Theoretically Exploring the Feasibility of Bypassing the US Debt Ceiling Through Federal Reserve Actions

Could the Federal Reserve "forgive" the US debt to bypass the debt ceiling? This question is more complex and theoretical than practical, as the Federal Reserve cannot directly 'forgive' the entire debt. However, there are intriguing nuances and potential paths that could be explored under certain legal and economic circumstances.

Limitations and Theoretical Possibilities

Firstly, it is important to consider the structural limitations. The Federal Reserve only holds 25% of the national debt. Therefore, the idea of 'forgiving' the entire debt is not feasible without Congressional intervention. Theoretically, the Fed could forgive its portion of the debt, thereby reducing the total national debt below the ceiling, which would allow for the issuance of new debt without a formal vote to raise the ceiling.

However, for the Federal Reserve to play this role, a significant amendment to the Federal Reserve Act would be necessary. This act currently stipulates that the Fed is independent and has specific mandates related to monetary policy and financial stability. An amendment to allow the Fed to forgive debt would require legislative action from Congress.

alternate Views on Bypassing the Debt Ceiling

A second viewpoint focuses on the construct of the Federal Reserve. According to the Supreme Court, the Fed is constructively part of the US Government. Its profits and trading gains are ultimately returned to the US Treasury. Given this relationship, could the Treasury simply declare the bonds held by the Fed as non-debt?

This argument hinges on the interpretation of the law. If the national debt includes all bonds owned by the Fed, then eliminating those bonds from the pool of 'debt to others outside the government' would reduce the total national debt below the ceiling. This interpretation would need to be tested by the Supreme Court, as it would be a significant legal challenge.

Legal and Economic Considerations

One more twist is the potential role of a Presidential Executive Order. If Congress were to pass laws that conflict, a Presidential executive order could be used to determine the implementation of the two laws. This order could interpret that the Congressional definition of 'debt' refers to external entities, not to bonds owned by the Fed, Social Security Administration (SSA), or federal military retirement funds. Again, this would need to be tested in the courts for validity and enforcement.

Past Arguments and Previous Actions

There was a notable argument a few years ago that this could be done. The Federal Reserve's quantitative easing (QE) program purchased a large amount of Treasury bonds, consisting of several trillion dollars. The US Treasury receives the net proceeds from the Fed's profits and a guaranteed rate of return on their paid-in capital. At its peak, the Fed was rebating over 80 billion annually in these profits, much of which came from the interest paid on these Treasury bonds.

Some suggested the Treasury could instruct the Fed to cancel these bonds, reducing the national debt total. The obvious objection is that this would destroy the Fed's investment and result in significant financial loss. However, since the Fed issued this credit out of thin air, canceling the bonds would not result in a financial loss but would reduce the Fed's balance sheet.

While this idea was proposed, it faces substantial obstacles. The Treasury, as the beneficial owner, would need to be convinced to instruct the Fed to take this action, and the necessary legal framework would need to be established. Moreover, this action would need to be approved by the Supreme Court to ensure its legality.

Conclusion

The concept of the Federal Reserve 'forgiving' the US debt to bypass the debt ceiling is complex and laden with legal, economic, and political challenges. While it is theoretically possible under certain conditions, the practical implementation requires significant legal and procedural changes. Nonetheless, understanding these potential pathways provides insight into the intricate nature of the US debt ceiling and the Federal Reserve's role in national finance.