A Trillion Dollar T-bill ?
Warning: a thought just came to me. It might be totally wrong. A little knowledge of the law is dangerous.
The idea is that the Fed can buy US federal government issued securities at will so I think it could buy one random T-bill for $ 1 trillion if it chose to do so. The national debt is calculated using the face value of the debt so this trillion wouldn’t count towards the debt limit.
Is this legal ? Damned if I know. I know that the Fed always purchase government issued securities on the open market, but I don’t know if it is required to do this or just chooses. I am quite sure that it choses but is not required by law to keep it’s operations secret. I am quite sure it could declare an intention to buy t-bills with face value $ 1,000 and particular serial numbers for $ 1 million each. This means their price at the initial auction would be almost $1 million, but they still would be (and be counted as being) $ 1,000 in deb to the Treasury.
Now at $1,000,0000 for $1,000 in 91 days there would be a lot of people eager to sell short. But the Fed is not required to take long positions balancing short positions (this is assumed in standard finance models). In fact the Fed is not allowed to do this, but it’s enough that it’s not forced.
There would be 2 instruments with very different prices. The actual paper T-bills with the special serial numbers and synthetic versions as long positions in trades between private agents. Actual US government securities sell for a price slightly higher than synthetic Eurodollar instruments because of default risk. They can sell for 1000 times the price.
I think this is legal and equivalent to the Platinum coin except for one thing. The FOMC can do this. The Treasury just collects the money at auction.
The Fed is required to buy from dealers so the money would go to them. They are entitled to lend but not give so it may also fail on those grounds. If they had the power to create and destroy debt themselves, then they might be able to give or forgive $1T in government debt they already own, but I don’t believe this would pass the no gift rule currently. Perhaps if the government defaulted on the debt it owed them they could write it down.
Federal Reserve Act section 14 part b1:
“Notwithstanding any other provision of this chapter, any bonds, notes, or other obligations which are direct obligations of the United States or which are fully guaranteed by the United States as to the principal and interest may be bought and sold without regard to maturities but only in the open market.”
If the Fed declares its intention to buy $1000 t-bills maturing in 91 days for $1000000 each, those bills will sell for $1000000 each in the auction.
As you both note, I didn’t know for sure that the Fed must buy on the open market. But I did explain why this doesn’t matter. If something will certainly sell for $1000000 tomorrow, it is worth about 1000000 today.
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