In recent essays I’ve made reference to a new framing of what is actually happening when the U.S. treasury issues a bond. It seems to me, this new framing goes to the heart of MMT and might well hold the key to a practical implementation of MMT principles in real world applications. The framing is this:

A U.S. treasury bond is a certificate of issuance of future dollars.

I will expand on this in a moment, but first it is important to say what this framing says a treasury bond is NOT:

A treasury bond is NOT a promissory note promising to pay the bearer a certain number of dollars at some future date—with interest payments along the way or at the date of maturity. Such a promise, obviously, encumbers the federal government with the obligation to “come up with” the stated number of dollars when the future date arrives—to say nothing of the additional dollars to cover the interest. It is the perceived need to come up with these future dollars to make good on the “promissory note” that is precisely the fear and understanding that makes it politically difficult (if not impossible) to propose paying for public goods, services, and pressing social needs by issuing treasury bonds. This perceived need to come up with future dollars is also what makes the “national debt clock” in NYC such a politically fraught (but fraudulent) tabulation—as if it represents future tax dollars that will have to be collected from American citizens.

But the new framing, simple as it is, makes clear this is NOT what a treasury bond is. Part of the confusion is that there are other kinds of “bonds”—corporate bonds, municipal bonds, etc.—which are, in fact, promissory notes. Everyone knows these other kinds of bonds do, in fact, require their issuer to come up with future dollars to make good on the promissory note and its associated interest payments. How could a U.S. treasury bond be any different?

In fact, a U.S. treasury bond actually is quite different. The difference lies in the unique reality that, unlike a corporation or municipality, the U.S. treasury, in concert with the Federal Reserve, has the legal authority and mandate to create U.S. dollars, as necessary, to meet the obligations of the U.S. sovereign government. And the way these necessary dollars are “created” is by the operation of issuing treasury bonds, an operation which proceeds as follows:

When Congress tasks the treasury with an obligation to spend, and there are not enough dollars in the treasury’s tax receipt accounts to meet the spending obligation, the treasury and Federal Reserve operate in concert to have the necessary dollars deposited in the treasury’s spending account. In the first step of this operation, the treasury issues a tranche of future dollars—dollars which become spendable at a specified future date. This tranche of future dollars is the treasury bond. The Federal Reserve arranges for its system of federal reserve banks to trade existing bank reserves for the treasury bond at a discount (e.g. the banks trade, say, 0.9 existing reserve dollars for 1.0 future reserve dollars). The treasury then uses the existing reserve dollars it has received in exchange for the tranche of future dollars to meet the spending obligation it’s been tasked with by Congress. When the specified date associated with the tranche of future dollars (the bond) arrives, the future dollars are automatically “activated” as present dollars in the federal reserve banking system.

A crucial appendix to this operation is this: If, when the treasury bonds are issued, there are not enough existing bank reserves available in the federal banking system to make the trade, the Federal Reserve, itself, is authorized to issue new dollars, trade them for the bonds, and hold the bonds on its own balance sheet. The upshot, in other words, is that the treasury can never issue a bond that it is unable to trade for current spendable dollars.

Why this could be existentially important

Understanding a U.S. treasury bond as a tranche of future dollars which are issued by a concerted operation of the treasury and the Fed may seem like a “chicken and egg” exercise. What difference does it make if a treasury bond is viewed as the issuing of future dollars, or viewed as a promissory note for dollars to be paid to the bond-holder at some future date? If, so long as the U.S. sovereign government is alive and kicking, there’s no doubt the promissory note will always be fulfilled, what difference is there between the two perspectives?

The answer is, “all the difference in the world”—and all the difference in the future world we hope, as a collective society, we can bring into being.

Fundamentally, the difference lies in what each perspective makes it politically possible for Congress to undertake and accomplish with federal funding.

If we hold to the “promissory note” narrative, when the treasury bond matures, the federal government must collect tax dollars to redeem it—or (if that is not politically feasible, which, inevitably, it is not) it must then issue a second bond to obtain the dollars necessary to redeem the first, ad-infinitum. Lot’s of people believe this “ad-infinitum” part is what has been happening for a long time (hence the running, blinking “national debt” clock in NYC). This makes federal government finance seem like a Ponzi-scheme. And we all know what happens, inevitably, with Ponzi-schemes: they collapse. Therefore, paying for federal spending with treasury bonds—instead of tax collections—will lead to collapse. And proposing something that will lead to collapse is not anything a politician can hang his hat on.

The consequence of the “promissory note” narrative—and the political squeeze it puts on Congress—is that new federal spending programs of consequence are virtually impossible to put forward. And if they are put forward, they must be packaged in a subterfuge of tax-investment-cost-sharing-projected-economic-growth hoodwinking that makes it appear that present tax-rates will somehow produce the dollars necessary to pay for the program.

The “future dollar” narrative, in contrast, has a profoundly different political energy: When the treasury bond matures, the dollars which it already contains simply become active, spendable dollars in the federal banking system. The bond-holders immediately make a profit because the number of dollars activated are greater than the number of dollars originally traded for the bond. There are ZERO tax-collected dollars involved—or required—whatsoever to “make good” on the bond or its premium. The only consequence is that something of great benefit to collective society is undertaken and accomplished.

Given this simple perspective, a politician might propose, for example, a federal spending program that pays for the creation and staffing of early childhood education and day-care facilities in every neighborhood, ward, and borough in the country—enough facilities and enough teacher-care-givers to ensure that every American family has a convenient choice for the day care of their pre-school kids. Let’s say the projected federal spending necessary to set up and staff these facilities is $30 billion a year. Instead of “subterfuging” about how higher tobacco taxes and decreased “crime costs” will offset the new spending (as president Obama did in 2015) our new politician has only to propose that “Early Childhood Care” (ECC) treasury bonds—in the amount of $30 billion (future dollars)—will be issued each year. No new taxes are necessary. No increase in the “national debt” is threatened. Just a lot of American citizens and small, care-provider businesses getting paid to teach and nurture pre-school kids—instead of leaving those kids sitting in front of TVs (or worse) for hours on end during the formative days and months of their early brain and personality development. (And, of course, not a small number of financial investors will have, as well, added guaranteed future dollar profits to their portfolios.)

Treasury bonds, then—understood as certificates of the issuance of future dollars—become the primary vehicles of MMT economic policy. There is no need to change anything in the existing treasury-Federal Reserve operations. There is no need to modify the rules allowing the treasury or the Federal Reserve to do anything different than what they already do every day of the year. The only thing necessary is to change our understanding of what a U.S. treasury bond is, and what is actually happening when it is issued—and when it matures. Doing so will not only help resolve a wide range of pressing political and social struggles, it will prepare us to confront, as a collective society, the staggering challenges that are coming with climate-change. We’re never going to collect enough tax-dollars to pay for the public goods and services those challenges will entail, so we’d better start thinking—now—about a new macroeconomic framework. “Treasury bonds are future dollars” might well be a significant part of that framework.

28 Responses to FUTURE DOLLARS

  1. Frank Wolstencroft

    Why not have the US Treasury create the money debt free on their computer as US Treasury notes equal in value to US federal reserve notes? ?

  2. I already understand MMT, so I don’t need any convincing. For those who do not accept the truth off MMT, I fear that they will just think this essay is an attempt to convince them that the naked emperor really is fully clothed if only they looked at him from the proper viewpoint.

  3. Andrew Anderson

    Fundamentally, the difference lies in what each perspective makes it politically possible for Congress to undertake and accomplish with federal funding. J. D. Alt

    The true perspective is that the debt of a monetary sovereign is inherently risk-free and therefore should yield AT MOST 0% with shorter maturities having NEGATIVE yields (or negative interest in the case of demand account balances at the Central Bank, aka “reserves” in the case of banks) .

    Why? To avoid welfare proportional to account balance, i.e. welfare for the rich.

    Yes, let’s have generous welfare and pensions but let’s not provide risk-free gains to the rich in the process.

    Moreover, negative yields on new new deficit spending shall, over time, convert the National Debt to a revenue PRODUCER, not a revenue CONSUMER.

  4. I guess you’ve discovered the perpetual motion machine. Not heard about such genius since ptolemy and epicycles. Genius!! Bravo!

  5. Marvin Sussman

    Much too complicated or to interest or to convince the vast majority of voters. The simplest story is told by Dr. Kelton:
    1. The Treasury pays all bills (including bond interest and principal) authorized by Congress, which has the “…Power to coin Money…” granted by the Constitution (I, 8), which specifies no limit.
    2. To maintain a stable balance of both the bank reserves and the Fed’s overnight federal fund interest rate, the Treasury matches all payments to the federal government (including taxes, fines, fees, tariffs, and bond purchases) against Treasury checks being deposited during bank business hours. If there are not enough payments on hand, the Treasury or the Fed sells bonds. If there are not enough Treasury checks on hand, the Fed buys bonds.

    Effectively, all payments to the federal government are shredded on or shortly after receipt and have no bearing on the ability of Congress or the Treasury to pay for desired programs. With its Constitutional powers, Congress can buy any goods and services available in the marketplace, including idle labor. That’s why it can pay for healthcare and expense-paid education for all: these goods and services are already in the marketplace.

  6. I am not an economist, so I’m posing this as a question as much as a factual statement.

    Without the spending constraint posed by the gold standard is there even a need for Treasury bonds? The reserves from spending must exist to enable the purchase of bonds, so the spending has already occurred at the time a bond is purchased. It appears that the only utility, beyond controlling interest with overnight rates, of bonds was to make some amount of reserves unable to be converted to gold, thereby defending a now non-existent gold reserve.

    The formula for determining “deficit” with the gold standard was “Spending – Taxes – Reserve = Deficit”.
    The present formula simply removed the reserve from the mix; “Spending – Taxes = Deficit” which explains why the bonds now represent the entire “net” money supply.

    The only reason bonds must be issued is to satisfy the mandate to “match” deficit spending with bond issues remaining in our system as a self-imposed but antiquated provision of the Federal Reserve Act. Given the damage potential of the low hanging fruit for political fodder the bonds present it would seem that simply eliminating them would be the wiser move. Interest could be offered on excess reserves in lieu of bond offerings, or just allow banks to set market pricing on overnight rates between themselves. The natural interest rate is anything above zero, so the monetary policy of the Fed is only useful in raising the rate, making possible the horrible policy of forced unemployment as a control mechanism countering fiscal policy as perceived correct by Congress.

    Viewing bonds from the perspective of “sequestering reserves” instead of borrowing makes them less than useless as a part of a fiat currency regime.

    • Keith, I think you have it right. To me, the Government issues three kinds of money; cash and coins (walking around money), reserves (checking account money) and T-bonds (savings account money). All three kinds are promissory notes denominated in dollars (that is, money) created by the Government out of thin air. All three are liabilities of the Government and financial assets of the private sector. It’s true that bonds are technically more like a CD than a savings deposit, but as a practical matter T-bonds can be easily exchanged for reserves or cash, probably in seconds if not minutes if you know what you’re doing.

      Keep it simple: the Federal Government finances its spending by “printing money*”. Don’t let the fact that some of that money is in the form of bonds obscure that fact.

      *I know that many MMTers hate the term “printing money.” But the general public understands the term, even if today “printing money” most often just means direct deposit.

  7. Pamela de Maigret

    How does this effect inflation?

    • Pamela, I’d think little. During QE, the government (Fed) bought about $4T of bonds, which is functionally equivalent to the government (Treasury) not issuing them in the first place. Mainstream economists believed this would be inflationary, MMT said it wouldn’t be. In the end, it wasn’t.

      Always think of inflation as caused by spending, which is influenced by government spending and taxation and corporate spending but most importantly by the ability and willingness of consumers to use income, savings, or credit in order to spend. The real purpose of bond sales is to drain reserves from the banking system, for the purpose of manipulating interest rates on the reserves that remain.

  8. Jackson Fitzgerald

    Bonds don’t need to be viewed as future Dollars because, functionally, they are current Dollars. As Mosler says, the bonds are the ‘new money’ in the system.

    It’s just swaps of one kind of ‘Dollar’ for another – as Warren, Stephanie & Scott have illustrated for the purpose of maintaining a base rate.

  9. My response to everyone who wants the treasury to just issue money directly to meet its spending obligations is this: Why place upon yourself the huge burden of legislatively modifying laws/rules of the existing monetary system when the same outcome can be achieved without changing anything? The outcome, in fact, already exists—we just call it by the wrong name (“deficit spending”) which prevents us, politically, from actually using the outcome (direct sovereign spending) in a proactive way. This is the point of the essay.
    To those who think of money created by treasury bonds as “debt money,” the point of the essay is similar: Treasury bonds do NOT create debt and thinking about them in that framework is precisely what prevents us from proactively using them to pay for large collective undertakings.
    Finally, I used to visualize that tax dollars were destroyed—and conceptually, in aggregate, that can be a useful framing. But apparently it doesn’t really happen. Tax dollars go into the Treasury’s various tax accounts in the federal reserve banking system—and they are credited when the Treasury spends.

    • This essay explains a subtle and quite important point. Government debt is not debt “for” government money, but “one and the same thing” as government money. IMHO misunderstanding this was a major – probably crucial – cause of the decline and fall of the Keynesian consensus. Dan Kervick, a former MMTer, used to post here, but got this wrong in some old posts here in just the same way as many economists did in the mid 50s-70s, and went up the same blind alley.
      The only quibbles are: 1) that Treasury bonds are debt, just the same as federal reserve notes and reserves are, should be emphasized more. And 2) tax dollars are destroyed upon receipt – that really does happen and is the best way of thinking of things. The real problem is NOT “not thinking of treasury bonds as dollars”. The real problem is “not thinking of dollars as bonds (debt, credit).” Always think of money as a creditary relation – or equivalently draw up T accounts – and you won’t go wrong.

      • As for T accounting in the Fed’s money creation “account” have you thought of what it actually means to make a debit in this T account? You are subtracting a finite debit from an infinite supply of money. Infinity is different from finite numbers in that if you add or subtract from infinity, there is no change to infinity. When you make an analogy, you have to be wary of how the analog differs from the thing you are comparing it to.

        MMT is trying to tell you that the Fed’s money making power is infinite. By the way, just because MMT is trying to explain to you how monetary policy works, does not mean that MMT tells you that there is no such thing as fiscal policy.

  10. Why is is in the best interest of the american citizenry to allow the financial services industrial complex engendered by the workings of the monetary creation powers as they stand,with all of its inherent conflicts of interest and shown past perversion of wall street and any kind of market based fundamental logic;to keep this perennial source of profit from near free money. When the best answer has already been proposed on the floor of the house in the 2011, and 2012 sessions as with the “the N.E.E.D act”, as proposed by rep. Kucinich., in HR 2990 in 2012.
    It seems irresponsible to allow the financial services sector with such a history of fraud to hold onto this golden goose, when the treasury itself ought to just issue the money, free of debt. Then congress can spend it on things the public can at least have the opportunity to vote on , come election time.

  11. Let us remember the purpose that was made of war bonds during WW II. It was not to “finance” the war. The purpose was to temporarily remove from circulation the money that was being earned by workers. Most production in the economy was going to the war, and there was little left to satisfy consumer demand. If the workers were allowed to spend the money they were earning, there would have been tremendous inflation. Delaying that spending till after the war, prevented inflation during the war, and was available to stimulate the economy after the war to prevent depression.

    The selling and redeeming of bonds can still play a role in controlling inflation and depression. It would be foolish to dismiss their utility.

  12. Hey, J.D.
    And above followers of the MMT ‘frame’-work….
    How ’bout you send this “”Let’s call the public debt …. ‘future money’ ….because “” essay to a lawyer, an accountant and a financial administrator at the Department of Treasury (because so much is being said about what Treasury Debt is NOT ), and also to another tranche of experts at the Fed, and ask for their feedback?
    Absent that, how ’bout I meet you in DC and we visit Treasury and the Fed for the same purpose?
    If you can’t make it personally, then maybe Joe Firestone or Rohan Gray ?
    Because this layering of meme upon meme – more lipstick – is getting kind of hard to comprehend.

  13. Creigh, T-bonds cannot be traded for reserves at face value of the bonds. T-bonds are only redeemable at face value when they mature. Traded at any earlier date, you buy and sell them at a discount. There is a an opportunity cost in buying a T-Bond. That cost is the inability to use the entire face value of the bond until it matures. If you could have traded your war bonds in WWII at face value before they matured, they would not have served the purpose of delaying spending. The interest of the bond is what the market thinks is the opportunity cost value is in dollars.

    • Yes, I get that bonds are tradeable at a discount. I just don’t think that makes a very big difference to the economic activity that issuing bonds vs. issuing reserves would make. The discount is currently very small, and the difference in “wealth effect” of bonds vs. reserves is also very small, as far as I could see. If a person is holding a bond and has an inclination to spend they’re gonna spend. If a lot of people are holding bonds and have an inclination to spend, the volume of bond sales will soon force the Fed into the bond buying market if it wants to defend an interest rate. Maybe the Fed will let the rate rise? I think I’m convincing myself that the effect, if any, would be that rising interest rates would depress spending. Perhaps in the housing market, but in other sectors it would seem to be small.

  14. To Calgacus: Yes, but isn’t it the case that the “debt” is merely a “tax-credit”–of which the sovereign government has an infinite supply?

    • J.D, yes, that’s exactly right. All the Federal Government’s moneys (“liabilities” or equivalently “debts”) whether they are cash, reserves, or outstanding bonds, are promises to accept the money back as tax payments, either now or at maturity. This is in contrast to bank money liabilities (or any other private debt) which are promises payable in Government dollars. And a bank–or the banking system as a whole–does not have an infinite supply of Government dollars, and so carries a possibility of default.

  15. I hope many bond holders are not horrified to learn that when interest rates go up, the value of their long bond holdings go down substantially. Then again, a lot of non-professional traders like to buy high, and sell low. They don’t make any money that way, but the professionals love to take them to the cleaners. Until I read Michael Hudson’s book “Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy” I didn’t realize how seriously I needed to take interest payments.

    Frotm the article The Profits of Financialization by Costas Lapavitsas and Ivan Mendieta-Muñoz.

    The financialization of capitalism has been marked by the sustained rise of financial profits. In the United States, financial profits as a proportion of total profits rose enormously from the early 1980s to the early 2000s, collapsed during 2007–09, and subsequently recovered, but without reaching previous heights.

    You have to realize that interest and debt is becoming an obscenely large part of all the profits made in the economy. You cannot dismiss the impact of interest rates so easily.

  16. Creigh, The buying of treasuries by the Fed is hardly the equivalent of the Treasury not issuing them in the first place. In the first place, to the degree that Treausuries are future money and not present money, financing the deficit with bonds delays the stimulative effect of deficits into the future. The buying of bonds by the Fed puts stimulative money into the economy immediately.

    It would seem to me that financing the deficit through issuing bonds greatly diminishes thei economic stimulative effect of deficits unless the Fed buys substantial amounts of these newly issued bonds. Moreover, Keymes explained why throwing liquidity at people does not necessarily get them to spend that liquidity on purchasing consumer goods. As has been shown, that money can just as easily be put into non-economically productive uses such as inflating the stock market. Inflating the stock market does not increase consumer spending, and it does not solve the underemployment problem. (I define underemployment to include people holding jobs that do not pay a living wage.)

    Under the prevailing circumstances, all the QE by the Fed did produce inflation in the stock market, but not inflation in the consumer price index. All that money had to go somewhere, and buying and producing more goods is not where it went.

  17. Calgucus, Treasury bonds is debt at least in so far as the government promises to retun your principal and pay you interest. When the Fed injects liquidity into the economy directly, there is no promise from the government that you will get anymore than they liquidity they injected. When somebody gives you something with no promise of anything else, I just don’t see how that is debt. The lesson that Keynes taught, and too many supposedly expert economists seem to have forgottten lately, is that monetary is not the only policy, and sometimes monetary policy has very little effect. Sometimes it takes fiscal policy to do what monetary policy cannot do, The analogy to pushing on a string is very apt one. When the pull of weak monetary policy is pulling a restraint on the economy, then loosening that pull ldoes work. When the freedom of perfectly adequate monetary policy allows the economy to work as strongly as it wants to, then the impact of loosening monetary policy is where you come into the pushing on a string. What foolish capitalist would go from closing down factories because there aren’t enough customers to buy its output to iunvesting in opening up new factories becasue there was money avaliable to open those factories. Any rational capitalist would rather put the money aside until the economy was able to make him or her a profit before he or she would waste it on producing stuff that won’t sell. As I like to say “What is it about not enough freakin’ customers do you not understand?”

  18. This is a very creative proposal, but let me again suggest that the problem here is not so much economic or linguistic as philosophical. Even some of the strongest advocates of MMT have not yet fully wrapped their heads around the concept of fiat money. Once that concept is thoroughly digested, there emerges an elegant simplicity which any citizen–even an economist–can understand. God said let there be light and viola–light comes into being from nothing but divine fiat. The U.S. Congress says let there be this amount spent for that purpose and viola–money comes into being from nothing but governmental fiat. That’s about as elegantly simple as it gets, and if it’s good enough for God, it should be good enough for us. As Mitchell and Fazi explain in “Reclaiming the State,” the machinations of the federal reserve and the artificial tie-in of federal expenditures to bond sales are, at best, a strange and unwieldy accounting system; at worst, a deliberate obfuscation and obstruction of the natural way–the elegantly simple way–that fiat money is meant to work.

  19. Sectoral balances approach.

    The government issues bonds to manage the dollar. T bonds are dollar management instruments, in regard of sectoral balances.

    Managing inflation/deflation in private sector, and foreign sector, independently.

    It’s about managing the dollar in real time, not the future.