How to Reduce the National Debt by 15%

I usually hate it when a blogger gives a long introductory build-up before getting to his point, so I will cut to the chase and then explain later.  How can we reduce the national debt by 15%?  Default on it.

Wait!  How can we default on 15% of the national debt without ruining our ability to sell bonds to investors, pension plans and foreign governments?  Simple, by defaulting only on the debt owned by the Federal Reserve.

Here is a chart of who owns the federal debt.

US Debt Pie Chart

As you can see, the Federal Reserve owns 15% of the debt.  All we have to do is tell the Federal Reserve that all those Treasuries they hold are now worthless.  BOOM!  We wiped out 15% of our debt.

Who would complain if we wiped out the Federal Reserve debt?  Would China and other foreign bondholders complain.  I don’t think so, because we are now less likely to default on their debt.  The same goes for pension plans.  We demonstrated that all these others debtors are so important, that we chose to default on the Fed to make our other debts more stable.

The Federal Reserve might complain, because they were looking forward to collecting the interest payments on that debt.  But, the Fed has to give most of their profits back to the US government anyway.  But won’t the Fed be less likely to buy more Treasuries with printed money?  Maybe, but if you could print money to buy guaranteed bonds paying three percent, would you stop?

Now, let me do the background and refresh your memory on how we got into this debt situation.  It’s all the fault of the Federal Reserve.

I believe that it’s one of a government’s primary responsibilities to protect and regulate the currency.  The United States (and other major governments) have abdicated this responsibility by farming out the responsibility to a separate entity, the Central Bank (the Federal Reserve in America’s case).

How did America get talked into giving up its responsibility and power to regulate the currency?  The idea was that if the government were allowed to print money, the irresponsible politicians would just vote to keep printing money, and the value of the currency would decline.  That certainly sounds like a good argument, but it didn’t work.

Now, since Congress can’t vote to print more money, they vote to increase the debt.  In addition to the money being printed, we now have to pay it back with interest.  What kind of sense does that make?

But if the government just printed money, wouldn’t that result in inflation?  Yes it would.  The pain would be immediate rather than delayed by going into debt.  The citizens would immediately feel the adverse effects of money printing rather than delaying the pain so their children will feel it.

The housing bust was caused by people being able to borrow equity from their house to spend on consumption.  This spending boosted the economy for a few years until the pain, delayed by debt, came home to roost.  If people had to earn more money to spend more, the pain would have been immediate rather than delayed.

It’s easy to understand how a person, or a government, can overspend if the pain is delayed.  If you want to control a system, you need immediate feedback.  Any delay in the feedback loop can cause instability.

If the government could just print the money, the citizens would know the cost and could decide if a stimulus plan created enough jobs to warrant the decreased purchasing power of the dollar.

If the existence of the Federal Reserve actually kept the government from spending too much money, then it might be a good idea.  But really, do you think it has worked?

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Sunday, October 28th, 2012 Currencies

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I am not a registered financial advisor. I only offer opinions, and sometimes these opinions veer off at weird angles from conventional wisdom (That's probably why you are here). My advice is, "Don't take my advice." Read my sidelong glances at economic issues and form your own conclusions.

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