That is not just a quaint idea from the 1920s. Credible authorities are making that argument today. In November 2010, Dean Baker, co-director of the Center for Economic and Policy Research in Washington, wrote in response to the debt ceiling crisis:
There is no reason that the Fed can't just buy this debt (as it is largely doing) and hold it indefinitely. If the Fed holds the debt, there is no interest burden for future taxpayers. The Fed refunds its interest earnings to the Treasury every year. Last year the Fed refunded almost $80 billion in interest to the Treasury, nearly 40 percent of the country's net interest burden. And the Fed has other tools to ensure that the expansion of the monetary base required to purchase the debt does not lead to inflation.
In 2011, Republican presidential candidate Ron Paul proposed dealing with the debt ceiling by simply voiding out the $1.7 trillion in federal securities then held by the Fed. As Stephen Gandel explained Paul's solution in Time Magazine, the Treasury pays interest on the securities to the Fed, which returns 90% of these payments to the Treasury. Despite this shell game of payments, the $1.7 trillion in US bonds owned by the Fed is still counted toward the debt ceiling. Paul's plan:
Get the Fed and the Treasury to rip up that debt. It's fake debt anyway. And the Fed is legally allowed to return the debt to the Treasury to be destroyed.
Congressman Alan Grayson, a Democrat, also endorsed this proposal.
In February 2015, financial author Richard Duncan made a strong case for going further than monetizing existing debt. He argued that under current market conditions, the US could rebuild its collapsing infrastructure with quantitative easing without causing price inflation. Prices go up when demand (money) exceeds supply (goods and services); and with automation and the availability of cheap labor in vast global markets today, supply (productivity) can keep up with demand for decades to come. Duncan observed:
Quantitative Easing has only been possible because it has occurred at a time when Globalization is driving down the price of labor and industrial goods. The combination of fiat money and Globalization creates a unique moment in history where the governments of the developed economies can print money on an aggressive scale without causing inflation.
They should take advantage of this once-in-history opportunity to borrow more in order to invest in new industries and technologies, to restructure their economies and to retrain and educate their workforce at the post-graduate level. If they do, they could not only end the global economic crisis, but also ensure that the standard of living in the developed world continues to improve, rather than sinking down to third world levels.
Abraham Lincoln revived the colonial system of government-issued money when he endorsed the printing of $450 million in US Notes or "greenbacks" during the Civil War. The greenbacks not only helped the Union win the war but triggered a period of robust national growth and saved the taxpayers about $14 billion in interest payments (figuring an average of $300 million in outstanding US Notes over 150 years, at an average real interest rate of 2.6% compounded annually). The US federal debt has been growing ever since 1835, when President Andrew Jackson last paid it off and closed down the Second US Bank. If judicious use of US Notes had continued to the present, there might now be no federal debt at all.
The Inflation Snag
In short, the sovereign debt crisis can be solved by issuing sovereign money. But is there really such a thing as a free lunch? Wouldn't buying up the debt with newly-issued money lead to a hyperinflationary disaster?That was the fear when the Federal Reserve began its QE program in 2008. But the Fed has now monetized $4.5 trillion in QE ($2.7 trillion of which consisted of buying back federal securities, and these fears have not materialized. The stock market has gone up, but not apparently from an increased money supply. More likely it is from very low interest rates, making bonds unattractive and facilitating stock buybacks and borrowing to invest. The cost of produce has gone up, but it is largely because of drought in California, which supplies nearly half the country's fruits, vegetables and nuts; and because speculators have moved into foodstuffs. Despite all that, the overall inflation rate remains at manageable levels.
Why didn't $4.5 trillion in QE drive prices into the stratosphere? As financial writer Matthew Kerkhoff explained in a November 2013 article, quantitative easing is just an asset swap:
When the Fed creates $85 billion, it uses this money to buy bonds . . . . When the Fed creates and gives $85 billion in reserves to its member banks, it removes $85 billion worth of assets (bonds) from the balance sheets of those same member banks. The result is that no new net financial assets enter the economy. . . .
It's much more accurate to think of the Fed's QE program as an asset swap. In fact it's even more accurate to think of it as a liquidity swap. . . . In this context liquidity refers to the ease with which money can be used.
Bonds are more cumbersome to spend than cash, but they still represent purchasing power. Government securities that can be quickly converted into cash or that are near maturity are considered a form of "near money". When the Fed buys the bonds, it is simply converting this less-liquid money back into more-liquid money. As Warren Mosler and John Carney explain on CNBC.com:
Quantitative easing is about the Fed buying Treasury securities. When you (voluntarily) sell them to the Fed, at current market prices, the Fed just shifts your dollars from your securities account to your bank's reserve account, all at the Fed. So why should that do anything to the economy? You have the same amount of dollars, and you could have shifted them in the same market place any time you wanted in any case.
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