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We dont intend to pay the Treasury Bill

February 10, 2011

When I read this in the casey report, it was like a smack in the face. Why didnt this occur to me before? We can accrue debt because we dont pay it off…we just eff everyone slowly.

One avenue would be default through inflation. Pay all the dollars that have been promised, but make those dollars smaller and smaller in purchasing power. That would be simple to accomplish if all the Treasury securities outstanding were 30-year bonds. Over a period of 30 years, a price inflation rate of just 10% per year would vaporize 94% of the purchasing power of a 30-year bond. Poof! No more debt problem.
But in fact the trillions in U.S. Treasury securities aren’t all 30-year bonds. The average maturity of Treasury debt (bonds, notes, and bills) is only six years. As debt comes due, it can be refinanced only by issuing new bonds, notes, or bills at then current interest rates – which would be rising to match the market’s experience with inflation.
So for the government to default on its debt through inflation, it wouldn’t be enough for the Federal Reserve to engineer a high inflation rate and stick to it. The default would require progressively higher and higher inflation rates, to outpace the rise in interest rates that the preceding year’s price inflation would constantly be fueling.

 

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