Thursday, April 13, 2017

How we help the senators default

The sandbox makes the red line wiggle more often and the blue line less.  But that process treats the senators like a member bank, except as a rule it is bankrupt, it could never cover the interest charges with its limited cash. It would have begun defaulting long ago.

If the Fed simply declared losses and wrote off government debt, the senators would attempt to cover the losses dollar for dollar with new debt, the result is unstable. The gap is too large for them to handle.

Normally, free exit happens with the S&L letting the member bank exit and recording the losses in bit error. But our government is way out of balance. The defaulting trading pit is a special bit error function, it takes  government bond defaults on a tradeable trajectory. It could directly credit deposits on each default, if it is fairly observable.  When deposits depart too far from treasuries help, the treasuries held reduced, deposits increased in a bigger than normal interest swap. I think that generates a sufficiently random default process.

We face the problem of unobserved inflation in the past.  Being unable to observe entry and edit, prices have to carry the implied insurance payment.  This is a slightly different semantics,the sandbox assumes bit error losses are directly observable. So, we are stuck with a two step method, we have to get the defaults out there, and let the discovery process cause bit error losses due from the past. Convert fake inflation into real inflation, and this means smaller market share for the tax dollar.

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