Bailout to Be Funded by Selling off Retirement and Savings Bonds? (virtual, doom)

[Neo-Logic]

The following is a blog post by Alceste which can be found here. Alceste contacted me and asked my thoughts on the subject. After reading, I think it's a fine blog post and the subject merits discussion on this forum as well - so I'm bringing it here. Everyone should consider the points Alceste is making and think about it - for they are important ones. I should mention that if you like the below portion in red/brown color, to Frubal Alceste, and not me.

"I was browsing through the full text of the bailout plan and this part caught my eye:

For the purpose of the authorities granted in this Act, and for the costs of administering those authorities, the Secretary may use the proceeds of the sale of any securities issued under chapter 31 of title 31, United States Code, and the purposes for which securities may be issued under chapter 31 of title 31, United States Code, are extended to include actions authorized by this Act, including the payment of administrative expenses. Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure.

I had to find out what “any securities issued under Chapter 31 of Title 31 of the United States Code” means, since I’m dying to know where the extra hundreds of billions of bucks is going to come from. So I went and looked it up. Dry stuff. But they seem to be referring to all of the securities held by the US treasury, without exception.
(Admittedly, I had to look up “securities“, too, since all this financial stuff is gibberish to me.)
So does the scheme really involve selling (to private banks) three quarters of a trillion dollars worth of stable and marketable government assets - such as retirement and savings bonds and foreign debt certificates - in order to purchase (ostensibly from the same banks) three quarters of a trillion dollars worth of chaotic, unmarketable assets of questionable value? What does that mean? I don’t know! Maybe someone else can explain! (Dad?)"

[Neo-Logic]

Hi Alceste,

Good post and I’m delighted you actually took the initiative and time to do some research to back up your position. Good work! I hope this is one of the amendments that Congress addresses. Admittedly, that hope is a mere notion of luxury, given our precarious situation.As your research found, that portion of the draft is stipulating that both the costs for the logistics and implementation of the authorities are able to be funded by selling off any US treasuries - including but not only limited to - retirement and saving bonds, as you’ve mentioned.

I should point out that while this is a scary proposition, it is one of the few options left. And just because they can do so, will not mean they will sell off the said securities of the Treasury. Yes, they could exercise the option to sell off securities, but the other option is to simply print more money and raise our national debt ceiling to cover the new sums of illiquid assets.

Economically speaking, it is wiser to have both means. Having the choice to choose between inflation and selling actual assets to amortize costs is better than only having the choice of inflation and printing more money if that aforementioned option of liquidating our current assets to cover the costs were not available. Correct me if I'm wrong, but there is few other ways to raise more money at this point. We either borrow, print, or sell. Here, we are choosing to utilize two options - print or sell. I believe it is better to have it and not need it than to need it and not have it.

If printing money was the only option to cover the purchase of illiquid debts, that is no less evil for the reasons that inflation will make bonds worth less and less. So in essence, we can say NO and refuse to give the authority to sell our bonds and assets, but their face value would be worth less than their real value. Sine bonds are valued over period of years, inflation would lower their potential yields and make them worth very little. The end result is essentially the same - the tax payers will take the brunt of the blow. The only question is - how many mechanisms do we give our Treasury in order to deal with the problem. I would rather we give them both the option that would inflate and the option that would liquidate to raise capital.

[Alceste]

Thanks for explaining, Neo. From the above, it seems you would hope for some restraint in terms of selling the US treasury, is that right? Me, I'm not sure I understand whether that should be considered good or bad. As a person with no financial background, I pictured the US treasury to be something like Unca' Scrooge's money room, and (naively) just pictured Paulson going in and out with wheelbarrows between it and the private banks. But when I tried to find out how much the US treasury is worth, I was surprised to find there is no money in it! Only more debt! In fact, I'm not even sure it's a place! So since the only thing anyone has to buy or sell is debts of various kinds, how do you know if it's good or bad for the treasury to sell one kind and buy another?

Anyway, that's when I realized this financial stuff is over my head. Me, when I have money in the bank, I still picture it as a little stack of money. Even though, between direct deposits and purchasing with my card I might go months without ever seeing my stack of money, it's very difficult to picture it as a concept - the bank's debt to me - and not my little stack of money that the bank is keeping safe.

It's enough to make you want to say "Screw this!" and go get your stack money from the bank while there still is such a thing as money and banks, and use it all to buy gold that you can keep in a cookie jar.

[Neo-Logic]

Economics is not over anyone's head. You do get the big concept, just a slight more information needed.

There's only two ways to raise money currently:

1) By printing more money and inflating ourselves short term
2) Sell what we have (non-inflationary) and raise money

The portion you brought up, is the portion that would give us option #2. Option #1 we have regardless. So we have to choose between more options or less options. That's basically just it.

[Alceste]

Well, printing more money I've always understood to be the disastrous tactic practiced by tinpot dictators who understand the concept of paper currency about as well as kids in a candy store. "What? We're out of money? Make me some more! Do it now! I want it!" "But Mr President, it's not that simple..." "Somebody shoot that man!"

Which, you have to admit, is not so different from what Bush has been doing since finding himself at the helm, so after so many years of it I think just running off another trillion would be disastrous, and plundering the treasury would be better IF they now insist on bailing out the private sector rather than "standing back and allowing the market to work" (which ever-so-ironically caused the problem in the first place).

I still think the whole idea is both ambitious and doomed, and that considering the circumstances, it would be a much wiser investment to implement an aggressive national program of promoting local food production a la the "dig for victory" campaign in the UK during world war two, or Cuba's strategy for surviving the US embargo that saw their supplies of oil and imported food cut off virtually overnight.

One way or another, Americans are going to start getting pretty hungry soon. While I understand a lot of them could stand to lose some weight, it would be wise to have some ripe veggies in the yard by the time the depression and inflation make it hard for them to feed themselves.