Ron Paul wants to cancel $1.6 trillion in debt
By Norman Leahy | Wednesday, August 3rd, 2011 | Policy, PoliticsMore specifically, the Texas congressman and GOP presidential hopeful has introduced legislation that would cancel the $1.6 trillion in Treasury debt held by the Federal Reserve:
Paul has argued for the last few weeks that the idea represents a quick way to make the growing fiscal crisis more manageable. Under his bill, H.R. 2768, the $1.6 trillion that the Treasury owes to the Federal Reserve would disappear.
The Federal Reserve began buying Treasury bonds in earnest late last year as part of its effort to keep long-term interest rates down. But Paul has argued that Fed purchases of Treasury debt represent a debt that the government owes to itself, and one that also leads to an unwanted and inflationary increase in the money supply.
Paul has also said the Fed is allowing the federal government to continue a spending binge it otherwise would not be able to afford, and is forcing the Fed to print money to keep up.
The Fed carries Treasury notes on its books as assets that it could turn around and sell at some future point. How the bond market would react to such a move isn’t clear to me — one could argue that cancelling debt like this could be read as making the U.S. government an enormous credit risk. That would give the bond vigilantes a fat target (and hold on to your shorts if they get started…they may be all you have left once the posse has left town). And as for our overseas lenders…well. They wouldn’t take such a move lightly, would they?
There’s a degree of logic to Paul’s move in that what the Federal Reserve has been doing is monetizing the nation’s debt, which is just another word for default. Cancelling the debt, then, would be like ripping the bandage off a wound: it’ll hurt like hell, but airing-out that wound will help it heal. But how well a patient can heal when reduced to a diet of gruel and sand is unclear…
And while we’re considering cancelling debts the government owes to itself, how about those IOUs in the Social Security Trust Fund? During the depths of the debt ceiling tussle, the President as much as admitted that the Trust Fund is neither trustworthy nor funded. Using Dr. Paul’s formula, cancelling that debt might also force the government to end the Ponzi scheme (so long as we first pass legislation requiring all seniors, and not a few bankers, foreign and domestic, to be disarmed or, better yet, jailed).
The possibilities are as endless as the consequences.
Which is why this bill isn’t likely to go anywhere, except into a list of Paul talking points and campaign brochures.
(Cross-posted at Score Radio Network)
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About the author
Norm Leahy has written about Virginia and national politics online since 2002, beginning with One Man's Trash (OMT), and continuing through Bacon's Rebellion (both the blog and the e-zine), Sic Semper Tyrannis, NBC12's Decision Virginia, Richmond.com and Tertium Quids. He is the chief blogger at "The Score" and a producer of "The Score" radio show as well as being a Washington Post contributor.
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8 Responses to "Ron Paul wants to cancel $1.6 trillion in debt"
Most of the debt we owe, we owe to… ourselves?
Which begs the question. Why not just set it down?
The Virginia Readjusters plowed this same ground in the 1870s — http://historyengine.richmond.edu/episodes/view/1090
Dr. Paul has plenty of facts to stand on.. Hope he gets the last laugh.
Obama was bowling for a perpetual debt crisis he could pin on Republicans to pave a path to victory for 2012.. BRILLIANT! As the sun rose this aug 3 morning, the lies of the Obama admin should have been exposed. This did not and will not happen thanks to cowardly establishment republicans who voted for party in spite of the people and with the best interests of thier campaign coffers. In their infinite wisdom the GOP gave their corporate cartel of wealthy donors reason to lend a hand for the next election.. follow the money.
Even if Dr. Paul sounds like a kook to you rinos, take a humbling moment to think about the repercussions his bill would have and understand the fundamental issue.. We have an excess volume of paper claims against bank notes we do not have. We create paper money representing amounts greater than our actual reserves available meaning that congress voted yes to creat evenmore money out of nothing.
Can’t make this stuff up.. This simplistic view is total gibberish to you rinos isn’t it.
Norman, That is not the same thing at all. Seems to me this idea has merit. I would think that reducing the bonds out there would be beneficial to bondholders. With the amount of monetizing done the past few years, wouldn’t de-monetizing be beneficial? However, this to would just be another temporary measure.
JZ, reducing the number of bonds out there is deflationary since the Fed is printing money out of thin air to buy their own bonds. The more money they print, the less the bonds are worth in real terms.
Turbo, the RINOS are silent because they don’t want to be kicked off the VIP list for the President’s Birthday Party. Jake Tapper has some details:
http://blogs.abcnews.com/politicalpunch/2011/08/the-presidential-planner-obamas-birthday-bash.html
Well, if we actually owe ourselves (which I am not sure we do) then it really doesn’t matter at all anyway. The $1.6 T debt would be offset by a $1.6 T asset – the bonds. Sounds like a gimmick and therefore poloitical grandstanding most likely.
Not good.
When the Federal Reserve buys bonds from the Treasury it is the first step in monetizing debt which dilutes the money in your wallet even more than it already has been. It doesn’t actually become monetizing the debt as long as the federal reserve bank later sells those bonds back into the market and takes them all off of their balance sheet. Simply “making them disappear” is the worst outcome possible for the bonds, that truly is printing money, and I’m amazed that Ron Paul would even suggest it. Sure, it cleans up the federal balance sheet, but if that is all you want to do then simply have the federal reserve buy a few trillion dollars worth of Treasury bonds and wish those away too.
I guess we don’t have enough trouble with Obama trying to stimulate the dollar into non-existence, now we have libertarians trying to do the same thing, unbelievable.
How’s this for a plan, how about we stop playing games with the currency, stop printing money, stop trying to maintain a 3% inflation rate, stop letting the federal reserve buy Treasury debt, balance the budget, and let people save the currency like it was actually worth something. This isn’t supposed to be a game of see who can destroy the currency the fastest. There’s nothing wrong with having the value of the currency actually remain stable, make it mean something, make it an honorable system of account, it doesn’t have to be just another way to rip people off and steal their savings.
This is why all paper currencies end the same way. The United States used to have a currency called the “Continental”, ever hear of it ? Maybe not, we destroyed that currency during the Revolutionary War, leading to the phrase “not worth a Continental” to describe something that was completely worthless.
What’s next, “not worth a Greenback” ?
There have been huge numbers of paper currencies throughout human history and most people have never heard of most of them, reason ? They all end the same way.
Even in recent history we have seen wholesale devaluation of currencies, remember these ?
1992, Finland, Italy, and Norway
1994, Mexico’s “Tequila Hangover”
1997, Thai Baht leads to devaluation across southeast Asia
1998, Russia’s “Ruble turns to Rubble”
2004 and continuing even now, Zimbabwe dollar collapse
2005, Turkish Lira drops six zero’s with “New Lira” because of continuing hyperinflation
2008, Iceland Krona collapses
This isn’t some kind of ancient history or fairy tale, it is reality, it happens. Paper currencies can and do collapse, often, history is littered with them.
I sure wish I could own a company that prints money and then loans it to the government.
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