By J.D. ALT
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.
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