NOTE: I’m not actually in favor of this, especially considering the blank check it would give legislators.
As a pure thought experiment, since the Federal Reserve, in buying govt bonds/Tbills/etc basically treats that as an asset, would it be possible (not saying they would want to) for the Federal Reserve to actually take over the entire 14 trillion in debt from the Federal govt?
I figure, since they own like 7 trillion of it, it would simply cancel out half of the debt right there, and suddenly the Federal Reserve owes the world a mere 7 trillion.
Just an amusing thought I had … Ron Paul wins Presidency, kicks out Bernanke, assigns Murphy as the new head of the Fed Reserve. Paul pushes through a balanced budget amendment and a debt ceiling amendment (thus requiring Constitutional amendment to raise). Fed takes on the entire debt of the Fed govt, pays off all creditors and reserves, and forgives all debtors. Then turns out the lights and closes the doors.
Oh, and then puts the For Sale sign on the building.
Hell, even with the potential momentary inflation that might cause, it’d be better in the long run.
It may hold a few trillions worth bonds on behalf of other parties, but these securities do not belong to the Fed.
Also, if the Fed buys all the outstanding USG debt, it cannot then just close, as the payment for this debt would be not physical notes, but just credit to accounts of respective banks held in the Fed. Sure, serves the banks well, but it’s an outright confiscation to just liquidate these accounts without any compensation.
No. The Federal government owns approximately $4.6 trillion of that debt, also known as “intragovernment holdings”. Here is the approximate breakdown of the government debt ownership as of March 2011:
Federal Reserve
$1.4 trillion
10%
Government Agencies (other than Federal Reserve)
$3.2 trillion
22%
Publicly Held
$9.6 trillion
67%
Total Government Debt
$14.2 trillion
100%
For your scheme to work, the government could simply default on itself, wiping out $3.2 trillion of the debt held by government agencies (excluding the Federal Reserve).
That leaves the public held debt at $9.6 trillion, plus the debt held by the Federal Reserve at $1.4 trillion, for a total remaining debt of $11 trillion.
The Federal Reserve, of course, can buy out the remaining $9.6 trillion. This can happen if the Federal Reserve issues freshly minted Federal Reserve Notes in the amount of $9.6 trillion, which will increase the base money supply by $9.6 trillion.
This Fed purchase of $9.6 trillion in debt will presumably be credited to the private member bank accounts. Member banks can then possibly lend the credited funds, at a 10% reserve requirement, with a potential money multiplier of 100 system wide.
Question: How would you deal with the inflation problem?
