Dean Baker, co-director of the Center for Economic and Policy Research in Washington, wrote recently concerning the federal deficit :
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.
This means that the country really has no near-term or even mid-term deficit problem. The current deficit is a positive. In fact, if it were larger we would have more jobs and growth. Furthermore, there is no reason that the debt being accumulated at present should pose any interest burden on future generations. In this vein, it is worth noting that Japan's central bank holds debt amounting to almost 100 percent of that country's GDP. As a result, Japan's interest burden is considerably smaller than the United States's, even though Japan's debt is almost four times as large relative to the size of its economy. [Emphasis added.]
Although Japan's relative debt is almost four times as large as ours and its central bank holds enough to equal nearly 100% of its GDP, investors are not fleeing the yen or driving the economy into hyperinflation. In fact Japan still can't pull itself out of DEFLATION, despite massive quantitative easing. The country still has willing trading partners and is still the third largest economy in the world, an impressive feat for a small island.
If the Fed were to follow the lead of Japan and hold federal debt equal to the country's gross domestic product, the Fed would be holding $14.75 trillion in federal securities, enough to refinance the ENTIRE U.S. federal debt of $13.8 trillion virtually interest-free.
The federal debt hasn't been paid off since the 1830s under President Andrew Jackson. It is just rolled over from year to year. An interest-free debt rolled over indefinitely is the functional equivalent of the government issuing money itself.
Andrew Jackson would have said the government SHOULD be issuing the money itself, rather than borrowing from banks that issue it. If Congress gave itself the right under the Constitution to issue money, he said, "it was conferred to be exercised by themselves, and not to be transferred to a corporation."
Indeed, that may be why the U.S. dollar has been going UP since QE2 was initiated, while the Euro has been going DOWN. EU governments are doing what the inflation hawks want them to do: cut back on services, privatize their pension money, and otherwise engage in austerity measures to balance their budgets. The effect has been to depress their economies and throw them deeper and deeper into debt, with nowhere to get the extra cash needed to pay the expanding debt and interest burden.
The U.S. and Japan are exploring another model: allowing their currencies to expand to meet the needs of their economies. This was, in fact, the original money system of the American colonists. It was revived by Abraham Lincoln to avoid a crippling war debt, after which it was dubbed the "Greenback solution."
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