A sovereign nation can always find the money to pay debts owed in its own currency. The Federal Reserve can buy the debt itself – just as it has been doing. That alternative would effectively eliminate the problem of interest, since the Fed returns its profits to the government after deducting its costs.
Alternatively, Congress could reclaim the power to issue money from the banks and fund its budget directly. The U.S. could pay its bills using debt-free U.S. Notes or Greenbacks, just as President Lincoln did to avoid a crippling debt during the Civil War. Congress could do this without changing any laws. Congress is empowered to “coin money,” and the Constitution sets no limit on the face amount of the coins. It could issue a few one-trillion dollar coins, deposit them in an account, and start writing checks.
Neither option need inflate prices. As long as the money is used to purchase goods and services, the result will simply be to increase demand, increasing production. Prices will not increase until the economy reaches full employment, and at that point any excess in the money supply can be taxed back to the government, keeping prices stable.
The key to all this is that our debt is owed in our own currency – U.S. dollars. Our government has the power to fix its solvency problems itself, by simply issuing the money it needs to pay off or refinance its debt. The U.S. federal debt has been carried on the books since 1835. It has NEVER been paid off during that time but just continues to grow. This has not hurt the economy, which for most of that period has been among the most vibrant in the world. The federal debt IS the money supply. All of our money except coins is created as bank debt. Historically, when the deficit has been reduced, the money supply has been reduced along with it, throwing the economy into recession.
The real problem with a growing federal debt is the interest on it, which WILL become an insurmountable burden if allowed to grow exponentially. Interest paid on the federal debt in 2010 was $414 billion, or about one-half of personal income tax receipts. That’s about as high as we dare let it go. But this problem can be eliminated either by funding the debt through the nation’s own central bank, effectively interest-free; or by the Treasury issuing the money outright, interest-free.
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