Ending the debt limit crisis: Dear Ben Bernanke

By Alan Grayson
October 9, 2013

Warren Buffett calls the debt ceiling a “nuclear weapon, too horrible to use.” Obama administration official Jason Furman says the consequence of a default on U.S. government debt is “too terrible to think about.” When asked about a default, Wells Fargo strategist James Kochan simply commented, “Holy cripes.”

With this crisis, America is risking financial Armageddon. The default of Lehman Brothers on its $613 billion of debt ignited a chain reaction in the financial system, nearly destroying the U.S. economy. A default by the U.S. government on $17 trillion of debt — debt that has been considered the safest in the world — could be far worse.

But at heart, this is not a debt problem. It is an accounting problem. The Treasury Department issues U.S. debt, and lots of it. So you would think that America is deeply indebted to its bondholders. Yet increasingly, it is the U.S. monetary authority, the Federal Reserve, and not private investors, who buys this debt.

So a simple solution to the impasse is as follows: Federal Reserve Chairman Ben Bernanke should simply cancel the Treasury debt that it owns. The government can just forgive the government’s debt.

This wouldn’t solve the debt problem entirely. The Federal Reserve doesn’t own all U.S. government debt; it owns only roughly $2 trillion of it. (Well $2,076,927,000,000.00, as of last Wednesday, but who’s counting?)

Yet canceling this debt would give the government substantial room under the debt ceiling to manage its finances. It would end the debt ceiling standoff in Congress, and it would prevent a default.

The debt held on the balance sheet of the Federal Reserve can be canceled without any significant consequence, because it is a bookkeeping artifact corresponding to the money supply. In essence, the government owes this money to itself. If I owe money to myself, I can cancel that debt at will and without consequence, essentially taking it out of my left pocket and putting it in my right pocket.

Last year, the Federal Reserve declared a “profit” of roughly $91 billion, much of which came from interest payments from the U.S. Treasury. The Federal Reserve then quickly remitted nearly all of this profit right back to the U.S. Treasury.

The Federal Reserve does this every year. Reducing or eliminating this unearned “profit” actually will provide a more realistic view of federal finances.

I am a Democrat, and known as a progressive. But this idea was put forward a few years ago not by me, or by a member of my party, but by Republican Representative Ron Paul.

He thinks, as do I, that the Federal Reserve’s dramatic expansion of its balance sheet is simply a way of financing the government by printing money. The Fed isn’t really “buying” Treasury bonds, it is just letting the government finance its deficit by adding to the money supply.

If this plan were enacted, there conceivably might be some operational problems for the Fed, but nothing compared to the nightmare of a default on Federal debt. Some of the Fed’s Treasury debt facilitates Fed open market operations, which is part of how the central bank manages the money supply. Surely it would be much easier for the Fed to change its money supply management techniques, though, than to figure out how to manage open market operations using defaulted Treasury bonds.

While canceling the Treasury debt held on the Federal Reserve balance sheet might be considered unorthodox, it is no more unorthodox than the quantitative easing that has added much of this debt to the Fed’s balance sheet. In any event, preventing a financial meltdown, with its attendant risks of interest rate and price spikes as well as staggering employment losses, is certainly central to the Federal Reserve’s mandate of ensuring price stability, maximum employment and moderate, long-term interest rates.

Bernanke could alleviate the debt ceiling crisis simply by canceling the debt held on the Fed’s balance sheet. I’ve written to him, and asked him to do so.

Let’s hope that he does.


PHOTO: Federal Reserve Chairman Ben Bernanke listens to opening remarks prior to delivering his semi-annual monetary policy report to Congress before the House Financial Services Committee in Washington, July 17, 2013. REUTERS/Jonathan Ernst


We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

“So a simple solution to the impasse is as follows: Federal Reserve Chairman Ben Bernanke should simply cancel the Treasury debt that it owns. The government can just forgive the government’s debt.”

Fatal flaw: The Federal Reserve is NOT a government institution. It is a *PRIVATE* bank.

Posted by chapkom | Report as abusive

It is correct that it is an entirely legal accounting trick.

However, it sets the precedent that the Treasury can cancel it’s own debt by pressuring the Fed to expand the money supply. I predict that if Bernanke did this, we’ll return to the 1970′s and the era of a central bank that was pressured by Nixon to overinflate the incomy, resulting in stagflation.

Incentives matter, especially in governance. The only way to return to an era where Congress balances it’s books is create incentives for them to actually do so, not use accounting tricks to cancel debt so they can continue spending indefinitely.

Posted by ThomasPCole | Report as abusive

We should have the Fed buy all of our debt from all sources and cancel it once purchased. We will then continue this practice forever.

Posted by keebo | Report as abusive

Click on “contact us” at the bottom of the Fed’s web page, then go to:

General Comments for the Chairman and the Board of Governors

The Board welcomes your feedback. Comments can be submitted by e-mail, phone, or postal mail:

Phone: 202-974-7008
E-mail: Submit a comment through our online contact us form.
Mailing Address:
20th Street and Constitution Avenue N.W.
Washington, D.C. 20551

Posted by MoBioph | Report as abusive

Why on earth would The Fed give up some of it’s power voluntarily? It won’t.

Keebo, what you’re suggesting is the Fed printing money to buy debt from all sources (nearly 15 trillion worth). The addition of 15 trillion to the base money supply would in effect cause record breaking inflation, mass unemployment and destruction of the lower and middle classes. I know you probably wrote this sarcastically, but you would be surprised how many people think this way..

Posted by NorthernLight | Report as abusive

I’m not smart enough to understand macroeconomics, but what I do understand about macroeconomics is that treating it like microeconomics gets you flawed conclusions, like the one core to this piece.

Posted by VicL | Report as abusive

So, Benny Boy who twice on “60 Minutes” a year apart said that the Federal Reserve in creating cyber-dollars was in effect “printing” money. He knew all along that their purchases of debt was just a thinly-veiled euphemism for creating money out of thin air.

The Emperor Has No Clothes

It’s time we grew up and acknowledge this process for what it is.
Federal government is NOT like family debt to which it is often compared because it has this ability to create cyber-dollars. Because the Federal Reserve has been exceptionally wise in balancing the value of the dollar, it still maintains its central position as the world’s reserve currency and for over two years has been considered the safest investment in the world, contrary to Standard & Poor’s foolish political degradation of the triple-A rating, meaningless especially since Moody’s (owned by Warren Buffett) and Fitch did not follow suit – none of which are official ratings in any sense of the word.

Posted by ptiffany | Report as abusive

The Federal Reserve System (FRS) is very much a federal government agency. It is just not directly controlled by the US Treasury. Its rules of operation were set up by Congress and the Executive Branch nominates the Chairman of the Federal Reserve Board, then approved by Congress, much like Justices of the Supreme Court. This organization was deliberately created to reduce short-term political influence on decisions to regulate the money supply, a huge mistake in the past that generally benefited the Plutocracy, the very rich who loved the gold standard.

If it weren’t for the Federal Reserve, we’d be in a much deeper depression.

Posted by ptiffany | Report as abusive

Publishing an article by Alan Grayson?? Really? Are you kidding? Google him… This country has lost its mind.

Posted by sarkozyrocks | Report as abusive


“If it weren’t for the Federal Reserve, we’d be in a much deeper depression”

You really need to study the history of debt based, fractional reserve banking and the pain it has caused the entire world. Why do you think the founders and early leaders of your country did away with the first central bank (early 1800s) and fought to keep them out of America for over 100 years… because the institution is a cancer on society and should be abolished… not celebrated.

Google “The Money Masters,” a low budget (actually poorly produced) but great piece on the history of money… done around 1995 it also accurately predicted the financial meltdown if the banking elite were not reigned in. Of course Instead they were deregulated even further… and here we are!

Posted by SRVES339 | Report as abusive

Mr. Grayson,

I’m asking you to voluntarily surrender your calculator and take up permanent residence in a rubber room.

You acknowledge “…that the Federal Reserve’s dramatic expansion of its balance sheet is simply a way of financing the government by printing money. The Fed…is just letting the government finance its deficit by adding to the money supply.” So YOU KNOW these billions are backed by nothing more than the value of their paper and ink thereon.

Each and every such dollar dilutes the full faith and credibility of America foreign governments expect to sustain the purchasing power of U.S. fiat currency. It may be crap, but it’s the “best crap” available. Is it not in the interest of every American that the perceived value and purchasing power of the dollar be preserved?

If a foreign power were doing this, America would quickly dispatch our armed forces to stop it and bring those responsible to justice. Unfortunately, as Walt Kelly once sagely observed in his “Pogo” comic strip, “We has met the enemy and he is us.”

“…canceling the Treasury debt held on the Federal Reserve balance sheet might be considered unorthodox, it is no more unorthodox than the quantitative easing that has added much of this debt to the Fed’s balance sheet.” Again you are AWARE, and yet the debt you would cancel is REAL. It is not the illusion you suggest.

The U.S. drowning itself in debt is like a goose in a pot of water with the temperature rising one degree a minute. For an initial period the situation may seem tolerable; but, over time that goose is dead meat. Bon appétit!

Posted by OneOfTheSheep | Report as abusive

The Fed would never do this because it is a private bank, and essentially, what’s going on here, is money laundering. Who do you think gets all that money that’s printed? Banks. Its loaned to them at super low interest rates, so they can loan it to you at exorbitantly higher interest rates. Does anyone wonder why there is an income disparity problem in this country? I don’t

Posted by mwilliams6464 | Report as abusive

Hey, if it’s an accounting trick, then lest pay all the vendors, Social Security, Medicaid and Medicare expenses with trick money. Therefore, there are not any liabilities for future pensions or benefits, and we can cover our unfunded liabilities with tricks.

What the increase in debt and the recurring QE’s have really done is penalize those who save for the future. The dollar has decreased in purchasing power, the true measure of an individual’s wealth. Any one who purchases groceries sees it every week in the supermarket–while “official” inflation has been flat for the past five years, the price of groceries alone has increased dramatically while wages have remained relatively flat.

The reality is that our government, and the Federal Reserve, have screwed the citizens of this country by devaluing their savings, the value of our work, and making more of population depending upon government.
It’s all part of the grand plan.

Inflate our way out of debt, more citizens consuming government services, increases taxes on those that work, vote ourselves benefits that our children have to pay for. Call it what you wish, but the “progressive” agenda is killing us.

Posted by COindependent | Report as abusive

It should be obvious why such an idea is deeply flawed. If the Fed cancels something on the asset side of its balance sheet, then in theory something on the liabilities side will have to be canceled as well. What will that be? The liabilities of the Fed consist mainly of currency in circulation and bank reserves. Both belong to someone other than the Fed.
So then it would have to replace the canceled assets with something artificial, like e.g. two of the $1 trillion platinum coins that were once proposed by another bien pensant.
But the monetary system is built upon the fiction that something of ‘value’ actually ‘backs’ the currency. Destroying that fiction so blatantly could result in a sudden decline in the demand for Fed issued money, in other words the massive monetary inflation of recent years (or rather, recent decades) would then likely lead to a sudden and dramatic fall in the dollar’s purchasing power. Note that the broad true US money supply has more than tripled since the year 2000 (up 230% to be precise). At current growth rates, it will have quadrupled in another three or four years. Such a massive inflation of the money supply can go on for a long time without any obvious effects on the prices of final goods, as long as a critical mass of actors in the economy BELIEVES that the policy will one day be stopped or even reversed. Canceling the treasuries held by the Fed would make it irreversible – and then we would find out what ‘unanchored’ inflation expectations look like

Posted by PaterTenebrarum | Report as abusive

Yes, of course this is a money supply issue and not a debt issue but the question we must all ask ourselves is how is inflation being controlled? As both “mwilliams6464″ and “COindependent” have suggested that money is being extracted back out though the rest of us. Yet inflation (or the value of the dollar) must be controlled not only internally but externally as well. I’m not too sure we can sell the bundled securities bridge anytime soon. Since, by bankrupting foreign nations you can market your own debt as more attractive to purchase relative to others. This also has the secondary effect of making these nations less able to afford the oil America needs to maintain its wealth which is increasingly becoming more expensive to buy. Reduce the demand and it frees up supply for America!

Posted by Mazer | Report as abusive

Yet this house of cards stands on continual growth. As long as someone is willing to fund our debt to buy oil (~19.6 million barrels per day x current price per barrel) and we are able to grow from this energy purchase no pain will be felt from the extraction from the money supply to pay for this. The problem is the only growth from America is from its debt. Will foreign nations continue to fund this debt with no sign of growth returning?

Posted by Mazer | Report as abusive

This article is a perfect example of how the most ignorant amongst us get to become congressmen and deserve to be voted out.

If the Fed can buy treasuries at will, then why don’t they just buy them all and own them all. Every so often they can just cancel what they own and the US debt will go down. Great win-win for the US. If the illustrious congressman did some research he would find the world doesn’t work the way he described.

II must say that it’s not easy to find out how the whole thing works. It always bothered me that everyone says that the FED buys treasuries. How can they do this since they don’t really have a stash of dollars to get the job done. This is what I’ve been able to find out. The Fed issues credits which the major banks take and consider $$. Along with the credits, the Fed tells the banks what to do with the credits. In some cases, buy treasuries. So, in the process the banks in fact are the ones who end up buying the treasuries. These treasuries are then put into the banks reserve fund. The last I heard, 50% of the major banks reserves are treasuries. I’ve also read that the regulators are worried that if the interest rates on treasuries increases and people start pulling their money out of banks, the castle of cards will collapse.

See you all on the bread line and have a good day

Posted by 1DukeZ | Report as abusive

Can some great economist answer two simple questions.

Is there any limit as to how many treasuries the Fed can buy?

Is the a limit as to how much debt the country can have??

Posted by 1DukeZ | Report as abusive

Mazer, Yes, because they want all money collapsed to G-Zero.

Posted by 2Borknot2B | Report as abusive

I don’t know who “they” is. But if your referring to Ian Bremmer’s book I don’t see eye to eye with him on the coming changes. The world can’t purchase oil with a different commodity so whatever that currency is will be the most trusted and thus the global leader. Do you think China will float its currency if OPEC agrees to its currency being the sole currency to trade for oil?

Posted by Mazer | Report as abusive

Representative Alan Grayson (D-Fla.) served on the House Finance Committee during the writing of the Dodd-Frank financial reform law. He is now on the House Foreign Affairs Committee and the Committee on Science, Space and Technology. Holy dooley, but that’s kinda important ain’t it?

For all that, Rep. Grayson can smile at the camera and say, “If I owe money to myself, I can cancel that debt at will and without consequence, essentially taking it out of my left pocket and putting it in my right pocket.”

Dear Lord, but we are in a pickle, I must say. Logic 101. I can’t owe anything to myself, OK. That’s not an accounting trick, but my ability to create pure gold with two-bit words.

I’m no economist, but even I know that if I have ten dollars in my left pocket, it’s there for a reason. Sure, I can take that money out of my left pocket (lunch budget allocation) and put it in my right pocket (are you married?). Now I’ve got the money to get home, praise the Lord! For His ways and means are way beyond finding out and ain’t that the truth.

But hey, what happened to my lunch?

Posted by Harderwijk | Report as abusive

Very impressive original idea! You should be publish it with the usual backup to begin a path to a nobel prize.Who really knows what the effect would be? We are in uncharted waters so let try it.If shutting down the government and defaulting on the debt are acceptable options, then government forgiving debt to itself must be a way forward.
I just finished writing an analysis that a USA debt default would have the positive effect of getting China and Japan who hate each other to work together. Maybe US forgiving debt might do the same thing. Keep up the good work!

Posted by johndoyle | Report as abusive

Also while you are it, can you get the US to withdrawn from WTO? It was a mistake to let China in. If we follow your advice, we don’t need their money anymore. Let’s undo the effects of China joining WTO to the US economy.Bring the jobs home!Yes, it might be a little painful but we will survive and better for it.

Posted by johndoyle | Report as abusive

after such accounting trick dollar status as reserve currency would be lost and demand for treasures would disappear.

Posted by mal17 | Report as abusive

What a terrific idea. Next, why don’t we pretend we can fly and walk off the ledges of buildings.

For this you go to Harvard Law School?

Posted by retired_sandman | Report as abusive

I’m no great economist but given that the question is simple enough I will give it a shot.

1.Is there any limit as to how many treasuries the Fed can buy?
First they are not “buying” them the Fed is creating additional money supply and as long as someone is willing to purchase this debt and the Fed can control inflation at the same time there is no limit.

2.Is the a limit as to how much debt the country can have?
One limit is the effect of an additional dollar of debt on GDP since if we aren’t growing as a result of taking on a additional debt burden an intelligent investor would stop giving us money. So the other limit is finding enough people to still give us money when the prospects of America paying it back look more and more grim due to no effect on growth from taking on additional debt. According to the stats from the Federal Reserve http://www.federalreserve.gov/releases/z 1/ I would say the point that one additional dollar of debt giving zero growth would be around 2014-2016.

Posted by Mazer | Report as abusive

Yes you do have to extinguish liabilities too. But by extinguishing excess bank reserves(Fed Funds)which amount to over $1 trillion, the banks are not really out of pocket and banking can continue. Bank P and Ls are not affected. This artifact is possible. It is no more crazy than monetizing debt or a fiat monetary system generally. The biggest problem is that is enables the dysfunction of the children in the legislature. But we do that every election. This is just another mechanism!

Posted by Mikazzum | Report as abusive

Wow, no wonder we’re in so much trouble. This is the solution floated by the congressman? Mr. Grayson, you need to hire some new assistants.

If the Federal Reserve System cancelled a couple of $ trillion in UST debt that it holds, the effect would be equivalent to reversing the past two to three years of Fed stimulus (QE). Now how will the “markets” react to that sudden draw down in liquidity?

The markets won’t like it. You know that, right?

Since the market participants like Goldman, Citi, JP Morgan/Chase etc. and similar “people” (Citizens United says they are people) fund the reelection coffers of our representatives, it’s obvious that this scenario is a non-starter.

Posted by Missinginaction | Report as abusive

“China’s official news agency has called for the creation of a “de-Americanised world”, saying the destinies of people should not be left in the hands of a hypocritical nation with a dysfunctional government.”

Our political parties are seriously hurting the country now. Both of them. We need a referendum vote on Term limits for congress and SCOUS and campaign finance reform. Nothing more or it will be turned into a never ending argument and well get nothing. Just those two things and all things can be achieved after just one or two election cycles. DEMAND IT!

Posted by tmc | Report as abusive

When the Federal Reserve buys Treasury securities via QE operations, it is functionally the equivalent of the Treasury not issuing those securities in the first place. So why not cancel the $2 trillion of Treasury debt held by the Fed if in doing so the debt ceiling time bomb is defused because the outstanding debt is reduced to about $15 trillion…. well below the $16.7 trillion debt ceiling?

Posted by club_ed | Report as abusive

From the Federal Reserve’s own financial statements:
“Federal Reserve notes are the circulating currency of the United States. These notes…must be fully collateralized.”

What this means – if the Treasury holdings of the Fed are “cancelled,” the value of the collateral for our currency is “cancelled.” Like any collateralized assets, if the collateral isn’t there, the value is much less than originally thought.

Yes it is really astonishing that a congressman is making this suggestion.

Posted by mustang84 | Report as abusive

Thought experiment. If a private sector domestic or foreign investor in US Treasury debt decided to forgive the US government of its obligation to pay coupon interest and redeem principal on the debt, not only would the Treasury’s liability be extinguished but also the future value of private sector cash asset. Therefore, since $2 Trillion of Fed holdings of Treasury debt matches virtually dollar for dollar the amount of excess reserves held on account at the Federal Reserve, it makes sense that if the Fed were to cancel $2 trillion of Treasury debt on its balance sheet, it would also have to cancel excess reserves held on account at the Fed. However, if banks got wind that the Fed was about to confiscate their excess reserves, wouldn’t they run for the exits in an attempt to keep from losing them? to confiscate these excess reserves?

Posted by club_ed | Report as abusive

Ben would have to have pretty big pockets to move the $2tn from the left to the right, eh? lol

Wait, maybe we could mint a $10 Trillion coin instead.

Hmmm, looks like crap, smells like crap, ….

Seriously, the FRB (private bank) has to let the politicians (America’s leadership) make the decisions so they are not culpable.

Big stinky problems in Washington, D.C., as they keep “kicking the can down the road” as none of them are willing to do the work necessary to fix the problem at hand. This has been snow balling and is the cumulative effect of solving the problem(s) we’ve had for decades (as pointed out on previous posts on the site today and yesterday).

Posted by BigKidBrother | Report as abusive

Really informative blog.Really thank you! Great.

Thanks a lot for the article post.Thanks Again. Fantastic.

Wow, great blog.Really looking forward to read more. Great.