Ron Paul's Debt Ceiling Solution
Chalk this one up to, "Why didn't I think of that?" Ron Paul has proposed a novel solution to the debt ceiling crisis, and I'm having a hard time figuring out the downside (though I know there has to be a downside). Paul's proposal is that we simply erase the $1.6 trillion in debt created by the various rounds of quantitative easing.
You read that right. Just tear up the debt like it never happened, thus buying the government another couple years before the debt ceiling looms again. How could we possibly do that? Well, it turns out we just kinda owe the money to ourselves. So it's like moving the money from your left pocket to your right. Any interest owed by the Treasury Department to the Fed gets refunded anyway, so it's a net breakeven.
The basic story is that the Fed has bought roughly $1.6 trillion in government bonds through its various quantitative easing programs over the last two and a half years. This money is part of the $14.3 trillion debt that is subject to the debt ceiling. However, the Fed is an agency of the government. Its assets are in fact assets of the government. Each year, the Fed refunds the interest earned on its assets in excess of the money needed to cover its operating expenses. Last year the Fed refunded almost $80 billion to the Treasury. In this sense, the bonds held by the Fed are literally money that the government owes to itself.
Unlike the debt held by Social Security, the debt held by the Fed is not tied to any specific obligations. The bonds held by the Fed are assets of the Fed. It has no obligations that it must use these assets to meet. There is no one who loses their retirement income if the Fed doesn’t have its bonds. In fact, there is no direct loss of income to anyone associated with the Fed’s destruction of its bonds. This means that if Congress told the Fed to burn the bonds, it would in effect just be destroying a liability that the government had to itself, but it would still reduce the debt subject to the debt ceiling by $1.6 trillion. This would buy the country considerable breathing room before the debt ceiling had to be raised again.
So just wiping out that portion of the debt seems like an elegant solution, no?
I can't help feeling a little queasy about it, though. First and foremost, it sure feels a lot like creating money out of thin air. I know that's the Fed's raison d'etre, but this just feels like blatant counterfeiting. Second, Ron Paul is a notorious Fed antagonist. He even wrote the book End The Fed, so he's hardly an impartial observer. I can't help thinking the old codger has an ulterior (though no doubt Constitutionally legitimate) motive in this proposal.
What am I missing here, guys? Can the answer really be this simple? Has Ron Paul single-handedly solved the debt ceiling crisis by sodomizing the Fed for $1.6 trillion (theoretically the Fed is the loser here, because they'd be giving up the assets)?
Some of you might point out that the Fed had plans to sell the assets to the public to tighten the money supply and control inflation, but they can do that simply by raising rates. Is this the perfect solution?
Comments
That's exactly why central
That's exactly why central banks are independent of their government.
That is a great synopsis, but
That is a great synopsis, but if we keep overspending like we are now, the 1.6 trillion dollars that we wouldn't have to pay the fed, we would still need to raise the debt ceiling next year.
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eokpar02 wrote: That is a
That is a great synopsis, but if we keep overspending like we are now, the 1.6 trillion dollars that we wouldn't have to pay the fed, we would still need to raise the debt ceiling next year.
True. But I think the hope is that we'd somehow get our shit together in the meantime. Of course, there's no historical basis for that expectation.
Then commercial banks + other
Then commercial banks + other financial institutions walk away with 1.6T? Imagine the outrage.
There is no debt ceiling
There is no debt ceiling solution. A solution for the debts by higher taxation seems to be possible when republicans were excluded from politcial decision making, which is not procurable.
Since the first gulf war 1991, the debt has more than tripled until now. The USA must change their foreign policy, the current foreign policy is a way too expensive on the long run. Non-interference will be wiser.
US foreign policy cost factors:
Operation Enduring Freedom +1 trillion $
Iraqi War+3 trillion $
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In all likelihood, that would
In all likelihood, that would make the problem worse. Once these politicians and bankers get it into their heads that they can just erase all the debt in a flash, they'll even crazier on QE than they already have. It would be like developing a hangover cure for the central bank. You'll feel better in the morning; until then, go nuts! Who cares?
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HarvardOrBust wrote: Then
Then commercial banks + other financial institutions walk away with 1.6T? Imagine the outrage.
The 1.6t was bought by the fed, not banks.
I am not cocky, I am confident, and when you tell me I am the best it is a compliment.
-Styles P
In The Flesh wrote: In all
In all likelihood, that would make the problem worse. Once these politicians and bankers get it into their heads that they can just erase all the debt in a flash, they'll even crazier on QE than they already have. It would be like developing a hangover cure for the central bank. You'll feel better in the morning; until then, go nuts! Who cares?
Putting the economy on QE = Giving a drug addict more dope
short-term effect, long-term hangover
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eokpar02
Then commercial banks + other financial institutions walk away with 1.6T? Imagine the outrage.
The 1.6t was bought by the fed, not banks.
The Fed holds 1.6T in government securities as assets... which they bought from depository institutions.
I'm not sure how wiping out 1.6T on the Fed's balance sheet will lower government debt. What would happen to the 1.6T?
The Pauls continue to be the
The Pauls continue to be the only members of Congress with any clue about the workings of the Fed.
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If this could work then the
If this could work then the entire government debt could be erased by having the fed print money to by it all and then burn it. I don't think that is something I want to be possible.
I don't fully understand the
I don't fully understand the implications of erasing $1.6T of debt either.
What I do know is that the Fed had to print $1.6T of money to buy those bonds. What happens to that money if that debt is erased - does it just stay in circulation, or do they recall all of it?
Also, does the dollar become weaker or stronger if this happens? I would initially think stronger, because there is less debt on the Fed's balance sheet. At the same time (assuming that $ stays in circulation) there is much more money floating around backed by far less credit, so I would think that the dollar would depreciate dramatically.
Finally, I think the markets and debt rating agencies would take this as a huge sign that the U.S. is no longer good to pay its obligations. Just deciding to erase debt (whether owe to yourself or another party) when it's inconvenient to pay is a slippery slope and could end up screwing us over big-time.
@MarketParticipant 3
@MarketParticipant 3 things:
1) They didn't actually print the money, so it isn't really in circulation. It is literally nothing more than an entry on an Excel spreadsheet for both the Treasury and the Fed. The idea was to spur commercial lending, but that never really happened.
2) Since the Fed would actually be losing $1.6 trillion in fungible assets off their balance sheet, it has to be a net negative for the Fed. The Treasury's debt is actually a Fed asset, so the destruction of said debt would be a notional profit to the Treasury and loss to the Fed. This is my reading of the situation, anyway.
3) I think you're absolutely correct here. Even if we have the ability to magically wipe out almost $2 trillion in debt, the ratings agencies couldn't possibly look kindly on that type of workaround.
The only thing that makes me hesitate to dismiss this idea out of hand is where it came from. Ron Paul is probably the sharpest guy in D.C., and it's difficult for me to believe that he would propose anything that wasn't fiscally kosher. That's just the kind of guy he is.
It doesn't erase the long
It doesn't erase the long term entitlement debt which MUST be addressed. But it clears the air politically around the debt ceiling discussion (which is mostly a political circle jerk by both Dems and GOPs)
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“The American father is never seen in London. He passes his life entirely in Wall Street and communicates with his family once a month by means of a telegram in cipher.” - Oscar Wilde
Team Ron Paul Is Smart, But
Team Ron Paul Is Smart, But This Won't Change Behavior, So Let's Keep The Pressure On And Force Change Now Rather Than Later
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Eddie- Thanks for the
veritas14 wrote: The Pauls
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HarvardOrBust
I am not cocky, I am confident, and when you tell me I am the best it is a compliment.
-Styles P
eokpar02
The Fed holds bonds, but
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If I'm following correctly,
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GoodBread wrote: you can't
This would cripple the Feds
alexpasch wrote: The Fed
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Will probably have disastrous
Doesn't matter what the
Accepting that this would
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Or maybe we could cut
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Alright--I'm going to explain
brotherbear wrote: That
ck123321 wrote: brotherbear
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Edmundo Braverman
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eokpar02
dazedmonk, the ISDA
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Ed, read this article by Rand
This is just off the top of
Also, to the above poster who
I don't think anyone here was
Greg Mankiw on Ron Paul's
Bondarb wrote: This is just
My solution, cut defense
I am not cocky, I am confident, and when you tell me I am the best it is a compliment.
-Styles P
Those (assuming they're
eokpar02 wrote: My solution,
eokpar02 wrote: Tell me, are
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