The interest burden will increase if the federal debt continues to grow, but that problem can be solved by mandating the Federal Reserve to buy the government's debt. The Fed rebates its profits to the government after deducting its costs, making the money nearly interest-free. The Fed is already doing this with its quantitative easing programs and now holds nearly $1.7 trillion in federal securities.
If Congress must maintain its debt ceiling, there are other ways to balance the budget and avoid a growing debt. Ron Paul has brought a creative bill that would eliminate the $1.7 trillion deficit simply by having the Fed tear up its federal securities. No creditors would be harmed, since the money was generated with a computer keystroke in the first place. The government would just be canceling a debt to itself and saving the interest.
The Trillion Dollar Coin Alternative
The most direct solution to the debt problem is for the government to fund its budget with government-issued money. One alternative would be for the Treasury to issue U.S. Notes, as was done in the Civil War by President Lincoln.
Another alternative was suggested in my book Web of Debt in 2007: the government could simply mint some trillion dollar coins. Congress has the Constitutional power to "coin money," and no limit is put on the value of the coins it creates, as was pointed out by a chairman of the House Coinage Subcommittee in the 1980s.
This idea is now getting some attention from economists. According to a July 29th article in the Johnsville News titled "Coin Trick: The Trillion Dollar Coin":
"The idea just started to get serious traction the
last few days as the debt stalemate has grown more intense and partisan. Yale
constitutional law professor Jack Balkin floated it as an option in a CNN op-ed yesterday (July 28th).
Today the idea has gone
mainstream. It is covered by NY Magazine , CNBC , and The Economist . Even Nobel
economist Paul Krugman of the NY Times has weighed in. Annie Lowrey of Slate discusses it as one of several gimmicks the
government could use to resolve the debt-ceiling debacle. Krugman added:
These things [like coin seigniorage] sound ridiculous -- but so is the behavior of Congressional Republicans. So why not fight back using legal tricks?"
The debt ceiling itself was a legal trick, a form of extortion based on a century-old statute that conflicts with the Constitution. However, said the Johnsville News article, "coin seigniorage is not a scam. It is legal . . . . This plan looks like it might be Obama's ace in the hole . . . ."
The article cites Warren Mosler, founder of MMT (Modern Monetary Theory), who reviewed the idea in a January 20th blog post and concluded it would work operationally.
Scott Fullwiler, associate professor of economics at Wartburg College, also did a comprehensive analysis and concluded that the trillion dollar coin alternative was unlikely to result in inflation. Comparing it to Ron Paul's plan, he wrote :
"This option is much like Ron Paul's proposal--actually identical in terms of the effect on the debt ceiling and the Treasury--except that his proposal would destroy all of the Fed's capital (and then some), which is a potential problem politically . . . though not operationally, and which the Fed is therefore very unlikely to agree to."
On the inflation question, just because the Treasury has money in its account doesn't mean it can spend the funds. It needs the usual Congressional approval. To keep a lid on spending, Congress just needs to be instructed in basic economics. They can spend on goods and services up to full employment without creating price inflation (since supply and demand will rise together). After that, they need to tax -- not to fund the budget, but to pull excess money back in and avoid driving up prices.
Spending More While Borrowing Less
In an economic downturn, the government needs to spend more, not less, as history shows. This can be done while still balancing the budget, simply by taking back the government's Constitutional power to issue money.
The budget crisis is an artificial one, and the current "solution" will only guarantee a deeper recession and more widespread suffering. Rather than obsessing over deficits and debt, the government needs to turn its focus to jobs, sales and quality of life.
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