July 07, 2011

Mr. Paul's Helpful Suggestion

I am intrigued and bemused by Congressional gadfly Ron Paul's idea that the current debt ceiling crisis can be handled expeditiously and non-legislatively by a simple act of the Federal Reserve, namely, its destruction of the $1.6 trillion in U.S. Government Treasuries currently on the Fed's balance sheet. In reality, of course, no material "destruction" or shredding is actually necessary; Ben Bernanke merely has to bring up the Fed's balance sheet on his corner computer, click on "Treasuries held," hit "select all," followed by "delete." And instantaneously, the United States will be $1.6 trillion richer, the national debt will drop from $14.3 trillion to $12.7 trillion, and we're good to run expenses through the roof probably for a couple of years more.

Certain liberal Keynesians, such as Dean Baker, think it's a good idea, on the surface of things, although smelling the rat underneath. Mr. Baker even points out that an additional bonus will accrue, specifically that the United States Treasury will be immediately relieved of any obligation to pay interest on the Fed's holdings, although this good news is somewhat offset by the balancing loss of "income" to the Treasury, since the Fed "pays" back to the Treasury the interest which the Treasury "pays" to the Fed, currently about $80 billion per year. I am not making that up.

Mr. Paul, who believes in a gold standard, obviously hopes that Americans in general get the joke. His proposal, in fact, would work, and while monetary theorists will raise various abstruse and arcane arguments about damage to the monetary base, and blah blah blah, these objections are all horseshit, for the simple, sufficient reason that the entire fiat money system is itself horseshit, and any system which lacks a corporeal reality and is entirely made up (I'm thinking about religious apologetics here, in fact), can always invent a new and factitious "explanation" or compensating artifact to take care of such a technical problem. We can say that the space where the Treasuries used to be on the Fed's balance sheet is now occupied by "Dark Matter." There, fixed it for ya.

The logical, symmetrical elegance of Mr. Pauls' suggestion is simply sublime. For what did the Fed pay for the Treasuries on its balance sheet? Nothing. It "bought" them with nothing. It conjured the money out of thin air, by taking them off the hands of compliant Primary Dealers who held the Treasuries for the shortest time possible and then dumped them on the Fed, and such PDs were "paid" when the Fed made an accounting entry (a few billion here, a few billion there) on the "reserve accounts" of its co-conspirator banks.

Now it is true that the Fed's Treasuries, if sold on a secondary market by the Fed to genuine third parties, would raise actual hard cash. Yet a couple of problems arise here. First, the Fed's participation in this ridiculous game of "purchasing" Treasuries in its "quantitative easing" programs has resulted in absurdly low interest payments (coupon rates) on the T-bonds the Fed holds, and it's difficult to see why there would be much of a market for this trash if the economy improved to the point where the Fed would be motivated to unload them in an effort to control inflation (this is the "sophisticated" financial argument). Second, however, is the whole idea of unjust enrichment - the Fed paid nothing for these Treasury "securities." Why should it make billions on their "resale?"

These are details a little removed from Ron Paul's wry joke at the Fed's expense. What he is really highlighting, in a pretty brilliant way, is that the entire money system has no reality anymore, that the actions of central banks the world over to "pump up liquidity" by making computer entries in their own balance sheets have created a farcical, and easily manipulable, system of measuring "wealth," and that the net effect of all this money creation has been simply to bestow long trains of 1's and 0's on the balance sheets of big banks with close connections to the fonts of money, the central banks of the world, and particularly the Federal Reserve Bank.

So hit "del," Mr. Bernanke. You won't lose anything. With the decks cleared, you can start tomorrow reacquiring everything you just erased, using the same consideration: nothing but the thin air in your office. And when we hit the debt ceiling again, well, the solution is obvious, and no doubt Mr. Paul will point the way once more.

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