Debt Ceiling: Could Ron Paul's Plan Save Us From Disaster, Twice?

This article was posted in Time’s online site on July 5th, no doubt as a reaction to the cry of foul by the patriot community that shook the net after their July 4th Time Magazine cover and article attempting to shred our Constitution.

The $1.3 trillion mentioned in this article would be a step in the right direction.  And if it only turned out to be a trillion and would only take us to next summer and the heart of the 2012 election with a new debt ceiling crisis, I’m sorry, but that would be perfect.

As for Time’s contention that it would look bad if we made the Fed tear up this phony debt, well I hate to pop anyone’s bubble, but it already looks bad, like the surface of the water does to a drowning person going down for a third time.

No, $1.3 trillion would be a great start and would buy us the time we need to get Ron Paul into office.  Then we go after the rest.

Posted by Stephen Gandel Tuesday, July 5, 2011 at 5:00 pm

Is Congressman Ron Paul our savior?

The Republican, and libertarian, who is running for President, again, in the past few days has been floating a plan that has the potential to end the debt ceiling standoff, for now, and eliminate the growing possibility that the U.S. government could have to default on its debt, which could cause disastrous economic consequences. Even better, in Ron Paul’s plan Republicans and Democrats wouldn’t have to come to some compromise about taxes or spending cuts. In fact, they wouldn’t even have to vote to raise the debt ceiling, at least not for a year, perhaps more. And that’s not all. Paul’s plan would not only solve the debt ceiling problem, it also might eliminate any harmful after shocks the Federal Reserve’s QE2 program could have on the economy.

Not possible, you say. Well at least one left-leaning economist, Dean Baker, thinks the plan has promise. Here’s why:

Paul’s plan starts with the Federal Reserve. In the last year or two the Fed has been buying up U.S. Treasury bonds in an effort to lower interest rates and boost the economy. The most recent round of that buying has been dubbed QE2, and has come under a good deal of criticism, though most economists agree that it was a generally helpful policy. The result is that the Fed now holds nearly $1.7 trillion in U.S. debt. But that is really phony debt. The Treasury pays the interest on the debt on behalf of the U.S. government to the Fed, which in turn returns 90% of the payments it gets back to the Treasury. Nonetheless, that $1.7 trillion in U.S. bonds that the Fed owns, despite the shell game of payments, is still counted in the debt ceiling number, which caps that amount of total Federal debt at $14.3 trillion.

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. A trillion and a half dollars is currently about what spending is expected to exceed tax revenue in 2011. And the deficit is expected to dramatically shrink in 2013 and beyond. So cut the debt by $1.7 trillion and you could run the government as is for at least the next year, and perhaps into 2013. By pushing the debate past the presidential election cycle you might be able to get some of the politics out of coming to a smart solution.  What’s more, under the current scenario, the Federal Reserve would eventually have to sell that debt back into the market. That could cause interest rates to rise. Rip up the debt and you don’t have to worry about what the added selling pressure of the Fed would do to the market.

(MOREQ&A Ron Paul)

There are of course a number of catches. First of all, the Fed probably couldn’t sell off all of its Treasury holdings. Some of the interest, say 10%, it gets from those bonds it holds onto the Fed uses to fund its operations. The Consumer Financial Protection Bureau, for instance, by way of Dodd-Frank, specifically gets funded from the interest that the Fed collects on the U.S. Treasury debt it owns. Second, even in good times, the Fed always holds a significant amount of Treasuries, if not as much as it has now. The Fed had about $700 billion in late 2007, just before the financial crisis began to unfold. Take that as a baseline, the Fed would only be able to retire about $1 trillion in U.S. debt. That would probably put us in the same debt debate situation we are in now sometime next summer or early fall, which is the heart of presidential election season, potentially making the debate even more politically charged than it is now. Lastly, that government debt that the Fed owns is back by bank reserves. They are technically excess reserves. But eliminate the debt and those reserves go away, too, which could lead to less lending by the banks.

But the biggest potential draw back is this: It just looks bad. It looks like we don’t live up to our obligations. Of course, government finances, especially those of an economy as big as ours are hard to grasp. As much as Sarah Palin and the rest of the Tea Party would like to think, the government doesn’t have to balance its checkbook in the way that individuals have to. But nonetheless, if the government regularly used the Fed to create money to buy up its debt rather than paying it off, it seems wrong. The optics are bad. “It smacks of the third world,” says Allan Meltzer, a Fed historian. “It’s what Zimbabwe would do.”

Drawbacks aside, if the Democrats and the Republicans can’t get to a compromise by July 22nd, I think the Fed option is a viable one. It’s definitely better than defaulting. And it is probably better than massive cutbacks in government spending that could potentially send us right back into a recession anyway. The optics of a government unable to come to a compromise are bad already.

0 thoughts on “Debt Ceiling: Could Ron Paul's Plan Save Us From Disaster, Twice?

  1. Anything would be better that is currently coming down the pike. Ron Pauls Idea is a sound one. If we continue to play this shell game as is, we are headed for a collapse of proportions that would rival something akin to the landing on Omaha Beach. If these clowns don’t get their act together soon, there is going to be a complete and total collapse of society as we know it.

    Even the beltway insider’s are hunkering down, buying provisions and protecting their families in ways they are too embarrassed to admit. We are going to have a Rodney King situation on our hands, only on a nationwide scale. We are so close to a total breakdown, that we need a true leader to pull us out, and quick. The punk ass weasels in office now are useless piss ants.

    We can keep the wrath of God away, but it’s going to take a man with some strength and courage in Washington, not the cowardly bunch of weasels we currently have now. Pray for a strong result people, we are in deep shit here.

    We had better be making some noise, because if we don’t, a total collapse is our future. Henry has had the courage to stand up to this shit, listen to what the hell he is telling you, don’t be foolish.

  2. Constitutionally, legislatively, and morally, Ron Paul has no equal. His 22 year voting record speaks for itself.
    Mr. Paul has not survived in politics for 22 years and maintain the ethics and morality he has by being anything other than stellar.
    If You refute the above comment, then I please invite You to listen to him speak about key issues. It is amazing how well he comes across because he doesn’t have to remember lies like other politicians. He understands what is happening in the world and knows how to apply the basic principles of liberty to achieve the real change that America so desperately deserves.
    American to American we are all on the same team. So I present Mr. Ron Paul as my Candidate for 2011 and invite anybody to meaningfully and respectfully debate why he is not the best for American and its people in 2012.
    Ron Paul = A real change, not for special interest, but for America’s Interests!
    Thank You for Your time
    Ron Paul 2012

  3. “Second, even in good times, the Fed always holds a significant amount of Treasuries, if not as much as it has now. The Fed had about $700 billion in late 2007, just before the financial crisis began to unfold. Take that as a baseline, the Fed would only be able to retire about $1 trillion in U.S. debt.”

    I don’t think you understand what it is going on. The purpose is not to bring the Fed back to its status in good times, it needs to be shut down completely. For now, the entirety of what the Treasury owes the Fed should be wiped out. You hold it as a given that we can only reduce these liabilities to their “normal” level. However, you fail to give any reason as to why. We may be on the verge of actually running this country with logic and reason.. that of which has not been seen in generations. It is understandable, then, that this would be beyond your comprehension.

  4. ALL AMERICANS PLEASE READ EMERGENCY!!!!!!!

    ALL AMERICANS PLEASE READ EMERGENCY!!!!!!!

    ALL AMERICANS PLEASE READ EMERGENCY!!!!!!!

    GLASS STEAGALL ACT… NO MORE DEBT… FIND OUT WHO ARE THE PRIVATE BANKER

    Can Anyone talk serious .. RON PAUL need to declare (The GLASS STEAGALL ACT)
    Whick means to SEPARATE Gambling INVESTMENT BANKING FROM REGULAR CERMERCIAL BANKING

    CERMERCIAL BANKING vs INVESTMENT BANKING MEANS TO PUT YOUR MONEY IN ALREADLY RICH CORPORATIONHOPING THAT THE CORPORATION GROWS SO THAT YOU MAKE A PORFIT OF YOUR INVESTMENT its (gamling) SO IF THE CORPORATION(s) GROW YOU MAKE MONEY … IF IT IS NOT GROWING YOU WILL LOSE MONEY (its kind of like gambling for rich people)

    BUT AS OF RIGHT NOW CERMERCIAL BANKS ARE ALLOWED TO BE BOTH AS INVESTMENT BANKS ALLOWED TO BE BOTH ALSO …..SO IF A CERMERCIAL BANK FAILLS ..ITS MOST LIKELY BECAUSE THE CERMERCIAL BANK OWERS INVESTED SOME OF YOUR MONEY.. INTO INVESTEMENT BANKS.. THAT INTURN INVESTED THEIR MONEY ON LARGE CORPORATIONLIKE GENERAL MOTERS AND A HUNDRED OTHER BILLION DOLLAR COMPANIES ,LIKE CNN, FOXNEWS ANY NAME BAND YOU CAN THINK OF ………….NOW THINK OF 300 MILLION BANKS DOING THE SAME THING …. THAT WHY The GLASS STEAGALL ACT …..NEEDS TO BE PUT BACK

    YOUTUBE IT UP.. SEE IT FOR YOURSELF
    KNOW THE HISTORY AND ORGIN OF DEBT BEFORE YOU SPEAK

    YOUTUBE – THE (MONEY CHANGERS) 3 HOUR VIDEO FOR A HISTORY LESSON IN MONEY.. LONG VIDEO BUT YOU WILL LEARN ALOT AND I BET YOU WILL PASS IN
    ON
    RON PAUL NEED TO TEAM UP WITH LYNDON LaROUCHE SUPPORTERS

    NO LIES.. IF YOU WANT TO KNOW THE TRUTH ..YOU HAVE TO SEARCH FOR IT
    COPY AND AND PASTE SOME KEYWORDS THAT YOU DO NOT KNOW AND SERACH IT ON WIKIPEDIA OR YOUTUBE AND PASS ALONG WHAT YOU HAVE LEARNED

Start the Conversation

Your email address will not be published. Required fields are marked *


*