Comment: They can't

(See in situ)

They can't

do that.

In a technical sense they can, because you're right, in effect the govt. owes itself. But they can't do it politically. Here's why:

If they cancel the debt the Fed bought they are eliminating the middle man, and the market sees this. So it means the govt. is in effect no longer issuing bonds... it is DIRECTLY printing the money. So law makers can no longer present the illusion that we are "borrowing" with REAL intent to pay back.

Right now they can argue credibly that "hey we are fiscally okay because look, we offer bonds to the market and people buy them! Yes, the Fed buys them too, but they are allowed to! The "debt" is available for anyone to buy!" If they did as you suggest then they draw a line between issuing "debt" and simply printing money at their own whim. It doesn't sound like a big difference, but perception means a lot (especially to Ponzi schemes).