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Kimberly Amadeo

How the Fed Can End the Debt Ceiling Crisis

By July 5, 2011

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Here's a great idea from Rep. Ron Paul (R-Texas) to head off the pending national debt ceiling crisis. Why not allow the Federal Reserve to cancel the $1.6 trillion in Treasury notes that it owns? After all, the Fed's ownership of the debt is just the government owing money to itself. Even if the Fed doesn't cancel the debt, it could just as easily say, "Hey guys, you can pay me later, no worries." This would give the President and Congress two more years to shift spending towards activities that create more jobs.

What's the best way to create jobs? According to a U Mass/Amherst study, it's (oddly enough) building mass transit. That creates 19,795 construction jobs for every $1 billion in government money spent. That's a lot more than the 8,555 jobs created for every $1 billion in military spending. Furthermore, defense jobs are mostly government jobs, whereas mass transit creates construction jobs. These are sorely needed with the current housing doldrums. If you don't like mass transit, try putting the same amount of money into education. That would create 17,687 jobs.

If Congress doesn't want to take the time to create new education or mass transit construction programs, then take the savings from defense spending and give you and your family another tax cut. Your increased shopping would create another 10,779 retail jobs.

It would also give our elected officials another two years to cut spending overall, to lessen the $14 trillion debt. That's what's needed - not a stalemate over the debt ceiling - to truly tackle the U.S. budget problem.

What It Means to You

What happens if Congress does not raise the debt ceiling? Quite simply, the  Treasury Department cannot auction new Treasury notes. In words, it can't take  out any new loans. Instead, it can only pay bills  as new revenue comes in.  In 1996 this happened, and Treasury announced it could not send out Social Security checks.

Furthermore, Federal regulations don't make it clear which bills  should be paid first. The uncertainty would raise the yields on Treasury notes sold on the secondary market, causing some mortgage rates to rise. If Treasury defaulted on its interest payments, foreigners would dump their holdings. The dollar would plummet and, Voila! the euro or yen or even yuan might become the world's the dollar's status as a global reserve currency. Think it couldn't happen? Not much demand for the British Sterling anymore.

Contact your Congressmen, and tell them what you would and wouldn't like to see cut. Here's how to write an effective letter -- How to Write Your Congressman.

Learn more about the FY 2011 and FY 2012 budgets, so you are informed. It's your money, after all.

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Representative Ron Paul (R-Texas) (Photo Credit: David McNew/Getty Images)

Comments

July 12, 2011 at 1:14 pm
(1) Robert F says:

Is anyone giving Ron Paul’s idea a serious nod or is it, like most common sense ideas just too simple to be considered?

July 12, 2011 at 4:26 pm
(2) useconomy says:

It wouldn’t surprise me if the Fed were keeping this idea in its back pocket, just in case. Dr. Paul chairs the Fed Oversight Committee, so I’m sure he’s shared his idea with Bernanke. I just hope we never have to find out. Surely our legislators won’t embarrass us in front of the rest of the world by actually refusing to raise the debt ceiling.

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