Can the US Treasury run out of money when the US government can’t?

By Eric Tymoigne

On one side, critics argued that MMTers say nothing new when MMTers emphasize US government’s monetary sovereignty; “everybody knows this” is a common refrain. On the other side, critics argue that MMT incorrectly merges the US Treasury and Fed into a US government, which ignores the fact that the US Treasury can run out of money because it needs to tax and issue bonds first before it can spend.

Something is amiss. This post shows that MMT can be understood from two viewpoints. One is the consolidation viewpoint and another is the coordination viewpoint. Both lead to the same conclusion; money is never an issue. US government can’t run out of money, US Treasury can’t run out of money. They are other implications in terms of public finances (the role of taxes, the role of Treasury issuances, debt sustainability, etc.) and monetary policy but the post does not address these issues.

The Consolidation Viewpoint

In 2005, while testifying in front of the House Budget Committee about the solvency of Social Security, Greenspan noted:

I wouldn’t say that the pay-as-you-go benefits are insecure, in the sense that there is nothing to prevent the federal government from creating as much money as it wants and paying it to somebody. The question is, how do you set up a system which assures that the real assets are created which those benefits are employed to purchase. (Greenspan in House of Representative 2005, 43)

Social security can’t be insolvent; there is a potential resource problem, there is never a financial problem. When Standard & Poor’s downgraded US Treasuries in 2011, the hysteria about the debt reached a new peak, and yet again all informed pundits understood that a credit rating for the US public debt is irrelevant:

As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills. In this sense, the government is not dependent on credit markets to remain operational. Moreover, there will always be a market for U.S. government debt at home because the U.S. government has the only means of creating risk-free dollar-denominated assets (Fawley and Juvenal 2011)

This is not an issue of credit rating, the United States can pay any debt it has because we can always print the money to do that. So, there is zero probability of default (Greenspan 2011)

We’ve got the right to print our own money that’s the key. Greece lost their power to print their money. If they could print drachmas they would not have this problem. They’d have other problems, but they would not have a debt problem. Seventeen countries in Europe gave up their right to print their own money, that’s enormously important. We’ve got the right to print our own money so our credit is good (Buffet 2011)

Interest rates on US Treasuries proceeded to fall further after the downgrade as the Federal Reserve kept its course of pushing down rates. Once again, everybody was reminded that the financials are irrelevant for a monetarily sovereign government. In 2014, Larry Summers nodded by noting that: “We have a currency we print ourselves, and that fundamentally changes the macroeconomic dynamics in our country.”

In all these cases, the authors use a rhetorical strategy that recognized the logical implications of monetary sovereign. This strategy cuts to the chase by pointing to the fact that that money is never an issue for “the US government/the United States.” Everyone nodes in agreement until someone in the room raises his hand and says: “Hey! But hold on a second! This is not how things work, the Treasury needs to tax and issue bonds first before it spends, it can’t print money at will.”

The Coordination Viewpoint

Answering that query involves changing the rhetoric to include the institutional features involved in the implementation of monetary sovereignty. Instead of saying that the US government can’t run out of dollars because it is the issuer of the dollar, one just needs to state that the Fed and Treasury coordinate to ensure that monetary and fiscal policies are implemented smoothly. Once again, money is not an issue for fiscal operations. The Fed always accommodates the financial needs of the Treasury, either directly or indirectly, in order to ensure that the payment system is not disrupted. The coordination has allowed the Treasury to meet all its obligations.

The Fed is the fiscal agent of the Treasury, the underwriter of Treasuries, and a guarantor of the stability of the payment system. While a lot is made about the independence of the Fed, full independence is a veil. MacLaury at the Minneapolis Fed put it this way:

First, let’s be clear on what independence does not mean. It does not mean […] that the Fed is independent of the government. Although closely interfaced with commercial banking, the Fed is clearly a public institution, functioning within a discipline of responsibility to the “public interest.” […] Monetary judgments must be able to weigh as objectively as possible the merit of short-term expedients against long-term consequences—in the on-going public interest. (MacLaury 1977)

Chairman Eccles again provides further insights on the financing of the Treasury:

“[In past Congressional hearings] there was a feeling that […] Government [borrowing] directly from the Federal Reserve bank […] 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. […] 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. (Eccles in U.S. House, 1947, p. 8)

The fear that the Treasury could run out of money because a Treasury-security auction could fail is unwarranted. The Fed makes sure Treasury-security auctions are always successful:

Now today in pricing a new Treasury issue, the Federal is in the position of underwriter. During the period of the offering the Federal tries to see to it that the Treasury’s issue is successful […] It stabilizes the market just the way any underwriter does. (Martin in U.S. Senate, 1952A, p. 96)

Throughout the past decades the Fed has done so in many different ways such as buying whatever was leftover in the auction, providing a dependable refinancing channel to the Treasury by replacing its maturing treasuries, and financing primary dealers that must bid at Treasury auctions. For example during World War Two:

It was evident that all funds needed for financing the war which were not raised by taxation or by the sale of Government securities to nonbank investors would need to be raised by the sale of securities to the banking system. At first commercial banks were able to draw down excess reserves by several billion dollars, but later they had to be supplied with a considerable amount of additional reserve funds in order to purchase the necessary securities […] In general, further reserve funds were supplied by Federal Reserve purchases of short-term Government securities. (Martin in U.S. Senate, 1952B, p. 288))

Bruce K. MacLaury summarizes all these points quite nicely:

The central bank is in constant contact with the Treasury Department which, among other things, is responsible for the management of the public debt and its various cash accounts. Prior to the existence of the Federal Reserve System, the Treasury actually carried out many monetary functions. And even since, the Treasury has often been deeply involved in monetary functions, especially during the earlier years … Following the 1951 accord between the Treasury and the Federal Reserve System, the central bank was no longer required to support the securities market at any particular level. In effect, the accord established that the central bank would act independently and exercise its own judgment as to the most appropriate monetary policy. But it would also work closely with the Treasury and would be fully informed of and sympathetic to the Treasury’s needs in managing and financing the public debt … The Treasury and the central bank also work closely in the Treasury’s management of its substantial cash payments and withdrawals of Treasury Tax and Loan account balances deposited in commercial banks, since these cash flows affect bank reserves. (MacLaury 1977)

The Federal Reserve and the Treasury must work together to support the financial system because they are ultimately two sides of the same coin—the US government. The Fed cannot be fully independent from the Treasury:

the history of central banking, as was brought out earlier by the chairman, is that central banking cannot get too far away from the policies of Government too long; and that while central banks historically have won battles against the Government, they have always lost the war. (Wiggins in U.S. Senate, 1952A, p. 235)

The central bank has independence of tools (interest-rate setting) and goals (inflation, etc.) but must work fiscal operations into its daily activities. It has done so through multiple means that have varied overtime such as direct financing, allowing intraday overdraft, and supporting primarily dealers. If the Fed does not play ball to meet the needs of the legislative and executive branches, there will be major disruption to the payment system and democratic system, and Congress can always take back the monetary powers it granted to the Fed. As Bernanke put it: “The Fed will do whatever Congress tells us to do.” The ball is in the hands of Congress and, at times, it has dropped the ball by political games surrounding the debt ceiling.

26 responses to “Can the US Treasury run out of money when the US government can’t?

  1. Andrew Anderson

    Social security can’t be insolvent; there is a potential resource problem, there is never a financial problem.

    Except the economy runs off bank deposits, not fiat, and the government-privileged banking cartel can create deposits too (“Bank loans create bank deposits”) and compete for the same resources as deficit spending – but not for the general welfare but for the private welfare of the banks themselves and for the most so-called credit worthy.

    And guess who’ll be blamed for any politically unacceptable price inflation? The banks or deficit spending?

    When, if ever, do MMT advocates ever propose to de-privilege private credit creation, aka “the banks”? Eh, Eric?

    Never seems to be the answer I’ve been getting.

    • Eric Tymoigne

      Banking is a public-private partnership. If the private sector does not do its job properly to develop the economy, it should be closed. We (among other post keynesians) did quite a bit of work on community development banks, on the negative impact of financialization, on the instability of private finance.

      • Andrew Anderson

        If the private sector does not do its job properly to develop the economy, it should be closed. Eric Tymoigne

        One would think de-privileging the banks should be tried first, which it never has been, despite claims to the contrary, since when in history have citizens been able to have accounts at the Treasury or Central Bank itself with all other explicit (e.g. deposit insurance) and implicit (e.g. expensive/scarce fiat) privileges having been abolished as well?

        We (among other post keynesians) did quite a bit of work on community development banks, … Eric Tymoigne

        The current two-tiered banking model is a relic of the gold standard when fiat was too expensive or scarce for the general population to use but largely only depository institutions, aka “the banks.”

        Then why, with inexpensive fiat, should we cling to a model that besides being inherently unjust* and historically unstable, is obsolete as well? What is wrong with a “loanable fiat” model with banks as mere loan brokers? With a Citizen’s Dividend to drive interest rates as low as desired but without cheating those who need to save and the non so-called credit worthy?

        *I.e. Who is worthy of what is, in essence, the public’s credit but for private gain?

      • Andrew Anderson

        If the private sector does not do its job properly to develop the economy, it should be closed. Eric Tymoigne

        Does “do its job properly” still mean, as it always has with government-privileged banks, financing automation (or off-shoring) to dis-employ the public with what is, in essence, the public’s credit? If so, where is the Citizen’s Dividend in the MMT (or your) scheme of things?

    • Andrew Anderson: Speaking for myself only, MMT is not advocating a revolution of the U.S. monetary/financial system—or even modification of it (except possibly enhanced regulatory oversight of private banks). MMT is simply describing the system as it currently exists. So MMT would never say or advocate what you are asking. MMT seems “revolutionary” only because its description and analysis of the existing system reveals a markedly different set of operations and relationships than what mainstream economists, politicians, and pundits habitually imagine to be the case. As a result of that different description and understanding, MMT is saying that what we can undertake to accomplish as a collective society is dramatically different than what we are told. It’s certainly true that government spending for the collective good, and private spending for private gain will be competing for the same “resources” to get things done. What MMT points out is that “money” is NOT one of those resources. Human society, after all, really has only one set of resources available to it: what the natural processes of the Earth can produce, and the human labor and ingenuity necessary to process and consume that production.

    • What sort of legal changes are you suggesting?

      • Andrew Anderson

        That we abolish, in a responsible manner, government privileges for the current two-tiered banking model, a relic of the gold standard, in favor of a “loanable fiat” banking model with banks acting largely* as loan intermediaries between accounts for all at the Central Bank or Treasury.

        *Deposit creation should not be forbidden, imo, but de-privileging the banks might easily make this too expensive; e.g. negative interest on large (e.g. ” the banks’ “) accounts at the Central Bank is certainly justifiable to penalize hoarding or other misuse of fiat.

  2. MMT could economise on vast truckloads of oblique, unnecessary language by admitting that in the real world the Fed can always act as an effective lender of last resort to Treasury.

    • Eric Tymoigne

      Was the post oblique? Yes about LLR but it is deeper than this. There is constant coordination either direct or indirect. We need to move away from the rhetoric that it is abnormal for the Fed to help fiscal implementation, when in fact it is the normal state of affair.

    • Nguyen van Tuan

      You got it ass backwards buddy, the lender of last resort is the Treasury on behalf of the US government.

  3. Being an attorney, I’m often amazed by people who launch into long discussions about what’s possible for the federal government to do or not do monetarily/economically, without clearly distinguishing between the bedrock constitutional powers of the federal government to create currency, control spending, regulate interstate commerce, etc., AND the ephemeral legislative vehicles created by the federal government, vehicles which can be abrogated or altered at any time, by which the government has chosen to implement its inherent constitutional powers. So often, the permanent governmental powers, bestowed by the Constitution, are thrown in with the current legislative vehicles (i.e., the Federal Reserve System), and the two are then spoken of, in one breath, as equally forceful constraints on the possible scope of federal monetary/economic agency. This is a key categorical mistake, often promiscuously made by proponents of mainstream economics, and it helps to explain much of the muddle in the ongoing attacks against MMT.

  4. @Andrew Anderson

    The banks are creatures of the government, as examination of their charters will reveal.

    They may squawk, but they will do as they are told.

  5. David Milburn

    If Prof P G Mehrling (formerly of Columbia U) can be believed, the FED became a dealer of first resort by purchasing the toxic bonds. They were the dealers for the US Govt and expanded their own balance sheet from nothing.

    In addition as Prof W F Mitchell states, the bid to cover ratio is proof positive that no matter what the doubters say, bond auctions are hot contests where there is no shortage of buyers hence the ratio is always more buyers than what is on offer – end of argument.

  6. F. Thomas Burke

    Andrew Anderson:
    I’m a novice here, but why would MMT “de-privilege private credit creation”?

  7. My comment was MMT-generic.

    Against that backdrop, the post itself is quite fine.

    But I’d anchor it here :

    “such as buying whatever was leftover in the auction”

    the rest is essentially CB interest rate control with constructive liquidity tactics and effects for auctions, etc.

    my generic point is that it is better to recognize the Treasury bank accounts (Fed and commercial) rather than coming out swinging about not being able to run out of money or spending preceding taxing/borrowing or the like

    also – known transfers between the two treasury accounts facilitate CB reserve control, which supports your point

  8. one additional generic point

    the idea that the Fed supplies the bank reserves that enable tax payments (or bond settlements) is not really an asymmetric one

    the Fed supplies banks the reserves they require to make payments of all types to all counterparties

    Treasury bank accounts are just another type of reserve account and/or commercial bank customer account

    and nothing that MMT has to say really requires the skirting of simple deconsolidated explanations

    knocking off those who are simply ignorant of double entry bookkeeping should be child’s play

    Paul, Larry, … etc.

    but keep the accounting simple and straightforward

    everything else then falls into place

  9. Thank you for the explanation Eric. It does shed light. (I’ve read you previous articles.) But I continue to believe that MMT’s weakness in communicating to lay folk is that they do not frame the issues in terms relatable to businesspeople, workers, regulators, bankers, bureaucrats, politicians and humans in general. Folks understand 1) money in the bank, 2) lines of credit and their limits, 3) employment, 4) inflation, and 5) laws. And under current laws: the Treasury needs to TAX or BORROW in order to SPEND. Borrow indirectly from the Fed but borrow nevertheless. If you can prevail on the high profile advocates of MMT to say:
    • Instead of: “Taxes and borrowings don’t fund spending.”; which under current LAWS is FALSE, and consequently generates endless pushback from civilians.
    • How about: “Right now taxes and borrowing fund spending. In order to fund…(Job Gty, etc)… the best alternative is to amend the Federal Reserve Act to allow the Fed to directly fund Treasury spending which it can’t right now, or to clarify the Platinum Coin.”

    The alternate has the advantage of being true, and making total sense. My approach would be: Revise Federal Reserve Act so Federal Reserve Bank reports to the Treasury…Execute on national “To-Do List” (infrastructure…)…Fund through securities purchased by the Fed – either a loan or just have Fed “gift” it to the Treasury. (I think dealing with piles and piles of debt and Magic Coins is MUCH tougher politically.) Issue currency!

    • Eric Tymoigne

      Francisco, three things:
      1- Regarding your suggestion to have the Fed directly fund Treasury (“How about: ‘Right now…”), there is no need to do this. The system works fine as it is as the Fed routinely accommodates the borrowing needs of the Treasury and ensures that tax payments get to the TGA in a smooth fashion. Today it does so by ensuring that issuance of Treasuries and transfer to TGA do not impact FFR (and post crisis, with the abundance of reserves, the Fed has had an easier job to fulfill that goal).
      2- Regarding the role of tax and Treasuries there are two cases.
      2a) In the consolidation view, it is strictly true that taxes and Treasuries issuance are not fiscal tools. None of them leads to a gain of monetary assets in the balance sheet of the US gov. What they do is destroy reserves. While many people do use the consolidation view when focusing on monetary creation, MMT also shows that they are more implications. What puzzles me is that people are willing to accept the monetary side (“The US can issue our one money so we are fine”), which is false in a strict sense of the operational reality, but they cry wolf when MMT continues by saying that taxes and Treasuries don’t fund the US government. This is false in the strict sense of operational realities but true in a consolidated gov.
      2b) First, in the coordination view taxes and Treasuries issuance have a double role. Yes they fund the Treasury (i.e. replenish the TGA) but they also are central to monetary-policy operations. Thus the Treasury may issue securities if it is in a surplus, or at the request of the Fed even if its deficit is covered. Treasury may ask the Fed for direct financing even if Treasury has a lot of money in its accounts. Second, the Fed is indirectly financing the Treasury. We just put intermediaries between them to feel good that the Fed and Treasury are not directly linked and to pretend that there is some price-discovery mechanism in the setting of interest rate on the public debt.
      3-The “taxes don’t fund the US gov” (we don’t say that taxes don’t fund the Treasury) is a rhetorical strategy that is true (again it comes from the consolidation view: “US gov”). It has the advantage of again getting to the bottom of the logic of monetary sovereignty and to show the true purpose of taxes (i.e. to give the gov the ability to spend without generating inflation because there are willing sellers). If you don’t like it you can say that that “the Fed always accommodates the financial needs of the Treasury but that does not mean that taxes are not needed”. And then you need to explain yourself by going into the operational details. It is less effective rhetorically as eyes will glaze over quickly (people like quick-bite punchy answers). Imagine how long Greenspan’s answer about SS would have to be to represent accurately operational realities. The main point would have been lost to the audience (i.e. the point that financial constraints do not exist). At least “taxes don’t fund” get you thinking.

  10. it is obvious from the history of the debates (PK being an iconic example) that mainstream economics is not qualified to criticize MMT in any effective or credible way

    this is the result of fundamental educational failure in the area of deep accounting logic

    and to suggest that the government budget equation rebukes this view is a joke

    but this does not mean that MMT is immune from some very justifiable criticism

    these are two different problems

    the solution to the second could drive the first further into the deeper darkness and ultimate expulsion it so richly deserves

  11. balance sheet stock consolidation is non-contoversial in terms of the facts and the methods and the purpose

    flow consolidation can be quite a different matter – if non-factual distortions and contradictions are invoked against otherwise observable facts in granular time

  12. The founder’s apparent obsession with the notion that taxes are paid with bank reserves is also problematic. It must be qualified to the point where it is seen on its own as only meaningless. It suggests on its own that households don’t pay taxes with endogenous bank money. That’s nonsense. Households do pay taxes. And they pay with bank money. They have no contact with bank reserves. This is a conflation of two levels of money, with no apparent purpose beyond intended mysterious simplification effects. And then there are the TTL accounts to boot.The purpose of the reserve system is to facilitate redistribution of commercial bank asset and liability shares. It’s an exogenous balancing item for endogenous mismatches.

  13. there is a deep irony in the asymmetry of the reserve-centric emphasis

    the very purpose of the reserve system is to enable the activities of private sector banking – the core concept being that of competitive balance sheet management, including endogenous money creation and evolution

    endogenous money is the real game

    exogenous money is just a residual mismatch position (in the case of settlement balances)

    it’s a strange thing to believe that bank reserves are the center of the universe

    • Andrew Anderson

      endogenous money is the real game JKH

      Then common stock (shares in equity) is a private endogenous money form that:
      1) shares wealth and power
      2) requires no government privileges such as deposit insurance or lender of last resort.
      3) requires no usury either.

      exogenous money is just a residual mismatch position (in the case of settlement balances) ibid

      If banks were 100% private with 100% voluntary depositors and properly charged for their use of the Nation’s fiat, it is unlikely that they could afford to run their own payment system on top of fiat. Instead, they would act as loan intermediaries between accounts at the Central Bank and not make or take deposits themselves.

  14. Andrew Anderson

    it’s a strange thing to believe that bank reserves are the center of the universe JKH

    On the contrary; the strange thing is that the use of a Nation’s fiat is largely reserved (no pun intended) for a government privileged usury cartel with the citizens forced to use private bank deposits or be limited to mere physical fiat, paper bills and coins.

    The money system is almost the complete opposite of what it should be; i.e. corrupt Gold Standard thinking still dominates even with inexpensive, as it should be, fiat.

  15. Re: Can the Treasury run out of money?
    What happens if Congress approves a deficit budget but does not approve a corresponding increase to the debt ceiling? If that happened, would the Treasury run out of money? What is the mechanism by which they would keep paying the bills? Would treasury essentially be *forced* to print high value platinum coins, or is there another option? If it did, would the Fed accept it as legal tender? Is there any other mechanism by which the Treasury would not actually run out of money in that scenario? We say that the U.S. can’t default on its obligations because it’s a monetary sovereign, but, at least under current law, it does seem to be a possibility, though the reasons would clearly have to be political. Or am I misunderstanding?