Both Fiscal and Monetary Policy

In Washington, D.C., the saga of the Federal debt ceiling, resulting from ever growing budget deficits, continues. Unfortunately, the story that fiscal policy alone is not enough to solve this problem remains largely untold.

On March 16, 2006, freshman Senator Obama pointed out, “The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies.” And, as Democratic Senate leader Reid said just a short while before Obama spoke that same day, “President Thomas Jefferson said: I place economy among the first and most important government virtues, and public debt as the greatest of the dangers to be feared.”

As we near yet another vote on increasing the debt ceiling, we should keep in mind 2 facts: (1) not increasing the ceiling does not equate to a default, and (2) it is a myth that the Federal government has never defaulted in the past.

On the fiscal policy front, a number of serious proposals have been made to address the budget and debt problems, such as Dr. Ron Paul’s Plan to Restore America and Dr. Rand Paul’s bill S.162 introduced in 2011. (There are a number of other proposals, e.g., the Paul/DeMint/Lee budget, the Tea Party Debt Commission budget, the Cato Institute budget, and the proposals published by the Heritage Foundation mentioned in my earlier article.) Also see Congressman Broun’s bill H.R. 2409 from 2011 to lower the debt ceiling.

But that of course leaves out the monetary policy. Previously, I have pointed out that we cannot honestly address the debt problem unless we follow the 3 part solution offered by Warren T. Brookes in the 1986 Heritage Foundation symposium on cutting the budget:

  • returning to the gold standard (as Bill Clinton has pointed out, going off the gold standard has had a number of deleterious effects),
  • allowing for competing currencies, and
  • abolishing the Federal Reserve.

Congressman Paul Broun has introduced legislative proposals in the House that would address these issues by following most of the solutions proposed by Brookes.

An additional measure would be the passage of a modified version of Dr. Paul’s bill from 2011, H.R. 2768 -- the Debt Crisis Resolution Act, which would “cancel public debt held by the Federal Reserve System and ... lower the public debt limit by an equal amount.” I would modify the original bill to make sure that the second part of its stated purpose is carried out. My addition to the original bill would be a new section:

SEC. 3. LOWERING OF THE PUBLIC DEBT LIMIT

(a) Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection; and inserting in lieu thereof an amount equal to the difference between the stricken out dollar limitation, and the amount equal to the amount of obligations described in Section 2(a) of this Act.

(b) The amendment made by Section 3(a) of this Act shall take effect immediately upon the execution of Section 2 of this Act.

While many “deficit hawks” focus on “entitlements,” the untold story continues to be monetary policy, including the potential $1 trillion per year interest payment debt bomb.

We will soon see who the true “deficit hawks” are.

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