Tuesday, October 15, 2013

The Fed and Default

The Administration claims that they are too incompetent to prioritize interest and principle on the national debt.   While that is likely a lie, and they are simply threatening to default on U.S. government bonds to coerce fiscal conservatives to let them continue to borrow and spend, there is an alternative.   If the Federal Reserve buys the maturing debt, then those holding the debt are paid off.   The Fed is then left holding debt whose payment is delayed until the Treasury obtains enough cash to pay it off using its "system," presumably first come first serve.


  1. Isn't defaulting on a bond held by the Fed still called defaulting?

    1. I am not sure what you should call it, but it shouldn't have any adverse effect on the ability of the Treasury to sell debt or cause any disruption in the ability of those in financial markets to the remaining government debt outside the Fed for collateral. From everyone else's point of view, the debt is being paid.

  2. How do the quantities match up? Can the Fed buy all the maturing debt without printing more money than they usually do?

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