The Fed Could Simply CANCEL $2 Trillion of Government Debt

Bipartisan Proposal Would Substantially Reduce Budget Crisis

Congressman Alan Grayson and former congressman Ron Paul are two of the fiercest warriors against an out-of-control Federal Reserve.

Paul has campaigned to dissolve the Fed for 35 years, and wrote an entire book called “End the Fed“. Grayson has  repeatedly slammed the Fed, and absolutely demolished itto its face.    Paul and Grayson also co-sponsored a bill to audit the Federal Reserve. (Their desire to rein in the Fed is supported by numerous top economists.)

So when the two of them support a Fed-related solution to the “government shutdown” crisis,  I listen.

Congressman Grayson writes:

A simple solution to the impasse is as follows: Federal Reserve Chairman Ben Bernanke should simply cancel the Treasury debt that it owns. The government can just forgive the government’s debt.

This wouldn’t solve the debt problem entirely. The Federal Reserve doesn’t own all U.S. government debt; it owns only roughly $2 trillion of it. (Well $2,076,927,000,000.00, as of last Wednesday, but who’s counting?)

NPR has a helpful graphic showing the various holders of U.S. government debt, including the Fed:

pm-gov_debt_v-624Source: NPR

Congressman Grayson continues:

Yet canceling this debt would give the government substantial room under the debt ceiling to manage its finances. It would end the debt ceiling standoff in Congress, and it would prevent a default.

The debt held on the balance sheet of the Federal Reserve can be canceled without any significant consequence, because it is a bookkeeping artifact corresponding to the money supply. In essence, the government owes this money to itself. If I owe money to myself, I can cancel that debt at will and without consequence, essentially taking it out of my left pocket and putting it in my right pocket.

Last year, the Federal Reserve declared a “profit” of roughly $91 billion, much of which came from interest payments from the U.S. Treasury. The Federal Reserve then quickly remitted nearly all of this profit right back to the U.S. Treasury.

The Federal Reserve does this every year. Reducing or eliminating this unearned “profit” actually will provide a more realistic view of federal finances.

Grayson gives credit to Paul for coming up with the idea:

I am a Democrat, and known as a progressive. But this idea was put forward a few years ago not by me, or by a member of my party, but by Republican Representative Ron Paul.

He thinks, as do I, that the Federal Reserve‘s dramatic expansion of its balance sheet is simply a way of financing the government by printing money. The Fed isn’t really “buying” Treasury bonds, it is just letting the government finance its deficit by adding to the money supply.

Indeed, Paul introduced a bill in 2011 which would have led to the cancellation of $1.6 trillion in federal debt held by the Fed.

Grayson continues:

While canceling the Treasury debt held on the Federal Reserve balance sheet might be considered unorthodox, it is no more unorthodox than the quantitative easing that has added much of this debt to the Fed’s balance sheet.

Indeed, quantitative easing – the radical program the Fed has engaged in for years, which doesn’t help the economy,   benefits the the super-elite and hurts the little guy, and more than offsets any savings from budget cuts in other areas – is largely performed through buying U.S. debt … $45 billion each month.

Grayson concludes:

In any event, preventing a financial meltdown, with its attendant risks of interest rate and price spikes as well as staggering employment losses, is certainly central to the Federal Reserve‘s mandate of ensuring price stability, maximum employment and moderate, long-term interest rates.

Bernanke could alleviate the debt ceiling crisis simply by canceling the debt held on the Fed’s balance sheet.

This may sound like a fringe idea. But the Financial Times noted in  an article last year entitled “Will central banks cancel government debt?”:

It is obvious that governments are struggling to find the correct balance between controlling public debt … and boosting the rate of economic growth. The former objective requires more budgetary tightening, while the latter requires the opposite. Is there any way around this? One radical option now being discussed is to cancel (or, in polite language, “restructure”) part of the government debt that has been acquired by the central banks as a consequence of quantitative easing (QE). After all, the government and the central bank are both firmly within the public sector, so a consolidated public sector balance sheet would net this debt out entirely.

***

Adair Turner, the chairman of the UK Financial Services Agency, and reportedly a candidate to become the next governor of the Bank of England, made a speech last week that said more unorthodox options, including “further integration of different aspects of policy”, might need to be considered in the UK. Two separate journalists (Robert Peston of the BBC and Simon Jenkins of The Guardian) said that Lord Turner’s “private view” is that some part of the Bank’s gilts holdings might be cancelled in order to boost the economy. Lord Turner distanced himself in public from this suggestion on Saturday. However, the notion will now be widely discussed.

***

Similar proposals have however been widely debated by economists in the past. This goes back at least as far as the works of Abba Lerner in the 1940s on “functional finance” and the role of fiat money. More recently, the Modern Monetary Theorists have reawakened Lerner’s ideas.

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  • Troy Ounce

    So why does the Federal Government of the US not pay for all oustanding debt of African countries? African debt problem solved and Fed will just cancel it!

    Are we living in a hologram or not?

  • Grayson, while technically correct, must be ‘shroomin if he thinks the crooks are going to give up their loot. This “accounting artifact” is an integral part of the “something for nothing” scam.

  • jane

    This is the scariest thing I’ve ever read. Just imagine what they could do next, if they were allowed to just go poof. Maybe buy another war, and cancelled that debt too. They have to suffer the consequences or we are all doom.

  • jane

    This is the scariest thing I’ve ever read. Just imagine what they could do next, if they were allowed to just go poof. Maybe buy another war, and cancelled that debt too. They have to suffer the consequences or we are all doom.

  • debtor serf

    I wish they would cancel my debt while they are at it.

    I always thought Bix Weir’s interview where he was saying individual debt would be cancelled in the coming storm, was basically wishful thinking. Bix also seems to be saying that Alan Greenspan is NOT a bad guy. I don’t think so. Alan Greenspan is one of the many highly responsible for the collapse. Bix would say that Greenspan was helping to collapse the system to get rid of the corruption and bring in a gold standard….blah blah….But, he doesn’t talk about the fact that Alan Greenspan and his buddies helped kill all the regulations that protected the public from run-away banking scams that began promptly after Greenspan and buddies killed regulation.

  • amerikagulag

    Good idea. We’re NOT PAYIN! Dissolve the FED, go back to printing our own money instead of buying it from a jewish bank AT INTEREST and a lot of this debt will magically diasppear! USARY KILLS!

  • amerikagulag

    Good idea. We’re NOT PAYIN! Dissolve the FED, go back to printing our own money instead of buying it from a jewish bank AT INTEREST and a lot of this debt will magically diasppear! USARY KILLS!

  • Where to begin? Clearly Paul and Grayson do not understand how our money system works.

    – If the Federal government wants to reduce its deficit it can cancel its intragovernmental debt which is represents loans from one agency to others. This amounts to + $4 trillion and included Medicare and SS trusts. Redemptions will be met by ordinary Treasury borrowings but not all at once, the intragovernmental debt is largely a fig-leaf (fraud).

    – If the government wants to reduce debt, the Treasury must create fiat dollars — United States Notes — and use them to retire debts as they mature. (Any European country within the euro-zone could do the same thing and end the euro crisis, at least the part that does not effect foreign exchange). Any funds created would be extinguished as loans are repaid, there would be no inflation.

    – If the Fed cancels the Treasury debt it holds it is in effect defaulting as these Treasuries are collateral for the bulk of its loans. The Fed’s loans would become instantly unsecured, the Fed would be seen as no different from the other ‘brand X’ commercial banks that have become insolvent due to unsecured loans. Because Treasuries are fungible all Treasuries would be considered cancelable regardless of who holds them they would be worthless as collateral.

    – At the same time, the Fed would be unable to guarantee banking system liabilities because it would be unable to confirm face price of securities it takes on as collateral: this is the essence of reserve banking! Without guarantees there is no lender of last resort = bank runs.

    – The fact that the government is considering this forces sensible market observers to consider alternatives to dollars held in bank accounts as once the run starts it will be unstoppable.

  • SILVERSTRICK

    ALL DEBT WAS INCURED BY THE ZIONIST, WITH OUT THE PERMISION OF JOHN DOE, WHY SHOUD A CRIMIAL FAMILY THE LIKES OF THE ROTHSCHILD HAVE IN ITS POSSESION MORE THAN 500 TRILLION WEALTH, IF IT WAS NOT STOLEN FROM THE HUMAN RACE, WE SHOULD COMFISCATE ALL WEALTH FROM THESE OLD CRIMINAL FAMILIES THAT LEFT NATIONS IN POVERTY FSOR CENTDURDIES, AND KILLED FAMILIES, JUST FOR THE GREED OF PSESSING WHAT THEY COULD NOT EARN WITH THE SWET OF THEIR EYE BROWS.I AM NOT SATISFIES WITH CANCELING ONLY 3 TRILLION DOLLARS, A REPOSETION OF ALL NATURAL RESORCES, INCLUDING DIMOND MINES,GOLD,COPPER SINK, SILVER,OIL ETC, FROM THESE CRIMINALS IS NOT ENOUGH IF WE DO NOT EXECUTE THEM FOR ALL THE EVIL THEY HAVE DONE TO HUMANITY, WERE THEY NOT THE ONES THAT EVEN UP TO NOW HAVE PUNISHED WHAT THEY CONSIDER WAR CRIMES, WHY SHOUD THESE CRIMINALS LIKE THE BUSH FAMILY ,CLINTONS,BERNAKES SHWABS, CHASE,DUPONTS ETC, BE ABLE TO CONTINE EXCISTING AND CONTINUE TO UNDERMIN HUMANITY BY JUST CONTINUE SPREADING THEIR SATANIC PHILOSOPHY TO THE IGNORANT, AND INOCENT. UNLESS WE GET RID OF EVIL NOTHING WILL CHANGE, INCLUDING MEN IN THE CHRISTIAN ZIONIST CHURCH, THE LIKES OF LEADERS LIKE TBN, CORNER STONE AND MANY MORE THAT LIED TO THE FOLLOWERS OF JESUS CHRIST, ALL ZIONIST JUDGES SHOULD BE REMOVED FROM THE BENCH.

    • Linda

      I agree with you, but all caps makes it nearly impossible to read.

  • payne100

    Why is Social Security shown on the NPR debt chart? From what I have read from numerous sources, Social Security is solvent and fully funded from incoming SS payments until at least 2030?

  • Ziad K Abdelnour

    So, if one is asking what is the most effective way to pay down our
    debt, I would argue that going with fiscal policy (reducing spending,
    raising taxes) is not particularly effective since Congress can’t even
    agree on what to name a post office, let alone a way to balance the
    budget. Rather, monetary policy is how we will reduce our debt which is
    exactly what we did the last time it ran up in WWII. We inflated our way
    out of debt. The number stayed essentially the same, it just came to
    be less and less scary as time went by because it was denominated in
    dollars and over time the dollar was worth less and less.

    Ziad K Abdelnour

    • not authorized

      LOL. If you paid back the debt, there would be no more money to circulate the system. Thats what is meant by “debt is money”. Our government was to issue it’s own money, with no need to borrow anything, from anyone. Government could legislate that notched sticks are “currency”, and it would be just as valid as the paper you use.

      Why do we not have just enough “money” available, issued by government, to encourage commerce for the benefit of everyone? Printing benefits no one except those who own the printing presses.

      Answer: “The financial system has been turned over to the Federal Reserve Board. That Board as ministers the finance system by authority of a purely profiteering group. The system is Private, conducted for the sole purpose of obtaining the greatest possible profits from the use of other people’s money” — Charles A. Lindbergh Sr., 1923