Paul Ryan’s plan won’t succeed without legislation to prevent the Federal Reserve from monetizing the national debt.
No man in America is a match for House Budget Committee Chairman Paul Ryan on the federal budget. No congressman in my lifetime has been more determined to cut government spending. No one is better informed for the task he has set himself. Nor has anyone developed a more comprehensive plan to reduce, and ultimately eliminate, the federal budget deficit than the House Budget Resolution submitted by Mr. Ryan on April 5
But experience and the operations of the Federal Reserve system compel me to predict that Mr. Ryan’s heroic efforts to balance the budget by 2015 without raising taxes will not end in success—even with a Republican majority in both Houses and a Republican president in 2012.
Why? Because the House Budget Resolution fails to reform the Federal Reserve system that supplies the new money and credit to finance both the budget deficit and the balance-of-payments deficit. So long as the Treasury deficit can be financed with discretionary money and credit—newly created by the Federal Reserve, by the banking system, and by foreign central banks—the federal budget deficit will persist.
It is true that federal deficits will rise more or less with the business cycle, leading previous deficit hawks such as Sens. Phil Gramm and Warren Rudman to believe that if we just reined in federal spending and increased economic growth we’d have a balanced budget. Indeed, for two generations, fiscal conservatives and Democratic and Republican presidents alike have pledged to balance the budget and bring an end to ever-rising government spending.
They, too, were informed, determined and sincere leaders. But they did not succeed because of institutional defects in the monetary system that have never been remedied…