Rep. Ron Paul (R-TX), who happens to be running for the 2012 GOP presidential nomination, has come up with the simplest solution to the debt ceiling issue. If for no other reason, this will stir up the Ron Paul for President 2012 crowd. The U.S. Congress should instruct the Federal Reserve to eliminate the $1.6 Trillion dollars of U.S. Treasuries they have purchased to fund the National Debt. If Fed chairman Ben Bernanke just tore the bonds up, that would essentially roll the debt limit back $1.6 Trillion from the current debt ceiling of $14.29 Trillion, which has already been surpassed, to about $12.7 Trillion dollars. This would give the federal government plenty of wiggle room to continue working on a genuine long-term solution. Perhaps as much as two years.
Now, on the face of it, this may sound like another typically screwball idea from Ron Paul. But then one must consider the whole purpose behind the Fed′s program of quantitative easing. They essentially printed money and lent it to major banks to buy the U.S. Treasuries. Not only does this help fund the federal government′s budget deficits, but also adds to the banks′ balance sheets for reserves. However, there is no mistaking that it is the Federal Reserve itself that really owns the bonds. Which they would sell anyway at some point. The Fed already refunds the U.S. Treasury the interest it earns on its assets. Last year, that amounted to about $80 Billion dollars which was refunded.
One can also argue that in a sense, we owe this money to ourselves, anyway. At least the $1.6 Trillion worth of quantitative easing. That money was created for one purpose and one purpose only, so digitally destroying it will not effect any other aspect of the economy. The only reason the Federal Reserve started doing this in the first place was because those who usually buy U.S. Treasuries, such as China, Japan, and other central banks and large private financial institutions, ceased buying them at their normal quantities. The alternative would have been an increase in interest rates to make the bonds more attractive to such investors at the Fed′s auctions.
So will the political class in Washington go along with this debt ceiling solution by Rep. Ron Paul? Most likely they will not. First, it might make the 2012 GOP presidential candidate even more popular than he is now. But the real reason is that it would open the blinds and shed light on the folly of our fiat currency system. Federal Reserve chairman Ben Bernanke, Treasury Secretary Timothy Geithner, Barack Obama and a host of other players have all built up an alarmist condition on the debt limit issue. That if it is not increased, we would face a financial Armageddon. That defaulting on the National Debt would plunge the world into chaos. But the truth is that the Fed could easily destroy the $1.6 Trillion dollars worth of U.S. Treasuries it is sitting on and nothing would happen, nobody would lose anything. So what do you think? Would this idea make Ron Paul for president in 2012 a more viable campaign?