I'm not talking about reducing debt in general - just the debt to the Fed. I'm talking about decreasing the money supply. Any debt paid back to the Fed would reduce the money supply by removing that money from circulation.
For over a decade and a half, we have been financing government budget deficits by printing money - specifically, the Fed issuing new money out of thin air and lending that money to Congress. This is why interest rates have remained so low over that period. Government doesn't have to compete for dollars to fund its excesses. It simply has the Fed manufacture dollars for it.
In today's market, if the government had to sell $2 trillion in bonds every year just to fund itself, interest rates would end up in the double digits to raise that much cash. So the Fed issues money (i.e. Qualitative Easing) to cover that gap while allowing the rest of the economy to fund itself, keeping interest rates low. Of course this has a negative effect because it devalues current dollars. Instead of raising taxes to cover that gap (a gap impossible to fill), it instead steals value from anyone holding dollars.
The only way to reverse that is to remove those added dollars. And government can do this by removing dollars from circulation and giving them back to the Fed. Or better yet, piling up several trillion dollars in the middle of a field somewhere and setting it on fire.
I think you’re oversimplifying how this works.
First, the Federal Reserve does not “lend money to Congress.” The Treasury issues bonds to the market. Banks, pension funds, foreign investors, and institutions buy them. The Federal Reserve may later purchase some of those bonds on the secondary market through Quantitative Easing, but that is not the same as directly financing Congress. The structure matters.
Second, Quantitative Easing largely created bank reserves, not piles of spendable cash circulating through the economy. Those reserves sit within the banking system. From 2010 to 2019, we had years of Quantitative Easing and still very low inflation. That alone shows that expanding the Federal Reserve’s balance sheet does not automatically translate into consumer price inflation. Inflation happens when broad money and credit expand into the real economy faster than goods and services can keep up.
Third, yes, if the Treasury ran sustained surpluses and paid down debt held by the Federal Reserve, reserves in the banking system would decline. That would reduce liquidity. But to do that, the government would have to tax more than it spends. That removes income from the private sector. Done aggressively, that doesn’t just lower inflation. It risks recession.
Fourth, the idea that interest rates would be in the double digits without Federal Reserve purchases is speculation. During the 2010–2019 period, Treasuries were heavily purchased by private and foreign investors even when Quantitative Easing slowed. Rates were low globally because of demographics, high savings, and weak growth. It was not solely the Federal Reserve suppressing them.
Finally, shrinking the money supply in a highly leveraged economy increases the real burden of debt. That is how you create credit stress. That is how downturns begin.
If the goal is stable prices, the solution is sustained fiscal discipline and steady monetary policy over time. Dramatically contracting the money supply by “burning dollars” sounds decisive, but in practice it can break the system faster than it fixes inflation.
