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.