{"id":310101,"date":"2025-12-22T12:00:33","date_gmt":"2025-12-22T12:00:33","guid":{"rendered":"https:\/\/www.transcend.org\/tms\/?p=310101"},"modified":"2025-12-17T07:14:26","modified_gmt":"2025-12-17T07:14:26","slug":"compound-interest-is-devouring-the-federal-budget-its-time-to-take-back-the-money-power","status":"publish","type":"post","link":"https:\/\/www.transcend.org\/tms\/2025\/12\/compound-interest-is-devouring-the-federal-budget-its-time-to-take-back-the-money-power\/","title":{"rendered":"Compound Interest Is Devouring the Federal Budget: It\u2019s Time to Take Back the Money Power"},"content":{"rendered":"

16 Dec 2025\u00a0<\/em>–\u00a0Albert Einstein is often quoted as saying that compound interest is \u201cthe most powerful force in the universe.\u201d The quote is probably apocryphal, but it reflects a mathematical truth. Interest on earlier interest grows exponentially, outrunning the linear growth of revenue and eventually consuming everything.<\/p>\n

That is where the United States now stands. The government does pay the interest on its debt every year, but it is having to pay it with borrowed money. The interest curve is rising exponentially, while the tax base is not.<\/p>\n

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Interest is now the fastest growing line item in the entire federal budget. The government paid\u00a0$970 billion in net interest<\/a>\u00a0in FY2025, more than the Pentagon budget and rapidly closing in on Social Security. It already exceeds spending on Medicare and national defense and is second only to Social Security. The\u00a0Congressional Budget Office projects<\/a>\u00a0that interest will reach nearly $1.8 trillion by 2035 and will cost taxpayers $13.8 trillion over the next decade. That is roughly what Social Security will pay out over the same decade (about $1.6 trillion a year). The Social Security Trust Fund is running dry, not because there are too many seniors, but because interest payments are consuming the federal budget that should be shoring it up.<\/p>\n

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Critics accuse the U.S. of \u201cprinting dollars\u201d and exporting inflation, but it is not the government that is printing these dollars.\u00a0Most of the money supply<\/a>\u00a0in modern economies consists of deposits\u00a0created by private banks<\/a>\u00a0when they make loans.<\/p>\n

Meanwhile, the producing economy is suffocating. The\u00a0money supply (M2)<\/a>\u00a0has not shrunk, but it is largely trapped in reserves, financial assets and corporate balance sheets. Households are short of cash, wages are too low and demand is suppressed. What the real economy needs is liquidity directed to productivity, not locked in speculative pools.<\/p>\n

However, every year more of the nation\u2019s income is diverted to bondholders instead of workers, infrastructure or production. This is not \u201cborrowing from the future.\u201d It is tribute \u2014 a structural transfer of public wealth to private creditors for the use of our own money \u2014 money that is legally backed by the full faith and credit of the American people and could and should be created by our representative government.<\/p>\n

Why the Usual Solutions Can\u2019t Stop the Interest Spiral<\/strong><\/p>\n

As the debt burden grows, policymakers are floating a variety of proposals. But none of them addresses the structural problem: the exponentially growing interest on the debt.<\/p>\n

1. Quantitative Easing (QE)<\/strong><\/h3>\n

Some analysts argue that the Federal Reserve will soon be forced back into QE, injecting reserves into banks by buying Treasuries. But even if the Fed bought the entire debt tomorrow, taxpayers would still owe the same trillion dollar interest bill. The payments would simply shift from pension funds and foreign central banks to commercial banks.<\/p>\n

The Fed is\u00a0required to remit its profits<\/a>\u00a0to the Treasury after deducting its costs. But since 2008, it has paid interest on bank reserves held at the Fed (IORB). That tab now runs at more than $100 billion annually and is consuming the Fed\u2019s profits, which the Fed pays to banks instead of remitting them to the Treasury. (For a fuller explanation, see my earlier article\u00a0here<\/a>.) When bonds are transferred to the Fed through QE, the debt service remains; only the postal address changes where the checks are mailed.<\/p>\n

2. Stablecoins<\/strong><\/h3>\n

Pegging government liabilities to crypto tokens also does not eliminate interest costs. Stablecoins merely replace lost creditors with new ones. The government still pays the interest \u2014 only to a different set of holders.<\/p>\n

3. Gold Revaluation<\/strong><\/h3>\n

Fort Knox holds<\/a>\u00a0about 147 million ounces of gold. At statutory book value ($42\/oz), it is recorded at about $6 billion; at current market prices (around $4,000\/oz), it would be worth roughly $589 billion. That\u2019s a dramatic increase, but it covers less than a single year of interest payments. Gold revaluation generates too little to fix the problem.<\/p>\n

4. Asset Sales<\/strong><\/h3>\n

Selling federal land or auctioning off slices of the public airwaves to private carriers can generate one-off proceeds but not recurring flows. They too cannot sustainably cover annual interest obligations.<\/p>\n

5. Austerity and Tax Hikes<\/strong><\/h3>\n

Austerity shrinks GDP and worsens the debt to GDP ratio, and tax hikes cannot keep up with exponential interest growth.<\/p>\n

Restoring the Treasury\u2019s Sovereign Money-Creating Power<\/strong><\/p>\n

It may be time to reconsider a proposal made in the early 1980s, when the idea of minting some large denomination coins to solve economic problems was suggested by a chairman of the Coinage Subcommittee of the U.S. House of Representatives. He pointed out that the government could pay off its entire debt with some billion-dollar coins. The Constitution gives Congress the power \u201cto coin money [and] regulate the value thereof<\/a>,\u201d and it places no limit on the value of the coins it creates.<\/p>\n

Capitalizing on the seigniorage from minting coins \u2014 the difference between their production costs and face value \u2014 is now done routinely by the Treasury. When the Mint produces a quarter, the Fed buys it at face value ($.25), even though it\u00a0costs only about $.12<\/a>\u00a0to make \u2013 a 100% profit. This just needs to be done in much larger numbers.<\/p>\n

In\u00a0legislation initiated in 1982<\/a>, Congress imposed limits on the amounts and denominations of most coins. The one exception was the platinum coin, which a special provision allowed to be minted in any amount for commemorative purposes.<\/p>\n

In 2013, with the endless gridlock in Congress over the debt ceiling, the idea was proposed to capitalize on this loophole and mint some trillion-dollar platinum coins. Philip Diehl, former head of the US Mint and co-author of the platinum coin law, confirmed that the coin would be legal tender.\u00a0He stated<\/a>, \u201cIn minting the $1 trillion platinum coin, the Treasury Secretary would be exercising authority which Congress has granted routinely for more than 220 years . . . under power expressly granted to Congress in the Constitution (Article 1, Section 8).\u201d<\/p>\n

Modern Monetary Theory economists, including\u00a0Warren Mosler<\/a>\u00a0and\u00a0Prof. Randall Wray<\/a>, showed that the coin would work operationally: it would be deposited at the Fed, crediting the Treasury\u2019s account without circulating in the consumer economy. Spending would still require Congressional approval, but financing would no longer depend on bond markets.<\/p>\n

But the coin was dismissed as a gimmick, and the debt ceiling crisis was resolved by simply raising the ceiling. Today, however, with compound interest threatening to devour the entire budget, that solution won\u2019t work. It\u2019s time to look again at a financial innovation employed by our founding fathers to win the American Revolution and the Civil War \u2014 government-issued money.<\/p>\n

Remembering Our Roots<\/strong><\/p>\n

The battle over who has the privilege of creating the money supply \u2014 government or banks \u2014 has raged for centuries. Today, private banks have won that battle. But it hasn\u2019t always been this way.<\/p>\n

Benjamin Franklin was called \u201cthe Father of Paper Money.\u201d He argued before the British Parliament that government issued money had allowed the colonies to escape the burden of debt, to thrive and grow. The king, urged by the Bank of England, responded by forbidding all new issues of paper scrip. The colonial economy then sank into a depression, and the colonists rebelled. They won the revolution, but the power to create money for which they had fought was lost to a private banking oligarchy modeled on the one dominated by the Bank of England.<\/p>\n

In 1862, President Lincoln boldly took back the money power during the Civil War. To avoid exorbitant interest rates on loans from British backed bankers of 24% to 36%, he had the U.S. Treasury print money directly as U.S. Notes or \u201cGreenbacks,\u201d nearly doubling the money supply. The Greenbacks were key to funding not only the Union\u2019s victory in the war but an array of pivotal infrastructure projects, including a transcontinental railway system, land-grant colleges, and the homestead system. Prices did go up, but it was\u00a0due to a lack of supply<\/a>\u00a0rather than increased demand, as the production of consumer goods was diverted to war.<\/p>\n

Unfortunately, Lincoln was assassinated, and the Greenback program was quickly discontinued. Repeated popular attempts to revive it failed. Coins were the backbone of the money supply when the country was founded, but they shrank in significance over the nineteenth century, as bank-created deposits backed by loans grew in importance. By the time modern monetary statistics were available, physical currency had become a minor part of the money supply, and today coins are only a tiny percentage of it.<\/p>\n

Enter the Federal Reserve: Who Does the Central Bank Serve?<\/strong><\/p>\n

In an April 2025 essay titled \u201cHow Private Banking Replaced Public Money<\/a>,\u201d economist Michael Hudson wrote, \u201cMoney has always been a product of the government, but in the late 19th<\/sup>\u00a0century, banking began to be thoroughly privatized and taken out of the hands of any government that controlled it.\u201d The 1913 Federal Reserve Act entrenched this privatization, aligning monetary power with banks rather than democratic government. In a Sept. 2022 interview on\u00a0The Ralph Nader Radio Hour<\/a>, Hudson argued:<\/p>\n

It was the Treasury that organized the internal improvements for America \u2013 the Erie Canal, the roads, all of the spending into the economy. And the Federal Reserve was created to stop social purpose spending by the government, by essentially cutting the Treasury out of the monetary management process. \u2026 The role of central banks is to prevent the government from spending money on social programs and to support the commercial banks in lending money to inflate the asset markets \u2013 real estate primarily, also stocks and bonds to support private raids of corporations. And essentially, because their product is debt, to load the corporate sector down with debt…\u00a0<\/em><\/p><\/blockquote>\n

This bias is evident not just in the interest on reserves that the Fed pays to banks \u2014 profits that should be returned to the Treasury \u2014 but in its use of quantitative easing.<\/p>\n

In response to the 2008\u201309 financial crisis, the Fed bailed out profligate megabanks by issuing\u00a0over $2 trillion in reserves<\/a>, simply by creating the money on a computer screen. Congress, the White House, and the Treasury all acquiesced. But when it was proposed in 2013 that the government bail itself out of its budget woes by minting two trillion-dollar coins, the Federal Reserve said it would not accept the Treasury\u2019s legal tender; and\u00a0the White House again acquiesced<\/a>. Somehow it has become acceptable for the Fed to create money for banks, but not for the Treasury to create money for the people \u2014 although the Constitution explicitly empowers it to do so.<\/p>\n

Inflation Safeguards<\/strong><\/p>\n

Trillion-dollar coins can evoke images of million-mark notes filling wheelbarrows. But as\u00a0Prof. Hudson has observed<\/a>, \u201cEvery hyperinflation in history has been caused by foreign debt service collapsing the exchange rate. The problem almost always has resulted from wartime foreign currency strains, not domestic spending.\u201d<\/p>\n

Critics point to the COVID-19 stimulus checks as proof that increasing the circulating money supply causes inflation. But a cross-country study published in 2024\u00a0by Olivier Blanchard and Ben Bernanke<\/a>\u00a0and\u00a0another by Brookings economists<\/a>\u00a0showed that the 2021\u201322 spike was driven mainly by supply shocks in food and energy, not excess demand.<\/p>\n

Whether minting trillion-dollar coins would inflate consumer prices depends on how the funds are used. Conventional theory says that inflating the money supply inflates prices \u2014 \u201ctoo much money is chasing too few goods.\u201d But the converse is also true: if the new money is invested in domestic manufacturing, construction and infrastructure, it can stabilize prices by expanding productive capacity, increasing supply.<\/p>\n

This principle was demonstrated in a 1997 paper by U.K. Prof.\u00a0Richard Werner<\/a>\u00a0titled \u201cTowards a New Monetary Paradigm<\/a>: A Quantity Theorem of Disaggregated Credit.\u201d Drawing on Japanese data, he showed that credit needs to be split into two separate circulations:<\/p>\n