Through its open-market operations, the Fed has acquired at least $1.6T of Treasury bonds, and these bonds count as part of our national debt.

When the Fed buys a bond from a dealer/bank, they simply credit that bank’s account at the Fed for the price of that bond, which literally creates “money in circulation,” e.g., M1, M2, M3, etc. Such transactions are called “quantitative easing,” and Ben Bernanke refers to them as his “printing press.”

Now suppose that the Fed sets up a special “bond-sales” account at a dealer/bank through which it sells some or all of these bonds. When a bond gets sold, the proceeds get credited to that special account and show up as “profit” on the Fed’s books. Such transactions are called “reverse quantitative easing.” But, by law, the Fed’s profits accrue to the Treasury as revenue. In other words, the Treasury could from time to time draw off revenue from that special account.

Notice that when the Treasury sells bonds at its bond auctions, those bonds increase the national debt. But, when the Fed sells these bonds it has acquired with money from Ben Bernanke’s printing press, the Treasury still gets the proceeds but the national debt doesn’t increase; those bonds were already part of the national debt.

So, with the cooperation of the Fed, the Treasury has $1.6T of headroom before it has to increase the national debt. AND SO THERE IS NO DEBT-LIMIT CRISIS.

Note also that Ben Bernanke doesn’t have to run his printing press, while these bonds are being sold off. But, here comes the fun, what if he did? What if the Fed went into continuous business, buying bonds with money from Ben’s press from one dealer/bank and selling them through another dealer/bank? It appears that all deficits could be coverd this way without ever increasing the national debt.

Disclaimer: I am neither an economist nor an accountant nor a lawyer. But plenty of people here are, and I’d very much like to hear their opinions about this scheme.

wigwam

wigwam

27 Comments