 US Treasuries
The Federal Reserve is basically a check kiting operation. Since at least 1971, the Fed writes a check to the Treasury in exchange for a bond. The Treasury deposits the check and spends it (inflation). The Fed then sells that 100k bond for 140k making an instant 40%. More going on there because the Fed also creates a short-side of the market (open-market operations).
But the point is... "Consideration" is a legal principle that says that contracts must have value conveyed to be valid. So, due to lack of consideration (legal principle) bonds are null and void. Now. Once those fraudulent bonds are sold into the open market, they do have value. The bond market has been in an uptrend because institutions borrow and build interest rate spread derivatives like mortgages and collect the spread. So lots of bonds and they don't really care what the price is because the margin is so low.
So. What if a lawyer at the US Treasury decided to null and void Treasuries due to lack of consideration? The market will likely unwind naturally and fairly slowly. National debt would go to $0. The Treasury does have a fiduciary responsibility to savers (T-bonds held in personal accounts), however that is a relatively small liability. Since the income tax of 1913 was originally to make the bond payments, that can be repealed.
The dollar would likely improve due to inflation being stamped out. Would menu prices change? No, of course not. Long term, the US Treasury should tie the value of the dollar to real good exports. That would encourage manufacturing and simultaneously reduce the cost of imports.
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Oct 28, 2011, 9:00am
