More 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)
