Toddsterpatriot, if I haven't mentioned it before, you ask excellent questions, and that is certainly a good question.
Historically, the current Federal Reserve holdings by themselves are not out of line in comparison to our GDP.
It's when I start aggregating what is held by other governments that I take pause. The Japanese are holding a lot of U.S. debt, as well as other governmental entities. The reason for some of these major holdings is not driven by a market desire for our treasury securities but as part of currency manipulation on the part of governments. This appears to me to be large enough to be very much along the traditional concerns of the moral hazard associated with simply printing money rather than borrowing it in the markets which impose market discipline via market interest rates and availability of credit.
[However, mitigating some of my philosophical concern about who is holding our debt is that in the case with the Japanese holdings it does make some market sense for the Japanese to extend this credit since they can borrow yen at a low interest rate, and engage in a carry trade by lending in dollars at a higher interest.]
Issue limit?
Yes, the Treasury Department is limited to issuing $300 million in U.S. notes:
United States Notes (characterized by a red seal and serial number) were the first national currency, authorized by the Legal Tender Act of 1862 and began circulating during the Civil War. The Treasury Department issued these notes directly into circulation, and they are obligations of the United States Government. The issuance of United States Notes is subject to limitations established by Congress. It established a statutory limitation of $300 million on the amount of United States Notes authorized to be outstanding and in circulation. While this was a significant figure in Civil War days, it is now a very small fraction of the total currency in circulation in the United States.From the U.S. Treasury's FAQs: Currency LEGAL TENDER STATUS at http://www.treas.gov/education/faq/currency/legal-tender.shtmlBoth United States Notes and Federal Reserve Notes are parts of our national currency and both are legal tender. They circulate as money in the same way. However, the issuing authority for them comes from different statutes. United States Notes were redeemable in gold until 1933, when the United States abandoned the gold standard. Since then, both currencies have served essentially the same purpose, and have had the same value. Because United States Notes serve no function that is not already adequately served by Federal Reserve Notes, their issuance was discontinued, and none have been placed in to circulation since January 21, 1971.
The Federal Reserve Act of 1913 authorized the production and circulation of Federal Reserve notes. Although the Bureau of Engraving and Printing (BEP) prints these notes, they move into circulation through the Federal Reserve System. They are obligations of both the Federal Reserve System and the United States Government. On Federal Reserve notes, the seals and serial numbers appear in green. United States notes serve no function that is not already adequately served by Federal Reserve notes. As a result, the Treasury Department stopped issuing United States notes, and none have been placed into circulation since January 21, 1971.
I agree.
It's when I start aggregating what is held by other governments that I take pause.
But one can almost be considered "monetizing the debt" and the other can't.
So why bother to borrow dollars at 5% interest rather than just have the Treasury issue them for free?
You believe there is a big difference between the cost of each?
Toddsterpatriot, if I haven't mentioned it before, you ask excellent questions, and that is certainly a good question.
Thanks, I try.