The Fed’s chief antagonist would have it cancel the federal debt it holds. It’s a fantasy that could turn into a nightmare, writes MoneyShow.com senior editor Igor Greenwald.
It's crunch time in Washington.
The nation's leaders are trapped in the sweltering capital trying to cut trillions in future spending as a condition for borrowing other trillions already spoken for. The populace is cynical, cranky, and paranoid that it's paying for some secret fringe benefit the stiff next door might not deserve.
Potential debt default is less than a month away, and President Obama (along with other worthies) is on record predicting a financial apocalypse if the debt ceiling is not extended.
But who's that quixotic hero charging into the mess on a white horse, with a plan to save the federal government $1.6 trillion at the stroke of a pen? Why, it's Rep. Ron Paul (R-Texas). Once a fringe Federal Reserve abolitionist, Paul has received a battlefield promotion to major presidential candidate and financial expert.
The longtime advocate for the gold standard has repeatedly criticized the Fed for buying Treasury bonds. But now he says this debt is to ourselves, and so doesn't need to be paid back.
And Paul is right, of course. The Federal Reserve could print out all the bonds it bought during QE1 and QE2 tomorrow and light a bonfire, wiping out its share of the federal debt. OK, so it might take an act of Congress.
Regardless, $1.6 trillion is a nice chunk of change to find under the bed. Granny might not need to take that Swiss vacation after all. Hedge-fund managers could stop house-hunting in Bermuda and the Isle of Wight.
Paul floated his debt-abolition balloon last week in an interview with conservative Iowa radio host Jan Mickelson. (Skip to the ten-minute mark on this video after the commercial.)
“We have to work hard to pay that interest to the Federal Reserve,” he said. “They're nobody. Why do we have to pay them off?...How did they pay for it? They printed the money out of thin air. So why don't we just eliminate it, and say we don't owe it to you any more?”
Mickelson followed up by asking whether this might not do further damage to the US credit rating, and Paul responded by arguing that this might actually reassure creditors by making Uncle Sam's remaining obligations more affordable. The entire exchange took maybe 90 seconds out of a half-hour interview.
Congressional colleagues and other fans of monetizing the US debt will have to wait for the PowerPoint followup. There's nary a peep about this debt-forgiveness plan on Paul's presidential Web site, nor the one devoted to his duties as a congressman.
Next: Why Paul's Plan Is Dangerous