Owen G on Nostr: The exact mechanism might matter here. The Fed can conjure up $25T and try to buy all ...

The exact mechanism might matter here. The Fed can conjure up $25T and try to buy all the outstanding bonds on the market. This would have the effect of driving interest rates to 0 (or below, as there's some inelastic demand for treasuries out there). Would this qualify as paying off all external debts? If they theoretically could buy all the public debt, then the Fed would be holding it all but the Treasury would still technically owe it (to the Fed).

If the Treasury is to do it without the fed, then the Treasury would need some kind of special authorization to create money. Assuming they get that, maybe they "mint the coin" (e.g. a series of trillion-dollar coins) in order to pay down debt. Then they have to find a buyer for said trillion dollar coins. Are they going to force bondholders to accept these relatively worthless coins? If so, this sounds almost like just defaulting outright on the debt.

I guess a third option would be for the Fed to use their magic to conjure up money and just wire it directly to the TGA (Treasury's account at the Fed) and then from there the Treasury can just spend that money whenever they need, instead of borrowing more. Once this has been done once, why would anyone ever believe in fiscal restraint anymore? What is the point of the government ever issuing another bond?

I think the real problem is that with any of these options, the credibility of the system is called into question. Predicting the impact of such a loss in confidence is hard. People will still need dollars (to pay debts, use in commerce, etc) so it won't go to zero overnight. If it happened, I personally would expect a sudden move down some double-digit percentage when the news comes out, then accelerated inflation going forward as people increasingly look for alternatives.