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It is all a Band Aid…. Nothing has Really Changed

By : Ziad K. Abdelnour| 17 October 2013
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As Congressman Ron Paul once said: “It is no coincidence that the century of total war coincided with the century of central banking”. Wise words from a wise man indeed.

It is a fact that almost every Fed chairman in the past 60 years has manipulated interest rates to brighten the economic outlook for incumbent presidents or newly elected presidents who won by large margins. The purchasing power of the U.S. dollar has fallen 94 percent in the past 100 years. The only way you can create inflation is by creating more money that is backed by the same reserve assets; the Fed is the only entity that can create more money. Ben Bernanke’s quantitative easing (QE) programs have pumped billions of unfunded dollars into the economy, thereby setting us up for massive inflation in the very near future. If this isn’t a form of financial terrorism, it is incompetence of the highest order.

So how do you reverse this trend heading for a total collapse of the US economy?

Listen to Congressman Grayson recent statement in this regard: “A simple solution to the impasse we are going through is to have the Federal Reserve simply cancel the Treasury debt that it owns. The government can just forgive the government’s debt. This wouldn’t solve the debt problem entirely as the Federal Reserve doesn’t own all U.S. government debt; but it owns a significant chunk of it – roughly $2 trillion”

I believe Congressman Grayson is right on the money in his analysis.

Come to think of it, the debt held on the balance sheet of the Federal Reserve can be canceled without any significant consequence, because it is a bookkeeping artifact corresponding to the money supply. In essence, the government owes this money to itself. If I owe money to myself, I can cancel that debt at will and without consequence, essentially taking it out of my left pocket and putting it in my right pocket.

Last year, the Federal Reserve declared a “profit” of roughly $91 billion, much of which came from interest payments from the U.S. Treasury. The Federal Reserve then quickly remitted nearly all of this profit right back to the U.S. Treasury.

The Federal Reserve does this every year. Reducing or eliminating this unearned “profit” actually will provide a more realistic view of federal finances.

While canceling the Treasury debt held on the Federal Reserve balance sheet might be considered unorthodox to some people, I believe it is no more unorthodox than the quantitative easing that has added much of this debt to the Fed’s balance sheet.

Indeed, quantitative easing is largely performed through buying U.S. debt … $45 billion each month.

Janet Yellen could alleviate the debt ceiling crisis simply by canceling the debt held on the Fed’s balance sheet.

For a person pretty much trained and educated by Bernanke this scenario is probably unlikely… precisely the reason why I think this whole shenanigan is a band aid leading to nowhere.

Unless some drastic actions are taken in a totally opposite direction, we are not resolving our long term debt problem. On the contrary, following the same policies of the last 60 years will exacerbate the problem even more.

Debt-free money could be created to directly pay for public goods and services, and government could be the employer of last resort for infrastructure investment.

Because infrastructure creates more economic output than investment cost, this results in falling prices. So, we can have full-employment, the best infrastructure we can imagine, and falling costs to consumers.

I guess when you want something you’ve never had, you have to do something you’ve never done….

Share your thoughts..

Comments

  1. Matt SammutMatt Sammut

    Very interesting thought Ziad. The biggest hole in it is that the US is not an island on its own. It operates in a world where fiscal integrity (pushing it to say we have that today) is needed or a world of further alienation and protectionism will take place at best. At worst, we will see economic and military clashes start to escalate. Do we allow Italy, Spain and Greece to do the same. What about Japan. Does the US believe it can operate differently than the rest of the world? These are difficult questions. You cannot allow one nation to take a course and prevent others from doing the same. The US does have a huge advantage already as they can print their own money. Saying this, it has become clear that this advantage is a two edged sword and the Federal Reserve is killing a great nation as we know it. The Feds and US government clearly believe that the only solution is for the Federal Reserve to keep printing money to buy US debt. It is working short term but over time, this will also blow up in their faces. You have a very creative thought here and it should be flushed out further…..

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