Smoke and Mirrors

Reader comment on: Josh Barro on the Debt Limit

Submitted by Michael E. Marotta (United States), May 11, 2011 10:31

"But the Federal Reserve's willingness to buy government bonds makes even that limit flexible, up to a point."

The Fed can be a challenge to unravel, but basically, they buy US Treasury bonds with "Federal Reserve Notes" printed for them by the Bureau of Engraving and Printing of the US Treasury Department. Moreover, the Fed is required by law to hold US Treasury Bonds as their primary asset. Of course the Board is appointed by the President with the approval of the Senate. (Despite all that, the Fed still maintains some measure of market independence.) Basically, the Treasury is buying its own bonds.

My numismatist friends who claim to believe in "hard money" do not like the fact tha the US Silver Dollar 1873-1932 was an inflation currency, doubled. First, as the price of silver fell eventually to 28 cents per ounce, silver was much cheaper than gold, though legally a silver dollar was exchangeable for a gold dollar. Moreover, for each silver dollar in the vault - where one-third of them lived forever, as no one wanted them - the Treasury could print a paper dollar "silver certificate." Also, unlike today, when all US Coins and Currency are "legal tender" in the 19th century, there were limits on the legal tender status of fractional currency (small change). So, again, for the millions upon millions of coins struck (nearly a billion Indianhead Cents alone), the government was extending itself credit in unredeemable currency.

All of that is to say that the present performance of smoke and mirrors is nothing new.

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