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How to Defuse the Debt Ceiling Time Bomb

The $16.3 trillion national debt is partly an illusion, because the Federal Reserve owns $1.6 trillion, which it purchased through its quantitative easing (QE) operations. 



The Fed has been earning about $80 billion a year in interest income from these Treasury holdings and will earn more like $100 to $110 billion this year which will simply be remitted back to the Treasury.



In other words, this is debt that the Government owes itself! Our children and grandchildren aren’t even involved and they will not be saddled with this debt as long as the Fed holds on to it. This raises the question about why this $1.6 Trillion of Treasury debt held by the Fed should apply to debt ceiling. 



After all, what difference is there between the Treasury issuing debt only to have the Fed buy it back, vs. theTreasury not issuing that debt in the first place?

Is there any good reason why the Treasury and Federal Reserve couldn’t simply wave a magic wand over this $1.6 Trillion debt held by the Fed and in effect cancel it? This would reduce the outstanding debt to about $14.7 Trillion which is well below the current statutory debt ceiling of $16.394 Trillion.

The idea of canceling some portion of national debt held by the central banks seems to be gaining traction in part because it finds support from both the left and right ends of the political spectrum. Here is post-Keynesian economist Mike Norman of the Modern Monetary Theory (MMT) school of thought suggesting debt cancellation as a way to defuse the fiscal cliff time bomb..... 



http://www.youtube.com/watch?v=-BKiIflAr-4

Meanwhile, at the other end of the political spectrum Ron Paul sees government debt cancelation as a means to bring lasting savings to the federal budget....

http://www.tnr.com/article/politics/91224/ron-paul-debt-ceil...

There are also these articles which appeared more recently ( mid-Oct ) in the FT blog and Seeking Alpha....



http://blogs.ft.com/gavyndavies/2012/10/14/will-central-bank...?

http://seekingalpha.com/article/925171-will-central-banks-ca...


Instead of driving off the fiscal cliff like Thelma and Louise, the Treasury and Fed could give Congress the means to slam on the breaks. This would buy policy makers another year or so of valuable breathing space to formulate sensible fiscal policy for economic growth rather than causing a self inflicted wound on the economy and millions of American workers and businesses. 



Mr. Bernanke, if you seek transparency and accountability for the Fed…. If you seek prosperity for the American people then come to Congress and tell our law makers that the Treasury debt held by the Fed should not apply to the debt ceiling. Mr. Bernanke TEAR UP THIS DEBT!



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With all due respect, I think

With all due respect, I think I'm with the bond traders on this one. It has always been implicit that bonds held by the fed would either be sold back into the market or held to maturity, in which case, I presume they would cancel the money or re-purchase. But just wholesale debt forgiveness would set a terrible precedence, I think. I don't believe the world would stand for it. But then, I'm no expert.

I'm Surprised....

I'm surprised you hold this view because the proposal to cancel debt held by the fed was originally made by Ron Paul.

http://www.tnr.com/article/politics/91224/ron-paul-debt-ceil...

Ed Rombach

I don't know that I'm for or

I don't know that I'm for or against. I think we're screwed either way. But I do think that we have more time to prepare for the worst without the cancellation. As Soros put it, " an orderly decline of the dollar " (too bad you can't hear my bad imitation of Soros)

2 Thousand years of terrible precedence on debt forgiveness!

Ron Paul speaks of the Fed creating National Debt out-of-thin-air. What could he mean? In that context, what does forgiveness mean?

Please read:

  • Leviticus 25 Jubilee
  • Mark 5 Jubilee
  • Magna Carta Widows & Orphans, A.D. 1215

Within these few pages, you will behold a wholly different perspective.

Disclaimer: Mark Twain (1835-1910-To be continued) is unlicensed. His river pilot's license went delinquent in 1862. Caution advised. Daily Paul

I can't understand why.

This is a great post and brings back some of these issues that are so important. But for the life of me I canont understand why this post doesn't have 100 upvotes bare minimum why do people not seem to care as much about the MOST PRESSING issues and a serious solution to our immediate crisis problem?

Great post I do sometimes worry that forgiving debt can cause inflation but if it is money it owes to itself then absolutely whats so bad about that?! this is a good good good idea.

The FED specifically might be earning 80-100 billion

per year in interest but for 2012 the US Govt paid bankers $359,796,008,919.49 in interest payments ALONE! (it actually was more like 425 billion but to clean up the pentagons books some new "one time" creative accounting took place in July 2012)

SOURCE
http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm

How about those who did not authorize or benefit from

all the Congressional Spending opt out of payment?

Can you be charged for a Service or Good you never received?

Can you be charged for Services or Goods that your Neighbor or fellow citizen 100 miles away incurred?

Debt that can be assigned to those who receive no benefit for it is Involuntary Servitude.

Debt Cancellation

by Executive Order :)

Yes We Can !!

donvino

Cut 50% across the board on

Cut 50% across the board on all departments and programs except the Dept. of Homeland Security, cut it out completely, 100% defunding. That ought to solve the debt issue :)

Cutting 50% across the board.....

....would be like waking up one day to find that only 50% of the ATMs were able to dispense money.

The initial White House plan over the next 10 years was to increase taxes by $1.6 trillion, cut spending by $600 billion and increase new stimulus spending by $400 billion, which translates into aggregate savings of $1.8 trillion over 10 years.

The original Republican / Boehner plan over the next 10 years was to increase taxes by $800 billion, cut spending by $1.4 trillion for aggregate savings of $2.2 trillion over 10 years.

If you divide these numbers by 10 it means that both sides were threatening to go over the cliff over a difference of between $180 billion versus $220 billion in annual "savings."

Meanwhile, the media has totally ignored the fact that the federal budget deficit declined by $206 billion in FY 2012 without any tax increases or any spending cuts. All else being equal, at that pace the budget would be in balance in 5-6 years.

This weak and tepid economic recovery is nevertheless throwing off enough additional tax revenue to organically whittle down the deficit on its own without any help from Congress or the White House.

Austerity policies in the Euro-zone have not worked so well and deficits in Greece and Spain have only gotten larger as their depressions deepen. Congress should base policy on the economic equivalent of the Hippocratic Oath which mandates that physicians "First Do No Harm".

Ed Rombach

Huh?

Cutting 50% across the board would be like waking up one day to find that only 50% of the ATMs were able to dispense money.

If the government cuts spending by a certain amount, that amount doesn't just disappear from the economy, it simply remains with whoever the government would have taxed or borrowed it from. Government spending does not create or destroy any money, it only redistributes it. So what are you talking about?

"Alas! I believe in the virtue of birds. And it only takes a feather for me to die laughing."

Ah huh....

""If the government cuts spending by a certain amount, that amount doesn't just disappear from the economy"

As a matter of fact, yes it does. Government spending with a non-convertibile fiat currency is not constrained by its ability to tax and/or borrow. I'm not saying this is the way it should be, I'm saying this is the way that it is.

"it simply remains with whoever the government would have taxed or borrowed it from."

On the contrary, federal government deficit spending means that the government is literally spending currency reserves into existence.

"Government spending does not create or destroy any money, it only redistributes it. So what are you talking about?

You would be correct if we were still on a gold standard.

Ed Rombach

Rombach

Balancing the budget means the end of inflation-financed federal spending, which means an end to inflation from that source: but this is in no way deflationary. The absence of additional inflation is not deflation.

"Alas! I believe in the virtue of birds. And it only takes a feather for me to die laughing."

Is Falling Money Supply Deflation?

NowOrNever - Austrian school economists often say that an increase in the money supply translates into inflation. If this is true what would you call a decrease in the money supply? The fact remains that if you suddenly reduce 40% of the currency reserves in the commercial banking system by forcing the government into an automatic balanced budget, the weakest links in the chain of the payments system are likely to fail, which could create a domino effect. You may not agree with me that such an outcome is likely and would result in a deflationary economic contraction, but do you at least see it as a possible risk? Why risk another relapse into recession when the deficit is already shrinking?

Ed Rombach

don't include the spending

don't include the spending cuts in your figures, because those are cuts are not negative, they are cuts from proposed increases in spending.

All Government Policy/Activity Should Be Held To Such A Standard

But harm is what government, and particularly centralized government, tends to do.

___________________________________________________________________________
"Bipartisan: both parties acting in concert to put both of their hands in your pocket."-Rothbard

No. Your proposal would lessen future debt spending.

Your proposal to cut spending is rational & in keeping with Ron Paul's proposed budget cuts. Yet, it falls short of a solution to the debt issue... The issue of debt continues.

The Fed runs a make-believe "legal tender" system. They create debt "out-of-thin-air." They call it monetizing. Fed Notes represent debt. They are promissory notes.

The "fiscal cliff" or "debt crisis" or "exploding National Debt" or paying debt with promissory notes will end someday.

End the Fed. It is not necessary. Listen to Ron Paul's recommendations on "sound money."

Disclaimer: Mark Twain (1835-1910-To be continued) is unlicensed. His river pilot's license went delinquent in 1862. Caution advised. Daily Paul

CANCELING DEBT IS ONLY A TEMPORY SOLUTION

Your proposal to cut spending is rational & in keeping with Ron Paul's proposed budget cuts. Yet, it falls short of a solution to the debt issue... The issue of debt continues.

AGREED. CANCELING THE DEBT HELD BY THE FED IS ONLY A TEMPORARY SOLUTION, BUT FOR A MAN ON DEATH ROW, A STAY OF EXECUTION CAN BE A GAME CHANGER.

Ed Rombach

Stay of execution?

...more like releasing the prisoner to go murder a few more people. The only result of this scheme to get around the ceiling by cancelling debt will be more borrowing.

"Alas! I believe in the virtue of birds. And it only takes a feather for me to die laughing."

Don't Execute the Messenger!

NowOrNever - A stay of execution can look like an eternity to a man on death row. I don't get why you are so hostile to this proposal to cancel the Treasury debt held by the fed when it is a proposal originally made by Ron Paul. Can you please enlighten me?

http://www.tnr.com/article/politics/91224/ron-paul-debt-ceil...

Ed Rombach

Doctor Ron Paul seeks to end the Fed. His book is "End the Fed."

You refer to death row for the Fed?

Doctor Ron Paul prescribed "End the Fed." Even wrote his book covering the operation. He seeks to do no harm. That is, ending the Fed is prescribed to end the harm done by the "legal tender" printing operation.

Ending the Fed is to stop blood, sweat & tears caused by the Fed.

I support Doctor Paul's efforts on this matter.

Do you agree? Do you have a better plan?

Disclaimer: Mark Twain (1835-1910-To be continued) is unlicensed. His river pilot's license went delinquent in 1862. Caution advised. Daily Paul

Why so kind to that Red Ink Baron! Curse that Red Ink Baron!

Mister Fed, Tear Down This Wall! We seek peace. We must eliminate this Fed. Mister Fed, tear down this wall!

Learn about the value of freedom. Learn it here. Learn it now! Profound change, now! End this Fed!

A cartel of banks posing as the Federal Reserve to print up $16 trillion of National Debt created out-of-then-air is not a many splendored thing! It is a curse! Curse you Red Ink Fed! The red ink is of your own making. Get thee gone!

Red Ink be no more! Think of it as a One-Hundred-Year Anniversary present. A Jubilee!

End the Fed! Foretold by Ron Paul.

Disclaimer: Mark Twain (1835-1910-To be continued) is unlicensed. His river pilot's license went delinquent in 1862. Caution advised. Daily Paul