Wednesday, July 20, 2011

Ron Paul’s Solution to the Debt Ceiling Impasse

Representative Ron Paul has hit upon a remarkably creative way to deal with the impasse over the debt ceiling: have the Federal Reserve Board destroy the $1.6 trillion in government bonds it now holds. While at first blush this idea may seem crazy, on more careful thought it is actually a very reasonable way to deal with the crisis. Furthermore, it provides a way to have lasting savings to the budget.

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.
Read the rest here.

HT: Blog reader Sophocles


Visibilium said...

Sophocles, I'll answer your email here, if you don't mind, since John has already posted the article.

If you're interested in the technical buzz, the comments by roidubouloi at 1113 and 1227 are correct. I'll answer any questions that you have about those comments.

One thing to keep in mind is that all of those Treasuries are laying around at the Fed for use in sucking the liquidity out of the system when the Fed decides to change course. Some people are concerned about future price inflation, and the Fed will use those bonds to head off monetary inflation. Manipulating reserve requirements is a cruder tool and could lead to (1) overshooting, (2) more speculation and about Fed intent and operations, and (3) more volatility. If I were a central banker, I'd think that Paul's idea would interfere with my ability to conduct monetary policy efficiently.

Since I don't like central banking, I'm fine with Paul's idea. It's high time that people get out of the delusion that the Fed can fine-tune anything.

Sophocles said...

Thank you both.

Through the last few years, following this blog as well as your comments Vis, I'm starting to get my feet wet with this type of stuff. I am still woefully ignorant compared to those of you who post with some authority on these matters.

My stock in trade tool over the last many years for my own economic situation has been to budget, budget, budget. Through this budgeting I would force myself to save even when I didn't think I could. And somewhere along the line I began to make some important observations about money and its "flow", its ebb and the building of reserves for myself and interconnecting them, creating fluidity.

Money has a certain power(I'm not speaking in terms of greed but rather money qua money) which is fascinating. In your previous post, John, it asks, "Is gold money?" For me, the question I began to ask myself is "What is money?"

So even though I don't quite grasp the technical jargon proficiently enough to really follow you guys, yet I think that even by mistake, since money works with certain rules, it would seem to follow that each of us in micro is an economy.

I sent this to you both because not only do I recognize how seemingly well versed you are in these matters, but I also happen to like Ron Paul.

Again, thank you both.