Originally Posted by dyna mo

The problem with Paul?s suggestion is that simply extinguishing the bonds doesn?t also extinguish the $1.6 trillion the Fed printed to buy the bonds originally, which now is dammed up inside the banks in a huge reservoir of liquidity because the banks have not been lending it out. This excess liquidity would be highly inflationary if (when) it flooded out into the economy as new credit, which it will eventually, if the economy ever recovers. Therefore, the Fed retains those bonds at the ready in its portfolio so that if (when) inflation begins to rise, it will have the bonds to sell back into the market to soak up that excess liquidity it created when it originally printed the money and purchased the bonds.

So, unless Paul?s idea is simultaneously implemented as part of his larger plan to eliminate the Fed altogether ? which is a good idea but unlikely to happen anytime soon ? markets likely would look askance at eliminating the Fed?s bond sponge, which it will eventually need to clean up the inflation mess it has set in motion. Many bond analysts are concerned that interest rates will spike and further exacerbate the federal government?s fiscal position when the Fed has to unload its bonds on the market.