Rep. Paul Introduces Bill to Cancel $1.6 T in Debt Held By Federal Reserve

The Hill's Fllor Action Blog ^ | 08/02/2011 | Pete Kasperowicz

[ex-Texan]

Rep. Ron Paul on Monday introduced legislation that would lower the federal government's debt by canceling the roughly $1.6 trillion in 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.

"If the federal government cannot cut spending and bring the budget back into balance, the Fed undoubtedly will be forced to simply monetize trillions of dollars in Treasury debt, which is nothing more than a stealth form of default," Paul said back in May.

Paul is highly critical of the debt-ceiling agreement that the House approved Monday, and said that rather than require real cuts in spending, the bill mostly cuts planned spending levels in the future. According to the legislation, discretionary spending in 2012 would be just $7 billion less than in 2011, and in 2013 it would be just $3 billion less than 2011 before allowing increases above 2011 levels.

"No plan under serious consideration cuts spending in the way you and I think about it," Paul wrote in a piece that appeared on The Hill's Congress Blog. "Instead, the 'cuts' being discussed are illusory, and are not cuts from current amounts being spent, but cuts in projected spending increases."

[green iguana]

Normally I like the economic and monetary ideas that Ron Paul has, but this one is terrible. Not sure what he’s thinking, or maybe there’s more to the story than this brief article let on.

Paul’s concerned about the inflationary increase in the money supply, but that’s already out there. The Treasury sold the bonds to the Fed, and the Fed printed cash and gave it to Treasury to spend. It’s been done. When the debt comes due, Treasury will give cash back to the Fed - that’s how you get the money back out of the system (assuming you don’t just sell more debt to get the cash...)

If the debt is cancelled outright, it does two bad things. It lowers the amount of outstanding debt, so Treasury now has that much more borrowing room under the debt ceiling, and it keeps the money out there in the money supply - you get rid of the debt without a corresponding decrease in the cash in circulation.

This is a plan the Demoncrats would love.