Should The Fed Burn A Pile Of Treasury Securities?
Is Ron Paul's suggestion that the Federal Reserve "tear up" some of its Government paper a good idea? by Gene DeNardo
Saturday, July 9, 2011
Ron Paul's recent idea on how to ease the national debt is hardly original but none the less worthy of consideration. He has 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, at least those who aren't anarchists, 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 practical sense already extinguished. The Fed is required at the end of the year to turn in its profits to the Treasury. The Fed makes good money on the interest it collects from the Treasury during the year from all the government paper it has in its possession. 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 hoarding the greenbacks it gathers from the proceeds of the sales.
The truth is 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.
We can also take Paul's idea one step further and approach this dilemma from another angle. The Fed could actually purchase brand new Treasury securities without paying the government one dime. It could then sell those securities and deposit the cash. Since the Fed must turn in its profits, much of the cash would end up back in the hands of the government at the end of the year, but without any new money creation and again; a lower debt amount.
Pauls idea or the left monetary critique ideas aren't nonsensical; they actually make perfect sense relative to the monetary system. Of course, that isn't saying that much.
On the other hand, it all makes perfect sense: if you happen to be on the receiving end of the Fed's graciousness. Problem is, very few of us are.
The merits of Pauls idea should be judged individually. If Paul stands for the common man as he claims, then we can judge his suggestions based on that premise. How would extinguishing a chunk of the federal debt affect the average fellow?
Taking the entire financial system into consideration, the effect of Pauls idea on everyman probably wouldn't add up to the proverbial hill of beans. The scope of the system is so massive, only wholesale change will benefit regular folks in any meaningful manner.
Extinguishing federal debt would lower interest payments, which would mean less federal revenue would be devoted to interest payments. Whether this would have much of an effect on federal expenditures is doubtful.
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The most important thing that Paul's proposal does is to air some dirty laundry that the financial experts are doing their best to sweep under the carpet. That dirty laundry is the open secret that our government and our monetary system are bankrupt. There would certainly be a price to pay for taking the steps Paul proposes, because it would effectively amount to a mild form of default. Default must eventually happen, though. It's inevitable with a monetary system of this kind, because the system depends upon the creation of even more debt at all times in order to expand itself. So the "price" of a mild default now is much, much better than the hard-core default that will certainly come later.
A mini-default would also induce the markets to reassess the official "recovery plan" and punish the Fed for engaging in a methology that ultimately only helps the rich while making everyone else poorer.
So, while it smacks of taking unpleasant medicine, Paul's proposal is actually crazy like a fox. Implementing it would mean the beginning of the end for the money suckers.
Posted By: Blonduxo
Date: July 11, 2011 12:24:07 PM
Just wonder what your opinion is of Scott Fullwiders suggestion in his article over at wall street pit entitled QE3, Treasury Style—Go Around, Not Over the Debt Ceiling Limit about the Treasury minting a trillion dollar coin and depositing it in the Fed's account and then buying back the bonds?
Would it be a viable mechanism to solve this crisis? What would Dr. Paul say? What do you say Gene?
Posted By: Deefburger
Date: July 11, 2011 03:08:28 PM
Scott Fullwider's idea is no different from the Fed cooking up a check on an empty account to buy Treasuries. It's the same scam! It's the same "something for nothing" that got us into this mess in the first place. Burn the Treasuries held by the Fed and give them their worthless checks back. Eliminate the debt held by the Fed. Then eliminate the Fed too!
I think that would be approxiamately the same thing although there is one essential difference. If the Treasury hands the Fed a trillion dollar coin, the Fed now has a trillion dollars that it can spend as it wishes. That could be extremely inflationary.
The Treasury securities that the Fed owns are basically purchased by the Fed with pretend money. Tearing a bunch up wouldn't seem to be either inflationary or deflationary, since the damage has already been done. The money supply would functionally remain the same.