Anything, including debt certificates, may be used as currency if it is accepted as such by most players in the market. The key to that acceptance is that the supply of it track the growth in economic production. Not the GDP, which calls it growth if two people who produced for themselves start trading the same products with one another without increasing the net amount produced. Arguably, it should also not include services, such as entertainment, that do not contribute to production. In other words, production of capital rather than consumption.
The problem with debt certificates is that there is no natural mechanism to hold down their supply, other than periodic market collapses. On the contrary, there are strong incentives on the part of both the public and private sector to magnify the supply of debt certificates. See what happened with securitization, which is still going on.
Note that congress has no constitutional authority to make anything legal tender on state territory. Only the states have that authority, and only to make gold or silver coin legal tender there. Congress may make federal reserve notes legal tender on federal territory, like the District of Columbia or various military bases and port facilities, under Art. I Sec. 8 Cl. 17, but nowhere else. It can also accept FRNs for payment of debt to the federal government. What it may not do, contrary to the Legal Tender Cases, is compel anyone outside exclusive federal enclaves to accept FRNs or anything else in payment for debts. Every state that accepts FRNs as legal tender is violating the Constitution.
When the Federal Reserve creates "money" out of thin air and uses it to buy Treasury bonds to finance government expenditures, as it did in QE1 and QE2, it is doing several things. One is to use focused inflation to prop up prices of various investment vehicles, such as housing, bonds, stock, and securitized debt, which would otherwise fall. Contrary to popular belief, rising prices of oil and food are not the result of it, not yet. That will come, but those price rises are due to reduction in supply of oil and food, not an increase in the supply of currency.
There is a close relation between this kind of government financing with debt certificates and unemployment. Opponents of deficit reduction by reduced government spending fear the unemployment of government workers, and that would indeed happen. However, a debt-finance deficit also involves the creation of the money that goes to foreign governments ("sovereign wealth funds") that loan the money back to us, but also accumulate FRNs that drives currency exchange rates that favor the sale of their products to us, and the offshoring of U.S. jobs to them. For every government job maintained by continuing the deficit, there is a destruction or non-creation of at least five jobs in the private sector, about two off-shored and the rest layoffs or never created.
The entire federal deficit comes from only a few key programs: Social Security, Medicare, Medicaid, unfunded government pensions, farm subsidies, and military spending. In trying to sustain the elderly, the ill, farmers, and our policing of the world, we are now at the brink of bringing down Western Civilization. This is not just a U.S. problem. The entire world has been following our lead and will fall with us. Within a year of the collapse, we may see unemployment of 90% everywhere, riots, looting, destruction of productive facilities, and hundreds of wars everywhere, some of them nuclear.
That outcome is not worth sustaining the elderly or the ill. If we have to choose, it is better to let them all die. Better them than most of the rest of the people on Earth. Those are our choices. Too many people are in denial that those are our choices. We will soon see, because at this point it is probably too late to prevent it.
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