Representative Ron Paul has hit upon a remarkably creative way to deal with the impasse over the debt ceiling: have the Federal Reserve Board destroy the $1.6 trillion in government bonds it now holds. While at first blush this idea may seem crazy, on more careful thought it is actually a very reasonable way to deal with the crisis. Furthermore, it provides a way to have lasting savings to the budget.
The effect would be a 1.6 trillion hit to seigniorage, or a 1.6 Trillion release of free money, the helicopter. Does this make sense?
Sure, if you want to pump the market bubble. But that 1.6 T in expected liquidity goes on the books of large brokers as computed inflation and will cause a short but serious rise in interest rates, followed by a crash as government is unable to make interest payments.
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