Congressman and presidential candidate Ron Paul recently introduced legislation calling for the federal government to cancel the $1.6 trillion debt held by the Federal Reserve. Such a move creates legal challenges, one of which would be that the Fed would openly acknowledge that it is a private entity and that fedgov has no authority confiscate its assets. (Fedgov had no “authority” to call in gold in 1933, but legal tests to that stood up.)
Yet the $1.6 trillion in Treasury debt was obtained via the Fed creating money “out of thin air,” to use an old and established description of what the Fed does when it buys debt (or other securities that it now owns). Banks do the same when they make loans to consumers via fractional-reserve banking.
Another argument that can be expected: if the Fed has no debt to sell, it cannot shrink the money supply if it deems it appropriate. This would be a smoke screen; it is highly unlikely we will ever again see the Fed decrease the money supply. QE3 is right around the corner.
3 Responses
On the surface this looks like a good idea to reduce the national debt. However, the results maybe disastrous:
1. The credit rating of the U.S. may reflect an equivalent to bankruptcy or a lower rating below AAA.
2. The Federal Reserve may increase the interest rates that banks charge for loans. This may result in hyper-inflation.
3. Savings banks rather than commercial banks may lose their float or the money they may barrow from. Commercial banks may have their own money supply.
4. With foreclosures that are caused by devalued property with mortgage rates above the value of the property, if interest rates are raised above the current levels that banks loan at, this would stagnate the housing market, since loans would be at a higher premium, whereas the value of the properties would be lower.
If the $1.6T debt to the Fed were “cancelled,” surely the Obama administration would shamelessly declare that it had just successfully reduced the national debt by $1.6T. And then, wouldn’t Obama and the Democrats — with the full support/acclaim of the of the left-wing media, academia, labor unions, etc — then use this same insane claim to justify further increasing our out-of-control government spending by yet another $1.6T? And thus, wouldn’t this action amount to, in effect, raising the debt limit by another $1.6T? Why would Ron Paul support that?