Why Does Uncle Sam Borrow?

By Dan Kervick

The Unites States government operates a fiat currency system.  The government is therefore the monopoly supplier of the final means of payment in our dollar-based economy, and is ultimately responsible, in one way or another, for any net increase in dollar-denominated financial assets in the private sector.

And yet, we continue to hear bipartisan expressions of fear and angst about the budget deficit and the national debt.  Both major parties seemingly agree that we are “out of money”.   They wrangle over various competing approaches to shrinking the gap between tax revenues and government spending.  They appoint commissions to study the government budget and recommend some combination of slashed spending and higher taxes in order to close that budgetary gap.   They warn us that we will transform ourselves into banana republic status if we do not urgently address our public debt problems.

This situation should be perplexing.  Why does a government that is the issuer of the national currency have to borrow that currency back from the public to which the currency is issued?   And how could such a government ever experience the kinds of budgetary squeezes and debt burdens that can pose severe problems for households and businesses?

I wish to make a radical suggestion:  Public borrowing is an outdated practice, and we could dispense with it entirely.   Borrowing by the public treasury and the accumulation of government debt obligations are legacies of the era that preceded the development of modern fiat currency, an era when governments were primarily users of traditional means of payment that lay outside their control, and not the producers and issuers of the primary means of payment.   That pre-fiat era is now dead in the US, and the chief remaining role of government borrowing in our time is to bamboozle the public, and to obscure the true nature and effects of government fiscal and monetary operations under a bewildering maze of bookkeeping ink and financial legerdemain.  Eliminating public borrowing, and replacing it with operations that are simpler, more direct and more transparent, would advance the cause of informed democratic debate over public spending and taxation.  Above all, the change would eliminate needless obscurity and confusion and help us all understand exactly whose bread is being buttered by the budgetary decisions made by politicians.

I will build up my argument against public borrowing in stages, through a series of thought experiments.  Let’s begin by imagining a country that operates differently from our own.  In this fictional country, the public treasury borrows directly from the central bank, but never borrows from any private lenders.  The central bank just deposits the borrowed amount into a special treasury account out of which the treasury spends, and also charges the treasury 5% interest on its borrowing.  Loans issued on any given date come due on the same date the following year, and must be repaid in full on that date, both principle and interest.

Imagine that the country’s GDP at some starting date is $2 trillion.  Over the next twenty years, the borrowing and repayment operations go like this:

On July 1st of Year One the treasury borrows $100 billion from the central bank.   It spends the entire $100 billion over the course of the year.

On July 1st of Year Two, the treasury borrows $205 billion from the central bank.   It then uses $105 billion of the borrowed funds to pay off the previous year’s debt entirely – $100 billion of principle and $5 billion in interest.  It then spends the remaining $100 billion over the course of the year.

On July 1st of Year Three, the treasury borrows $315.25 billion from the central bank.   It uses $215.25 billion of the borrowed funds to pay off the previous year’s debt entirely – $205 billion of principle and $10.25 billion in interest.   It then spends the remaining $100 billion over the course of the year.

This recurring process goes on for twenty years, so that finally …

On July 1st of Year Twenty, the Treasury borrows $3,306,000,000,000 from the central bank.   It uses $3,206,600,000,000 of the borrowed funds to pay off the previous year’s debt entirely- $3,053,900,000,000 in principle and $152.7 billion in interest.  It then spends the remaining $100 billion over the course of the year.

Let’s suppose that GDP grows by 5% per year, starting at the previously mentioned figure of $2 trillion in Year One, so that by Year 20, GDP is $5,053,900,000,000.   That means that in Year Twenty, the debt has grown to about 65.43% of GDP.

In this first example – call it “Example A” – government spending never increases.  It remains at $100 billion per year.  Thus it declines from 5% of GDP to just below 2% of GDP.   Let’s consider, then, a more realistic and slightly modified example – call it “Example B” – where annual government spending grows by 5% per year and so keeps space with GDP.  In this revised example, spending in Year Twenty is $253 billion, and the public debt in Year Twenty is 100% of GDP.

We can make a few immediate observations about these imaginary scenarios in our fictional society.  First, the growing debt numbers in these examples might seem very scary, but they are effectively meaningless.  The debt consists entirely of money owed by one part of the government to the other.  The central bank produces increasingly large amounts of money each year to extend to the treasury, and the next year almost that entire amount is delivered back to the central bank, financed entirely by more borrowing from the central bank.  But year after year, only modest amounts are actually spent into the economy: in Example A, $100 billion is spent into the economy each year, and in Example B amounts ranging from $100 billion to $253 billion are spent.  There is never any government solvency issue, because the debt is simply owed from one part of the government to another, and the money generated to fund the borrowing and spending is directly created by the central bank, a creature of the government itself.

Second, notice that there is something absurdly convoluted about the whole procedure.  The exact same functional operation could be accomplished by the central bank if it simply credited the desired amounts to the treasury each year, with no borrowing and no debt repayment.   In Example B, it would credit $100 billion in Year One and $253 billion in Year 20.  No debts would ever be booked, and no additional intra-governmental payments would ever be made.

Third, would the spending be inflationary?  It hardly seems so.  Even in Example B, spending remains steady at 5% of GDP, and the government is only injecting a fixed proportional level of new monetary assets into the economy each year, no more nor less than the overall rate of economic growth.

Suppose the central bank, in a fit of whimsy, increased the interest rate on its loans to the treasury to 25%.  In Year Twenty, then, assuming the treasury’s spending is no different than it was in Example B, the amount borrowed would be 832% of GDP!   But again that number has little inherent significance.  The effect is still exactly the same as if the central bank had just credited an amount equal to 5% of GDP to the treasury.  Each year the central bank lends the treasury an increasingly massive amount of money, but each year the treasury sends almost the entire amount back to pay off the debt of the previous year.  It is a little game they play.  The large sums are never spent into the economy to bid for goods and services, in a manner that might generate inflation.  They are just passed back and forth as ledger entries between two government agencies.

Now let’s modify the thought experiment by changing this first scenario slightly.   Assume that there is a law in our fictional country prohibiting the treasury from borrowing directly from the central bank.   The treasury can only borrow from private sector lenders.  However, the central bank can purchase any financial assets it likes from private sector owners of those assets, including debt assets issued by the treasury.   And the treasury and central bank can therefore work around the legal restriction by relying on those private sector intermediaries.

To simplify, suppose they rely on a single, large private sector dealer.  Each year, the dealer loans the treasury the entire amount the treasury desires to borrow.  The central bank then purchases the entire debt from the dealer at a price somewhat greater than the amount loaned, but less than the dealer would receive if they were paid the next year at the official interest rate.   For the sake of simplicity, let’s assume that the central bank pays the dealer exactly half the rate of interest the dealer would have received by holding the debt to maturity.   For example, if the dealer loans the treasury $1,000 at 5% interest, the central bank then purchases that debt for $1,025.  The dealer thus makes a profit of $25, and the treasury now owes the central bank $1,050.

So now let’s take another look at Example B above, but this time we will modify the numbers to take account of these new procedures:

On July 1st of Year One the treasury borrows $100 billion from the dealer at 5% interest.   The central bank then purchases that debt for $102.5 billion from the dealer.  The dealer has made a profit of $2.5 billion on the total transaction.  The treasury spends the entire $100 billion that it borrowed over the course of the year.  It owes the central bank $105 billion as a result.

On July 1st of Year Two the treasury borrows $210 billion from the dealer at 5% interest.   The central bank then purchases that debt for $215.25 billion from the dealer.  The dealer has made a profit of $5.25 billion on the total transaction.  The treasury spends $105 billion of the borrowed amount over the course of the year, and uses the remaining $105 billion to pay off the previous year’s debt now owed to the central bank.  Due to the new borrowing, it now owes the central bank $220.5 billion.

On July 1st of Year Three the treasury borrows $330.75 billion from the dealer at 5% interest.   The central bank then purchases that debt for $339.02 billion from the dealer.  The dealer has made a profit of $8.27 billion on the total transaction.  The treasury spends $110.25 billion of the borrowed amount over the course of the year, and uses the remaining $220.5 billion to pay off the previous year’s debt now owed to the central bank.  Due to the new borrowing, it now owes the central bank $347.29 billion.

This recurring procedure again goes on for twenty years, so that finally …

On July 1st of Year Twenty the treasury borrows $5,053,900,000,000 from the dealer at 5% interest.   The central bank then purchases that debt for $5,180,250,000,000 billion from the dealer.  The dealer has made a profit of $126.35 billion on the total transaction.  The treasury spends $252.7 billion of the borrowed amount over the course of the year, and uses the remaining $4,801,200,000,000 to pay off the previous year’s debt to the central bank.  It still owes the central bank $5,306,600,000,000 as a result of the new borrowing.

Now how have these new procedures changed the fundamental economic outcomes in our fictional society?  As far as the treasury goes, nothing has changed.  The treasury still spends the same amount each year, and it still lends the same amount each year.  The treasury debt year-over-year is unchanged from Example B.   But notice that the central bank is injecting more money overall into the system.  Some of that money still goes to the treasury and is then spent into the economy just as before.  But some now goes to the dealer.   And notice also that the quantity of central bank monetary injections, as a percentage of GDP, has changed.  Because the central bank is injecting this money on the dealer side of the operation in line with a fixed percentage applied to an ever-increasing government debt total, the dealer’s annual take rises at a pace that exceeds the annual increase in GDP.  The debt the treasury owes the central bank is still meaningless, but total central bank injections as a percentage of GDP climb from 5.13% of GDP in Year One to 7.50% of GDP in Year Twenty.  Treasury spending stays at 5%, but the dealer share of GDP goes from .125% to 2.5% over the twenty year period, and the dealer share of raw injected dollars rises from $2.5 billion to $126.35 billion.

Note also that, as before, the entire functional effect of the operation could be accomplished by directly crediting the treasury account by the annual treasury share of the injection, and directly crediting the dealer account by the annual dealer share of the injection.   The borrowing pays no essential role.

We have considered two main scenarios so far: one in which the treasury borrows everything it spends directly from the central bank, and one in which it borrows from private sector dealers who then sell the debt to the central bank at a profit.   Now let’s consider a third scenario.   Suppose that just as in the second scenario the treasury sells debt to the private sector to finance its spending and to repay all of its outstanding debt.   But in this new scenario, the central bank does not buy all of the debt from the private sector dealers, but instead buys just a portion of it.   For simplicity, we will consider a situation in which the central bank always buys exactly half of the treasury debt purchased in that year.  The ultimate effect is that annual size of total government money injections into the private sector goes down.  Let’s see why:

Each year the dealer sends a payment to the treasury to purchase the entire debt issue for that year.   And each year the government sends three types of payment to the private sector: (i) the annual treasury spending amounting to 5% of GDP as before, (ii) the central bank purchase from the dealer of half of the debt purchased by the dealer that year, and (iii) the treasury debt repayment to the dealer for the portion of the previous year’s debt that was not purchased by the central bank.

The result is that in Year Two, for example, the treasury borrows $210 billion from the dealer at 5%.  The treasury spends $105 billion which is 5% of GDP.  The central bank purchases half of the $210 billion debt from the dealer for $107.63 billion, giving a 2.5% profit to the dealer on that portion, and the treasury sends the dealer $52.50 billion to repay, with 5% interest, the portion of the previous year’s debt retained by the dealer.  The net government injection into the private sector, which includes the three government payments to the private sector minus the dealer payment to the treasury to purchase debt, is $51.25 billion – which is 2.56% of GDP.  And in Year Twenty, the net government injection into the private sector turns out to be $189.52 billion, which is 3.75% of GDP.

For each year after the first year, we can calculate the total profit the dealer has booked on the previous year’s lending.  Some of that profit was gained immediately after the debt purchase, when the central bank buys half of the current year’s debt, and some of the profit is reaped in the next year, when the treasury repays the portion of the debt that was not purchased by the central bank.  It turns out that the dealer profit continues to rise, going from .18% of GDP in Year Two to 3.39% of GDP in Year Twenty.   And the total government monetary injection into the economy goes from 2.56% of GDP in Year One to 3.75% of GDP in Year Twenty.

But how can this be?  How can the total government monetary injection be so low in each year when the treasury continues to spend, as before, 5% of GDP?  One way of looking at what is happening this is that an increasingly large proportion of the ordinary treasury spending, which is always 5% of GDP, is absorbed each year by the dealer to purchase additional debt from the government, and increasingly significant portions of that migration of funds are converted into dealer profit.

It’s clear that we are beginning to touch on complex distributional issues here, but that the distributional questions are obscured behind lending operations that, even in our extremely simplified fictional scenario, are not easy to track.  If these were real-world operations, we would have some important questions to ask: Who is the dealer?  Who does the dealer represent?  Who loses and who gains if we employ the operations described in the third scenario rather than the second one or the first one?

And further distributional issues are raised when we move to a final fictional scenario, one that begins to resemble the real world US system.   Suppose the government in our fictional example now voluntarily decides to collect taxes, in order to reduce the amount of debt it issues each year.   The taxes supplement the amount that is borrowed, and then the total revenues from taxes and borrowing are used by the treasury to fund both its spending and debt repayment.  Clearly the addition of taxation introduces other distributional factors into these operations.  Adding taxation to the mix affects who is receiving payments from the government, since fewer payments will go to the dealer, and it also affect who is sending payments to the government, since some payments are shifted from the dealer to the taxpayers.

But again, it should be clear that in both scenarios three and four, the government could achieve the same functional effects by changing the operations, eliminating the borrowing altogether, and instituting some combination of direct central bank credits and debits – both crediting and debiting dealer accounts and crediting and debiting other private sector accounts.

So what lessons can be drawn from these fictional examples for the real world of government financing operations under a fiat currency regime, a regime such as the one that operates in the United States?

I propose we view these operations in this way:  Our government is the monopoly supplier of net financial assets to the private sector economy.  But it supplies and extracts these monetary assets through two different channels: one is the US Treasury channel though which most of what we consider government spending occurs.  The Treasury channel is also the channel through which money is extracted from the private economy in the form of taxes.   The other channel is the banking channel operated by the Federal Reserve System.  The banking channel generates IOUs for dollars of its own accord, in response to the demand for credit in the marketplace for loans.  The Fed continually accommodates this expansion of bank credit by supplying additional bank reserves to the system.  These reserves provide banks and their customers with the final means of payment to which the bearers of bank IOUs are entitled.  The chief mechanism through which the Fed provides these reserves is via the purchase of US Treasury debt.

So the issuance of US Treasury debt plays a dual role.  On the one hand, as debt is issued, rolled over and re-issued over time, the accumulated effect is to convey Fed-issued money into the public treasury.  On the other hand, the debt is purchased by dealers representing financial institutions.  When the debt is then subsequently purchased by the Fed, the Fed is in effect creating additional money and supplying to the financial system as in the form of bank reserves.   This is free money, because it comes in the form of profit on the purchase and re-sale of government debt.  The government sells debt to dealers, and then pays the dealers a premium to sell the debt back to them.  The dealers profit from serving as middle-men between two branches of the same government!

But as we have seen from considerations of the thought experiments above, the entire functional effect of these operations could be accomplished in a precisely equivalent way without the issue of a single Treasury bond, note or bill.  The mechanisms of borrowing and repayment now serve mainly to bamboozle the public and empower unscrupulous opponents of public spending and progressive government.  These borrowing and lending operations create large, frightening debt numbers on government account books.   These numbers are exploited by demagogues to create insolvency fears among the public, and these fears are in turn exploited to pressure citizens into shrinking the active role of government.

People who have not thought through all of the byzantine bookkeeping of government finance and Fed-Treasury interactions – and thinking through these operations is hard! – naturally seek to apply the best analogy they can find in order to understand them.  Unfortunately, the analogy they typically employ is the analogy with household debt.   But that analogy is completely inappropriate.  The issuance of government debt under a fiat currency regime by a government that is the monopoly supplier of the public currency is nothing like household debt.   The government issues this debt solely as a mechanism for injecting additional currency into the private sector economy, not because it needs to “raise” the additional funds.  Households, on the other hand, are users of the public currency, not issuers of it.  They have a finite budget constraint, and issue debt in order to acquire funding they would not otherwise have.  And when they can’t pay their debts, they face bankruptcy.  The government under a fiat currency regime, in strong contrast, can never be in this situation.

The sovereign national government in a fiat currency system has an option available to it that no currency user in the system possesses: it can run a pure deficit.  That is, it can simply spend more than it takes in, without borrowing to cover the gap.   The Federal Reserve System in the US is a creature of the US Congress.  It was created by an act of Congress and represents a delegation of the constitutionally-provided monetary authority that belongs by right to Congress.    Congress could at any time choose to direct the Fed to credit the account of the US Treasury by any amount Congress desires.  It could expand the deficit, and help counteract demand shortfalls in a stagnating economy, without issuing a single penny of additional debt.

The only limit on the process is the policy goal of price stability.  A significant net expansion of dollar-denominated financial assets could be inflationary in some circumstances.  However, in circumstances of high unemployment and underutilized manufacturing capacity, we are probably far away from that price stability danger horizon.    Clearly, the quantity of net financial assets in the private sector always needs to increase continually along with the growth in the economy, that is, along with increases in the total volume of goods and services available for sale.   The spending channel is one way in which the consolidated government – Fed and Treasury combined – accomplish that task.   The bank credit channel is another way.  But sometimes the effectiveness of the credit channel breaks down when interest rates are near zero, credit demand remains low, household incomes are stagnant and declining, and the desire to pay down debt is strong.  The obvious solution in such circumstances is to directly inject monetary income into household and business bank accounts, either in exchange for goods and services, or with no strings attached.

The American people are by right the sovereign masters of their currency system, and should demand that the US Congress take charge of that system and end the illusory game of public debt and public debt fear-mongering.  If we need to extract monetary assets from an overheated economy to reduce demand, we can do it by taxing.   If we need to inject monetary assets into an underperforming economy to increase demand, we can inject those assets directly.   If we need to redistribute wealth and purchasing power to restore democratic balance in our society, we can both tax away monetary assets and inject monetary assets at the same time.   A system relying solely on taxation and direct monetary crediting, and that eschews public borrowing altogether, would be much more transparent.  The effects of its operations would be more open and obvious to the public, and that would improve intelligibility and clarity, and re-empower democratic decision-making.

The borrowing game is pointless.   Let’s end it.

85 responses to “Why Does Uncle Sam Borrow?

  1. “On July 1st of Year Two, the treasury borrows $205 billion from the central bank. It then uses $105 billion of the borrowed funds to pay off the previous year’s debt entirely – $100 billion of principle and $5 billion in interest. It then spends the remaining $100 billion over the course of the year.”

    The one thing missing from this thought experiment is that the government gets the dividend from the central bank.

    Therefore it only needs to ‘borrow’ $200 billion from the central bank. It pays interest of $5 billion, principal of $100 billion, then it spends the remaining $95 billion plus the $5 billion bank dividend.

    That is why it is economically irrational for the government to ‘borrow’ from a third party. Banning borrowing from the central bank is a obfuscated way for some entities in the economy to get a guaranteed payment from the government – literally for no value add.

    • Yes, I left that aspect out of the fictional country to keep the calculations a little simpler Neil. Also, I have heard a lot of comments over the past few months to the effect that the government should be borrowing right now because interest rates are so low. But I wanted to point out that to the extent that the government is borrowing from its own central bank – which it does indirectly even if it doesn’t do it directly – it doesn’t matter what the interest rate is, and it doesn’t matter whether the bank returns the interest to the treasury or not. Whatever payments are made just go from one government branch to another either way. That’s why I briefly considered the situation of the 25% interest rate. A rate like that makes the intra-governmental lending and debt payments balloon up. But the private sector spending stays the same.

      I also left out considerations of the debt ceiling, since that’s a wholly voluntary and arbitrary cap the government imposes on itself.

    • “The only limit on the process is the policy goal of price stability. A significant net expansion of dollar-denominated financial assets could be inflationary in some circumstances. However, in circumstances of high unemployment and underutilized manufacturing capacity, we are probably far away from that price stability danger horizon.”

      Dan, how then do you explain the clear and present stagflation now, or its existence generally? It pretty much defines our recent history. Isn’t there an elephant in the room?

      • I take it you have no coherent explanation for monetary inflation in the face of unemployment.

  2. Bill Thompson

    A good article which uncovers the complete failure of the US Government to properly tend its debts. Their thinking is that they can perhaps just print dollar paper and increase debt forever without any real imposed limit. Ah yes, let’s just raise that damn bar instead. So simple, so easy. Economists such as Greg Mankiw and even Krugman and De Long seem to think and preach that there is absolutely no problem at all in throwing another $5, $8 or $10 trillion out there to the banks to “help the economy recover”. But that’s just the point — if you print QE dollars and give it all to the American banks then you cannot ever guarantee that they will “do the right thing and spend and lend”. In fact, just from the current poor “recovery” of the US from this recession, I would most heartily say that is how NOT to do it.

    But China did exactly the same thing — they implemented QE — and just once — on a massive scale and then ordered their banks to spend and lend. Since the Chinese Govt. owns and runs the banks in China — they started lending money furiously within days. In other words — the Chinese banks obeyed their governments wishes to the letter. And one year after the financial crisis started in 2008 — they then zoomed out of their own recession on turbo in 2009 with 10 % GDP forecasts.

    On one side you have China turning fast on a sixpence to respond and implement successful economic policy and on the other side of the water we have the partisan and corrupt bickerings of the Reps and Dems, whose eventual late implementations of corrupt and bad economic policy responses are somewhat reminiscent and likened to the speed of a striking slug in treacle. It isn’t the Reps and Dems corrupt fault — but I greatly fear that the Democartic Process itself is now made from a very rotten and corrupt mould that is already infested with too many corrupt, fat fleas who are sucking the very economic breath out of America.

    And something else regarding the measurement of QE and its effects. Why has nobody argued, measured or compared America’s useless QE policy in regard to The Marginal Productivity of Debt – which has been negative since 2006? Is the MPD now no longer taught in Econo 101 then?

    Apologies for my last question. This was really a question for Dr Krugman to answer. I’ve tried asking about this on his blog, but he always pulls the highly manipulated, adjusted and weighted Fed stats out of his hat as his piece de resistance. I return with John William’s Real Stats and he always insists that things like Food and Energy do not matter in the weightings for CPI. I get the distinct feeling that some “aligned” economists don’t want anyone to know the real value of the dollar. But how else can you measure purchasing power or measure inflation other than by honestly comparing the cost of commodities like food and energy(what every citizen buys) over time against the dollar?

    All Krugman and many other American economists ever say is that Food and Commodities are way too volatile to be included in the CPI stats. If that’s so true then why does China include a 33% weighting for just food in her CPI stats? What’s more, with no food or energy in the American CPI stats — all you are technically left with is the measurable inflation rate on Durable Goods. And since most Durable Goods these days are made outside America — Is this therefore an honest measurement of the American Inflation Rate for America’s manufactured goods in the CPI stats ? Doesn’t anyone find this way of measuring the US CPI just a tad odd ?

    And it gets even dumber. What are ordinary American citizens supposed to do when they can no longer afford food and energy costs which are zooming up now. Or perhaps they might be lucky enough to allow their families, as an extra special treat, to snack on a mop or maybe pour a high octane bicycle into there car so they can get to work?

    • Bill, I also get irritated about the economist’s habit of using various excuses for not including the prices of things whose prices are rising in their measurements of the price level.

      What about houses? We categorize houses as “residential investment” rather than a kind of machine people buy in which to shelter themselves. So throughout the period when real estate prices were absolutely soaring, we were told that the the Fed had “conquered inflation.” Meanwhile we were in the middle of a looming price bubble catastrophe.

    • The purpose of tracking the inflation rate is for the Fed to decide when to raise interest rates to cool down the economy. When they do raise the rates the sectors of the economy which are immediately affected are construction, mainly home construction, and durables, mainly automobiles.

      It is for these reasons why they use a core inflation rate empathizing those sectors. And the fact that increasing interest rates doesn’t have much of an impact on the decision to buy food and energy. Attempting to control inflation in food and energy by changing interest rates will be fruitless. It would be like putting the thermostat controlling your furnace outside your house, it wouldn’t see the change in the temperature inside because it is not measuring the correct temperature. It would turn on the furnace when it got cold outside but it would never shut it off when it was warm enough inside.

  3. Can we persuade someone to create a simple animation of your scenarios? It would be 100x more influential.
    We really need to have this discussion get out to a wider audience. Soon.

    • I have the scenarios on a dynamic spreadsheet that lets me work out different results by changing parameters for the rate of interest, the % of the initial rate of interest paid by the central bank when it repurchases debt and the % of the debt re-purchased. Maybe I can figure out how to attach some graphics to the data.

      • Dan,
        Plots could be shown in a stock flow platform like simile or the stock flow module of netlogo (or stella). A nice GUI could be included so one could have “sliders” to change parameter values.

      • Dan,

        Ask a friend who has the Numbers spreadsheet app on his or her Mac to do it for you. Numbers can read .xls. There’s a button there to turn your data into charts. Easy peasy for a quick solution. Better than nothing.

    • I came across the following model which was created by poster HBL @ Rogue Economist Rants
      It’s a MacroEconomic BalanceSheet Visualizer:

  4. Pingback: Reading – 4/26/12 « Blue Mormon Breakdown

  5. The best Dan…. Resp,

  6. Articles like this really diminish the credibility of MMT. Government debt serves a fundamental purpose in the market as the risk free asset. It is essentially the anchor from which all other assets are priced. Anyone with a basic background in CAPM or basic financial market understanding knows how this works. Eliminating the issuance of such paper would wreak havoc on the global financial system in more ways than can even be mentioned. Do you not consider the ripple effect of such a dramatic paradigm shift? You are not just changing the wheel. You are rebuilding it. To say that we could just eliminate the government debt markets without any negative repercussions is beyond naive.

    • Peter,
      The Global Financial Markets are the problem! Why should the world’s population sit back and let them run an endless financial ponzi game? Finance should exist to help with the distribution of goods and services to the masses, not to arbitrarily keep them from the masses. Finance should support the economy, not the other way around.

      • Brent,

        Who is going to replace the burden of government debt? The private sector will. That means larger banks and more private debt. You don’t even seem to understand what the implications of this sort of policy are. This is not “perfect” as you write below. It’s very naive and incredibly misguided.

      • Whenever someone in finance screams The World Is Going To End! that usually means their world….not ours.

        Yes. Doing away with government debt would probably destroy all kinds of virtual worlds of wealth. However not one factory or home will go up in smoke. The sun will not stop shining and plants sowed in fields will not stop growing. The oceans will not dry up. Not one heart will stop beating. All your clothes will still be in your closet and your food in your refrigerator. Your garbage will still be in the bin.

        Ah but you say…all the world of commerce will stop in its tracks! Not a person will lift his finger to do any work.

        Really? I doubt that. You are like the Napoleon of Tolstoy’s War and Peace who believe that it was He and he alone who caused the armies to rise up and march and ignored the fact that they were the ones who wanted to do it and he merely pointed the way.

    • Well, that is an important objection Peter. However, if the point of the bond issuance is just to provide dollar holders with a risk-free savings vehicle, then why not have the Fed issue the bonds and leave the Treasury out of it? After all, the Fed is the central bank, and it seems to me that what you are saying is that the financial system needs a certain foundational kind of risk-free bank savings account.

      What I object to is the notion that the Treasury needs to borrow from the private sector in order to spend, and that as a result the Treasury piles up debts which burden the Treasury and taxpayers. if we change the system so that the Fed provides savings instruments, while the treasury only taxes and spends, with no debt issued to the public and with the gap between spending and taxes covered only by the government’s inherent ability to credit accounts as needed, then I think it would be clearer to the public what is going on. The Fed would be providing interest payments to savers – employing its unlimited capacity to do so, with no solvency issues – and also supplying the banking system with reserves directly, possibly using interest on reserves as the tool. National savings and banking policy would be one thing; fiscal policy would be something else.

      • Thank you, that’s more or less along the lines of what I thought

      • I don’t even know what your point is then. The Fed and Treasury are condensed in the MMT framework so if you’re just proposing that the Fed should issue the debt then it seems like you just wasted 2,000 words and a bunch of people’s time writing this.

        • The point is transparency, public intelligibility and democratic accountability.

          It doesn’t just matter how things are classified and understood by economists in an adequate theoretical framework. The cause of democratic self-government requires that government operations be organized institutionally in a a way that is pellucid, and therefore easily grasped and debated by the public. The way governing institutions are organized should correspond to their underlying functional logic, and not obscure that logic under a maze of Kafkaesque redundancy and indirection that needlessly bewilders people and leads them to apply false analogies. Right now, we are having a tremendous amount of difficulty moving the body politic to endorse fiscal expansion, and part of the reason for that is that they are vulnerable to demagogues who point to huge treasury debt numbers, and compare those numbers to the total size of GDP and total tax revenues, to convince them they are “out of money.”

          • Fine, but your conclusion is still wrong. If we eliminated the government bond market it would wreak havoc on the global economy. The bond market might not serve a funding purpose, but that doesn’t mean it is “pointless”. And your retraction to have the Fed issue the debt is just shuffling chairs around. It won’t change anything. So again, I am sorry, but I really don’t see the point of this article. It’s clear you haven’t really though through all of the ramifications of your “examples”.

            If MMT is ever going to catch on you need to really think through these things. I’ve barely scratched the surface on the problems here and I am relatively new to MMT. So it’s alarming that there is an oversight of this magnitude in one of the core ideas of MMT.

          • I think having the Fed take charge of bond issuance would actually have a profound political impact. The insolvency and bankruptcy phantom that hangs over the public debate about spending priorities would vanish. People already understand the fact that the Fed doesn’t fund its money creation by borrowing and taxing. But they are convinced that the Treasury operates on something like a household budget constraint, and needs to fund its spending with tax revenues or borrowed revenues.

            You don’t seem interested in any of the political dimension, Peter, and seem to be looking at everything solely from the point of view of securities investing.

    • 100% agreed; I’d suggest you look at MMR rather than MMT (check out the blog pragmatic capitalism), they are very similar, but the MMR crowd actually have far greater grasp of modern finance than MMT, who, despite protestations to the contrary, are often highly abstract and not especially aware of how the real world works at times.

  7. Dan, I quite agree. I made much the same point last year in a paper entitled “Government borrowing is near pointless”. See:


    Milton Friedman in 1948 advocated a monetary regime in which there is no government borrowing. See paragraph starting “Under the proposal…” (p.250) here:


    There are various excuses for government borrowing, none of which stand scrutiny. Very briefly they are as follows.

    1. Stimulus. That can be effected simply by having the government / central bank machine print money (as advocated by Abba Lerner).

    2. Funding infrastructure. That excuse is bunk because infrastructure spending is such a small proportion of total government spending that it can come out of income.

    3. Spreading the cost of infrastructure across generations. This just aint physically possible.

  8. @Peter
    Dan et al, correct me if I’m wrong but
    – As I understand it, bond issues do serve a monetary policy purpose, so they’ll still be around. The just shouldn’t be required as a pointless hamstring on government spending (which does not require prior taxation or bond issues)
    – Ignoring that, the non-existence of government bonds won’t eliminate a risk-free asset for pricing purposes. You can find some other borrower with iron-clad creditworthiness, like a Berkshire
    – CAPM is bollocks that isn’t taken seriously anyway? How do they discount the cashflows of equities? CAPM? Wrong! Industry convention – e.g. 10% or so for a mine, slightly more if in a developing country etc…

    • As I understand it, bond issues do serve a monetary policy purpose, so they’ll still be around. The just shouldn’t be required as a pointless hamstring on government spending (which does not require prior taxation or bond issues)

      Yes, that’s right. I’m not sure whether the government does or does not need to issue these savings vehicles itself. But in any case there should be no suggestion that the issuance of the savings vehicles has anything to do with with government’s spending operations of buying airplanes, hiring park rangers or sending out social security checks.

      Ultimately there are two distinct channels of government net financial asset injections: the banking channel and treasury spending channels. We should keep them separate, and not open up treasury spending to uninformed political attack by entangling that spending with with the ever-inflammatory bugbear of debt and debt-burdens.

    • It’s extremely unlikely that the private sector could produce enough risk free assets to replace treasury bonds.

      Look, even when governments don’t need to borrow or are running a surplus, they still issue debt regardless because of the importance of risk free assets, Norway is an example.

  9. BFO,

    MMT wants to eliminate the Fed, but that’s a whole different matter all together.

    Berkshire Hathaway is not risk free. You’re talking about changing the risk structure of the entire financial system. Have MMTers considered that this might actually make the banks even larger because the private credit system would have to make up for the lack of a public credit market? This might even exacerbate the money manager capitalism that MMTers often complain about.

    CAPM might be bollocks, but it’s the way Wall Street prices a great deal of risk. So you can say it’s wrong, but you can’t say it’s not important.

    I don’t think you all have thought this through entirely.

  10. Thanks Dan. This is perfect!

  11. I’m going to be a little picky here, but it’s necessary, I think, because this article is important. The least this academic blog could do is engage in some effective proof-reading to help a busy author. The error is in “payment that lied outside their control.” “Lied” is not the past tense of this verb, and it makes the expert sound semi-literate not to know this.

  12. @ Peter,

    Do you have a link showing a quote from MMT people that they want to eliminate the Fed? I took several graduate classes with the authors on this site and none of them indicated that they wanted to eliminate the Fed. In fact, Dr. Wray has stated that a LOLR (Federal Reserve) is a requirement for a working capitalist economy. Their criticism has always been transparency and the post-monetarist theory that many federal reserve presidents believe in.

    While its true that treasury bonds no longer need to be issued to affect the overnight interest rate, I don’t think any of the UMKC professors I had, believed that treasury bond issuance should be ceased. They generally advocated a need for treasury bonds as a low risk asset for private entities (i.e. pension funds, private savings, collateral, etc.). In fact, Wray thought (if I remember correctly) that pension funds and other large investment pools should only be allowed to purchase municpal, corporate, and government paper. He may have even indicated that only government paper should be allowed as their passive investment strategies tend to distort markets (especially commodities).

    IMO I think we need to have treasury bonds available as a low risk investment vehicle even if we’re not using them to drain reserves out of the banking system. Certainly the idea of Federal Reserve being the issuer has been noted above. The practical issues surrounding the transition from one entity to the other appears to be the main issue.

    • This is my understanding as well (although I’ve not had the luxury of being a student at UMKC). There is some irony in Peter’s laser-like focus on the importance of publicly issued debt instruments, because it tends to reinforce, rather than detract, from Dan’s post here. It also is off the mark in its criticism, because Dan’s post does not address whether it might be beneficial to have a national consumer bank. What it demonstrates is that there should not be a law requiring the government to borrow from private citizens the very same currency that it can create with the stroke of a computer key.

      We can empower our government to (1) allow the Treasury to spend without borrowing; and (2) run a public consumer bank to provide the public with a baseline of risk-free investments. The point is that spending should not be tied to the national bank. It’s wholly arbitrary (and stupid) to have a law, as we do, that requires the national bank to grow in size by exactly the size which the government net spends.

      • Well said. I wish I had your gift of saying in a couple of paragraphs what I went on about for too many.

  13. 1) I should not have said MMT wants to eliminate the Fed. Rather, MMT wants to consolidate the Fed and eliminate monetary policy as the primary lever of policy, right?

    2) I have read many MMTers say that there is no need for public debt. For instance, Bill Mitchell says:
    “A sovereign government within a fiat currency system does not have to issue any debt and could run continuous budget deficits (that is, forever) with a zero public debt.”

    This is not correct in my opinion (for reasons previously mentioned) and demonstrates a very misguided understanding of the way our markets and economy are intertwined.

    3) I am relatively new to MMT and don’t mean to misrepresent so please pardon any mistakes.

    • I think when Bill Mitchell talks about a fiat currency system not having to “issue any debt” he is talking about the same thing Dan is, i.e., that it is not necessary to do so in order for the government to spend more than it taxes (net spend). Whether it is advisable to “issue debt” (run a national bank) for other purposes, e.g. “to ensure that the [private] sector would have its risk-free asset” in Bill Mitchell’s words, is an entirely separate question. But because it is a separate question, it has to be debated on its own terms. It has no relevance to whether the government should issue debt matching the amount it net spends. That’s just an arbitrary tethering–a relic of a non-fiat monetary system–that must be done away with.

      • Exactly. We are using the semantics and perpetuating the psychology of a period that is no longer valid from a macroeconomic perspective. It’s akin to speaking of “the ether” in physics or astronomy. Whether the gov’t chooses to allow the private sector to benefit from the activities of gov’t spending via the provision of interest bearing assets is a matter of choice not necessity.

    • Peter: Nobody is proposing that we do away with bonds. Some MMTers, like Bill Mitchell or Dan Kervick above, at times use rather inconsistent and confusing terminology adopted from the modern “mainstream”.

      Money is debt. Money is a bond. A dollar bill is a government bond. No government can spend without going into debt – “borrowing”, because that is what money is, debt, an IOU. The transaction misnamed “government borrowing” – the government selling its T-bonds for its dollars – IS. NOT. BORROWING. It’s a completely different transaction from what the word “borrowing” is used for anywhere else.

      Nobody is proposing abandonment of a risk-free vehicle for savings. The (complete) ZIRP idea is that the bonds the government issues would be restricted to the ones called “dollar bills”, and would not pay any “interest.” In other words, the government would not print dollar bills with a date in the future on them, and sell them at a discount in the present, which is all a bond is. Were a couple of Treasury auctions in the 30s when our brilliant financial sector payed a premium though, guess they were afraid of Dillinger! 🙂 The risk-free interest rate would be at the natural rate of zero.

  14. So as an analogy, would it be fair to say that money is the ‘grease’ that keeps the gears of the economy moving smoothly, and that although the people, via the gov. are the owners (and via gdp, makers) of this grease. But instead of just dabbing it on themselves, the gov has outsourced that operation to a supposedly neccesary third party, who with very little effort and no real justification, manages to cream off year in year out an ever increasing tidy profit? And who also it would seem, then has this supposed power to threaten to not add grease and let the gears grind to a halt, (using this as a loose analogy for the dreaded indebtedness) am i close?

  15. Yes Helen. You are right. Best to see the Banksters as a kind of Shadow Government that through its money creation powers blows unsustainable debt bubbles which effectively impose costs on the real economy that amount to taxation without representation. The effect can be seriously deflationary as we’ve saw with the Great Depression and now see with the current great Recession.

  16. Ooops typo.

    Yes Helen. You are right. Best to see the Banksters as a kind of Shadow Government that through its money creation powers blows unsustainable debt bubbles which effectively impose costs on the real economy that amount to taxation without representation. The effect can be seriously deflationary as we saw with the Great Depression and now see with the current great Recession.

    • Greg Bickley

      “Yes Helen. You are right. Best to see the Banksters as a kind of Shadow Government that through its money creation powers blows unsustainable debt bubbles which effectively impose costs on the real economy that amount to taxation without representation.”

      Which is why I have come to find the “vertical” vs “horizontal” distinction of MMT to be a little unhelpful these days. I now prefer “Vertical ” and “Vertical plus” . With Vertical you get free money. With Vertical plus you get money that you must pay back with interest. Banks are NOT within the system, they are outside just like the govt is, but they charge more and give back way less. Interest is no different than taxes. It is a cost that must be considered and can become a real drag on the economy.

      The Krugmans et al wrongfully model banks as within the private sector, as agents which simply connect “savers” and “borrowers”. Nothing could be further form the truth. Its like seeing government as simply connecting those who want to pay taxes and those who want to collect taxes.

  17. As usual, I am confused. It seems to be so evident to me that currency issuer doesn’t need to borrow for anyone. I’m starting to think I am the one who is brainwashed 😉

    Seriously, I can understand there may be a need to issue govt savings bonds in response to public demand and there may even be some need based on some desire to manage general lending rates. You might (not likely) be able to sell me on the fact that issuance is related to restraining our politicians. But, to convince poor Canadians they need to give their $50 or $100 – c’mon.

  18. This seems like a tautology to me. The article says we should stop borrowing. But then the comments say we should issue bonds/debt in order to meet demand/necessity for debt. I understand that the government doesn’t need to borrow, but this just seems obvious. Of course, we have a printing press. That’s no secret. The bigger problem is that people think we can go bankrupt. Not that we need to reinvent the way the system operates. I don’t see the need to stop borrowing and neither do you since you seem to be in favor of issuing debt for other purposes.

    We need to focus on convincing policy makers that they can’t run out of money. But we also need to keep policy makers in check once they understand that. While debt issuance and the accounting that comes with it is not the optimal approach I have yet to read how MMT would contain policy makers once they understand that inflation is the real constraint? Does MMT tackle this issue somewhere? What is the process by which Congress would be controlled and not allowed to just spend out of their bottomless money bag? Does MMT have answers for this?

    • Grant, the central pillar of the MMT approach to price stability is the job guarantee/ELR program and other automatic stabilizers.

      I don’t think helping people understand that we can’t go bankrupt is enough. First, no matter how many times you tell people that, many don’t believe it as long as the existing operational procedures appear to require the treasury to match all spending with tax revenues or borrowings. The entanglement of borrowing, taxing and spending under one operational roof, and the existence of the Congressionally-imposed budgetary constraint, convince people that Treasury functions just like any other business or household and that deficits automatically correspond to future taxes. The way to cut that psychological link is to put the taxing and spending under one roof, and public borrowing – if indeed it is necessary – under another roof.

      I’m really agnostic on the whole business of how, whether and in what quantities the government should provide risk-free savings vehicles for people holding large dollar reserves. But I think it would be best to put that business under one roof and disentangle it from treasury operations. It’s one thing to give reserve holders free money. It’s another to slip the free money into obscure security sales, and repos and reverse repos that the people who aren’t financial accountants can’t easily understand, and that seem to reward middlemen for intermediating between two departments of the same government.

      Wouldn’t it be cleaner to have it work like this: the Fed gives various short, medium and long-term interest payments on reserves, and also charges holding fees on reserves. They use these payments and fees to set the target FF rate. The Treasury just taxes and spends. For any time period of interest, the public gets a nice clean statement on the net of Fed interest payments over Fed fees, and the net of government spending over taxing. The sum of those two numbers represents the total government net financial asset creation for the period. Easy to understand, easy to debate.

      There is never a solvency issue. But if we are faced with inflation and need to slow down the pace of NFA creation, then the debate becomes simpler and more to the point: is the problem on the fiscal side with the balance of spending over taxes? Or is the problem on the reserve management side with excessive interest payments to savers?

    • Casino Implosion

      “But we also need to keep policy makers in check once they understand that.”

      Isn’t this problem really the key to the whole thing? Don’t all the worries of Austrians and conservative economists boil down to this: that once the cat is out of the bag, once MMT comes to the masses and is understood by lawmakers…that the entire consensus that is debt-work-economy-money will unravel as the populace votes itself a “free lunch”?

      For some reason, this never seems to be squarely addressed in the writings of MMTers. They always seem to sort of pass over it.

  19. Pingback: Three MMTers and Milton Friedman say government borrowing is pointless. « The Jefferson Tree

  20. Peter, Dan,

    Scott Fullwiler discusses replacing government bonds with interest bearing reserve balances in this paper:


    Worth a read.

    • It appears you are still working on Prof Rowe. Good luck with that. I’ve decided to cut my loss there.

      • I jump back in there every so often. Maybe we can wear him down eventually 🙂

        • Dan: Good article BTW – a little long though, but you’ve admitted that. WRT to Rowe, I asked how taxes drive money affects the discussion of how to move away from high unemployment and near recession conditions – his response was that demand side stuff was debunked in the 70’s, END. Here’s my take; there are too many in the profession (loose term) that enjoy debating the arcane and too few that actually care about societal change. I wouldn’t waste your time. I guess that is why I was drawn to MMT crowd. I think it is time to step away from it all for a while – I am frustrated.

          • that demand side stuff was debunked in the 70′s

            Yeah – Don’t you remember when that happened? It was when brilliant economists discovered 2+2 = -58 . There were all those plane crashes caused by pigs flying into the engines. Hell froze over & the heating oil Dick Cheney bought caused an oil shortage. Everybody in Australia who wasn’t holding on fell off.

            All economists realized and convinced everyone else that giving money to ordinary people for working was an inflationary road to serfdom, while giving money to rich people for doing nothing (at best) was the best way to fight inflation & would make everyone rich. I think the proof was something quantum.

    • Thanks philippe. I have that paper. Scott has also discussed IOR in several posts at NEP: two of them are from July 2009.

  21. Nick Rowe agrees that the government can’t ‘run out of money’, but thinks that large deficits and debts will entail higher inflation and higher taxes in future.

    • That’s always a possibility. So the question becomes how the government’s net injections of financial assets are regulated to as to preserve a reasonable level of price stability. The current approach is the “independent central banker” approach – the treasury operates under a legislatively imposed budget constraint + a debt ceiling and the unelected central bank is supposed to enforce discipline by deciding what proportion of government debt it will purchase and what interest rates should be. An alternative would be to employ the MMT job guarantee mechanism that regulates the price level by adjusting the full employment price of labor.

      • The build up of debt means ever higher interest payments over time (not because interest rates are forced up, just in overall quantity). IOR would also entail increasing interest payments over time. These are potentially inflationary, no? Does MMT work without a zero interest rate?

        • If IOR was a substitute for bond purchases it wouldn’t necessarily mean higher interest payments. Treasury securities + open market operations are basically a means of paying interest now. If the government managed interbank interest rates by adjusting reserves up and down via interest on reserves, the result would be no more inflationary than now, I wouldn’t think.

          • I think if the Fed pays interest on reserves and drops the discount rate to the target rate (as Mosler advocates) then there wouldn’t be an interbank market for reserves. Scott Fullwiler says in that article that IOR would result in less interest payments over all (if that replaced bond issuance). My point was regarding the increase in the overall quantity of interest being paid out on an ever-expanding debt (or permanent deficit spending in the case of an IOR-based system). With compounding interest and no paying down of the debt through taxation you eventually end up with exponentially growing debt repayments/ interest payments, don’t you? I’m no economist so I really don’t know. I suspect that this could be very inflationary in the long run if not countered somehow with tax increases. It makes me suspect that MMT might only really work with a permanent zero (base) interest rate policy.

        • Also, MMT seems to require the complete reformation and shrinkage of the financial system in order to work properly. MMTers aren’t always very clear on this.

          It makes me suspect that MMT might only really work with a permanent zero (base) interest rate policy.

          This is a common confusion. “MMT” is what we have right now. MMT is a theory about what we have right now, and is distinguishable from 99% of recent economics by making logical sense & applying to reality. No radical reformulation necessary. ZIRP is not necessary or even terribly important. The JG is what is important, not financial fun & games.

          Understanding how finance works, and thereby preventing financial fraud is important – and this is what would lead to shrinkage of the financial sector. It gets enormous wealth – for doing basically nothing at best. Since the crisis, it took and takes massive government intervention to prevent “the free market” from shrinking the financial sector on its own.

          • “ZIRP is not necessary or even terribly important.”

            Let’s say you don’t have a ZIR policy but still follow the MMT prescription of deficit spending to accomodate private sector savings desires without worrying about the size of the deficit. If the interest rate is above a certain level (either on bonds or on interest bearing reserves) then the quantity of interest payments could potentially spiral upwards exponentially. At this point, every little teeny bit of additional deficit spending would lead to additional enormous interest payments, getting ever larger over time (compounding). At some point the whole thing becomes ridiculous and you either get massive inflation/ balance of payments (currency) crisis or else you have to hike taxes/ cut spending massively.
            If you have a ZIRP on the other hand, you wouldn’t run into such problems as you wouldn’t have to deal with the problem of COMPOUNDING INTEREST, which can become EXPONENTIAL beyond a certain level.

          • Philippe : You err here: “With compounding interest and no paying down of the debt through taxation you eventually end up with exponentially growing debt repayments/ interest payments, don’t you?”

            The debt WILL be constantly paid down through taxation. More money, more government debt, more NFA, more GDP will lead to higher tax “receipts”. Deficits are the usual consequence of good policy, not aims in & of themselves. Of course if the government printed money & bonds like wild, ran giant deficits, raised interest rates sky-high just for the hell of it, it could cause inflation & giant debt. What is necessary is that interest rates be lower than productivity increases, than real growth. If they’re higher, of course you will get inflation in the long run. If deficits are bounded at a fixed percentage of GDP & nominal growth is positive, you’re still not going to get infinite debt/gdp.

            Exponentially growing debt repayments/interest payments / national debt is more or less a good thing, proper to a growing economy. Who cares about exponential debt if the economy is growing faster than the debt? If the debt/GDP is stable? Not even the modern moronic mainstream worries about debt growing in line with GDP.

            There is a whole line of thought, going from Keynes’s “take care of the unemployment and the budget will take care of itself” through Lerner’s observation “Functional Finance is sounder than Sound Finance”, to Evsey Domar’s 1944 “The Burden of the Debt …” paper, to Godley &? Lavoie, up to Scott Fulwiller’s Interest Rates & Fiscal Sustainability, which summarizes part of the history. Functional finance, MMT, not caring about the deficit will tend to lead to lower debt/gdp than austerian budget-balancing Sound Finance!

            Like I said, ZIRP is not essential or even terribly important. MMTers want low & stable interest rates for financial stability & low inflation etc, but not necessarily ZIRP. So you might say non-crazily-high interest rates, which would be bad under any economic regime, are important. The whole world was run on MMT, more or less, during the postwar “Keynesian” full employment era. It’s an incredibly well tested theory. People & governments cared a lot more then about full employment than about the budget. And lo and behold. The budget took care of itself!

  22. Rowe obviously thinks a permanent ZIRP makes no sense. I have to say at present I’m undecided on this – I’ve yet to understand it properly, need to read more perhaps to learn the whole MMT view on this. It seems to be an area that is not fully developed, even though it’s crucial. Also, MMT seems to require the complete reformation and shrinkage of the financial system in order to work properly. MMTers aren’t always very clear on this.

  23. Adrian House

    Please! Dan Kervick skips right over the fundamental question:
    If their is demand for the dollar (because the world uses the dollar as a back up for their own currency), then does it make sense for America to borrow money at low interest rates, and invest it in America?
    The answer is HELL YES WE DO! If we borrow at 3-5%, and use that borrowed money to invest in education, R&D and infrastructure, then I guaranty you those investments are going to be worth more then the 3-5% interest we are paying to borrow the money. Even the biggest corporation in the world (GE) borrows money so they can expand and make bigger profits. Why would the American Federal Government not behave in the same manor as business do? We can argue about how much debt is too much, but we should be able to take advantage of the situation when the world likes to invest in the dollar. We can and do use the tool of debt to our advantage via investing the borrowed money in the right places.

    • I agree we should be investing in Amercia, Adrian House. But I don’t think we should let our judgement be colored much by the interest rate. The US government is the monopoly supplier of the dollar, so it shouldn’t be of concern to us how much it costs to acquire them in the market.

    • The US can set the interest rate on its bonds if it wants to, these are not controlled by the market as they are for countries in the eurozone.

  24. For me the banks imposing unnecessary taxation without representation costs on the real economy through inflationary bubble blowing is pretty much the same as the historical practice of coin clipping. Bankster Money Clipping easy money if you can get away with it! Note well though that the practice was engaged in by both private and public sector interests.


  25. Bayard Waterbury

    I am not a professional economist. Dan, are you? I suspect that you must be. This is a truly fascinating article. It makes intuitive sense to me. Your examples are wonderful and easy to follow. Why do we so rapidly discard common sense approaches. Sometimes I think that common sense is disrespected because so much of what is in academia reeks of contrivance. This idea doesn’t. Of course, this will never happen. Rational ideas in today’s political world have absolutely no traction. The only things that have traction are the things which reinforce the tyranny of our plutocracy.

    • No, I am not a professional economist, Bayard. I’m an amateur, and make frequent mistakes – which other people frequently point out to me!

      Because I never received the professional training, I have to reason slowly through some things that the professionals are able to jump through quickly. But I guess there is a benefit to going slow too.

  26. Dan,
    Nice work! The convoluted nature of our public finance and monetary system makes transparency and public understanding almost impossible. I’m all for the development of a consensus MMT platform of monetary reform proposals.

  27. Shaun Hingston

    Great article Dan,

    I’m happy to see veteran MMTers finally starting to tackle one of the ‘root’ problems of our society.

    Government Debt is a dead-weight loss, and a means of rent-extraction. Why does a country that creates its own currency need to borrow said currency from the private sector?? The idea is absurd. Remove Government Debt. Everyone must have equal control over the creation, circulation and destruction of money.

    • Getting rid of borrowing is one thing, Shaun. But radically decentralizing monetary sovereignty is another. The latter just seems like a recipe for laissez faire to do its thing, and will ultimately lead both to more debt bubbles, and to the concentration of monetary power in the hands of private corporate power.

      • Shaun Hingston

        Everyone must have equal control over the creation, circulation and destruction of money. I really don’t see how this would lead to more debt bubbles and malicious concentration of monetary power..

  28. Zachary 18

    Now if we were to take the issuing of Treasury notes to fund Government spending out of the equation wouldn’t the Federal Reserve still have a federal funds target rate for lending to the banks? When there was inflation they could still raise rates contracting the money supply and lower them when the money supply needed juicing. Although we could use fiscal policy mostly for increasing the money supply. I can still see a beneficial role for monetary policy especially in controlling inflation by raising rates thus taking money out of the system. Should inflation become a problem monetary policy could be very useful since raising taxes and/or cutting spending in the face of inflation which in theory is fine would nearly be impossible politically. It kinda flips the whole thing on its head. The banks would be paying interest to use Government money and making money the old fashion way lending it. I hope my youthful naivete is showing too much…

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  30. Hey Dan, how about a follow-up post that runs through the same arithmetic, in the same way, for another scenario: a debt-free government, in which the Fed simply cashes any checks the Treasury issues? Depositing the required amount, ab novo, in private entities’ bank accounts?

  31. Completely new, Why does the government borrow at all if it is a monetary sovereign? Is there any reason why it is necessary? Why does the government just print its own money and spend it? Why is there a need to have a central bank at all?

  32. The Observer

    Dealer Profits! That is the primary reason John F. Kennedy was killed by our friends at the Federal Reserve System. Sure he had other enemies, however he wanted to eliminate those “dealer profits” and bring the above function into the treasury.