The Millennials’ Money (Pt 2)

By J.D. Alt

The comments on Part 1 have given me pause and food for thought—and they are much appreciated. Obviously, the generational theme is a lot more complicated than simply BGXers versus Millennials, but I don’t want to get lost explaining or defending the generational theories of Strauss & Howe. I’m sensitive to the critique that making BGXers out the way I am is a dramatic oversimplification and might, in some degree, be counterproductive to my goals by alienating the BGXers themselves. I’m struggling with that because, on the other hand, I want the book to be a “simple” and highly focused message—and the message is (a) that understanding and effectively using modern fiat money could very usefully become the “political brand” of the Millennials, and (b) the BGXers, because of their ideological baggage, can be expected to resist the whole way down the road.

In the meantime, what comes next in the proposed book is the essay Diagrams & Dollars, which I won’t repeat here, since it is already posted. The beginning and end of the essay will be re-written to better flow with the Millennial narrative. The section after D&D is what follows below. This is a particularly difficult segment for me: I am trying to convey, accurately, the money operations described by L. Randall Wray—which is a bit like trying to describe the rotations of a rubric’s-cube puzzle—and to do it in a way that won’t wrangle the brain of a typical Millennial reader who isn’t aspiring to being a banker. Comments here will be especially helpful!


Rules and Values

The question now to be asked is this: If the diagrams we have just developed, illustrating how a modern fiat money system actually works, are true, why then do we behave as if they were not? Why do our political and media leaders—both conservative and liberal alike—insist that the dollars our federal government spends are the dollars it has collected in taxes, or borrowed from the Private Sector pot? We’ve already suggested a possible answer, but now we should explore a bit further. Having a forceful response to this question will be essential to the Millennials’ efforts as they come to power and seek ways to pay for all the things the BGXers have left for them to resolve.

In our brief history of how President Nixon took the U.S. (and consequently the rest of the world) off the long established gold standard, we noted that the existing “rules” that determined how the government could issue dollars remained unchanged—even though those rules had been specifically created to prevent the government from issuing more dollars that it could back up with gold. We also noted that the generation just beginning to come to power at the time—the baby-boomers—were more than happy with the arrangement because the old “rules” reinforced the ideological view of the world they wanted to impose. Specifically, we noted, the “rules” made money scarce, which in turn supported the boomer’s ideology of competition as the basis of American values.

Given this history, it seems the Millennials have essentially two tasks before them: First they have to clearly see that the old monetary “rules” are illogical and counterproductive in today’s world of modern fiat money. Second, the Millennials must debunk the belief-mantra of the BGX generations that the end of money scarcity—at the level of collective society—will lead to a socialist “nanny” state, destroy the benefits of market-based competition, eliminate the motivation of merit-based rewards, and destroy the special human capacities for creative entrepreneurship, self-actualization and personal achievement. If anything, as we stated earlier, modern fiat money, properly managed by a cooperative democracy, can support these American values in ways—and at a level—the BGXers never imagined. The Millennials, as they begin building their political brand in earnest, need to start making arguments as to why modern fiat money makes this positive outcome a real possibility.

Let’s explore these two tasks in turn.

The “Golden” Rules

As we’ve already noted, the main purpose of the gold standard was to “protect” the value of money by limiting the amount of dollars the federal government could issue. (We won’t go into the probable history of why, ultimately, this failed to work—as exemplified by what President Nixon was forced to do when French President De Gaulle asked for his gold! In today’s world of modern fiat money, it doesn’t matter.) What does matter is seeing the “rules” that were intended to make it work—and understanding the fact that, even though the circumstances they were designed for no longer exist, those rules are still operational today. And the operations the rules impose profoundly affect how we “see” the world of money.

Here, then, is a simple overview of the “golden rules” we’re currently living with:

As far as money is concerned, the U.S. federal government is set up with two “money departments.” Department one is the Central Bank (called the Federal Reserve or, typically, the “Fed.”) Department two is the U.S. Treasury. The Treasury is given the job of spending the federal government’s dollars to buy goods and services the government needs or wants from the American people. The Fed is given the authority to issue dollars—that is to simply create them by fiat. By law, however, even though the Fed is the department that legally can create money, it is not allowed to spend that money to buy goods and services. Spending can only be done by the Treasury. Nor is the Fed allowed, by law, to simply issue dollars and deposit them in the Treasury’s checking account so it can then spend them. Nor is the Treasury allowed, by law, to borrow new dollars directly from the Fed.

What these rules boil down to is that a very intentional wall was erected between the department that can create sovereign money, and the department that can spend it. The purpose of this “wall” is not hard to figure out: Without the ability to spend dollars, there was no incentive for the Fed to simply issue money indiscriminately, which could result in the issuing of more dollars than there was gold to back them up. But how, then, did (and still does) the Treasury department get dollars to put into its account so it can spend them to buy goods and services? Again, following the “golden rules”, the Treasury is only allowed to obtain dollars for spending in one of two ways:

First, it can collect taxes. When citizens pay their federal taxes the dollars are deposited in special bank accounts across the country, and the Treasury can transfer those dollars at any time into its checking account for spending.

Second, if the Treasury needs to spend more dollars than it has in those special tax collection accounts, it can obtain the additional dollars—again, by law, it’s the only option provided—by selling Treasury bonds to a very special and elite group of financial businesses called “primary dealers”. Today there are 22 primary dealers in the U.S. (among them a few familiar names like Goldman Sachs and J.P. Morgan.) Basically, what happens is the Treasury calculates the number of additional dollars it needs for spending, then announces a Treasury bond auction for that amount—and the primary dealers “buy” the bonds at the stated price (so it’s a bit mysterious why they call it an “auction.”) The dollars from the “sale” of the bonds goes into the Treasury’s checking account for spending. The primary dealers then “sell” the Treasury bonds (which pay interest) to other financial institutions and private investors, earning fees for the transactions.

Looking at the snapshot just described, it very much appears that our diagram of sovereign fiat money cannot possibly be true! It looks very much like the U.S. Treasury does have to collect taxes in order to have dollars to spend—and that it actually spends the tax dollars it collects (rather than simply cancelling them as I.O.U.s). Even more disconcerting, it also appears that if the Treasury has to spend more dollars than it has collected in taxes, it does, in fact, have to sell Treasury bonds—or “borrow” money from the Private Sector!

Except for one detail that is such a miraculous sleight-of-hand hardly anyone notices it or understands, actually, how it works: When the Treasury announces that it is going to have an “auction” of say, $20 billion in Treasury bonds, where do the dollars that the primary dealers use to “buy” those $20 billion worth of bonds come from? The answer is, the dollars will come from the Fed—and they will be newly issued fiat dollars which previously did not exist. The Fed puts these new dollars in the hands of the primary dealers by “swapping” them for “old” Treasury bonds the dealers had on hand.

In other words, the dollars the primary dealers use to buy the new Treasury bonds with—which are deposited in the Treasury’s checking account for spending—are actually coming directly from the Fed’s authority to issue fiat money “out of thin air”. It turns out, then, that in order to spend, the Treasury is not “borrowing” money from the Private Sector at all! It just appears that way because of the arcane operations the old “golden rules” impose. As far as the Treasury “spending” the tax-dollars it has collected, we’ve already understood what is really happening there as well: the Treasury (1) cancels the tax I.O.U. the dollar it has collected represents, (2) it issues a new I.O.U. to replace the cancelled one, and (3) it then spends the new I.O.U. to buy new goods and services from the Private Sector.

There is one other thing that is very important for the Millennials to clearly see: The primary dealers—the brokers who are in the enviable position of managing these cryptic operations to put new fiat dollars in the Treasury’s spending account—are not complaining about the “chore” they’ve been given to do; nor are they ever likely to. Unless, of course, the Millennials come along and begin to wonder why, in fact, things are done in such a convoluted and sleight-of-hand fashion. Why, if the Fed is going to issue the new fiat dollars that will enable the Treasury to buy goods and services from the American people, why run all that money unnecessarily through the hands of a few elite Private Sector brokers? Why not, instead, do the simple and straightforward thing of enabling the Fed, by law, to issue the new dollars and deposit them directly in the Treasury’s spending account? Not only would that eliminate the windfall fees and commissions the primary dealers have been skimming for decades, it would also have the virtue of making “visible” from where the money actually flows. And this, in turn, would do everyone the favor of turning off the BGXer’s incessant mantra about the government spending—or misspending—the citizen’s tax-dollars.

14 responses to “The Millennials’ Money (Pt 2)

  1. Ben Johannson

    Ignore questions of your theme. You can perseverate on that forever — it leads nowhere as many different perspectives can all be correct.

    Your job is to present, accurately as reasonably possible, a narrative framework which flows without interruption. Your narrative is more than adequate to the task so focus on style, aesthetics, explanations and structure that won’t leave a reader feeling lost. If some don’t like the BGXer theme they can write their own book. Unless you can look at something and conclude it is wrong or misleading, go with it.

  2. J.D. – as you say, this is where it gets tough. You have to ask yourself what level of person you’re addressing this to. To parse through this takes an interested mind. I.e. this isn’t for the masses) I would suggest some diagrams to go along with this to illustrate visually what you’re describing (e.g. a chart of Fed & Treasury roles; a simple flow chart of how conventional thinking sees money flows, versus the correct way).

    With respect to framing, consider whether you wish to focus the arguments on how to make the “American values” better – “…destroy the benefits of market-based competition, eliminate the motivation of merit-based rewards, and destroy the special human capacities for creative entrepreneurship, self-actualization and personal achievement.”

    I’m not convinced that Millennials are as focused just on these values as the BGX era. They have more interest in the common good, on the sustainability of the planet, etc. So what I’m saying is that you might consider appealing to the Millenials aspirations, not just the message of “we can make capitalism better with MMT”.

    Thanks for your work, and the opportunity to participate along the way – you’re making a difference.

  3. Not sure how far out of the weeds you’re trying to stay (for instance Wray’s book might have a few too many tangents & anecdotes for a popular audience), but I always found Eccles’s 1947 congressional testimony pretty compelling. This was the longstanding chairman of the Fed testifying before Congress that the rule against the Fed buying Treasury bonds directly was pointless (not at all limiting Congress from spending as much as they want) and obfuscatory. It had already been partially lifted during WW2 and any other times of crisis, exposing the ‘self-imposed’ nature. But Congress still went ahead and re-imposed this “mistaken theory” rule (Eccles’s words).

    Also if you want to slightly soften the shadowy/conspiratorial sound of primary dealers (although I get you’re going for that somewhat), you might mention that they’re contracted through the Fed and the list changes at least relatively frequently (rather than being some set cabal). And a bank can literally start an application to become a primary dealer through the NYFed’s website.

    • Here’s my favorite extract from the 1947 text…
      “Mr. ECCLES. Well, as I remember the discussion —and I have referred to it in this statement—there was a feeling that this left the door wide open to the Government to borrow directly from the Federal Reserve bank all that was necessary to finance the Government deficit, and that took off any restraint toward getting a balanced budget. Of course, in my opinion, that really had no relationship to budgetary deficits, for the reason that it is the Congress which decides on the deficits or the surpluses, and not the Treasury. If Congress appropriates more money than Congress levies taxes to pay, then, there is naturally a deficit, and the Treasury is obligated to borrow. The fact that they cannot go directly to the Federal Reserve bank to borrow does not mean that they cannot go indirectly to the Federal Reserve bank, for the very reason that there is no limit to the amount that the Federal Reserve System can buy in the market. That is the way the war was financed. Therefore, if the Treasury has to finance a heavy deficit, the Reserve System creates the condition in the money market to enable the borrowing to be done, so that, in effect, the Reserve System indirectly finances the Treasury through the money market, and that is how the interest rates were stabilized as they were during the war, and as they will have to continue to be in the future. So it is an illusion to think that to eliminate or to restrict the direct borrowing privilege reduces the amount of deficit financing. Or that the market controls the interest rate. Neither is true.”

  4. I think Jamie nailed it in his comment to part 1. As a boomer myself, I didn’t recognize your description of my generation either.

    When I was being trained in marketing, one of the classes on how to “connect” with, and understand people was about recognizing the major life-changing events of their youth, and the effects it had on them. For my parents’ generation (who were my customers), it was the Great Depression and WWII. For boomers, it was the 60’s: Vietnam, drugs sex and rock’n’roll, women’s lib, civil rights. We brought about great changes in the culture.

    I know you’re written before about competitive and cooperative “genes”, and I see that sort of flavor in this series. I don’t think it’s correct to think that those are characteristic of the two generations. Many of the issues that shaped boomers’ lives caused us to “Come Together”. There was conflict, of course, but it was with forces outside our generation, which was very much a coherent community.

    To connect with Millennials, understand the major events of their generation, how they have affected their lives and their attitudes, what they crave as a result of their experiences. Relate to that, and they will listen.

  5. I am one of the commenters on your previous post who objected to your characterization of BGXers. I am gratified that you are thinking about this and I want you to know that I agree with the first poster here… as long as you are thinking about the issue (how you represent the generational framework), it is better to go ahead and publish your book and not worry too much about pleasing old curmudgeon’s like me. I agree that the flow and style of your narrative take precedence over making your work more accessible to an audience outside your target audience. Also, if you are clear that your intention is to explain, not to blame, then you can’t be responsible for other people being defensive or taking offense.

    I think you could say more here: “The Fed puts these new dollars in the hands of the primary dealers by “swapping” them for “old” Treasury bonds the dealers had on hand.” This raises many questions for me. Are the swaps always 1:1? What if there are insufficient “old” bonds? Is that a ridiculous question because there are so many “old” bonds lying around? What if no one buys the new bonds? Why do you put quotes around “swap” and “old”? Should I undersand that this is not really a swap and these are not really old bonds? These are presumably bonds that never sold and no one ever owned. Is this correct? Is it significant?

    I know you don’t want to get bogged down in too many details, but your purpose is to bring light into a dark area. For all the previous content you have written, I feel like you are bringing me along, making it as easy for me to understand as possible. But at this point I feel once again that I am left in the dark.

  6. People get angry about government because they think government is taking money from them and they have less.

    They can’t see that if government spends less, then they would get less in the first place – because they would likely lose their job or savings income.

    What you need to do is direct that ire about somebody getting something for nothing. The primary dealers get paid for doing absolutely nothing other than taking credits from the Fed and transferring them to the Treasury – because there is a pork-barrelling law in place that enriches them.

    It serves no purpose. It is illogical. It is the prime example of a ‘non-job’.

    If the Fed is capable of setting an appropriate interest rate for the entire economy it is more than capable of setting an appropriate interest rate on an overdraft for a mere government.

    To suggest it can do one and not the other makes no sense at all.

  7. A minor point, and at these low rates today, perhaps irrelevant, regarding the auctions of bills and bonds by the Treasury: when the Treasury conducts an auction, there is a “bid to cover” ratio that is reported, which sums up how strong or weak the demand for the “auction” was from our clearing banks; therefore, I wish to mention that there is some semblance of an auction!

    A ratio that compares the number of bids received in a Treasury security auction to the number of bids accepted. The bid-to-cover ratio is an indicator of the strength or demand for a Treasury offering relative to investor bids deemed suitable in the auction process. A higher ratio would be an indication of a strong or “bought” auction.

  8. “…a bank can literally start an application to become a primary dealer.”

    I bet you never see a member owned credit union become a primary dealer.

    The monetary utopia you envision of the deficit spending US Treasury and the credit/money magician, the FED becoming one cooperative entity, that would democratically satisfy all our earthly needs – Has one little problem – the international trading partners of the US, who are governed by self-interest and don’t always ideologically agree.
    Even if the FED/USTreasury does become a feely-touchy entity with a social moral conscious solving the increasing rich/poor divide, the unfunded social entitlements, and fixing the delapated infrastructure, the rest of the world isn’t going to stand for this US elite exceptionalism, because their already tired of the US dollar reserve system in it’s present form, or any other form of exclusivity. I encourage you to keep thinking about it, because it’s a worthwhile project.

  9. “The question now to be asked is this: If the diagrams we have just developed, illustrating how a modern fiat money system actually works, are true, why then do we behave as if they were not? Why do our political and media leaders—both conservative and liberal alike—insist that the dollars our federal government spends are the dollars it has collected in taxes, or borrowed from the Private Sector pot?”

    A look at humanity’s insistence on clinging to a variety of religions will give some hint. Most humans, whether exposed to simple explanations of fiat money or natural selection will ignore reality and choose to believe what gives them the most comfort. Thus belief in an afterlife persists and so does the idea that money would better serve us if it was tied to gold!! Or if not tied to gold, that the government must borrow from “us” something that it can create (as if that’s possible)!!

    When it comes to understanding “money” most humans can’t let go of the (false) concept that money’s most important feature is to serve as a store of value for the individual holding it. From a naturally selfish point of view that makes sense and it’s an understandable human tendency. Only when one attempts to solve the problem from the point of view of the government can one see that “hard money” makes no sense because it’s neither fair nor sustainable! It’s obvious to anyone willing to apply minimal logic that obligation to the group cannot be fairly imposed among the citizens using hard money of any kind.

    Basically, you must convince people to set aside their (understandable and natural) selfish desire for a money that serves as a secure store of value for the individual, and instead place the most importance on a money(and government from which it cannot be separated) that would fairly impose obligation on each member of the group. (That is not to say that money can’t do both….. but fair imposition of obligation must trump value.)

    Yes, the average Joe must be convinced that the money in his bank account has no more innate value than the money in his Monopoly game. They are both just tokens that have no natural value, but a value that varies depending on the rules of the game and their enforcement. In a way Monopoly is much more fair than our current system. At least in Monopoly every game (generation) starts anew with a fresh standing of account. How fair would Monopoly be if your family met up for a game at Christmas but each player was forced to start the game with his holdings from the game played at Thanksgiving!! Not even the most competitive member of the family would consider that scenario fair. But if it has been the family tradition for years to play be those rules, what would it take to convince the family that it would be more fair to start each new game as a fresh slate??

    That is the system we are up against. It’s so obvious from the outside looking in. But as a player, if you’ve got even one dollar in your hand, which had to come from the game before that, which came from the game before that, you just do what it takes to keep that dollar. For design of a truly fair system, it takes an effort to look at the system from the government perspective rather than the player.

  10. Thank you for simplifying these concepts, from a crazy Canuck with no economics background!
    Could someone clear up a concept that I am still struggling with please?
    1. Banks inject money into the economy when somone borrows. This money is removed from the economy when the debt is paid back.
    2. Governments inject money into the economy and they remove money from the economy when they collect taxes.
    Question: what is the difference?
    Like Jamie, I also had problems understanding the following concept: “The Fed puts these new dollars in the hands of the primary dealers by “swapping” them for “old” Treasury bonds the dealers had on hand.”

  11. I’m really appreciative of these comments–and especially the ones regarding the characterization of the boomers. This is important because it’s central to the theme I’m trying to develop. I’m realizing the frame has not been properly created: what has to be explained, without getting lost in the history of it, is how “DO YOUR OWN THING” in the 60s and 70s morphed into “TRICKLE DOWN” economics and the ideology of money scarcity in the 80s and 90s. This will require a bit of a detour, but it’s an interesting detour for me, personally. So we’ll see where it goes. Thanks very much to the commentators for putting up this road sign!

  12. Re taxation: viewing dollars as I.O.U’s that the gov’t accepts and then destroys, how can we describe a valid, workable economy where person X pays 20,000 dollars in taxes, and person Y pays 100,000? What is a good, workable solution for who pays what? I can see where a gov’t might want to tax carbon industries more, for instance; might tax individual small businesses less, monopolies more. I suppose it all comes down to politics? Well, there is the rub: whose politics?

  13. JD, I think you’ve achieved a good balance in this section between providing important details of the operations and keeping the description accessible. (Not easy to do.)

    Re: the query of a couple of commenters (who raise a good question) about the swap of existing treasuries for new Fed reserves:
    1. These treasuries only exist because of previous govt deficits.
    2. If no treasuries were in existence and the Fed was still prohibited (ridiculously) from lending directly to the Treasury, the Fed would need to lend reserves to the primary dealers and take something else (other than existing treasuries) as collateral.

    This underscores that it is the Fed’s ‘reserve add’ (initial loan to primary dealers) that enables the dealers to purchase the new treasuries without causing the short-term interest rate to deviate from the Fed’s target. (In reality, the reserve add is required for interest-rate management.)

    I took a stab recently at a post summarizing Wray and Fullwiler’s descriptions of the operations. Not sure if it will be of any use to you, but thought I’d mention it in case.