Obama and the rest of the Democratic leadership insist that the GOP is holding the world economy hostage: unless the Democrats agree to gut social services, the GOP will force the U.S. to default on its debt.

But, as economist James K. Galbraith has noted:

US debt consists of bonds issued in US dollars [...] How can the US possibly default on its own currency? The obligation is in nominal dollars, which is to say when the bond retires, the US issues a check in dollars to cover it. [...] As long as there is diesel fuel to power up the back-up generators that run the government’s computers, they will have the money to back their own bonds.

In fact, the Federal Reserve already owns two-trillion dollars of the national debt (Treasury bonds) that it bought up with money that it virtually printed (e.g., QE1 and QE2). The Fed prints money by incrementing a bank’s balance in its account with the Fed in exchange for some bonds. Instantly that bank has more money to put into circulation through lending.

So, in essence, the Fed has already paid off two trillion of the national debt with freshly printed money. But, unfortunately, Treasury bonds held by the Fed are technically part of the national debt. So, how can the Treasury buy them back from the Fed without raising taxes and/or selling more bonds?

As Beowulf and letsgetitdone have repeatedly pointed out (e.g., here), although the Treasury can’t print money, it can mint money. It could, for instance, mint coins with a face value of $100 billion each and buy those two-trillion dollars worth of bonds from the Fed in exchange for twenty of those coins. And, doing so would not put another penny into circulation.

If it’s that easy, why are the Democrats wringing their hands and bargaining away Medicare or Social Security with the GOP? Because they face the fundamental problem of all American politicians: how to stay “bought” by their sponsors from the 1% without alienating the rest of their constituents, i.e., how to blame the other party. “Those GOP devils made me do it.” Whatever comes out of these negotiations will please the 1%, screw the 99%, and give the politicians cover.

Remember that just before his inauguration, Obama promised to make “entitlement reform” a hallmark of his administration; per the Washington Post of January 18, 2009:

President-elect Barack Obama pledged yesterday to shape a new Social Security and Medicare “bargain” with the American people, saying that the nation’s long-term economic recovery cannot be attained unless the government finally gets control over its most costly entitlement programs.

Everyone at FDL understands that “reshape the Social Security and Medicare ‘bargain’ with the American people” is Peterson-speak for screwing us over. Obama’s sponsors, Pete Peterson, Robert Rubin, and other members of the 1%, consider us 99%ers to be an unfair drag on their economy.

It is our duty to blow Obama’s cover on this debt-limit doomsday kabuki/charade. Force him and the rest of the Dems to take full heat for selling us out. All Geithner has to do is buy those Treasury bonds held by the Fed and burn them, thereby shrinking the national debt by two trillion dollars without putting another penny into circulation.