One Answer to the U.S. National Debt

by John M. Curtis
(310) 204-8700

Copyright August 16, 2011
All Rights Reserved.                                         

            Pushing the U.S. economy to the breaking point, Washington’s game of chicken on raising the national debt ceiling pushed Standard & Poors Aug. 4 to downgrade U.S. credit from AAA to AA+.  While there’s many moving parts in S&P’s decision, their stated rationale blamed a dysfunctional national government, hopelessly gridlocked in partisan squabbles.  Raising the national debt $2.4 trillion to $16.7 trillion without measurable tax increase caused S&P to downgrade U.S. credit, concluding that the current tax structure was untenable.  Whether you agree with S&P’s logic, the downgrade caused the sixth biggest one-day loss in Dow Jones Industrials’ history at 634 points.  Whatever the justification, most economists saw S&P’s actions as arbitrary, causing damage to the U.S. economy.  S&P is now under investigation by the Securities and Exchange Commission.

             U.S. national debt has piled up since President George Washington was forced to finance the Revolutionary War.  Every successive generation of U.S. presidents has been forced to raise the debt ceiling to keep the government afloat.  Going through financial panics every hundred years since 1776 prompted the panic of 1907 that created the Federal Reserve Bank, mandated with stabilizing the nation’s money supply.  With no commanding authority, the U.S. Fed functions to supply liquidity to banks, set interest rates and maintain the value of the dollar.  Politicians, like GOP presidential candidate Rep. Ron Paul (R-Texas), have questioned the Fed’s Constitutionality, since it’s not accountable to the White House, Congress or Supreme Court, the three separate-but-equal parts of the U.S. government.  Attempts to control the Fed have failed since its inception.

             Paul seeks nothing short, through his House Finance subcommittee, of auditing the Fed.  Paul believes the Fed operates with no legal authority, something not permitted under the U.S. Constitution.  Since its creation in 1913, Paul doesn’t accept the amount of the national debt, allegedly piling up since the Revolutionary War.  He calls the Federal Reserve Board created “out of thin air,” while the Fed was actually created by Congress in 1913 to prevent future banking crises.  Paul has trouble with current Fed Chairman Ben. Bernanke’s “quantitative easing,” where the Fed buys U.S. Treasuries, charges the U.S. Treasury and then tacks the bill onto the national debt.  He’s dumbfounded by the process by which the Fed prints money, charges the government and expands the national debt.  During Wall Street’s recent liquidity crisis, Paul calls on the Fed to forgive at least $1.6 trillion in illegitimate debt.

             Paul’s objections to the Fed stem from the arbitrary way it prints money, distributes cash to various financial institutions and charges the government interest that has piled up un-repayable levels.  He’s sees multinational corporate interests lobbying Congress for more cash to fund the Military Industrial Complex, subsidize the oil, agricultural and drug industries at tax payers’ expense.  When Congress runs out of cash to fund pet projects, according to Paul, they raised the debt ceiling and expect the Fed to order the U.S. Treasury to print more cash and charge U.S. taxpayers.  Since the debt has piled up faster than the country can add jobs and expand the tax base, the U.S. Treasury no longer has the resources to repay the Fed.  Like the International Monetary Fund and World Bank, the Fed has the authority to forgive or write off as much debt as its sees fit to help grow the U.S. economy.

             Given the whopping interest payments on the national debt, the U.S. government is currently upside down or under water.  When the IMF or WB forgive sovereign debt, it’s because it creates too much hardship for third world countries to flourish.  U.S. national debt has become so burdensome and the interest payment so intolerable, that it’s time for Bernanke’s Fed to forgive a substantial portion of the national debt.  There’s simply nothing written into the Fed’s bylaws or U.S. banking code that prohibits banks from writing off bad debt.  Just as the Fed helped by toxic assets or bad debt from destitute financial institutions, it can also forgive some portion of the national debt to make the country more fiscally solvent.  Forgiving bad debt helps get the crushing debt burden off the U.S. economy.  Forgiving some or all of the national debt would stimulate the economy and create jobs.    

             Instead of printing more money in what’s become euphemistically known a “quantitative easing,” the Fed should forgive some or all of the national debt.  If major domestic and international banks forgive bad debt, there’s simply no reason the Fed can’t forgive at least some potion of the national debt.  Interest payments on the national debt have become a kind of slavery for U.S. taxpayers.  If the IMF and World Bank have no problem retiring bad sovereign debt, the Fed should have no problem writing off bad domestic debt.  No international body can blame or punish the U.S. for managing it own economy.  Slashing government spending is counterproductive when you throw otherwise hardworking taxpayers into unemployment.  Forgiving some portion of the U.S. national debt would be a positive step in stimulating the economy.  There’s simply no excuse why the Fed can’t do it.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com.and author of Dodging the Bullet and Operation Charisma.

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