There are six main ways government may acquire funds:
- Fees for services
- Sales of assets
- Grants from donors
- Coining or printing "money"
There appears to be no bar to the Fed simply donating the currency it creates, to the government, without accepting bonds in exchange.
It is, of course, unconstitutional, on state territory, but the reason why it is unconstitutional is instructive. The Constitution delegates no power to Congress to make anything legal tender for the payment of debts, except perhaps on the territory of federal enclaves created under Art. I Sec. 8 cl. 17. Only states may make anything legal tender on their respective territories, and only gold or silver. The Union government may accept other things in payment of debts and taxes to it, and require acceptance of other things in payment of its debts, on its exclusive territory, but despite the wrong Legal Tender Cases, it may not do so on state territory. The acceptance of federal reserve notes as legal tender is only a custom, and one that undermines our constitutional order. That custom needs to end, and it appears it will end soon.
Those two rounds, QE1 and QE2, were done because the sovereign lenders wouldn't loan us the money. Indeed, they have already lent us most of the dollars they hold, and are only acquiring new ones at the rate of about $800 billion a year, which is not enough to cover the $1.7 trillion deficit. Nor are domestic lenders going to be willing to buy bonds. First, all they are holding is about $1.5 trillion, which they need to stay in business, and second, it would take interest rates of more than 20% to get them to loan it, especially if they lose confidence that they would get paid back in currency that is still worth anything.
My model indicates the Fed will soon begin inflating the currency at a rate of 20%, rising to 40% by mid-2012, at which point it will go runaway, quickly ascending to rates that rival what happened in Weimar Germany or Zimbabwe. Social Security and Medicare checks might still go out, but the recipients won't be able to buy anything with them. Eventually, the checks will cease because there won't be any more government workers working to issue them.
I try to explain all this in a few animated videos:
So you want to raise the debt ceiling?
So you want to create more jobs here? (Part 1)
So you want to create more jobs here? (Part 2)