142 and 143: James R. Hines Jrrevenue rely on ex
Page 144 and 145: James R. Hines JrStates is the lone
Page 146 and 147: James R. Hines Jr119Table 3: Social
Page 148 and 149: James R. Hines Jrtapped federal tax
Page 150 and 151: James R. Hines Jrer economic costs
Page 152 and 153: James R. Hines Jrtries, and consequ
Page 154 and 155: James R. Hines Jrtries from 1999 to
Page 156 and 157: James Kwak 12911Can the United Stat
Page 158 and 159: James Kwakone hundred years. 6 At t
Page 160 and 161: James Kwakthe Royal Navy had over o
Page 162 and 163: James Kwak135Figure 1: National Deb
Page 164 and 165: James Kwaka real growth rate of 2.2
Page 166 and 167: James Kwakkeep the national debt at
Page 168 and 169: James KwakRepublicans have seized o
Page 170 and 171: James Kwakreduction package. 45 Fur
Page 172 and 173: James KwakThe bottom line is that f
Page 174 and 175: James Kwakprovisions, including hea
Page 176 and 177: James KwakDespite these political c
Page 178 and 179: Jim Millstein 15112Burning the Furn
Page 180 and 181: Jim Millsteinits spending and tax c
Page 184 and 185: Jim Millsteinon reserve balances wi
Page 186 and 187: Jim Millsteinfull list of options i
Page 188 and 189: Jim Millsteinfundamental disagreeme
Page 190 and 191: Jim MillsteinHowever, other things
Page 192 and 193: Jim Millsteinwould likely command a
Page 194 and 195: Jim MillsteinThere will inevitably
Page 196 and 197: Charles W. Mooney, Jr 16913United S
Page 198 and 199: Charles W. Mooney, JrSecond, would
Page 200 and 201: Charles W. Mooney, Jrticipants, did
Page 202 and 203: Charles W. Mooney, JrThe extent and
Page 204 and 205: Charles W. Mooney, Jr“Treasury Di
Page 206 and 207: Charles W. Mooney, Jrin subpart B i
Page 208 and 209: Charles W. Mooney, Jrcount holders
Page 210 and 211: Charles W. Mooney, Jrdefault. If an
Page 212 and 213: Charles W. Mooney, Jrcould be achie
Page 214 and 215: Charles W. Mooney, Jrconsider adopt
Page 216 and 217: Charles W. Mooney, Jror gold coin.
Page 218 and 219: Charles W. Mooney, Jrpre-1933 legis
Page 220 and 221: Charles W. Mooney, Jrbegin by notin
Page 222 and 223: Charles W. Mooney, Jrformity requir
Page 224 and 225: Charles W. Mooney, Jrnation based o
Page 226 and 227: Charles W. Mooney, Jrthe Treasury d
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Charles W. Mooney, Jrcans in Congre
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Charles W. Mooney, JrThe government
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Charles W. Mooney, JrIf Wade’s sp
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Charles W. Mooney, Jring in Perry,
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Charles W. Mooney, JrThere would be
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Charles W. Mooney, JrBut that concl
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Charles W. Mooney, JrCourt of Feder
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Charles W. Mooney, Jrtem. 135 This
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Charles W. Mooney, Jr. b. The Race
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Charles W. Mooney, JrBut, of course
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Charles W. Mooney, Jrhave adopted r
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Charles W. Mooney, Jrtions Conventi
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Charles W. Mooney, Jrthe other hand
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Charles W. Mooney, JrIf the U.S. co
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Charles W. Mooney, Jrpursue massive
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Charles W. Mooney, Jrof multination
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Donald S. Bernstein 23714A Comment
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Donald S. Bernsteinis what most ban
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Donald S. BernsteinAmendment, simpl
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Donald S. Bernsteinfallout of alloc
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Steven L. Schwarcz 24515Direct and
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Steven L. Schwarczin Perry held tha
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Steven L. Schwarczwould apply to fe
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Steven L. Schwarczunder Section 13(
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Steven L. SchwarczD. Assessing the
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255AppendixThe 2011 Debt Limit Impa
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Jeremy Kreisberg & Kelley O’Mara
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