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Comment: Defusing the Debt Ceiling Time Bomb

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Defusing the Debt Ceiling Time Bomb

The $16.3 trillion national debt is partly an ILLUSION because the Federal Reserve owns $1.6 Trillion of it 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.....

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....

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

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!

Ed Rombach