Debt defaulting to yourself?

Ron Paul has some good ideas, some crazy ideas, and some that just make you tilt your head and go “Uh… yeah!… wait, uh… no! … huhwhat?”

He recently introduced HR 2768 which is intended to immediately eliminate $1.6 trillion from the federal debt.

The text of the bill isn't available just yet but here is the gist of the idea

• The Treasury owes the Federal Reserve about $1.6 trillion
• The Fed essentially makes the investment money out of thin air
• The Treasury then has the right to make the interest payment money out of thin air and cancel it all out.

Its an interesting idea. It essentially would be a bold statement that the Fed is a fake customer to the Treasury and so we don’t accept any deals with them as real. They sort of are a made up customer since they can make up money to buy things.

Does the treasury bond interest rate crash if we default on bonds, but only on those which were never actually issued to anyone in the real market? Can the Fed continue to use its purchasing power to artificially inflate interest rates?

The big question which relates more to his candidacy – Is that kind of uncertainty better or worse than the kind we have now?