Should The Fed Burn A Pile Of Treasury Securities?

Ron Paul’s ┬áhas proposed what leftist critics of the status quo monetary system have been proposing for decades: that money printing should be used to fund the government.

To give Ron due credit, he is not proposing exactly that. More precisely, he is proposing that the Fed should tear up a bundle of its Treasury securities, which would lower our overall debt total bringing us below the current debt ceiling.

Still, the mechanics are identical, if not in reverse order. Far left liberals have correctly criticized the fiat system of money production as benefiting the banking and elite wealth interests while disadvantaging the poor. Their solution has always been to free up money production as a method of directly funding the state or for that matter, the states, alleviating the interest and debt that is synonymous with our current system.

The interest on the particular notes in question, since they are entitled to the Federal Reserve is in a mechanical sense already extinguished. The Fed is required at the end of the year to turn in its profits to the Treasury. In this sense, the Treasury has already stopped paying interest on the bonds the Fed owns, since the interest is the Feds profit, which by law must be returned to the Treasury.

Opponents of Ron’s idea believe that if the Fed torched a pile of its government securities that it would lose the ability to withdraw money from the economy. The Fed does this by selling securities and putting the proceeds in its vaults.

The Fed does not lose its ability to suck money out of the economy until it relinquishes all its paper assets. As long as it has something to sell, it can pull money from the economy and store the greenbacks in its vaults.

Extinguishing federal debt would lower interest payments, which would mean less federal revenue would be devoted to interest payments. The question might be if a lower debt amount actually has any real impact on a monetary system based entirely on debt production.


Gene

Gene De Nardo has a longtime interest in Economics and Political Theory.

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