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The Fed Could Simply CANCEL $2 Trillion of Government Debt
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 it ... to 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:
Source: 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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why not cancel all the debt?
Tylers...Why do you put that on ZH?
GW I would expect better from you.
If our US Government were to decide to do that then just what message does that send to Foreign Investors? Could it be that we could just declare their holdings "Null and Void"? That "solution" is just as good as Minting Two $1 Trillion Coins.
That "solution" will instill such great CONFIDENCE in the US Governments committment to HONOR ITS DEBT. Right? Not a chance in Hell...
That is a DEFAULT. It is admitting DEFAULT. We need to do that anyway. But we need to do that HONESTLY. WE have eroded so much trust away that it may be impossible to rebuild it. But HONESTY is a start.
FED canceling debt = Lost confidence in US FRN
Lost confidence in US FRN = Spike in borrowing costs for UST
Spike in UST borowing % = Poof ~~~~ to current worldwide banking/economic system
= Say hello to NWO
Unfortunately, the FED is a privately owned institution and not part of the government. The losers would be the very people (Rothchilds, Warburgs, etc) who OWN the fed and whom the system is set up to enrich.
The only way this would be implemented is by "selling" all the Treasury's gold to the Fed in exchange for the 2 trillion odd bucks. The owners of the FED would end up with gold and the US with the shaft.. as God intended.
We can not confiscate the FED-Rothchilds-etc 2 trillion bond money because they stole it fair and square from the US citizenry. If the US citizens actually owned congress they could issue a criminal fine for the private FED of 2 trillion dollars and confiscate from a judjment against the FED holdings. But first we would need honest politicians. Also congress is not even allowed to audit the FED or look inside Fort. Knox. even though our military guards it. I can not concieve that Fort Knox does not have security cameras in its vaults that are reviewed by guards somewhare. No one publically has ever seen any of its footage. Why? Because they are embarasingly empty is the obvious reasoning.
"Unfortunately, the FED is a privately owned institution and not part of the government."
That is a fact. So there's gotta be a catch because there's no freakin' way the private FED is going to agree to just 'cancel' $2 Tril worth of loans they gave to the government. Again, the FED is not part of the government in any way, shape or form. If that debt is just 'cancelled', the FED is going to need $2 Tril worth of "their" money back, and it truly is "their money" because they actually own the US currency and rent it back to the people (which is the government) at interest . Since pretty much all money on the planet was 'loaned into existence', the cancelling of that debt would be balanced off by the 'disappearance' of $2 Tril in actual cash back into that imaginary void it was birthed from in the first place.
But wait... what I just described was just an orderly "repayment of debt", and that's not what we're talking about here... is it? Serious question. No, I don't think it is. Ok, I admit, I'm missing something here. If anybody would like to fill me in I'd appreciate it. I gotta say one thing though, if Paul and Grayson are for it, then surely the FED "is not" in favor of it.
Carrying forward with this idea...
The treasury has (allegedly) about 8000 tons of gold = 256 Million ounces
It repays its 2 trillion dollar Fed debt with the gold ... therefore the gold value per ounce would be about 12,000 bucks /oz.
This Is change I can believe in (as a holder of physical gold).
Wait a second...if it's possible to just magically make bad things go away, why do we have any problems in the first place? Just make ALL problems magically go away! Wouldn't that make more sense? LOL...complete first-grade shit...too funny...
http://www.youtube.com/watch?v=m-Cn6EVzuHs
PS: the dog is not for sale!
It's not first grade logic.
You're ignoring the debt-money origin of this newly created fiat. The "QE cash" was created from a debt entry in a mythical ledger, the interest assinged to the loan is virtually zero. Ergo, there is no loss of capital to the lender, nor is the interest expense an issue due to the remittance process back to the Treasury. From nothing is nothing.
The benefit of forbearance (to bring an end to this QE mess) is: 1) the money supply will have increased from the proceeds of the original loan being spent on tangible goods and services and 2) and because future current-earnings will not be encumbered to repay the fiat later wth "real" proceeeds (ie. personal income), disposable incomes will rise in the aqggregate.
The repayment of fiat is where the REAL theft occurs becasue those mythical fiat proceeds inure to the benefit the creator in real dollars.
This is not an agrument for government printing, this is a medicinal course of treatment to correct past mistakes and for returning to sound money principles.
"This is not an agrument for government printing, this is a medicinal course of treatment to correct past mistakes and for returning to sound money principles."
Okay, so who suffers from this "medicinal course of treatment"? Who's hurt? Because if you're contending that no one suffers and no one's hurt, then we're indeed talking MAGICAL BULLSHIT. It's pretty simple: You don't get something for nothing.
On the contrary: QE is something from nothing. (which is why it is so dangerous in the hands of bankers)
There is no creditor in the traditional sense -- no entity that raised existing capital to expose to risk. Nor are QE proceeds the product of a deposit yielding fractional lending process; its entirely "make believe" capital created by an arbitrary debit. Crediting that mythical ledger book back to zero has no impact on any particular creditor because there is no creditor in the traditional sense of the word. Simultaneously, the crediting of the mythical ledger leaves in place the M2 in circulation, presumably contributing to velocity. Capital injections, anyone??
None of this proper.
But to close the book, one needs to credit the account in the least damaging way possible.
"But to close the book, one needs to credit the account in the least damaging way possible."
Oh, yeah? Why's that? So no one gets hurt? A whole lot of pain would do this country--or what's left of it--a whole lot of good....
Sure, that would put great trust in the US's other creditors... or am I carazy?
It's a WORLD OF DEBT! Please see Hilarious Music Video: "WORLD OF DEBT":
https://www.youtube.com/watch?v=99xsqxzJnXs
Aussie economist Steve Keens has been saying Jubilee for years, maybe there is some merit, at least it's worth considering.
As usual savers will be shafted and the reckless will be rewarded, that sounds about right/continues the trend in this current ponzi.
The mainstream would love the fed, TPTB would look great and the zombies could keep kicking the can for years to come.
Yay!
Let's call it for what it is: The Great Forebearance. While repulsive to adults, mass forgiveness of excess fiat by CB's is required medicine. (It's ZIRP, anyways.) As the maturities roll-off, cancel them.
The underlying fault of QE is the false hope and prayer that one day some beneficent banker, relieved of his burdens, will shower golden coins upon a class of ingenious inventors whose efforts will rekindle the flames of prosperity and all will be better in our world... The reality is that QE merely funds largess in domestic fiscal policy and channels hot money into foreign markets -- all the while deminishing the value of currency held in my pocket. Thanks for nothin'!! QE has not resolved the problems of 2007 & 2008 - those problems are merely resting on the shelves of CB's as collatoral waiting to re-infect the world. To steal a phrase: It's the debt, stupid!
Not sure this is not really possible without triggering some deriviative chain of events. Call it what you want, but you would think it would dilute the value of debt obligations to all others...which would probably make them less inclined to purchase US debt in whatever form. But since when does any politician worry about unintended consequences?
tactic... In essence FED you a hundred year old US protector of the currency or private foreigner owned operation?
Write down the 2 T
Think!!! The Fed creates treasuries. Money market funds buy them in exchange for Federal Reserve Notes which they get from their investors ... people like you and me. Now you write those treasuries down to zero.
You (the MMF investor) then ask the MMF to return the FRNs you deposited with them. The MMF takes the treasury note and asks the treasury for it to be exchanged for FRNs. No problem. You (MMF) give me (US Treasury) the treasury bills ... I (treasury) give you nothing in return ... I've declared the treasury bills to have no value. You (MMF) have nothing to return to the investor. The DEFAULT cascades. The treasury breaks it's promise to the MMF. The MMF breaks its promise to its investors. The investors break their promises to their trading partners. The system collapses.
computer glitch
America has lost her Americaness. The last cowboys are dead. All thats left are city slickers that everybody is pissing on and an oversized military she can't afford to maintain that serves a foreign powers interests and is under their control. Not to mention a fat police state the slickers pay for to help oversee their own decent into slavery. The icing on that shit cake is that completly disgusting and embarrasing thing called a president. What a bloody mess.
GW - I know that Ron Paul is mentioned as supporting (originating) this absolutely absurd USd deflating, United States hating, idea in your article.
I would be very surprised if Ron Paul generated this idea. Before you attach his name to this, I do hope that you have researched it more deeply than just quote from some BS spewed forth by Grayson.
I swear that it's been a couple of years since I'd theorized that the Fed was going to be the Fall Guy, the black hole that swallowed up all the bad debt.
And, just like Manthong, I too recently mentioned the military shortcomings of the Fed.
I'm thinking that the bankers have had their run and that they'll now have to pony up (else the US govt label them as "terrorists," OR, just turns a blind eye while the citizens get busy).
Another totally crappy article by GW.
I have to say I prefer his (crappy) Fukushima science fiction.
1) this (stupid) "idea" is the same as the $1TN coin idea.
2) this idea makes no sense because you can't take a fucking eraser and simply take out an asset without taking out a liability and vice versa. Destroying the Fed's USTs would require destroying cash that was used to pay for them.
"Destroying the Fed's USTs would require destroying cash that was used to pay for them."
Aside from the fact that we're talking about fiat, AND that this is all nothing more than electronic bookkeeping, well, those left holding any of it would actually benefit wouldn't they (if the notion of scarcity still has meaning).
This would be an attack on the same entities that were handed FREE fucking money. Again, though the archives don't go back far enough to show it, I'd stated that the banks signed up for exactly all of this- they could have been buried way back when OR they could get injections to save their asses until they were told they had to "give back." (and those "injections" really were no more than filling for holes in their balance sheets). For those who don't understand the value of "buying time" let me repeat my often spoken words about this: Time is the ONLY thing you cannot get more of. If you run out of time it's done. Dragging things along, postponing the "crash" does have merit, much like slowing down the time to impact does (crumple zones in cars, roadway barriers etc.).
Yep,
And it would shift more "real debt" to the other suckers.... I mean government financiers listed in the graphic above...
So in other words, if the government doesn't hold spending at the current level of which the 2 trillion bones are forgiven by the fed, then the new debt would be shouldered by "real" holders of debt along with the fed when it takes up debt load again...
Get what I mean?
Then at some point, other entities would be asked to forgive the debt as well...
Ain't inflation a bitch? lol
Can this be published as an Op-Ed in Monday's NY Times, Washington Post and Wall Street Journal?
This is more important than Putin's Op-Ed rant about Syria!
From past experience, anytime that magic math, or creative accounting claims that you can get something for nothing, or solve a debt problem in a win win no trade off way.... it is an illusion. Trillion dollar coins, debt to yourself, cutting the budget with 10 year out budget cuts, foreign creditors will forgive our debt, etc.etc. ..... DC does not fix problems, they create them.
Please stop saying there is a "threat of default."
It's a fraud.
Treasury pulls in 200b per month and debt service is ~20b a month.
There is NO threat of default. There's plenty of money to pay on the debt.
Stop buying to the chicken little meme.
"Treasury pulls in 200b per month and debt service is ~20b a month."
LOLOLOLOL! THEN WHY DO WE HAVE TO RAISE THE DEBT CEILING???
Are you actually saying that debt service is the government's only expense???
True, no involuntary default from inability to pay.
How about, voluntary default as political theatre.
The Well-Meaning Dolt vs the Scary Clowns, Blame for the Default episode. Now that Breaking Bad is finished.
I always assumed that this would come to pass. What could possibly go wrong?
Fuck it............cancel $30T and we'll have nearly $13T in the bank.
Jubilee!
what i been sayin' all along....Good Fed, Bad Fed.
All the debt to bad Fed...it fades off into history.
New Good Fed continues the next chapter with a clean balance sheet.
Happily ever after, yo.
Give up all your freedom and Barack makes it happen.
Doesn't this mean that it effectively becomes the Govt printing money outright.
Why stop at just that? Do think of all the children! Buy the US Gov debt from foreign and domestic entities, then cancel that debt. Then just issue some couple dozen trillions more, lend them to the US Gov and then just cancel that debt.
Then every american citizen should just have some money put on his EBT card and buy himself a brand new Ferrary or something. Beavis and Butthead would agree with that!
Cancel is such an ugly word. Mint 17 one-pond lead coins and stamp $1T on them... There, no cancel involved - everyone is PIF.
Ah, but cancel could be by the MOTU Fed Edition. They'd still have the big balls.
And there wouldn't be any Chinese RE moguls wanting to buy Wyoming. Though, Wyoming could always then be nationalized.
As long as we are talking about magical money, having its problems magically fixed:
http://www.youtube.com/watch?v=08-yKCvMTTM
Ellen Brown - Public Banks and Why We Need ThemThat 2011 recorded lecture starts with a digression about how the trillion dollar student debt bubble could be banished by the Federal Reserve Board.
However, all these magical solutions to the problems caused by magical money tend to deliberately ignore that the source of that is the EVIL MAGICIANS, the international banksters, actually made and maintained the established systems for THEIR benefit.
We are still surrounded by the ways that magical money, made out of nothing, has created a fundamentally fraudulent financial accounting system, whereby magical mathematics is operating everything. There are no quick fixes possible to the real deeper issues, which are that government IS organized crime, controlled by the best organized criminals, and must necessarily be.
Why should taxpayers take the hit on student debt?
It's the schools collecting big bucks to send non-hireable/functioning students into society. Make them pay for their failed products.
You can bet your ass that if Ford or GM sent out products that didn't work, they'd be on the hook for repairs/clawbacks!
Ford and GM are "Too Big To Fail". You had best get up to speed.
So are the Educational Institutions.
The only people who can fail is the Taxpayer. In fact they are set up for failure.
It was just your lack of foresight and planning that you did not make yourself "Too Big To Fail". So it is YOUR FAULT. So you get to pay for it. Do you understand now, SLAVE?
Get back to work. Your Bank and Government DEPENDS on you. You need to bail them out. Stop bitching and moaning or they will take even MOAR with a "Solution" that they have planned.
/sarcasm.
For sure, brettd, I was NOT saying that such a superficial magical solution was a good idea, only that it was a similar kind of possibility, within the overall framework of magical money, made out of nothing. The supreme source of that monetary magic in the USA, the Federal Reserve Board, could do all kinds of wild things, IF it wanted to.
What the FED did do, to make trillions and trillions of "dollars" out of nothing, and practically give it way to various big banks, including lots of foreign ones, was pretty awesome!
It is easy to ask questions about why the FED can make trillions and trillions out of nothing, to benefit the ruling classes, then why could it not do that in ways which benefit some other classes?
Of course, when one starts to develop those kinds of half-assed ideas, then lots of strange notions and unintended consequences pop up, as many previous comments on this article above have already pointed out.
To quote your example, without the FED doing its tricks, then GM would be gone, since it dabbled deeply in acting like a big bank, while Ford may still exist, since it did not do that so much. However, we are Century too late, and some unknowable number of quadrillions of dollars short, to be able to fix the runaway problems caused by having a fundamentally fraudulent financial accounting system, for so long.
The PRIMARY thing that the FED has actually done is continue to use the power to make money out of nothing to benefit the biggest banks, and those who own them, while that hurt everyone else. Political power was used by the ruling classes to benefit them, regardless of the longer term effects upon everyone else! Meanwhile, the fundamental nature of money-as-debt destroys the future, and automatically means that the younger you are, then the more you are being lied to, cheated and robbed by that political system that you were born into. Thus, there MIGHT be some superficial poetic justice in creating more money out of nothing to help students. However, none of that addresses the deeper issues that creating money out of nothing violated the basic laws of nature, because it is fraudulent, since no energy can be made out of nothing, nor sent to nothing. That is the deeper reason why the FED system is runaway social insanity, with no superficial way to fix those problems, but rather, probably being driven towards psychotic breakdowns of the political system.
The majority of universities are owned by states. A lot of the rest by cities. That's just pushing the debt down a level.
Accounting 101: bad debt, uncollectable, loss. Get on with it.
Though the number of useless suits who'd get kicked off would be heartening.
Let me toss my hat in the ring while we are heading into unorthodox waters;
Nationalize the Fed, print off enough cash and pay out all debt and liabilities - calculate the inflation caused, and add an extra amount of dollars to all deposits and pensions to compensate for the inflation.
Divide the new total circulating currency by the 8,000 tonnes of gold that may or may not be held in the US, and back the currency with gold and then make it illegal for the congress to create a deficit (resulting in going to prison). Further, make it illegal to issue soveriegn debt.
Ends up in a tail chasing exercies...I think that is where hyperinflation gets a toe in.
Just move straight to a gold backed solution.
Your suggestion is well intended but it would be disastrous. Imagine you borrowed $400k from your father to buy a house. Your loan is paid off with the print run. So what does your father do with $400k? He can't lend it out because you no longer have any need of debt. So he decides to spend it on buying "stuff" and because he has all the cash and you have none, he outbids you on everything.
The last part about stopping further sovereign borrowings is something we all hope for.
The fact that you are offering a solution is an example we should all follow but no solution can be as painless as printing.
As a one off manouvre it might help but in essence it simply allows for additions to the money supply without any real value being attached or created by that increase in money supply.
In any case what does one cancel next time round? Or do we keep doing this? That is, run up some more treasury debt and then cancel it again.
((((((((DEBT JUBILEE))))))))
ok..I admit I only have a high school education but in my 45 years of working I have learned my labor gets me X dollars of perceived value. My employers and I determine that value via our negotiations and the available supply and demand of the labor force that is currently avaialble and willing to do the work.
I get confused when higher educated people on this forum state that the fed reserve is a private enterprise that by act of congress get to control 100% of the money supply (creation) and establish the interest it charges to people (businesses) to borrow this created money. What confuses me to the true identity of the fed reserve is that in all private businesses I have even known it is in their interest to make money. The charter of the fed reserve as I understand it is that they do not operate that way because any excess profits after expenses are mandated to be deposited into the US Treasurery hence a zero profit center for the Fed Reserve or in essence a Non-for-profit charity organization in structure.
Another thing I get confused on with the fed reserve is how can they have an asset side to their balance sheet if they had no assets to start with? Do they consider the money they create to be the asset or a debt?
It seems to me that if they create money then the one side of their balance sheet would be a liability and if they exchange it for a treasury bill then it would be an asset thus a zero sum balance. The treasury dept could care less what the interest charges are if whatever they have to pay the fed just ends right back in their pockets anyways.
Now to the part I just can't get my head around. It seems the strategy that they are speaking of by forgiving 2 trillion of the US government is that the current debt ceiling spending limit is 17 trillion plus or minus a few billion. Is the plan to forgive two trillion thus reducing the current debt to 15 trillion thus under the 17 trillion cap thus allowing the government to not have legally reached the debt limit thus allowing the government to continue to spend money without having congress to authorize new spending?
The other part I am having difficulty with is if that is the current strategy being floated by politicians isn't that 2 trillion still in circulation diluting the US dollar by that amount? And if the answer is yes, by what percentage does it dilute the dollar? And what current holders of US debt would be ok with an instant dilution without being compensated for their loss of value for the FRN?
What happens to ordinary citizens dollar? Do they get compensated because it seems to me this would cause inflation by the same amount of dilution value.
Correct me if I am wrong but prior to 1913 when money was printed by the US Treasury and was restricted by the amount of true collateral in the amount of gold and other precious metals to back up its value?
Somewhere I thought I had read that the US Dollar was considered stable and a good medium of exchange as a world reserve currency due to the failth and belief that the US Government (US Citizens) always paid its debts as thus retained a status as a store of value? In otherwords, its value was a result of peoples perception?
This is all very confusing for me but somehow I get the feeling this won't be good for me and that ordinary citizens such as myself will get the short end of the stick and will have to pay more and get less.
BTW...my bank pays me .001 % interest on my money...what a joke..if they go forward with this 2 trillion debt forgiveness then I expect to see my gold and silver increase in value and if it doesn't then it proves to me just how fucked we all really are.