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Why Trump's U.S. Debt 'Default' Isn’t as Insane as It Sounds

Goldhedge

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#1
Why Trump's U.S. Debt 'Default' Isn’t as Insane as It Sounds

By Anthony MirhaydariMay 6, 2016

he Donald has done it again.

On Thursday, the presumptive GOP presidential nominee told CNBC that his solution to dealing with the $19 trillion-plus national debt — and the risk of a budget blowout should interest rates rise and balloon the interest expense owed by taxpayers — involves a form of default such as repurchasing existing bonds at a discount. "I am the king of debt," he said, alluding to his corporate bankruptcies and use of leverage to build his real estate empire. "I love debt. I love playing with it."

His many detractors, freshly outraged over his "taco bowl" tweet, let loose again, calling Trump’s idea “insane”and warning that it would tank the economy or set off an “unprecedented financial crisis.” The general consensus: Trump is an idiot who doesn't know much about the way the financial system works.

The solution of those on the left, to paraphrase: Borrow and spend even more, funding government largesse in the hopes we can grow out of our debt hole. The politically unlikely solution of moderates such as the Committee for a Responsible Federal Budget: Cut spending, including entitlement programs like Medicare and Social Security, while raising taxes.
Debt-to-GDP ratios, overall debt levels and demographically driven budget deficit projections are all downright scary. The accumulation of debt like we're seeing now is without precedent outside of a global war. And the rise of the national debt threatens the government's ability to respond to unforeseen crises such as war, pandemic, recessions and disasters.

A struggle against these trends has manifested in what is the greatest experiment with cheap money stimulus ever —including swelling the Federal Reserve’s balance sheet to more than $4 trillion (up from $800 billion before the financial crisis), negative interest rates in much of the developed world and fresh chatter of dropping money from helicopters (by both the European Central Bank and the Bank of Japan), alluding to a 2002 speech by former Federal Reserve Chair Ben Bernanke.

All of this is pretty unorthodox. Where is the outrage? Only some nontraditional voices on the right — the likes of Sen. Rand Paul (R-KY) and even Trump — seem to be proponents of more traditional monetary policy.

And Trump’s latest idea fits right in with historic tradition. Harvard economist Kenneth Rogoff, who specializes in the study of historical high-debt scenarios, notes in a forthcoming Journal of International Economics articlethat advanced countries have relied on unorthodox debt-management strategies far more often than many realize, including "restructuring debt contracts, generating unexpected inflation, taxing wealth, and repressing private finance."

America and many other developed economies have a long history with credit defaults. It's only in the modern post-war era that America's sovereign debt has become sanctified, along with the elevation of the dollar to the status of global reserve currency of choice (replacing the British pound).

Rogoff, along with Harvard colleague Carmen Reinhart, has written that before World War II "the outright write-down of debt in advanced countries was common and consequential" and that “the message from dozens of episodes of significant debt reductions in advanced economies since the Napoleonic War is that everything is on the table.”

Back in 2013, I wrote of the desperate need for America to default on its debt — using the idea of a debt-for-equity swap — and why there is historical precedent for the kind of outside-the-box thinking Trump is bravely pushing:

Robert Wright, a market history professor as Augustana College, reminded me that many state governments endured "hard default” scenarios in the early 1840s in response to a plunge in real-estate values in the wake of President Jackson's closure of the Bank of the United States and the resultant Panic of 1837. Also contributing was a restive pre-war population that didn't like the idea of paying back losses via tax revenue.

So they defaulted, reset the books and added balanced-budget amendments to their constitution to stay out of trouble in the future. Perhaps it's time for Washington to follow an example of fiscal discipline and creative thinking set nearly 200 years ago. Hit reset, prevent another debt binge and move on with the reforms and investments we need to get this economy revved up.

After all, it seemed crazy and unorthodox when President Nixon ended the dollar's convertibility into gold in 1971, undermining the post-war Bretton Woods currency regime. It seemed crazy when private ownership of gold was outlawed during in the Great Depression. And it seemed crazy when the Treasury started issuing fiat currency — known as "greenbacks" for their distinctive coloration — to bolster the war effort against the rebels in the South.

Perhaps history books will mark President Trump's write-down of the national debt as another entry in the list of crazy economic ideas that got America back on track.


http://finance.yahoo.com/news/why-trumps-u-debt-default-222400110.html

 

Weatherman

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#2

Buck

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#3
I'm guilty of using the word Reset
I've used it before

What I started wondering:
What does a real reset encompass?

I know what growth looks like, I know what real sustainable growth looks like, I know what government waste looks like, I know a liar when I meet one...
What does a Reset look like and how much is that going to cost me?
Do I get to Reset or would that just be the Government? the Banks? the Corporations?

The article was hard to read
 

latemetal

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#4
No one has any interest in paying off, or even containing the debt. " The solution of those on the left, to paraphrase: Borrow and spend even more, funding government largesse in the hopes we can grow out of our debt hole. The politically unlikely solution of moderates such as theCommittee for a Responsible Federal Budget: Cut spending, including entitlement programs like Medicare and Social Security, while raising taxes.
Debt-to-GDP ratios, overall debt levels and demographically driven budget deficit projections are alldownright scary. The accumulation of debt like we're seeing now is without precedent outside of a global war. And the rise of the national debt threatens the government's ability to respond to unforeseen crises such as war, pandemic, recessions and disasters." THIS WAS A TOTAL CRAP SANDWICH.
 

nickndfl

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#5
Run interest rates into the deep negative where holders of Treasuries will be anxious to get 80-90% of par value if they cashed in right away rather than have quickening erosion of the principle.
 

goldielox1

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#6
What difference would it make? Big deal even a 20% haircut is only $4 trillion. We would hit that again in just a couple years. The $19 trillion quoted number is a drop in the bucket if you look at unfunded liabilities which are what, nearly $300 trillion? That wouldn't even be touched in this haircut.

Besides, we're already defaulting every day when we print more unbacked money (which is every day). Inflation is a form of default. We're paying back 1980's debt for instance with 2016 dollars which are worth like 50 cents on the dollar.

Look the simple solution is to abolish the Fed by paying off all Federal Reserve Notes with interest free Treasury Notes. The debt would go to zero and the interest paid would consequently go to zero. Money supply and inflation would be unaffected (actually the dollar would strengthen since we wouldn't have to pay future interest). $19 trillion would be wiped out over night with no negative repurcussions unless you own stock in the Federal Reserve.
 

TAEZZAR

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#7
The general consensus: Trump is an idiot who doesn't know much about the way the financial system works.
And just what is the personal worth of these morons in the "The general consensus" ?
Probably, all put together, their personal worth does not even approach Trump's personal worth !!
So, who is the "idiot" ??
 

FunnyMoney

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#8
I know what growth looks like, I know what real sustainable growth looks like, I know what government waste looks like, I know a liar when I meet one...
What does a Reset look like and how much is that going to cost me?
Do I get to Reset or would that just be the Government? the Banks? the Corporations?

The article was hard to read
You had to ask. It is very depressing, extremely depressing and it's going to cost us our first born and war and only God knows what else.



...
Look the simple solution is to abolish the Fed by paying off all Federal Reserve Notes with interest free Treasury Notes. ....
Well, it's a simple solution if the previous debt wash is all that's really needed to "right" the ship and if the bond holders of "full faith and credit in the USA" can actually be thrown under the bus without ramifications. Not actually as easy as you might think.

The real solution is to find out who the real owners are and how much they've actually stolen from the economy and the nation over the last 100 years and get that returned at the point of a gun and a rope. Don't expect the traitors to allow even an audit though - so no solution, not the simple one and not the complicated one (reset) and not the real one should be expected. A combination of rising prices in the everyday items and lower standards of living is what've we have seen and what we should expect. Gold will go up in a debt default and will go up if there isn't one.
 

Mujahideen

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#9
i would like to see our government defualt on the debt and never borrow any "money" again.

Since our money isn't backed by anything, I don't see why we need to borrow.
 

Joe King

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#10
i would like to see our government defualt on the debt and never borrow any "money" again.

Since our money isn't backed by anything, I don't see why we need to borrow.
It's sweat equity that backs it. It makes the debt worth something, that it can be sold.
 

Rusty Shackelford

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#11
So his solution is to buy debt back from others under the guise that you best get what you can get now cause it is likely the US ain't gonna be able to service the debt we owe you. In return, we now owe ourselves the debt we just purchased off of our previous debt holders. Sure we don't owe China 1 trillion any more, we just owe ourselves 500 billion. We have history that we can't even pay ourselves back so big effin deal that we lowered our debt number knowing we won't/can't pay that.

Not to mention the precendet established for future US debt buyers. Who wants to touch us when we welch on the debt? So we are left with just US buying our own debt. Hell what could possibly go wrong with that in the long term.
 

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#12
Only the congress, you know them spineless tit whiners that meet in the house of representatives can impair the obligation of contract. Well they at least are the start of it, not the office of the president and not the Senate.

So I don't think this debt is going anywhere but up and trump saying he can do this and do that is a bunch of BS because if elected he is going to run into the worst board of trustees you can imagine. USA, is not a corporation to be owned and dealt with as a company that is purchased.
 

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#13
Eye, yie, I....

This thought has been burning in my mind. Let's say the Donald gets elected. The Donald suggests to the congress that this debt needs to be dealt with. "Now this is opening a can of worms." Says I.

Let's say they go all gunghoe and do it. Let's say it passes. Now on past performance of the Congressional administration of tax laws due to the passage of the 1913 bill allowing the theft of then greenbacks which had value the congress made a mess of the tax law, which was actual law, and invented that dastardly domestic thieving corporation called the IRS. And, yes I have been through/read a lot of this when it was passed as such.

Now here is my giggle.....as the congress invented the IRS because this tax law was taking up too much of their previous time then as a performance indicator of such I think they will invent a thing to control this debt reduction also, in fact a thing to manage all of it. My question is "Will they reinvent the federal reserve?"

Eye, yie, I..... grab a hold of something solid because I see us floating into the falls.... hummm, gold is solid right.
 

<SLV>

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#14
This is probably why TPTB have chosen him for us.
 

Joe King

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#17
There's more than a few inaccuracies in this vid.
One is that they don't lend FRNs and the bit about how interest works ignores the value added from producing goods with the borrowed funds. No one just borrows dollars without doing something with them, but they depict someone borrowing the "first 10 dollars" and having no way to get that extra dollar for interest than taking out a new loan.

What if I borrow $10 to start a business that makes toasters and I sell $11 worth of them to the bank that they give away to new customers? Seems to me they just paid off my loan for me.

Also, the Fed wasn't started in a monetary vacuum. A parallel monetary system existed at the time. The way they show the Fed being started it makes it seem as if no other currency or money existed. The banks would have most certainly accepted a $10 gold piece as payment for that original $10 loan in 1913....or whenever it was.
 

pre-64'

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#18
There's more than a few inaccuracies in this vid.
One is that they don't lend FRNs and the bit about how interest works ignores the value added from producing goods with the borrowed funds. No one just borrows dollars without doing something with them, but they depict someone borrowing the "first 10 dollars" and having no way to get that extra dollar for interest than taking out a new loan.

What if I borrow $10 to start a business that makes toasters and I sell $11 worth of them to the bank that they give away to new customers? Seems to me they just paid off my loan for me.

Also, the Fed wasn't started in a monetary vacuum. A parallel monetary system existed at the time. The way they show the Fed being started it makes it seem as if no other currency or money existed. The banks would have most certainly accepted a $10 gold piece as payment for that original $10 loan in 1913....or whenever it was.
Joe, lets assume Gold is Money. If I were to extract all the Gold from earth and lend it out with interest, how would the borrower(s) pay the interest then? Or let's say I lend the Mona Lisa at interest and demand another 10% of a Mona Lisa which does not exist? In actualality the lender does not do this. They lend with interest smaller amounts. Each time they lend though, they become the owners of more and more Gold(assuming they lend Gold). In essence the concentration of wealth is achieved with the avarice of lending it with interest.

The argument that interest is rent doesn't hold water. Because when you rent a home for example, it doesn't cause homes to be overproduced. Home renting is still within the purview of the market. In other words once the supply of homes cause the price of them to fall at or below the cost to build them, building them ceases.

There is one inaccuracy though. The borrower does not have to borrow another $10 to pay the interest, only $1 would be necessary. But then another $.10 would have to be borrowed, then $.01. But in this scenario, it assumes no other money exists which means only barter is possible.
 

pre-64'

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#19


See as the concentration of wealth happening? Assume in the above scenario that only 1,000 oz of Gold exist on earth. Who becomes the sole owner of it? Fiat is the lender.
 

michael59

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#20
I liked the second vid that was 24 minutes, I thought it was more informative. Actually that first vid is part of that second one.
And there is a neet equation in the second one.....

Home valued at 200,000 frn's.
One ounce gold coin with face value of 50dollars but equivalent to 1,000frn's.
200,000/1,000 = 200 coins»

Face value of 50dollars x 200 coins is 10,000$

Now that is an equation I have been looking for, for a very long time...
:2 thumbs up:

Edit: had to correct auto correct.
 

Joe King

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#21
Joe, lets assume Gold is Money. If I were to extract all the Gold from earth and lend it out with interest, how would the borrower(s) pay the interest then?
The problem with these types of analogies is that they assume a zero sum game. It's not.
Yes, I agree that if you and I are the only two people and you have the only $10 in existence, it doesn't really work. But our World doesn't work that way. It's not a zero sum game. The pie can get bigger. We can also make a new pie for more people to enjoy.

Here's the way I think the analogy should work.
You are the banker who lends me $10. I use that as capital to buy a pile of wood (raw materials) that I fashion into a fancy book case. I sell the book case to your brother for $26. Now I have $11 to repay my loan, $10 with which to purchase more wood and $5 for my labor. After I build and sell a few more book cases I can afford to hire a helper so I can make even more book cases.......what I've done is to create money. Or at least new value as measured in money. Value that previously didn't exist. Now multiply my activity by millions upon millions doing the same thing and you get an economy that uses debt as a tool in order to further itself.....and I'm not saying here that the use of debt hasn't been abused, because it certainly has, but that's a slightly different discussion.
...and granted, my analogy is bit over simplified, but I think it reflects reality a bit better than the zero-sum-game type of economy that is portrayed in the vid.

IMHO, there's no way a "monetary" system such as we have today could have been instituted without a previously existing monetary system, and that's the part the vid also leaves out when they say the only way to pay that first loan is by taking out a second loan....it just ain't so if you already have any wealth at all in existence that can also be used to pay the debt.
 

Joe King

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#23
Joe someone somewhere is left holding the bag.
Only if they couldn't produce what they thought they could at the time they accepted the loan. No one borrows without doing something with it. Whether they do the right thing with it, or not, has a large degree of impact on whether or not they ultimately end up as a bag holder.
...that said, I don't fully agree with how its run or even how it started. We'd be better off with an actual gold backed currency, IMHO.


Edited to add: it's only when too much is borrowed by too many who don't do the right thing with it, that it become a crisis.
 

Rusty Shackelford

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#24
I wasn't implying that the guy with the loan is holding the bag. It is usually a guy or two down the line, ie the consumer who either will be the one paying the magic interest monies with a constant money supply or will be losing purchasing power as money supply is inflated to hide the insidious nature of fiat money.
 

pre-64'

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#25
Joe, your example makes sense. The thing missing though, is the fact the lender will extract the Gold from the economy. Virtually own it outright and MUST create a money substitute.

I'm not arguing a zero sum. I think Gold and Siver value can float based on the total production whatever that is. If total production is $100,000 a year and there are 1000 oz of Gold, each oz would be valued at $100. When total production goes to 1 million, then each ounce is worth $1,000. The means most often associated with more production is an increase in population. So ultimately Gold value will increase, but more people will share it.

Regarding the alternative to debt financing which can never be paid off, is equity financing. In your scenario, you could make available 10 shares of your 'Joe's Bookcases'. $1 a share. But since you are the initiator, you could dilute each share so you would end up with a 10% stake. If your bookcases were the 'bomb' as far as uniqueness value you could dilute it so you have a 90% stake. This would be negotiable though. So then when you sell your $26 bookcase, your labor of $4 would come out(I cut your pay for simplicity). And since there are now 11 shareholders, each shareholder would get 22/11 or $2 each. This is just for illustration purposes. Not likely be possible(the numbers). This may not make sense but the 10% dilution means you would actually own 9% of the company as would the rest of contributors.
 

Joe King

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#26
I wasn't implying that the guy with the loan is holding the bag. It is usually a guy or two down the line, ie the consumer who either will be the one paying the magic interest monies with a constant money supply or will be losing purchasing power as money supply is inflated to hide the insidious nature of fiat money.
How can someone down the line be paying interest if they themselves don't have a loan to pay?
What you're describing is more or less a result of the system having been abused. There's nothing inherently wrong with lending capital for a particular cost.
...and again, I'm not saying that the system hasn't been abused. It certainly has been. However, that's a somewhat different topic, as IMHO you can't just say that because excess credit creation is bad, all credit creation is bad.


Joe, your example makes sense.
Thanks. That's why I think vids like that distort the truth, and in doing so simply serve to continue the confusion. It could even be dis-info in order to keep people barking up the wrong tree.


The thing missing though, is the fact the lender will extract the Gold from the economy. Virtually own it outright and MUST create a money substitute.
We're way past that. What do think 1933 was all about? They took the gold money and gave you paper coupons for "money" in its stead, while removing said coupons redeemability.


I'm not arguing a zero sum.
Maybe you aren't, but the video does.


I think Gold and Siver value can float based on the total production whatever that is. If total production is $100,000 a year and there are 1000 oz of Gold, each oz would be valued at $100. When total production goes to 1 million, then each ounce is worth $1,000. The means most often associated with more production is an increase in population. So ultimately Gold value will increase, but more people will share it.
I think a better idea would be to have Gold fixed while allowing prices to adjust to its purchasing power. IMO, it'd be really nice to have prices slowly adjust downwards over the years and generations.
...but that's just my opinion because I think it would be exceedingly confusing to have money whose individual pieces change value over time.

Or do you propose recalling all currency at various times to re-issue in new denominations as value changes? Which I still think would be very burdensome to the People.



Regarding the alternative to debt financing which can never be paid off, is equity financing. In your scenario, you could make available 10 shares of your 'Joe's Bookcases'. $1 a share. But since you are the initiator, you could dilute each share so you would end up with a 10% stake. If your bookcases were the 'bomb' as far as uniqueness value you could dilute it so you have a 90% stake. This would be negotiable though. So then when you sell your $26 bookcase, your labor of $4 would come out(I cut your pay for simplicity). And since there are now 11 shareholders, each shareholder would get 22/11 or $2 each. This is just for illustration purposes. Not likely be possible(the numbers). This may not make sense but the 10% dilution means you would actually own 9% of the company as would the rest of contributors.
Anything like that would be fine. Sell stock and bonds in yourself. If you're worth it in the investors eye, they'll buy 'em. Then you just gotta perform to expectations...same as IBM or any other company would have to.
 

Rusty Shackelford

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#27
The same way businesses don't pay taxes. Consumers do.

Somewhere down the line something has to give to service the imaginary profit banks make by fractional reserve lending. Currently the popular way to "pay the loan" is with inflated dollars and reduced purchasing power that affects everyone but the banks that lend money they don't have and generate profits off of that lending practice. They are insulating their purchasing power against they inflationary environment they foisted on everyone else.
 

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#28
So Joe, are you saying that as the fiat is valueless then there is no value on the debt? If you are then I am in agreement.
BUT, but we all need to start using diffractional terms or different terms because the US treasury mints $50 gold pieces that cost spot price in dollars that is no where near the amount stamped into the coin.

Wow, by head is spinning just trying to keep up with you guy's.
*falls over and has seizure*
 

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#29
Worse, a 1933 double eagle(90%) has a face value of $20 but has a gold melt value of 1229.50 FRNs ATM...an increase of 6047.5%. Your 1986+ GAE(91.67%) with its $50 face value has a gold melt value of 1270.7 FRNs ATM...an increase of only 2441.4%.
 

Joe King

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#30
So Joe, are you saying that as the fiat is valueless then there is no value on the debt?
The "value" in the debt is the constant stream of tax revenue used to service the debt.

Same as the "value" in securitized mortgages being the payments, not the keys to the house.
 

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#31
Well, it's a simple solution if the previous debt wash is all that's really needed to "right" the ship and if the bond holders of "full faith and credit in the USA" can actually be thrown under the bus without ramifications. Not actually as easy as you might think.

The real solution is to find out who the real owners are and how much they've actually stolen from the economy and the nation over the last 100 years and get that returned at the point of a gun and a rope. Don't expect the traitors to allow even an audit though - so no solution, not the simple one and not the complicated one (reset) and not the real one should be expected. A combination of rising prices in the everyday items and lower standards of living is what've we have seen and what we should expect. Gold will go up in a debt default and will go up if there isn't one.
What I'm saying is the $19 T debt is just a promise to redeem in future FRN + interest (the interest will also be borrowed from the Fed of course). If we abolish the Fed and its FRN and replace it with interest free treasury notes (dollar bills such as Lincoln's Greenbacks), those can be used to payoff all our current debts. Since the bonds are already owed money, replacing them with treasury notes (dollar bills) will not affect the money supply negatively (increasing it). The $19 trillion has already been printed. We're just extinguishing it (replacing it) along with the future obligation to pay interest on it to our masters, the Fed.
 

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#32
Further, I would argue the dollar would be stronger because the future interest is no longer an obligation as it will be eliminated. (assume a 5 year duration at 2%/year and the $19 trillion is really $21 trillion). Paying it off with interest free dollars actually would strengthen the buying power of the dollar by 10% in this example.
 

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#33
Whether our masters would allow it is the big problem...(Jackson, Lincoln, JFK)...that's the problem. Not to mention our ignorance as financially illiterate slaves.
 

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#34
What I'm saying is the $19 T debt is just a promise to redeem in future FRN + interest (the interest will also be borrowed from the Fed of course). If we abolish the Fed and its FRN and replace it with interest free treasury notes (dollar bills such as Lincoln's Greenbacks), those can be used to payoff all our current debts. Since the bonds are already owed money, replacing them with treasury notes (dollar bills) will not affect the money supply negatively (increasing it). The $19 trillion has already been printed. We're just extinguishing it (replacing it) along with the future obligation to pay interest on it to our masters, the Fed.
It sounds good, ...from the debtors perspective.
What you're missing in the equation is the fact that creditors aren't really looking to cash out in exchange for a pile of freshly printed paper. No, they're far more interested in collecting on the on-going sweat equity that had actually been promised to them.
 

michael59

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#35
19T is 19 with 12zeros divided by spot of 1275.40 is. 14,897,287,124.6 ozers of gold. Now that is 14....Let's just say 15Billion ozers of gold. Is there even that much gold around?

Holie crap.....something is wrong here because we are just one country in this world.

So take the 14 number and multiply it times a $50 gold denominated piece and the $ a mount is 744,864,356,280 dollars gold. There is no way this country can or has that amount of gold to mint or ever had it.

Wow, we are 14 Billion ounces of gold in debt.....that is mind boggling.
 

solarion

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#37
Is there even that much gold around?
I believe most estimates are around 185,000 tonnes above ground give or take. There's 32,150.7466 Ozt/tonne or roughly 5,947,888,121 Ozt worldwide.

5,947,888,121 Ozt * $1275.60 = $7,587,126,087,147.60

Total global debt is supposedly around $230T ...so yeah gold at its current FRN exchange rate would seem to be just a tad low.

$230T / 5,947,888,121 Ozt = $38,669

Interestingly on USdebtclock.org there's now a ticker that indicates dollar to gold & dollar to silver ratio. Currently says $7320 and $812.16 respectively.
 

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#38
Idk I had to use an online calculator because my phone would not do 12 digits. But still the numbers do not equate as far as I can tell.....So somebody is going to lose at this liers poker game that is going on. Wonder who?
 

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#39
Speaking of poker.... I played 52 games of kanfild/canfeild. Whatever they call it. And, on the assumption of 1,000 per game I tracked all 52 on a note pad. When all was done I was in the black by 2,200.

So you can win against the house just like them three groups of loto gamers did over the Massachusetts lottery did. It can be done....question is..."what do you have in your wallet?"
 

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#40
Valuing gold based on debt is a false premise as the debt is overvalued to begin with.

No one loaned us 19 trillion dollars worth of gold in the first place.
 
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