It is an interesting idea.
I believe the flaw is there if you look at the Feds balance sheet. It cannot "erase" an asset, U.S. Treasuries, without "erasing" some liabilities. That a balance sheet must balance is a law of mathematics that even the Fed cannot change.
The Feds liabilities are basically debts it owes to somebody; and thus those liabilities are assets to those somebodies, like foreign countries, district banks, other banks, citizens indirectly. Once the foreign countries see that somebody is going to get screwed,they will sell their U.S. Treasuries, interest rate soar and the dollar will collapse. If the fed "erases" the liability it has to US banks, they lose assets, there is a run on the banks and the banking system and the economy will collapse.
Thus the Fed just leaves its Treasuries on its books never planning to collect anything, just like all the other near worthless assets it now has on its books. Why declare that they are worthless which is exactly what sayings the US government is not bound by them is.
If the Fed says that the US government is not bound by the treasuries, it is equivalent of the Fed declaring bankruptcy, namely we no longer have enough assets to meet our liabilities.
Either the Fed monetizes the debt or the Fed and country default on the dollar, but why speed it up by making a formal declaration. |
