if the government is forced to go cold turkey into balanced budget mode it will immediately mean that there will be about 40% less currency reserves circulating in the commercial banking system.
Why? The only way reserves can shrink is if (a) the banks start lending out the reserves and/or buying assets with them, or (b) people draw down their demand deposits (i.e. withdraw physical cash from checking/savings accounts). What makes you think a reduction in federal spending will have either of these effects? The only way that cuts in federal spending affect the banking system is if the people/businesses currently receiving federal money default on their obligations when spending is cut, and this damages bank assets (loans/securities). If bank assets are damaged enough, you could see bank failures, with reserves (and all other bank assets) being liquidated to meet liabilities. But, as I said before, I don't see the consequences of federal spending cuts being so severe as to cause bank failures. And if there are no bank failures, there is no decline in M1 or reserves.
You may be right. Can you cite an example?
Every recession/depression in the history of the world where the government reacted by doing nothing (as it should). For example, the Depression of 1920.
Is there any good reason why the Treasury and Federal Reserve couldn’t simply wave a magic wand over this $1.65 Trillion of debt held by the Fed and in effect cancel it?
Yes, two reasons. Firstly, it would have an inflationary effect, by impairing the ability of the Fed to reduce M1 in the future. Secondly, by allowing the federal government to borrow more money right now. Evading the debt ceiling has one effect: allowing more debt sooner. This makes the problem worse. The debt ceiling is a check (however weak) on the ability of the federal government to borrow, there us no value in undermining it.
GENERAL REMARK: it seems to me, based on your comments in general, and about "austerity" in particular, that you don't understand (pardon me, I mean no offense) (a) what causes booms and busts, and (b) what ought to be done (or not done) during the bust phase. I highly recommend that you read some Austrian economics re the business cycle.
"Alas! I believe in the virtue of birds. And it only takes a feather for me to die laughing."
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