Memo to Congress: Don’t Increase the Government’s Debt Limit!

By L. Randall Wray

In a piece written for CNN, Senator Evan Bayh rails against the growing federal government budget deficit. He warns that next month the Treasury will ask Congress to raise the debt limit from its current $12.1 trillion, and promises that he will vote “no”. It is time, he argues, for Congress to stand up for our nation’s future by creating a bi-partisan debt commission that would finally put an end to “unsustainable” deficit spending.

The Senator goes on:

When President George W. Bush took office in 2001, our public debt amounted to 33 percent of our economy. Today, it is 60 percent of our gross domestic product. If we do nothing, our debt is projected to swell to over 70 percent by 2019. To put those numbers in perspective: If you divided the debt equally among all Americans, every man, woman and child living in the United States today would owe more than $39,000.

I presume the Senator has got his math correct, but there is a glaring error in his English that can be corrected by substituting an “n” for an “e”: If you divided the debt equally among all Americans, every man, woman and child living in the United States today would own more than $39,000. Government debt is a private asset. You and I do not owe government debt, we own it. Indeed, the only source of net dollar-denominated financial wealth is federal government debt.

The good Senator continues, comparing his proposed debt commission with an earlier successful bi-partisan effort:

There is precedent to create this type of commission with real teeth. President Ronald Reagan created a commission, chaired by Alan Greenspan, to shore up Social Security in the early 1980s.

That commission hiked payroll taxes to transform Social Security from a “pay-as-you-go” system (payroll taxes collected were matched to current year spending) to an “advanced funded” system that accumulated “Trust Fund assets”. In truth the Trust Fund is nothing but an accounting gimmick in which one arm of government (the Treasury) owes another arm of government (Social Security), with workers and their firms saddled with payroll taxes that are a third larger than Social Security spending. Like almost everything else Alan Greenspan did, the Social Security commission was a monumental failure and its actions were completely unnecessary. All Social Security payments can be made as they come due whether the Trust Fund holds Treasury debt or not, and no matter how much “revenue” the payroll tax collects. Like the bowling alley that credits points when pins are knocked down, the Treasury cannot run out of “points” credited to the accounts of pensioners.

The anti-deficit mania in Washington is getting crazier by the day. So here is what I propose: let’s support Senator Bayh’s proposal to “just say no” to raising the debt ceiling. Once the federal debt reaches $12.1 trillion, the Treasury would be prohibited from selling any more bonds. Treasury would continue to spend by crediting bank accounts of recipients, and reserve accounts of their banks. Banks would offer excess reserves in overnight markets, but would find no takers—hence would have to be content holding reserves and earning whatever rate the Fed wants to pay. But as Chairman Bernanke told Congress, this is no problem because the Fed spends simply by crediting bank accounts.

This would allow Senator Bayh and other deficit warriors to stop worrying about Treasury debt and move on to something important like the loss of millions of jobs.

19 Responses to Memo to Congress: Don’t Increase the Government’s Debt Limit!

  1. He said he will vote no unless Congress does something credible to address our future entitlement program, which no serious person does not believe is a problem.

  2. But then they'd have no useful fiction to limit government spending. I doubt they'll deny the debt ceiling increase.

  3. The only problem our entitlement programs might have in the future is that our economy cannot produce enough goods and services to fulfill demand.Note that Congress already has the power to reduce benefits for these programs at any time.The problem that any serious person must see is that our economy cannot continue to support an inefficient health care system, which is driving costs for both public and private programs.

  4. And China would either have to hold those excess dollars in non-interest bearing accounts, or spend them, eventually returning the dollars to the US and destroying the peg.Yes, please vote No on increasing the debt ceiling.

  5. Mr. Wray,I have a question about this. Let us assume the government stops issuing treasury securities entirely and the fiscal deficits accumulate as excess reserves and The Fed pays a near zero deposit rate on overnight reserves to the banks. Since the government deficits are the mirror image of the non-government sector surpluses as you note, the non-government sector will accumulate very large savings in short order and these will appear as deposits in the banking system. Presumably the banks cannot pay anything significant on those deposits given the overnight rate is near zero. If there are no government securities to buy what does this mean for the non-government non-bank sector? Must they buy riskier financial assets since secure governments assets are increasingly unavailable? In addition, the excess reserves in the banking system remain no matter what, so does that mean that depositers are stuck there and have no outlet for their savings other than zero rate bank deposits? Sorry for the questions. I'm trying to understand the consequences of this policy.Keith Newman

  6. Keith: good question. The Fed's overnight rate sets the base interest rate; it is effectively the shortest term, riskfree interest rate. Other rates set relative to that: a premium for risk, and a premium for holding longer maturities. So the quick answer is: so long as Fed keeps its rate on reserves very low, all other rates will set relative to that very low rate, hence in general will be lower than they would otherwise be (ie when the fed funds target is higher). That is Keynes's "euthanasia of the rentier".Anon/Pebird: Yes, the only problem we face with an aging society is the possibility that we might not be able to produce plus import what is necessary to provide them with a share of output. It has nothing to do with finance. Govt can make all payments as they come due. I have explored both SocSec as well as Healthcare in previous blogs on this site. LRWray

  7. This posted by Greg in GeorgiaMr WrayThanks for the post. I am just becoming familiar with the MMT/Chartalist thinking of yourself, Billy Mitchell and Warren Mosler but I think I'm beginning to understand. Its not that hard it just requires inverting almost everything you hear on Fox News or CNN; "Government deficits mean poor house" (No, govt deficits mean prosperity), "The Chinese might come asking to be paid back" ( No the Chinese purchased bonds willingly, we will gladly pay them whenever they want) "The US is gonna run out of money" (No we can never run out of our own money)I do have a question though. The debt ceiling and the deficit are not the same, true? So what exactly is it they will vote on? Sometimes it sounds like the deficit and other times the debt ceiling. I hope our elected officials know the difference.

    • In common conversation, they mix the terms up all the time because they believe the two are related.
      Deficit spending means adding money to the economy, other than bank credit money (as Steve Keen describes).
      Debt means banks are purchasing more T-bills. Under current rules, Tsy is required to sell T-bills at auction to middleman bankrupt cockroach-invested Too Big To Fail insolvent banks, which are backstopped by the Govt.

      In common language, Tsy is required to “borrow” money from broke banks that depleted their capital on high risk speculative deals and guaranteed-to-fail mortgages and mtg securities.

      As Wray has pointed out, the Tsy is forbidden to “borrow” directly from its own govt bank, the Fed.
      On the other hand, banks don’t need to HAVE money in their vaults or reserves to “LEND” to the Govt. Banks can write a bouncy check to the Tsy and the Fed will cover that.

      So banks can “invest” in the point spread with borrowed money, and banks can borrow money from ONE wing of the Govt (central bank) to lend money to another wing of the Govt (Tsy), money that the Tsy never NEEDED to borrow in the first place, except per current rules set by Congress.

  8. Sorry, but just to be sure : The actual excess reserves sitting in bank deposits are the non-government's savings resulting fom government deficits. If no government securities are issued to drain them, am I correct in believing that that quantity of deposits has nowhere to go except to remain in these deposit accounts?Thanks.Keith Newman

  9. Hi anon: Yes I learned that very early in my studies of economics: if you invert it you usually have it about right.Debt is a stock, deficit is a flow that adds to stock. Flow of deficit creates private sector income flow, net of consumption. We call it "saving" (income not consumed). This accumulates as a stock of debt held in portfolios; we call it "savings" (accumulation of net dollar denominated financial wealth). It is like the difference between your income ($10 per hour, $400 per week) and your financial wealth ($500 in your bank account plus the 20 bucks in your pocket).LRWray

  10. Hello LRW, I linked across from WCI blog, but I have been long aware of your ideas to some extent from your book, and I do believe you offer some useful insights.Nevertheless, I must say that, while I accept that your argument that government can pay for its expenditure in reserves instead of selling bonds works in principle, I doubt that it would be possible to apply on any significant scale in practice. The non-state's willingness to hold non-interest-bearing state debt like reserves is not sufficiently large to allow the state to pay for much (employment, for example) that way before the terms of trade turn badly against it. In short, I think that it would lead to an unacceptably high rate of inflation. The stock of base money (which may be held either as reserves or currency) is typically a few percent of GDP, so even a modest increase in state spending would lead to a relatively large proportionate increase in the stock of base money, which could be expected to bid up prices correspondingly.Perhaps the use of base money could be effectively increased by nationalising the provision of current accounts held at banks. Is that what you have in mind? Or maybe the state could increase the holding of base money by paying interest on reserves, but in that case it might as well sell bonds anyway.To give some idea as to what potential you see for reserves-financed state spending, I would be interested to know what level of inflation you would consider tolerable.

  11. For more on creative ways for the treasury to issue money see:

  12. Rebel: you misunderstand. What I presented is a description of actual practice, not a proposal. Check the data. The Fed's balance sheet is now $2 trillion, more or less equal to total reserves and currency outstanding, and voluntarily held.If it were not voluntarily held, overnight rates fall below target and Fed drains the excess. LRWray

  13. You have obviously not heard that the global central bankers are demanding the necessary reduction in government deficits in order to provide continuing confidence to the global capital markets that somebody, somewhere knows exactly what is happening and will continue the necessary financial life support.And thus your notion that the government can just create a proper measure of new money and pay it into existence in order to finance something like a living wage for all Americans is both preposterous and heretical.Very well done.

  14. LRWray,In that case, you are not really addressing Senator Bayh's concern, which is for the future. Low short term interest rates may be acceptable now while the US economy is depressed, but assuming the US economy does pick up, the market pressure will be for interest rates to rise. Then, if interest is still being paid on reserves – which means that they are effectively floating rate treasuries – to encourage them to be held, the interest cost presents the same problem as if the deficit is funded by selling treasuries. If not, then I contend that the demand for non-interest-bearing reserves is just too small to support a significant amount of deficit spending without causing inflation. Do you disagree with my logic or my contention that funding deficits via non-interest bearing reserves would be inflationary, or do you consider inflation to be acceptable?

  15. Rebel: Yes I disagree and I think you still misunderstand me. Treasuries are reserves that pay interest (with different maturities). The market can "pressure" for higher rates all it wants. Govt doesn't have to pay them. If they don't want Treasuries, let them eat reserves. Do you seriously believe we face a situation in which bond holders or sellers of products or services to the US govt are going to refuse dollar credits to their bank accounts? LRWray

  16. Just eliminate the law requiring the issuance of T-securities to equal the deficit. No T-securities = no debt = no ignorant debt debates.T-securities became obsolete in 1971, when we went off the gold standard and became Monetarily Sovereign ( ).Those who do not understand Monetary Sovereignty do not understand economics.Rodger Malcolm Mitchell

  17. Nixon met at Camp David with a bunch of wonks including PETE PETERSON, and they ended the Gold Std so foreign countries and foreign investors would not be able to demand Gold from the Treasury. (Pete Peterson MUST know that he’s wrong, which means he’s a big fat liar.)

    Nixon radically UPGRADED the USA and Global monetary and financial system to one where govt money and bank money amounts to “points” — like at a bowling alley — a genuine historical-consistent system of “money” going back 1000′s of years of civilization, not a tangible physical commodity that amounts to a psuedo primitive BARTER system.

    Bowlers NEED points and they COMPETE for points. The bowling alley does not need to “HAVE” points and never needs to “borrow” points from other bowling alleys or bowlers.

    If the bowling alley decides to have Senior’s Day on Wednesday and give FREE POINTS to anyone over 60, that does not cause a “deficit crisis” in points. The “points vault” in the back room of the bowling alley does not get depleted, because THERE IS NO POINTS VAULT.

    Mostly what I see Liberals screaming about is “protect that S.S. Trust Fund from being looted by the Govt” (and other recipients), when the whole crux of that fund is “investing in Treasury Bonds”.

    That’s what SS is SUPPOSED to do (today), because a Securities acct is a SAFE storage place. That’s why Banks, Corps, Countries, and Rich People convert their surplus Dollars to Treasuries, because it’s a SAFE place to park money. Govt Securities are fully guaranteed by the United States Constitution, Amd 14, and SHALL NOT BE QUESTIONED. (edit: so are Reserves)

    The only context to claim the Govt has been “looting” the SS Trust fund — thereby arguing that Soc Sec is “broke” and benefits and Medicare must be slashed — is the question of whether that Trust account balance of nominal “points” is counted for political reasons as part of Govt “general revenue” and politically-subtracted from the announced “deficit” figure — or if those Trust Fund “points” are not subtracted and the announced deficit figure is bigger.

    This all starts with the assumption that a “deficit” of points at the bowling alley (govt) is BAD!
    This starts with the assumption that the job of a bowling alley is to SAVE points in the back room “points vault” and prevent bowlers from getting too many points. (Install pins that are more dead? Warp the lanes?)

    This is the assumption that the Govt’s job is not “public purpose” of providing sufficient “points” to ALL players to play in the economy, the Wealth of Nations as a whole (Adam Smith was obviously a Red Commie!!!), and it assumes that Govt must TAKE points from some people to GIVE points to other people — the myth of “Tax and Spend Liberals”.

    We should UPGRADE LIBERALISM all the way to 1971, so Dems can be “Cut Tax and Spend More Liberals”, or rather Libs could INFLICT taxes on behaviors they choose to punish, such as speculative looting of business and consumers and workers.

    “money is the measure of value, but to regard it as having value itself is a relic of the view that the value of money is regulated by the value of the substance of which it is made, and is like confusing a theatre ticket with the performance”. – Keynes

  18. You and I do not owe government debt, we own it.

    Egregiously wrong. It is a future tax liability for taxpayers, and “we” don’t own it, the bondholders do.