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Pastimes : The Justa & Lars Honors Bob Brinker Investment Club
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To: Oblomov who wrote (7775)8/16/1999 2:29:00 AM
From: JF Quinnelly  Read Replies (2) of 15132
 
The fact is that there would be less money in the system - $5.5
trillion less if the debt were paid off. The value of assets
would need to fall in relation to money. In other words, the impact would be deflationary.

When a bond is retired, the bondholder gets cash in exchange for his bond. By retiring $5.5 trillion in bonds, you have exchanged $5.5 trillion in cash for those bonds. There is no loss of money in the system. It's like energy in physics: it has merely changed its state, it hasn't vanished.

Most of the holders of Treasuries are institutions, not consumers. The money would not necessarily move to M1, and would not necessarily be spent.

Bondholders receive a checkbook entry from the Treasury for each bond retired. By definition it is M1, high-powered money. It is liquid and can be spent, whether for non-Treasury financial assets or consumer items.

The process of retiring Treasury bonds converts illiquid debt into liquid, highpowered money. It's an equation.
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