Tuesday, April 10, 2012

Floating value federal reserve notes

A few thoughts on the prospects of floating rate Treasuries (re Money and Collateral):

The key from that paper is this:

"This discussion was conditioned by the similar situation faced by the U.S. Treasury in 1919 after it promised to stabilize bond prices during and after WWI. This policy caused conflict with certain Fed policymakers and the eventual losses on Liberty bonds were still remembered by Congress and the Treasury in 1951, 30 years later."

Per Wikipedia the Treasury defaulted on these bonds and:

"The Act of Congress which authorized the Liberty Bonds is still used today as the authority under which all U.S. Treasury bonds are issued."

So the FRN's would be designed to make good on losses to T-holders when the Fed exits ZIRP.

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