[The camera returns to the now furiously burning US bonds] Reducing the assets of the Federal Reserve System by any amount causes us no discomfort because the assets of the Federal Reserve can be raised again at any time. The Federal Reserve is different, after all. It can create new money at will and show it as an asset on its balance sheet - with no effect on inflation. Inflation occurs only when that new money is spent into the marketplace for goods and services in excess of the growth of the economy. (Cash received by those who sold the bonds to the Federal Reserve was almost all re-invested elsewhere, not spent on consumables.)
"But," you ask, "what about the interest the US paid on those bonds -- the Federal Reserve is 'owned' by its member banks; won't they be hurt by the loss of that interest income?"
[Camera returns to Janet Yellen] No, they won't be hurt -- because any profit made by the Federal Reserve flows not to its owners but to the US Treasury -- to the government of the United States. So the member banks do not suffer any loss of bond interest. When the Federal Reserve holds bonds issued by the government, the interest paid by the government to the Federal Reserve on those bonds is returned to the government as profits. True, when the Federal Reserve destroys its bonds the government no longer receives profits from those bonds -- but the government also no longer has to pay bondholder interest to the Federal Reserve. No one loses interest income when the bonds are destroyed.
I know you will find this difficult to grasp. But destroying the bonds owned by the Federal Reserve is both legal and possible -- and buying them and then destroying them does not directly cause either inflation or deflation, or a loss to anyone except the Federal Reserve, which can make up for that loss easily. The chief effect is reduction of the national debt.
Issuing US bonds to cover government deficits indeed increases the national debt and is usually inflationary. When issued, that first sale of the bonds puts money into the hands of the US government, which then spends it into the marketplace. But the Federal Reserve has minimal effect on inflation when it buys already issued US bonds. Any inflation caused by issuing a government bond almost all occurs when the government spends the money raised by selling the bond, not when the Federal Reserve creates the money for buying the bond, or when it buys the bond -- or when it destroys it to reduce the national debt.
Just imagine all those national debt clocks with their numbers spinning backwards, showing the national debt going down. [Camera shows a debt clock, with numbers first spinning upward to $17.3 trillion, stopping, then spinning downward, stopping at the new national debt of $14.3 trillion.]
In a few weeks, the absence of any inflation or deflation caused by destroying these bonds will become apparent. It will also become apparent that the Fed can destroy bonds at any time with no effect on the economy -- except that the national debt is reduced.
And here is the truly fascinating part: once almost everyone realizes that the Federal Reserve can destroy bonds without endangering the economy, we will do it again and again. Each time, we will reduce the national debt. We will create money from nothing, by typing into a computer. Then we will use that money to buy already-issued US bonds on the open market. (This is non-inflationary because the bonds are already issued and the government has already spent the money it received for them. We are simply swapping no-interest Federal Reserve notes (dollars) for interest-bearing US bonds.) And then we will burn up the bonds. [Camera shows a debt clock spinning downwards - until it reaches zero, and stops.] The US debt clocks will all spin downward - until they stop at zero.
The national debt will be eliminated. There will be no national debt to burden our grandchildren. Taxpayers will stop paying hundreds of billions of dollars annually for interest on the big part of present national debt not owned by the Federal Reserve.. Eliminating those interest payments will substantially decrease the annual deficit.
Government will continue to operate at either a deficit or a surplus. As we do now, we will produce inflation if we run a deficit larger than the growth of the economy. A deficit will result whenever net annual spending by the government, as authorized by Congress, is greater than revenues from taxes and fees.
But the Federal Reserve can see to it that the national debt is gone forever.
[Pause]
The US Treasury is no longer as it was when I began speaking to you tonight. The national debt is reduced by about $3 trillion, and we no longer need to raise the debt ceiling to pay our bills.
In future weeks and months, the Federal Reserve intends to buy government bonds and then to destroy them until we eliminate the national debt entirely.
Thank you and good night.
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