The Federal Reserve can end the eternal debate on the debt ceiling forever - and go on to end the national debt altogether. Here is how Janet Yellen, the new Fed Chair,could make a historic announcement on TV, and start her term with a blaze of glory. Most people are unaware that the Fed has this power, but it does. Why don't they make use of it?

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Imagine the new Fed Chair making history with this appearance on TV:

[Camera shot of an announcer, speaking from the Federal Reserve building in Washington, D.C.]

Announcer: We are presenting a special broadcast tonight for an announcement by Janet Yellen, the new Chair of the Federal Reserve System.

[Camera shot of Janet Yellen, at the Federal Reserve building.]

Janet Yellen: Good evening!

Once again, our nation is caught up in a debate over raising the debt ceiling. On February 3rd, U.S. Treasury Secretary Jack Lew pleaded for yet another increase. Unless Congress acts before the end of February, America will default on its legal obligations. Spending by the US government must be authorized by Congress. But Congress continually balks at raising the debt ceiling, preventing the borrowing required for spending it has already approved.

The Federal Reserve, acting on its own, can end this foolish debate, not just this once, but forever.

Behind me, you will see a wire cage, full of papers. [The camera pulls back to show a wire cage behind Yellen, then moves in closer to the cage.] The papers in the cage are US Treasury Bonds, owned by the Federal Reserve System. [The camera returns to a head shot of Yellen.] The US national debt totals $17.3 trillion, and the Federal Reserve holds about $3 trillion of that debt in the form of US bonds it bought on the open market.

Any bonds issued by the government that cannot be presented for redemption are canceled, and the debt they represent is simply eliminated. So if the Fed destroys its US bonds, the national debt would be reduced automatically by the value of the bonds destroyed: about $3 trillion.

The Federal Reserve System has decided to destroy the US bonds it owns. The destroyed bonds will never be presented for redemption. As you can see, we are burning them up. [The camera shows the papers in the wire cage beginning to burn, quickly turning into a conflagration. A blaze of glory.]

Burning up the bonds reduces the national debt by some $3 trillion, to well below the current debt limit. The government can now pay its bills.

The assets of the Federal Reserve must of course be decreased by the value of the bonds destroyed. But we can do that easily -- it's just a matter of entering some keystrokes. [Camera shows hands at a keyboard typing numbers into a computer.]

Can the Federal Reserve just do this? Yes. No government authorization is needed.

[Camera returns to a head shot of Yellen.] You ask, "But what about the decrease in assets? Can the Fed afford to reduce its assets that much?"

Yes, the Federal Reserve can afford the necessary decrease in assets. It simply reverses the increase in assets it made to buy the bonds in the first place. The money to buy the bonds on the open market was created by a similar keyboard entry -- assets were simply increased by the amount of money needed to buy the bonds. Those assets came from nowhere, and we can as easily make them disappear back into that nowhere.

[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.

Authors Website: http://whatsnotso.blogs.com

Authors Bio:

A serial entrepreneur, cofounder of three high tech companies and an avid multihull sailor.