“Debt-Free Money” and “ZIRP Forever”

By Scott Fullwiler

I wrote a while back about how neoclassical economists don’t realize their view that interest on reserves (IOR) stops “printing money” from being inflationary also means that it’s impossible to create inflation by “printing money.”  See here.

I’m not 100% sure on this one (and please feel free to correct me if you know better than I do) because I admittedly haven’t given the literature a thorough read, but from what I can tell, it appears “debt-free money” advocates may not realize they are similarly overlooking the actual operations of the monetary system.  So, apologies in advance if I’ve misinterpreted.

From what I’ve seen, “debt-free money” (DFM) advocates want a world in which the government spends via cash (i.e., paper money).  They are against government issuing bonds or any interest on the debt, since that would suggest the government’s money isn’t “debt free” (again, please correct me if I’m wrong in this description).

What they may not realize (or they might and I just haven’t come across it), though, is that it’s not possible in a modern monetary economy to force “cash” on the private sector (note here that “cash” is not the same thing at all as “income” or “wealth,” as obviously there’s infinite demand for those).  There are significant implications for neoclassicals (as I explained in the post I linked to above) and now DFM advocates as well.

(A side note—as Randy Wray explained, the term “debt-free money” is a non-sequitir.  I’m going to use the term here simply to identify a group of people with particular views.  Also, my overarching point here is to elaborate Randy’s phrase “ZIRP forever” near the end of that post, said in reference to and in some apparent solidarity with DFM’ers.)

What happens, for instance, if I receive a $100,000 transfer from the government in paper money?

Well, I’d put 90% or more of it in the bank almost immediately.  And so would almost everyone else.  But this will quickly leave banks with an excess of vault cash.  When banks have excess vault cash, they “sell” it to the central bank (or government, for those that want to eliminate the central bank) in exchange for reserves.  But when done on any scale—as a government debt created as cash would do, on a huge scale in fact—banks are holding more excess reserves than they desire at the central bank’s target rate.

Because banks in the aggregate cannot rid themselves of excess reserves but instead simply lend/borrow them among themselves, the lending/borrowing continue until the interbank interest rate—the federal funds rate in the US—falls to zero.  This is simply supply and demand—the supply curve has shifted well to the right of any point on the demand curve (which is quite inelastic to begin).

The only alternative to ZIRP?  Pay interest on these reserves at the central bank’s target rate, or drain the reserves by having either the central bank or the treasury issue longer-term liabilities like bonds or time deposits.  All of these options would make the government’s “money” in the form of reserves interest bearing or even outright bonds—i.e., no longer “debt-free money” according to the DFM definition.

In fairness, this isn’t the DFM view yet; I’ve instead used the current banking system as a base case or starting point.  In fact, though, the DFMers support 100% reserve requirements or a Minsky-like version of narrow banking whereby the payments system is split off from the rest of the financial system via something like post office accounts (see here).

In other words, in the DFMers preferred world there would be no “excess reserves” of the sort I used in my example above.  My deposit would either be in a bank that would keep 100% in reserve or outside of the banking system entirely in a post office-like account as is done in numerous countries.

So how do we get to ZIRP in the preferred DFM world?  Let’s suppose that my deposit earns 0%—a basic deposit account at a 100% reserve bank or post office/narrow bank, and consistent with the concept of DFM.  Do I want to keep all of my $100,000 in an account that earns 0%?  Probably not, though I might not want to put it at risk, either, or at least as close to no risk as possible.  And I want it to be liquid.  In other words, I want the liquid, money market-type of investments that are so popular in the current world.

These will still exist in the DFM world.  They will either be through financial innovations at 100% reserve banks to get around the reserve requirement—as banks have already done for decades to get around lower reserve requirements—whereby banks offer low interest accounts with near-money liquidity.  Or, they will be held in a similar sort of account at a financial institution outside of either the 100% reserve bank or post office/narrow bank system.

These accounts, as they do now, will offer low interest, money market-like rates on near money accounts with a variety of short maturities.  But what will the rate of interest be on these accounts?

Think about this for a second . . . .  I’m earning 0%.  Almost any rate above that is better.  And if the entire national debt is now in “cash” or in the narrow bank/post office or 100% reserve bank system, the total value of these balances is about 60% to 70% of GDP (according to current US numbers).  Again, this is WAY more “money” than we want to hold if given an interest-bearing alternative.

So, how much do these non-bank financial institutions have to offer to get us to move our excess balances to these near-money accounts?  At the margin, just a little more than 0%, much like money markets do now under the Fed’s near-ZIRP strategy.

Importantly, this means that the short-term rate of interest in the DFM economy—the equivalent of the central bank’s interbank target rate in the non-DFM world—is zero, or very close to it.

How would the central bank—or if we’ve abolished the central bank, the government or whatever centralized authority (as at least some of them have referred to it) the DFM policy makers have chosen to oversee the short-term rate of interest—raise the short-term rate?  The same way a monetary authority does this now—by offering an interest bearing alternative to the zero-rate accounts at the 100% reserve banks or post office/narrow banks, and also to the near-zero rates of the near-money accounts at non-bank financial institutions.

These would be achieved using one or more of the same three methods that central banks currently use.  First, the monetary authority in the DFM world could pay interest on reserves, which would enable the 100% reserve banks and/or the post office narrow banks to pay interest, forcing the non-bank financial institutions to similarly pay more interest on near-money accounts to compete for funds.  Second, it could drain the reserves by offering time deposits or reverse repos to these same institutions in exchange for the reserves—this would have the same effects as the first option of paying interest on reserves.  Or, third, it could issue bonds.

Obviously, though, all three options violate DFM by paying interest on the government’s money.  Government money would not be “debt-free” according to the DFM definition.  In the end, from basic accounting and supply and demand, the options are to pay interest and leave the world of DFM, or live with ZIRP forever.

I’m not sure if the DFM supporters are in favor of ZIRP forever or not.  If they are, then they are logically consistent.  If not, then, well, they aren’t.

Lastly, note how this is all demonstrates what Abba Lerner (and a few others, like Beardsley Ruml at the Fed) said 60 years ago—the point of the government’s debt issuance isn’t to finance expenditures but rather to provide the private sector with an interest-bearing alternative to the government’s “money.”

So, interestingly, understanding how DFM works also illustrates the MMT view of government spending and government bond issuance.  Logically we should expect that DFM supporters could join MMT in rejecting otherwise widespread concerns about government solvency, China refusing to purchase US national debt, the financial sustainability of entitlement programs, and so forth.

31 Responses to “Debt-Free Money” and “ZIRP Forever”

  1. Auburn Parks

    Brilliant post Scott. Hopefully Yves puts this one up over at NC so that we can continue the ongoing discussion over there.

  2. Hi Scott, what would you do right now if you were Fed Chair? Would you raise interest rates? I ask because I’ve been trying to think of ways the Fed can use its tools to overcome the idiotic fiscal austerity being practiced by Congress and the White House. Here’s an idea from Robert Pollin – http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=11898

  3. “Debt Free Money” is just government spending/tax cuts using the ‘Ways and Means Advance’ system.

    Essentially Treasury runs an overdraft with the Central Bank and stops issuing bonds.

    You then remove deposit protection insurance and offer a zero-interest ‘Post Office Savings’ account to all who want it at National Savings. That then drains any deposits from people who don’t want their money at risk at any price. You might want a ‘pensioner bond’ with National Savings as well, otherwise private pensions are going to find it difficult to pay pensions.

    Everybody else has deposits at the banks that are now at risk (bailed in) and the banks have to pay the price for that type of deposit and make the loans at the price generated by the lower quantity of risky deposits they now have available to them. This has a knock on effect and makes subordinated bonds and equity more expensive. The result will be lower loan quantity because the price is now higher. There is after all a preference for liquidity.

    When you get a drain of deposits to National Savings – because people have got a bit scared in the current economy – the banks have to stop issuing loans and may have to actively start calling loans in – unless the central bank maintains a discount window of some description so the reserve account can effectively go overdrawn.

    At any point in time there will be 7, 30 and 90 day deposits maturing, so yes there can still be bank runs. Maturities are still not matched as they are in a peer-to-peer lending environment.

    That is a ‘debt free money’ environment in a nutshell at least on the solvency side.

    On the liquidity side the central bank will still need to offer short term liquidity operations when the interbank gums up. Otherwise you will get banks failing for cash flow reasons, rather than lack of equity reasons.

    You’ll note we didn’t have to change anything about the current banking system to bring this about.

    • Scott Fullwiler

      Agree completely, Neil. Planning on dealing with endogenous credit money in a later post, but you’ve nailed it here.

    • @Neil Wilson

      Essentially Treasury runs an overdraft with the Central Bank and stops issuing bonds.

      Exactly, Neil.

      But in this country, there is an entire swath of society who favor “debt-free money” who do not understand this is what that means. You have already soared over the heads of those who spout this by assuming this explanation is known, or can be known. It’s not.

      Because.

      They think the Treasury is hijacked by the Federal Reserve.
      They think the Federal Reserve is a private corporation created by bankers 100 years ago.
      They think the Treasury has to pay interest to the Federal Reserve to get its money. (Somewhere between 7-10% annually.)
      They think the Federal Reserve is controlled by foreign bankers (specifically 6-8 families).
      They think the US Constitution dictates that the federal government has the sole right to create cash and coin.
      They think the US federal government should issue “debt-free money” to screw the Federal Reserve and the private bankers.
      They think this will restore the country.

      The money will, therefore, be “free of debt” to the Federal Reserve.

      That is what they believe.

      • No, not correct at all. Some KNOW that a 100$ bill is printed for 9.7 cents and can be spent by the FG to buy 100$ of services/products or for direct support for seniors and other needy people and they know the money spent that way will stay in the economy until it is used to pay taxes and will never have to be returned to a bank plus interest. And some know that commercial banks can never put money into the economy and are only capable of removing money via interest which must be replaced by the Fed leading to the perpetual inflation we have experienced under the central bank.

        • And most people also know that US Notes could not be used for bank reserves nor to pay down the national debt nor for international settlements. And some people actually know that a drastic change was made in 1933, 80 years ago, and no changes were or have been made in the FED to accommodate that change from gold as money to paper becoming fiat money.

        • @charles3000,

          No, not correct at all. Some KNOW that a 100$ bill is printed for 9.7 cents and can be spent by the FG to buy 100$ of services/products or for direct support for seniors and other needy people and they know the money spent that way will stay in the economy until it is used to pay taxes . . . . et cetera

          I’m not saying that what I wrote is correct; I am saying that what I wrote is pervasive. I hear it all the time when I try to explain MMT, and it goes to what I wrote on Randy’s thread just before this one about the meaning of the word ‘debt’, which others mentioned there as well. The government ‘has to borrow from China, the Federal Reserve, and get taxpayer money’ before it can spend. If we would just ‘issue our own debt-free money in line with the Constitution’, we could free ourselves of this economic slavery.

          I’ve explained MMT to groups of people, and they say ‘wow, that’s great, I get it’. Two months later I hear the ‘borrow from the Federal Reserve and taxpayer’ argument coming out of their mouths, along with the ‘deficit destroying the middle class’ argument, and debt is bad, etc, we need gold to back up our currency. The fault is mine. I obviously failed 100% to explain it properly.

          I’m sure there are “SOME” as you wrote. But the fact that we still characterize the deficit nationally as our downfall and a sin against God and the ruin of America that has to be eliminated shows that no one understands it in the majority. The fact that every talk and television show peddles the same points shows that no one understands it in the majority. The fact that our President hasn’t got the message shows that no one understands it in the majority.

          Yeah, sure, some are getting it. But most people don’t read, charles3000. They don’t verify for themselves. In all the documents that I have read, library copies, it shows that 2-4 people have checked them out in 80-100 years. People prefer to read, believe, and quote G. Edward Griffin’s The Creature from Jekyll Island : A Second Look at the Federal Reserve, latest: 5th edition 2010. You read it? I’m slogging through it right now, because I finally realized this is what I’m up against when I talk to others.

          And some people actually know that a drastic change was made in 1933, 80 years ago, and no changes were or have been made in the FED to accommodate that change from gold as money to paper becoming fiat money.

          Not exactly accurate. For example, there are congressional documents in 1947 (where Marriner Eccles spoke extensively) that show there were. Or Beardsley Ruml. Our problem is that there are no journalists who have done their homework and, as a result, reported accurately along the way. None after Nixon took us off the gold standard internationally in 1971. Why? Because of Nixon’s reelection, Watergate, and his impeachment in August 1974. Journalists were looking for the next great Bernstein and Woodward moment, and thought the economy too banal a subject. I mean, fercrissake, Reagan ran on a platform in 1979/80 where point #4 was restoring the gold standard. Then he got shot within the first six weeks, and the underlings set about deregulating everything (banks, media, transportation) while he recovered. According to an inside source I had at the time–Reagan’s family lawyer—it took two years longer than we were told; Reagan came within a nanometer of dying and the extent was kept hidden. Some might remember Reagan in his yellow golf sweater, and Nancy at his side, waving and smiling to the public and media from the hospital room. He collapsed to the floor at that moment, and spent the next nine months in bed with Nancy, Deaver, and others, hiding it. The family lawyer was in the hospital room when it happened.

          We need to talk the language of the people we are trying to convince.

  4. Rob Rawlings

    I have a question on ‘When banks have excess vault cash, they “sell” it to the central bank (or government, for those that want to eliminate the central bank) in exchange for reserves.’

    Why couldn’t they as an alternative reduce the interest rate they are paying you on your deposit and find new borrowers to lend that vault cash to at a lower rate than they were previously lending at?

    • Scott Fullwiler

      Hi Rob

      Banks don’t lend vault cash. They make a loan, creating a deposit for you. If you withdraw in cash–which almost nobody does when they borrow, the borrower’s subsequent spending is almost always transferred electronically like when you use a credit card or take out a mortgage–then that’s going to come out of vault cash, true, but the qty of vault cash a bank holds normally is already projected to account for that. If there are significant deposits as there would be if a large amount of govt spending occurred in cash (or all of it, as DFM wants, and monetarists, too, interestingly), then this would quickly overwhelm how much vault cash a bank wants to hold for any purpose.

      • Rob Rawlings

        Thanks for the reply.

        To extend my question a bit: You deposit the newly created cash and the bank ‘sells’ it to the CB for reserves as you describe. The banks then have more reserves than they wish to hold and the interbank rate falls as they strive to get rid of them. Why couldn’t they lower rates on both deposits and loans, and increase loans until the level of lending matches the levels of reserves that banks wish to hold ?

        • Scott Fullwiler

          But the lending doesn’t get rid of the reserves. Banks don’t lend reserves.

          Think about right now. We have ZIRP, or close to it. We’ve had QE, so banks have tons of excess reserves–about $2T or something like that. Even if lending does increase, you don’t change the qty of reserves banks are holding. You might change the qty of excess reserves–shifting some from excess to required–but in today’s world required reserves were already voluntary since the Fed provides reserves if the interbank market needs them anyway. In DFM world, you wouldn’t change the distribution of required and excess reserves because they’d all be required to begin.

          • Rob Rawlings

            Even if there were no reserve requirements wouldn’t there be an optimal level of reserves that banks would desire to hold against a given level of lending ?

            In the example you give the govt spends money into existence and most of this money ends up as additional reserves. This moves banks to a position where they have excess reserves relative to optimal. I’m still not seeing why they won’t reduce rates they offer to depositors (to reduce reserves) and borrowers (to increase lending) so they can again get back to optimal reserves levels.

            I can see that the central bank, wanting to maintain its target rate, may intervene to drain (or reward the holding of) these “excess” reserves, but that would just be a counterbalance to the initial increase in the money supply.

            (At the moment , at ZIRP, lack of lending opportunities means that reserves are extremely high, but as banks can’t find good lending opportunities sitting on the reserves is still in away “optimal”).

  5. @mikeriddell62

    This all sounds a little academic to me in the sense that a lot of what you suggest is theory that is unlikely to be tested by a government since it has no incentive to do so (politics will suppress any systemic innovation that might eliminate the need for politics).

    So we need to begin in the community by issuing currency (cash, say) that is earned into existence by individuals who work together for that community’s common good. The yard stick is time so it is completely egalitarian in that an hour of my time is no more valuable than an hour of your (academic 🙂 time.

    If you are too busy to give your time to community, it probably means you have a job that pays you in $money that was lent into existence, and so you won’t really be interested in being paid in funny-money that’s earned into existence for contribution to community. (Via a civic infrastructure of under-funded yet invaluable community centres and good causes).

    So the currency becomes a means of valuing resources that aren’t valued – namely people that are unemployed or underemployed, and it values their application to produce things of value to the community (which is more community) by the hour.

    So ‘community’ is valued properly, at least by those that produce it. (Funny to discover that the whole valuation system is elitist and doesn’t value community simply because it doesn’t produce it.)

    Helping people to grow and become included in community life not only makes them better human beings, but it also gives them a choice. They can sit at home and produce nothing, or they can get out and produce community.

    What’s interesting is that what we are also producing is a currency, that is backed by the valuable resource of community. It has a unit of account (the hour) and the potential to develop into a store of value and means of exchange so that i can acquire goods and services from others in my community that not only want to feel that they are a valued part of that community but in the absence of $cash they can still buy and sell using funny-money which operates in much the same way. I think economists might term it ‘added liquidity’. Of course inflation wouldn’t occur since the currency is only ever earned into existence for activities that contribute to the common good – and we can’t get enough of them now can we?

    This community will soon grow into a “market” sized population of like-minded people that want to prove to others that they are givers and not takers. “Purpose” is the way to make a profit, 21st century style.

    And so the word about this community will spread until big corporates realise that having some of this funny-money is actually useful for them to prove that they understand the need to distinguish themselves from their nasty capitalist/selfish and greedy competitors, and so the community widens to include them because they’re prepared to accept the community’s cash, in part payment for stuff that they want to shift so that only the balance is paid in $cash. (Don’t tell anyone that this disguises the level of discount the business is offering).

    Now we have a system where people and communities get rewarded by businesses for contributing towards the common good. It’s a system where contribution and entitlement are linked inextricably. It’s a system that keeps a tab on who’s done what and figures out using the free market, who deserves what.

    If Bitcoin is anything to go by, this currency would be worth buying since liquidity and stability (and thus value) will grow over time and offer a nice safe and sustainable shelter for investors looking to take shelter from the coming collapse of $dollar backed investments.

    No debt, no banks, no MMT no ZIRP just community goodwill and trust.

    • Scott Fullwiler

      “This all sounds a little academic to me in the sense that a lot of what you suggest is theory that is unlikely to be tested by a government since it has no incentive to do so (politics will suppress any systemic innovation that might eliminate the need for politics).”

      Of course it’s academic. Every serious policy proposal needs to be scrutinized at an academic level. I don’t see where anyone’s proposing getting rid of politics. I’m certainly not. I don’t think DFMrs are either.

      “If Bitcoin is anything to go by”

      It’s not.

      “No debt, no banks, no MMT no ZIRP just community goodwill and trust.”

      Remember at the beginning of your post when you said “a lot of what you suggest is theory that is unlikely to be tested by a government since it has no incentive to do so (politics will suppress any systemic innovation that might eliminate the need for politics).”” You seem to have made that error yourself. You’ve created a world with no taxes, no banks, no debt, etc., and you expect me to take that seriously given your opening paragraph that already refuted it?

      • @mikeriddell62

        It might not be a world sans taxes, banks and debt, but it is a community of like-minded people that are bonded with a common purpose – to show the world what good looks like.

        We’ve developed our own software to enable our community to connect share and trade in sustainable ways.

        What we produce, by working together differently is community. What we reward and incentivise, is the production of community.

        I think people like me have had enough of policy and politics. If you have and if you want to do something more meaningful with your time and your life so that you leave the world in a better condition than when you found it, you’d be welcome to join our community (of like-minded individuals).

        Talk’s cheap is all I’m saying.

        🙂

        • Scott Fullwiler

          Yes, I’m totally with you in building community-based economies. Time banks, sharing economy, etc., etc. Would be interested in what you’re doing–I teach in a sustainable MBA program and there’s lots of interest among students in this.

          But that and what I’m discussing in the post aren’t mutually exclusive.

  6. Was the point about outsider money markets that they’re the cause of needing non-zero interest rates? Or just an example to point out that people search to gain some interest on their savings? Wouldn’t those ‘slightly more interest for slightly higher risk’ financial alternatives exist regardless of where the non-risk interest rate is?

    It seemed like you argued clearly why rates on official currency and bank substitutes fall to 0, and how non-0 rates are a ‘savings subsidy’ policy that must be actively chosen, whether in the current system or any DFM full reserve system. But the 4-5 paragraphs about money markets, between the jump from “So how do we get to ZIRP in the preferred DFM world?” and “How would the central bank raise the short-term rate?” seem to detract from your post’s clarity.

    Anyway, it definitely seems like the main driving difference between PM/DFM advocates and the MMT view is that the former are really caught on the labeling. If we literally just changed central bank fancy terminology from reserves/securities to checking/savings, and changed the accounting term of “interest payments on national debt” to “savings subsidy”, we would be much better positioned to make rational democratic choices about how to run things. We could all realize that the “public debt” does not need to be paid off, but that interest payments on ‘it’ can be a policy problem in terms of distribution (do we really need to subsidize no-risk savings? That should be a political choice)

    • Scott Fullwiler

      The point is that if you want a short-term interest rate >0, you will have to offer an interest rate >0 on the govt’s money. I was explaining how we get to that point–the CB sets a short-term rate that the money markets follow, but it can only set that rate above 0 if it offers IOR or drains reserves with bonds, etc.

      With or without DFM, you will have $trillions that will seek out a short-term, low risk alternative to deposits, which provides the incentive to offer such an alternative. But with the monetary authority not able to set a rate on govt money above zero in DFM world, the rates on these alternatives to deposits will also settle at around 0 (a bit higher given risk and maturity differences–sort of like with Tbills vs. Eurodollars now).

      This post had nothing to do with my views on the term “debt-free money,” as I noted parenthetically.

      • “The point is that if you want a short-term interest rate >0, you will have to offer an interest rate >0 on the govt’s money. I was explaining how we get to that point–the CB sets a short-term rate that the money markets follow, but it can only set that rate above 0 if it offers IOR or drains reserves with bonds, etc. ”

        If you have economic growth and banks can lend at 7% they will push the short term rate up as they compete for funds. If the market is offering 1% the bank that offers 2% gets more funding and others follow suit. If the market is offering good returns then the demand for loanable funds picks up and sends up rates.

        • Scott Fullwiler

          “If you have economic growth and banks can lend at 7% they will push the short term rate up as they compete for funds.”

          No they won’t. The central bank provides funds at its target rate whenever the short-term rate starts to rise above its target. And in DFM world, you’re talking about a qty of interest-free money that is far and away beyond any amount that would result in a shortage–$10T as of now plus whatever additional is created in DFM world to compensate for (in their world) banks’ inability to create credit. That might even double the amount.

          “If the market is offering 1% the bank that offers 2% gets more funding and others follow suit. If the market is offering good returns then the demand for loanable funds picks up and sends up rates.”

          There’s no bank that needs to offer 2%. It can borrow in the money markets at 1% because the Fed will keep the rate there by adding funds if the rate goes above it.

          You are describing a gold standard world. In the world since the 1930s there’s no “market” setting short-term rates except for slight differences in maturity, liquidity, etc, above the risk-free rate.

          • “No they won’t. The central bank provides funds at its target rate whenever the short-term rate starts to rise above its target. And in DFM world, you’re talking about a qty of interest-free money that is far and away beyond any amount that would result in a shortage–$10T as of now plus whatever additional is created in DFM world to compensate for (in their world) banks’ inability to create credit. That might even double the amount.”

            But the fed will increase its target interest rate. As the fed increase the supply of equity money to people or gov, this results in greater spending. This spending increases the growth rate, inflation rate and pushes up the interest rate. If the fed doesnt send up its target interest rate inflation and growth will be too much. Your not taking into account that if money is issued to public it gets spent. You need to take into account that money is being distributed differently now to parties that actually spend at zlb instead of banks.

            “There’s no bank that needs to offer 2%. It can borrow in the money markets at 1% because the Fed will keep the rate there by adding funds if the rate goes above it.”

            The central bank wont fight upward pressure on rates if growth, inflation is above target. The fed wont maintain ZIRP if inflation is overshooting for example. The issuance of money directly to people or to the treasury/congress to spend will create growth.

  7. “So, how much do these non-bank financial institutions have to offer to get us to move our excess balances to these near-money accounts? At the margin, just a little more than 0%, much like money markets do now under the Fed’s near-ZIRP strategy.”

    At near ZIRP you are correct but not outside of ZIRP. As the economy picks up banks compete amongst each other to obtain funds and push rates up.

    “Importantly, this means that the short-term rate of interest in the DFM economy—the equivalent of the central bank’s interbank target rate in the non-DFM world—is zero, or very close to it.”

    The rate can be anything. If the economy is growing stronger the rate goes up.

    “Obviously, though, all three options violate DFM by paying interest on the government’s money. Government money would not be “debt-free” according to the DFM definition. In the end, from basic accounting and supply and demand, the options are to pay interest and leave the world of DFM, or live with ZIRP forever.”

    The central bank money isnt a liability in the sense that it has to be repaid to anyone even if the IOR are in place under DFM. RRP’s are a separate security which in themselves are a liab. If I lend you a car at 3% it doesnt make the car itself a liab.

    • Scott Fullwiler

      “At near ZIRP you are correct but not outside of ZIRP. As the economy picks up banks compete amongst each other to obtain funds and push rates up.”

      Not correct, as I explained in response to your previous comment.

      “The rate can be anything. If the economy is growing stronger the rate goes up.”

      The rate goes up if the monetary authority increases it. Otherwise it doesn’t.

      “The central bank money isnt a liability in the sense that it has to be repaid to anyone even if the IOR are in place under DFM. RRP’s are a separate security which in themselves are a liab.”

      It’s a liability in the sense that the CB and govt accept it in payment. Randy explained this in his post. Yes, RRPs are a collateralized loan, not the same as a time deposit, but functionally the same thing.

      “If I lend you a car at 3% it doesnt make the car itself a liab.”

      Again, Randy covered the concept of debt-free money vs. liabilities. Go over there if you want to have that discussion. The discussion here is about how interest rates are set.

  8. I have only read the first few paragraphs but will read the rest later. The Govt can obviously issue debt free money AND have a national debt/savings account because it has been done as recently as 1970. Also the history of US notes, the ones with the red serial numbers, disqualifiers the remark that you get debt free money from the Govt, put the money in the bank creating more reserves and thereby more money via loans. Those US notes could not, by law, be used for reserves.

    • Scott Fullwiler

      “I have only read the first few paragraphs but will read the rest later. The Govt can obviously issue debt free money AND have a national debt/savings account because it has been done as recently as 1970.”

      I didn’t say it couldn’t. I said the debt-free money proposal is for “debt-free money” ONLY. That’s what I was analyzing. Obviously there’s been all kinds of other stuff. But the debt-free money proposal is for the govt to not pay interest on its debt. That rules out the “national debt/savings account” you brought up.

      “Also the history of US notes, the ones with the red serial numbers, disqualifiers the remark that you get debt free money from the Govt, put the money in the bank creating more reserves and thereby more money via loans. Those US notes could not, by law, be used for reserves.”

      You didn’t understand what I said at all. I didn’t say the money was put in the bank to create more reserves. It’s vault cash, which banks sell to the Fed for reserve balances when they have too much. If they can’t sell it back to the Fed, they’ll stop accepting it in short order. Finally, my argument had nothing to do with making more money via loans. I left that out on purpose.

      • I stand corrected on not quoting you precisely and not fully comprehending your argument, however US Notes were issued in limited quantities for many years and I have never heard of any ill effects from them plus, I believe, with little evidence, evidence that is hard to secure, that the economy was very good when US Notes were at their peak percentage in the economy. And the debt free proposals I have seen were freedom from bank interest debt which defined the US Notes.

  9. Creigh Gordon

    Scott, you say “the point of the government’s debt issuance isn’t to finance expenditures but rather to provide the private sector with an interest-bearing alternative to the government’s “money.”

    I’ve concluded, perhaps naively, that there are two reasons for the government to issue interest-bearing bonds. One is of course in support of a target interest rate for monetary policy reasons. The other is historical – a way to defend gold reserves is to incentivize the holding of currency by offering interest. From the government’s POV, bonds are an attractive way of doing the second because they preclude conversion to gold until the bond’s maturity date is reached.

    If one questions the effectiveness of monetary policy (I certainly have doubts) and has no need to defend a gold supply, why not ZIRP forever? Is there really a public purpose in providing the private sector with an interest-bearing alternative to the government’s “money”?

    You are right that under these circumstances banks might have little incentive to accept deposits, beyond what they could lend out at retail rates. It might be necessary to pay them a nominal amount for the service. I don’t know what effect this slightly negative interest rate would have on the economy. I’ve been wondering about just these questions lately.

  10. First, it seems to me that “debt” is being used in more than one way in the current discussion. I do not think that the advocates of “debt-free” money mean debt in the general sense of an obligation, such as the obligation to redeem paper money for coins, or the obligation to accept money at face value in payment of taxes.
    I think that key issues in the question of debt-free money are segniorage and democracy. In a democracy why shouldn’t the value of new money accrue to the citizenry as a whole instead of to banks, the rich, or the so-called bond vigilantes? Why have a fiat currency if we act as though we have to go hat in hand to the rich and powerful and borrow it from them? How can we have a democracy if we are in hock to the plutocrats?
    In American history, isn’t the prototypical debt-free money the greenback? Greenbacks were used for financing the Civil War instead of issuing debt at exorbitant interest rates to the bond vigilantes of the time. Isn’t that the kind of debt indicated in the phrase, “debt-free money”?
    The Continental Dollar was another example of debt-free money, one which failed because the states did not take on any obligation for it, nor did they allow the Continental Congress to do so.
    Proposals for debt-free money include those for the free coinage of silver in the late 19th century and the platinum coin or coins of today. In both cases the idea was to use segniorage for the benefit of the general population, during times of a shortage of money and a concentration of it in the hands of a few.
    All of these examples involve currency, but, as we know, the same thing could be accomplished today by the stroke of a pen or making entries by computer. Why should we pretend that we have to go into debt to the moneylenders in order to have money?

  11. I don’t know about DFM but I think you’re right under the assumptions you state – as usual.

    The interesting thing is that the idea of attempting to structure such a thing away from the conventionally designed banking system ends up producing exactly the same type of interest rate arbitrage effect as would be the case if it were the bank reserve managers chasing down any available non-zero risk free yield when their excess reserve balances earn a zero rate of interest.