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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.
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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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youve just destroyed you own argument with your last three words. Nobody wants to go there, neither for love of justice nor for love of Miley's nipples; if you be a deviant, libertarian, raging anarchist with a zest for paganism.
Imagine Miley in a world war! Cos that's what deflated bubble and gold hoarding does. It kills all economic activity.
Gold = peace and prosperity
Paper = war and economic devastation
Gold = peace and prosperity for the few and war, poverty and devastation for the rest
Paper = peace and prosperity for even fewer and more war, poverty, and devastation for the rest
Good observation that war, poverty and devastation will always be with us.
If the Fed is going to do that, they might as well buy another trillion or two. No wait - they are!
It's an old argument: debt to yourself nets you to zero, so just cancel it. This is why Japan's debt is not seen as a problem because so much of it is intragovernmental. Just one problem: shadow banking.
The "fractional reserve" in shadow banking is any asset but particularly US TSYs. The "multiplier" is provided by rehypothecation. If you eliminate TSYs, then this is to the shadow banking system the equivalent of eliminating high-powered money from the traditional banking sector, causing all the fairy money magicked into existence based on that original stock to go *poof* at even the slightest hint of a default anywhere in the chain. Highly deflationary.
Now you could argue that this would not be the case if the Fed's 2T stash of assets was unleveraged (ie, not lent out via repo and then rehypothecated into credit), but as ZH has been reporting over and over again (eg http://www.zerohedge.com/news/2013-07-08/collateral-shortage-back-twist ), the Fed hoovering up TSYs across the curve has resulted in a shortage of high quality collateral for everyone else in shadow banking to fuel credit creation.
As ZH already reported, the Fed is aware of this unintended consequence and has taken steps to make its stash available to shadow banks (http://www.zerohedge.com/news/2013-09-23/bill-dudley-explains-feds-logic... ).
So no, the Fed cannot just cancel 2T in debt with Treasury because those assets will be, or have already been, pledged as collateral in a shadow banking credit creation chain.
This is also why a US default is a bigger deal than many people realize (*poof* goes credit from the shadows), which is why a default will not be allowed. Maybe I'm wrong and the banksters have really lost control, but I'm calling this as just another case of political theatrics. The politicians are playing it up while on the stage (bunch of narcissistic drama-queens that they are), but they don't own the theatre, they just work there.
Right...it's some banks collateral at 14 X
...or 50-80x over in Europe to fuel the Eurodollar-denominated shadow banking system (which is bigger, less regulated and more insane than the domestic USD system).
So, based on what you posted, you can create cancer out of thin air.
Fuck. Them. All. The Fed, the Shadows and every bloodsucking son-of-a-bitch that walks the face of the earth.
Good analysis.
That 'debt' represents highly leveraged collateral in Shadowland. No 'Poof' possible without the monster house of cards collapsing.
Easy to do if SIFI's take it in the ass, but I doubt they will bend over. It's a suicide pact.
After all, they run the show.
It's not a good analysis.
If you cancel UST's then what is left out there is pure cash that doesn't have to return to the Fed and be canceled.
That is true in light of traditional banking, which today is back to representing >50% of the story, having been the minor player since 1997. See: http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2012...
It is, however, an error to ignore the (still deleveraging) shadow banking sector in this context, particularly given that collateral rotation has happened in large volume into US TSYs. For a good description of this messy situation, see: http://www.voxeu.org/article/exit-path-implications-collateral-chains
Ditto. Just having the Fed hold the debt is effective forgiveness. But if you cancel the debt you also must extinguish the currency created to buy it in the first place. Greece and Rome have already demonstrated what happens when debt cancelation become national policy. If the Fed were to "call in" the collateral prior to cancelation, cash would need to be advanced. But more important, you shatter the illusion that UST paper is the BEST collateral in the system. If we decide to declare UST debt toilet paper, then the whole system collapses.
"If the Fed were to "call in" the collateral prior to cancelation, cash would need to be advanced."
"If we decide to declare UST debt toilet paper, then the whole system collapses".
Again we differ. We The People are not required to settle our debt to the Fed using their FRN. We can use whatever paper that Congress decides to issue. TRUE Federal notes for example. In fact We The People can give the Fed a new currency $ten trillion 'coin' that is redeemable only on our terms. (No differently than the IOU's in special non-negotiable debt that is issued to take the place of your pilfered FICA, ahem, 'contributiuons').
Additionally, if some suspicions are correct that TPTB want to crash the system in order to usher in a NWO with "jewbux 2.1" or whatever they'll term it, then FRN's would need to be replaced, and per your rationale that too would collapse the whole system. The salient question is probably, "Who is going to issue that new currency first? TPTB or the rest of us?" With the word "sheople" becoming more true and more ubiqutious every day, I'll bet on TPTB.
So instead of letting the Fed issue FRN, you are going to trust CONgress to issue the money? Thats a good one. Those fuckers would print just as much money or MOAR then Ben. And instead of the PD's getting the benefit of that flow, it would be all of their "buddies". Congress is practically paralized right now, but if they could print, wouldn't that be the same as no debt ceiling? Sure they could "vote" on it, but you know they would always vote to expand the money supply.
Congress is the only entity that is constitutionally given the right to issue currency. That is, if the constitution means anything to you.
"The Constitution specifically grants Congress its most important power — the authority to make laws. A bill, or proposed law, only becomes a law after both the House of Representatives and the Senate have approved it in the same form. The two houses share other powers, many of which are listed in Article I, Section 8. These include the power to declare war, coin money, raise an army and navy, regulate commerce, establish rules of immigration and naturalization, and establish the federal courts and their jurisdictions."
But, the Money printed would be without interest. So, all of your Income Tax would go to fund the Government and not to just pay Interest on the Debt.
Did the banks not collect interest pre 1913 Fed? You can bet your ass there would still be interest. What better way for .gov to go than to cut out the middle man (the Fed)? They can make the skim too!!
God, you're an idiot.
Gold. Anyone that prefers paper is a stupid fucking cunt.
"Just having the Fed hold the debt is effective forgiveness"
Not quite. You'd be correct if Fed = US Government = US Citizens. This, however, is FAR from "same pants; different pocket". You also overlook that the Fed collects interest on all of that issued debt. It's in their interest to create debt for the rest of us; always has been.
Forgiveness minus vigorish. Usury is the 1st Commandment in their bible.
And the lst time I looked, Uncle and Fed owned over half of the outstanding debt; not the 2 trillion and change mentioned in this item. Did I miss something?
My thoughts exactly. The Fed is NOT part of the government. They might remit 91 billion back to old Uncle Sam, but how much did they really make? 910 billion? Does anyone really know for sure? I don't think this is a left hand/right hand argument myself, but I am certainly no expert.
Details. ^%)_)%#@$%^U&^()&^&^!!!
Details, always getting in the way!
QE killed money velocity, this will give you velocity because the banks would be forced to lend. My calculations say instant 5% annualized inflation, and 7% long rates, initially. what I don't know is if this brings in a flood of tax revenues to more than offset.
Now why would the Fed agree to that? Out of the goodness of their hearts maybe? Whatever they own by now, be sure that they want more!
Well the fiction Krugman et al presented that QE wasn't money printing would be revealed - sure netting the debt out between govt and FED works but how is the FED going to withdraw the cash out of circulation it created to buy the debt if the debt is simply cancelled out? Obviously we all know it never had any intent of doing that but it always pretended it would - 'when the time was right'
The Fed won't withdraw the cash, the gov't will: they will increase taxes. I hope Volcker lives another hundred years...because he will be needed.
The Fed buys treasuries and the govt spends that money into circulation. By canceling the debt, how will that liquidity be mopped up?
Exactly. If the Fed cancels interest bearing debt on the asset side of its balance sheet--which is matched with non-interest bearing debt (base money) on its liabilities side--the Fed will have no way to control base money. This would be the equivalent of the Treasury printing $3 trillion and dropping it from a helicopter--which by coincidence, the Treasury would insure fell straight into the bank reserve accounts of their TBTF primary dealer buddies--with no accounting sheet balance. Obviously runaway inflation would be the result.
Obviously runaway inflation would be the result.
There'd be no difference between 'disappearing' the debt currently on the Fed's books, versus rolling it over endlessly through monetising it via QE.
The pols on the Hill might take it as a signal to spend even more wantonly, and foreign creditors might see it as another nail in the US' even attempting to limit the quantity of USD in existence by paying its debt the real way, but in terms of the actual money in existence there's no difference.
It all depends on how much money actually makes it into circulation - what its velocity is. So far velocity has been low and dropping. If it starts rising inflation will follow. And if they lose control of that hyperinflation is possible.
more energy production that is paid for in dollars and other currencies. (yuan, yen, Bangladeshi bucarets.) what's your plan?
As befits the above article, it ends with citing MMT 'Modern Monetary Theory' or more aptly the Magic Money Tree people
Money Magick is what is on offer here
As clever as it may be, the real problem is that we don't know at all what would happen with such a blatant act of money monetisation ...
Perhaps nothing would happen in the short term ... Or perhaps it would be the surprise final tipping point of the great US dollar hyper-inflationary monetary collapse ... Weimar Germany 1923, America 2013
There are people in Fed and Treasury who are probably amazed that the US petro-dollar has held together as long as it has already ... Just on raw instinct that anything really 'new' like this could topple the whole house of cards, even the Powers That Be will hesitate until they themselves are ready for collapse, with oligarchs fully vested in real assets instead of paper
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From their point of view, it would be less risky to start stealing the US $19 trillion in pension fund IRA 401K etc assets ... Or do a sudden, surprise one-off 10% 'tax' on all bank deposit and securities accounts (they are seriously talking about this throughout the Western world)
They are having a nice experiment on that in Poland right now, where the government just took over the pension funds people have been paying into for 10 years ... people are complaining but swallowing it ... just like the Americans did with the MF Global, Sentinel and Peregrine Financial seizures ... fully approved by America's bank-bribed judges ... and people not acting beyond angry internet commenting ...
people in Poland complaining about pension funds? haven't noticed :P they're too busy with polarized pseudo-politics divided into two camps. just like USA today is.
FM. Fucking Magic
Almost ,, the correct term is PFM , Pure Fucking Magic .. trust me I've been in IT since the stone age.
< ------- Keep dreamin' pal
< ------- Yes, absolutely they will
I'm going to contact Wells Fargo and see if they will forgive my home loan.
Lololol.
The reason the fed is there is to hide the elites piggy bank. The elites go there for low interest loans which is a huge advantage in a always capital starved economy. Its a blatant way to maintain power by lending to people on in the elites little club.
Could you imagine if every bank had to go to congress for funding. To much light on blood suckin parasites
N
"what does reputation matter when you never had one to begin with." interesting theory. there is always the question...so I'm told..."do you want business...or do you want more business." How is one to know whether the "drop off rates" (so blithely noted by the in the know) aren't simply a function of a lack of "drill will"? it's not like the production numbers are b.s. nor the fact that a complete alternative not only exists (Teslas) but that a previous alternative (coal) always has (denial of history.) very strange this "energy demand in the form of always a higher price" thing.
I think Bernanke’s posturing gave the answer when Ron Paul asked him this question, he was very hesitant and squeamish, avoided a direct answer.
For the Fed it would mean another blow to its balance sheet but more importantly it would mean the Wizard of Oz curtain protecting the gangsters would be removed exposing the fraud.
For Grayson it would be his chance to make America a greenbacker (congress would issue money) nation printing all the currency congress wants without the interference of the Fed.
Monetarily there would be an initial shock, then euphoria. The inflation or deflation would depend on federal and monetary policy going forward, but with a caveat, there are $2.13 trillion dollars already sitting at the Fed owned by banks. If the interest rates increased and the banks no longer had to play rehypothecating games then watch out Main Street.
It would be nice if the Fed offset the loss of $2 trillion in federal money with the $2 trillion in excess reserve and then sold assets raising the interest rates to 5% or 6%. Of course they will not do this because it puts them, and their owners out of busness.
DEATH PENALTy for Central Bankers.
Round up everyone in the Fed and SHOOT EM IN THE HEAD
"Eye for an eye..." requires a much more extended death for such vermin. Imagine the pain they have inflicted. They are the financial equivalent of global warming; i.e., some victims have already suffered the consequences, but most of the damage is stored in the financial atmosphere, awaiting the confluence of social needs//demographics/loss of faith that will unleash it. If there were ever a sure bet...
Well, that is one way the Fed could start to get the sacred "balance sheet" in line.
I suggested that the US just repudiate Fed Debt yesterday.
How many Abrams and B-2's does the Fed have?
What a wonderful idea!!!
So then the politicians would ramp up spending further, knowing that the debt will always be cancelled again and again. If this approach is taken, in the interests of "efficiency", why not just eliminate the middle man (The Fed) and print money for itself. Either way, total fiscal indiscipline would follow, and in turn, hyper-inflation.
MMT is a crock. Gold, Bitchez...
Nah.
End the fed.
Cancel the debt.
Pass balanced budget amendment.
Introduce new asset based currency.
Things would be much better.
Introduce new asset based currency.
First, you have to have assets.
And The Fed don't even get two $1Trillion Platinum coins in return..?
Why stop with Fed? Social security could cancel over $2 trillion in owed debt. The trust fund holdings are simply another example of the check kiting accounting our government runs as well