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The American Crisis: To Free a Lender-Owned Nation (Part IV)

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Once again, the model impertinently presumes government debt.   Government freedom from debt would void the proposition that, when a coin replaces a note, the government must lose the interest returned in Fed profits, on a dollar's worth of government bonds.   There would be no government bonds.   See Part III, footnote 5.   But the rationale is more messed up than that.   It is missing essential details.  

Let's break down the process into simple transactions, for a 1,000 batch of dollar coins.   First from the Treasury's perspective, then from the Fed's.    Only the face-value tax and interest on it are of concern, the production and processing costs being undisputed.   Also, we need to know what fraction of the debt held by the public is held by the Fed. As of November 2011, this fraction was 1,880,000/10,127,031=18.5%. [1]

From the Treasury's perspective:

(i)                    The Treasury delivers 1,000 $1 coins to the Fed, at which time the Fed credits the Treasury's checking account at the Fed with $1,000.  

(ii)                  As soon as convenient, let's say promptly, the Treasury calls off a $1,000 bond sale. The called off sale could not have been directly to the Fed by law, [2] so there's no loss of interest returned, not at once.  

(iii)                 However, the Treasury has unbalanced the money supply by avoiding that sale, to the tune of $1,000, triggering a Fed bond sale.   We'll leave that balancing purchase up to the Fed.

From the Fed's perspective:

(i)                    The Fed retains the 1,000 $1 coins as non-interest bearing assets, until it can put them into circulation in exchange for the 1,000 $1 paper notes that are swapped out. [3]    In the report context, 500 coins are added to the currency at the same time, so that there is no effect on the demand for currency, from this transaction.

(ii)                  But circulation has been increased by $1,000, as above. To maintain the quantitative status quo, [4] the Fed must sell bonds to withdraw money.   The Treasury dollars were checking account money, spent to finance the government. [5]   To maintain the status quo in this case translates into preserving the Fed's share of the debt held by the public. [6]   To do this, per dollar, the Fed can sell no more of that debt than the fraction of $1,000 that is its proportionate share.   This fraction is 1,880,000 / 10,127,031 = 18.5%. [7]

Accordingly, the loss from returned Fed profits is only 18.5% of the loss from a $1,000 bond sale, so that, per coin-swap, 81.5% of the interest relief from the coin payment is retained.

Using figures from page 3 of the 1990 report, the full interest relief of $461 million per year after deducting 6% costs, derived from a 2-1 substitution, half of which was ultimately discounted, but 81.5% of which should have been retained, yields an omitted amount, in millions of dollars per year, of:

{ [ 461 / 94% ] / 2 } * 81.5%    =    $176.5 million dollars per year

The margins of error would not meaningfully affect the order-of-magnitude conclusion.

Applied to the 2011 report, the 81.5% omitted interest relief per coin-swap uses the figures on page 32.   The 1.5 ratio replacement generated $(19.7-10.8) = $8.9 billion extra interest relief, from the 50% added coins.   Thus, from the 100% replaced coins, the amount omitted 2*8.9*81.5% = $14.5 billion over the 30 years

2.    New Tricks To Discount And Delay Counting Tax Miss The Point That 81.5% Is Not From The Fed.

I'll have grounds more relative than this--the play's the thing wherein I'll catch the conscience of the King.

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Clifford Johnson is a semi-academic naturalized Brit. He first entered the U.S. as a rah-rah Harkness Fellow. For theater, language, and also as a questionable ex-Brit, Johnson adopts a Tom Paine II persona. His activist credentials comprise serial (more...)
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This final (of four) article explains how a GAO re... by Clifford Johnson on Monday, Jan 9, 2012 at 10:20:37 PM