Ron Paul's Solution to the Debt Crisis

[Frank DeMartini]

Interesting article about Paul's Solution on buying back the debt:

http://www.hollywoodrepublican.net/2011/07/ron-paul%e2%80%99s-surprisingly-lucid-solution-to-the-debt-ceiling-impasse/

[JJonesMBA]

Good article. I left this comment:


Thank you for your insight into Dr. Paul’s rationale for this proposed solution. He is the only 2012 Presidential candidate on either side who saw this crisis coming, and has been consistent with his principles and solutions.

While I understand and agree with much of this article’s premises, I disagree with the conclusion that the government’s interest burden would be reduced.

As I see it, I think the interest burden would be inclined to increase, since the extra $1.6 trillion dollars allowed to be raised would have to come from bills, notes and bonds from the Treasury. As the Federal Reserve currently constitutes a large portion of the demand, either two consequences would follow:

1) the Fed would continue buying, leading to a cycle where the US government never pays off its debt and never grows smaller (and is funded via inflation), or

2) the Fed no longer purchases Treasury assets, leading to an increase in interest rates as demand falls to attract holders of the US debt.

This second possibility could result in either increased interest payments (and subsequent slowing of the economy – unless the Fed reduced reserve requirements, possibly leading to price inflation), or force the government to finally restrain the reckless spending to reduce the deficit, reducing the incentive to raise further debt.

Unfortunately, I’m not so optimistic either side of the establishment is willing to cut subsidies to the military-industrial complex or special interest groups here at home – at least until we get a President and Congress who follow the Constitution and believe in traditional American values of liberty and limited government.