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Rep. Ron Paul Forgets Sound Money   July 8th, 2011
This is a surprising proposal from Rep. Ron Paul       

 
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Rep. Ron Paul has made a proposal regarding our debt ceiling: Cancel what we owe to the Federal Reserve. While it might sound attractive, it's completely at odds with his belief in sound money.

Republicans and Democrats were scheduled to meet today during a White House summit devoted to the issue, but the Texas congressman has spent the last week touting his own solution to the government's money woes: Forgive the debt the U.S. Treasury owes the Federal Reserve and chop $1.7 trillion from the nation's sizable $14.4 trillion debt.

'It's not the ultimate reform that's needed, but it's a start,' Paul told The Des Moines Register. 'What we have is a situation where we essentially have a debt to ourselves. It doesn't make a lot of sense, but it is counted in our deficit.'


Coming from almost any other politician, this kind of suggestion wouldn't be too much of a surprise. But from Ron Paul?

Say what you will about Ron Paul, he's been a perpetual supporter of sound money. Real money. Not printed fiat currency. Yet his proposal to just write-off the $1.7 trillion owed to the Federal Reserve is the exact opposite of sound money.

When the Federal Reserve loans money to the government, money is printed. When the government pays back the money to the Federal Reserve, the printed money is destroyed. The only way to work towards undoing the damage of all the printed money is to pay back the Federal Reserve. Canceling the debt just leaves that printed money in circulation with all the inflationary, dollar-damaging consequences that entails.

The money the federal government owes to the Federal Reserve is money that the Federal Reserve has printed. That's bad enough and is inflationary. But at least if the U.S. Government has to pay it back (and pay interest on it) it will eventually somewhat offset the inflation by destroying the printed money when it is paid back to the Federal Reserve.

If the debt the Federal Government owes to the Federal Reserve is simply cancelled, that will be tantamount to Washington politicians making the decision to print money, arbitrarily canceling debt already incurred, it will be even more inflationary than the money-printing already is, and will actually permit Washington to continue engaging in out-of-control spending rather than confronting the hard decisions it must face now.

This proposal is completely inconsistent with sound money.

Coming from Ron Paul, I'm honestly not sure what to make of it. I assume at some point Rep. Paul will provide an explanation as to how he reconciles this proposal with his long-held belief in sound money.

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