If U.S. Stopped Issuing Treasuries, Would It Go Broke?

Here’s another interesting piece from Randall Wray, the economics professor from University of Missouri-Kansas City (that same school which employs Bill Black of “The Best Way to Rob a bank is to own one” fame).

Wray has a lot to say - most, but not all, of which I found convincing – but that’s a story for another day.

This is what I found most interesting:

Here is what I propose: let’s support Senator Bayh’s proposal to “just say no” to raising the debt ceiling. Once the federal debt reaches $12.1 trillion, the Treasury would be prohibited from selling any more bonds. Treasury would continue to spend by crediting bank accounts of recipients, and reserve accounts of their banks. Banks would offer excess reserves in overnight markets, but would find no takers—hence would have to be content holding reserves and earning whatever rate the Fed wants to pay. But as Chairman Bernanke told Congress, this is no problem because the Fed spends simply by crediting bank accounts.

This would allow Senator Bayh and other deficit warriors to stop worrying about Treasury debt and move on to something important like the loss of millions of jobs.

What the good Professor is suggesting is that the Treasury doesn’t have to issue bonds at all. In fact, since the Treasury does control the electronic printing press, it could legitimately buy stuff with money it prints out of thin air.

Sounds a bit like counterfeiting, doesn’t it? But, let’s step back for a second: what is the functional difference for the federal government between Treasury securities and bank notes? Both are liabilities of the federal government. But liabilities of what? The only obligation they enforce on the government is the promise to repay with more paper (or electronic bank credits, if you will). For all intents and purposes, bank notes, reserve deposits, and Treasury securities are fungible: they are obligations to be repaid in the same fiat currency.

I’m looking at a five dollar bill right now. It says “Federal Reserve Note" across the top. It has an oversized picture of Abraham Lincoln in the middle. It also says “this note is legal tender for all debt, public and private” in the lower left, signed “Anna Escobedo Cabral, Treasurer of the United States.” On the back, I see “The United States of America” up top and “In God We Trust” underneath with a picture of the Lincoln Memorial in the middle, labelled “Lincoln Memorial” for those who don’t know what it is. But, I’m trying to figure out why Geithner and the gang couldn’t just reel off a bunch of these and some Jacksons and Benjamins and pay people?

Now I’m looking at a Canadian Twenty. It sure is colourful. It has a bunch of French on it and a picture of the Queen. But, other than that, it’s really no different than the American fiver. “Ce billet a cours legal/ This note is legal tender.”

I have some Euros and Mexican pesos too. But these central banks don’t say anything about their obligations. Very dubious! At least they’re colourful like the Canadian money.

How ‘bout a British tenner? Dickens on the front, and the Queen on the back (she’s everywhere). A-ha. Here’s what I’m looking for. It says “Bank of England. I promise to pay the bearer on demand the sum of ten pounds.”

I think that gets me to my point, actually. From the government’s perspective, there is no functional difference between any of its obligations like bank notes, electronic credits, or treasury bills and bonds. As the Ten pound note says, “I promise to pay the bearer on demand the sum of [fill in the blank sum] [fill in the blank fiat currency].”

So, the U.S. government could legitimately stop issuing bonds altogether if it wanted to. When people complain about the admittedly enormous government debt, they don’t think of the mechanics of the issue. As I see it, in a fiat money environment, the first function of the Treasury bonds is to serve as a vehicle to add or subtract reserves in the system to help the Federal Reserve hit a target Fed Funds rate. The second is to give holders of government obligations a return on their investment. After all, bank notes or bank reserves don’t pay much if anything.

Am I missing something?

Source

Memo to Congress: Don’t Increase the Government’s Debt Limit! – L. Randall Wray

Comments

[socrateaz]

You have summed up a good point. I think if the economy becomes flooded with money then the value one sees in that money becomes worth what it can purchase. Inflation should become the ultimate result meaning all need more monies just to exist. So more would need to be printed causing hyperinflation eventually. I do think putting some monies into the system each year is a good policy.if it is based on some reason. Maybe at the rate of inflation or a percentage of GDP. But indiscrimanant wealth added to the system will exhasperate already serious problems.

2009 Nov 20 08:30 AM

[Jeff Nielson]

Edward, the only thing "missing" in your article is to extend the reasoning slightly further - and to fully explain this scam.

Yes there is NO benefit to the American public for the government to BORROW the paper called "money" from the private bankers of the Federal Reserve. However, there is a HUGE incentive for these private bankers to continue this scam.

The U.S. government now "owes" the Federal Reserve over $4 TRILLION for doing NOTHING except printing money - with the annual INTEREST alone which the Fed takes in from this scam at roughly $200 BILLION.

Indeed, one way for the U.S. to combat its massive insolvency (CAUSED by the reckless policies of the Fed) would be to simply RENOUNCE ALL DEBTS owed to the Federal Reserve.

There can be no possible justification for paying these banksters $4 trillion for nothing more than ink on paper (plus the hundreds of BILLIONS in annual interest). And unlike the foreign governments which hold TRILLIONS in U.S. debt, there would be NO repercussions for renouncing debts owed to the Fed.

Remember that the Fed "owns" no assets of its own - except for the U.S. Treasuries which it has "misappropriated" (i.e. stolen) from the American people. This means there is NOTHING "backing" money printed by the Fed - meaning that the American people have LITERALLY received NOTHING of value in return for their $4 trillion of debt.

It is a LEGALLY unenforceable contract - because there has been no "consideration" provided for these trillions.

2009 Nov 20 12:54 PM

[flow5]

No, you are wrong. There is a difference. It should not be confused by the doomsters. In fiat system the volume of currency issued is dictated by the deficit-financing requirements of the issuing government. In a fiat system the volume of currency is not self-regulatory. In a fiat system the more money that is issued, the higher prices will rise. In a fiat system the government's credit is put in jeapordy. I.e., a fiat system eliminates currency as a medium of exchange, and leads to hyperinflation.

In a managed-currency system (our current system), the volume of currency in circulation is determined by the public's desire to hold whatever volume of currency it needs for the exchange of goods & services. This is the cash-drain factor, or the process by which the volume of currency put into circulation, or taken out of circulation, through our banking system.

I.e., the volume the money stock remains the same, but it's composition changes (e.g, currency or demand deposits), depending upon the needs of trade. The currency-deposit ratio typically rises during recessions (it was .73% in June 06 & .85% in November 09). And there is no expansion coefficient associated with an increase in the volume of currency held by the non-bank public, (it is dollar for dollar).

The volume of our money stock is determined by monetary policy objectives, but the level of currency held by the non-bank public is lawfully, and properly, left unregulated.

All currency gets into circulation, directly or indirectly, through the liquidation of time deposits, by the cashing of demand deposits. There is one exception in demand deposit creation; those rare instances when the U.S. Treasury borrows from the Federal Reserve Banks. However it cannot be said, as of time deposits, that increases in the public’s holdings of currency reflect prior commercial bank credit creation. It is more appropriate to say that expansions of currency are accompanied by concurrent expansions of reserve bank credit.

And any expansion or contraction of the monetary base [sic], is neither proof that the Fed intends to follow an expansive, nor a contractive monetary policy. Furthermore any expansion of the non-bank public’s holdings of currency merely changes the composition, (but not the total volume), of the money supply. There is a shift out of demand deposits, NOW or ATS accounts, into currency. But this shift does reduce member bank legal (required), reserves by an equal, or approximately equal, amount.

An expansion of the non-bank public’s holdings of currency will cause a MULTIPLE CONTRACTION OF BANK CREDIT and checking accounts (relative to the increase in currency outflows from the banks) ceteris paribus.

To avoid such a contraction the Fed typically offsets currency withdrawals by open market operations of the buying type (e.g., purchases of governments for the portfolios of the Reserve Banks). The reverse is true if there is a return flow of currency to the banks. Since the trend of the non-bank public’s holdings of currency is up (ever since 1930), return flows are purely seasonal and cannot therefore provide a permanent basis for bank credit and money expansion....&more

2009 Nov 20 01:14 PM

[SouthPaw]

Yes but that U.S. Five Dollar Bill is not paying you interest. If the Fed prints enough Five Dollar Bills, it will take a very high rate of interest for people to accept them.

2009 Nov 20 01:17 PM

[SouthPaw]

Yes but that U.S. Five Dollar Bill is not paying you interest. If the Fed prints enough Five Dollar Bills, it will take a very high rate of interest for people to accept them.

2009 Nov 20 01:17 PM

[yellowhoard]

Given the massive current and future obligations that our government is on the hook for, I'm not sure it matters who is printing the money.

I like the idea, but how do we pay for 100+ trillion dollars that we are currently on the hook for without massive inflation and/or massive increases in taxes?

Obviously, interest free is appealing. But, even without interest, we're boned.

2009 Nov 20 01:25 PM

[flow5]

But as everyone already knows, federal deficit financing, and our government's debt management practices, are accurately reflected in our financial markets, by the rates-of-change (in the flow of funds).

I.e., the supply & demand for loan-funds, our protracted foreign trade deficits, our entitlement programs, etc., will impact inflation expectations, and the expectations of future economic activity. And it is proper that these projections are pointing to debt repudiation, and the issuance of a new currency (as France did in 1960).

2009 Nov 20 01:32 PM

[jhetts]

Come on, I practically slept through my capital markets class in college and still know the difference between issuing new debt and monetizing the debt, and the different consequences for both

2009 Nov 20 01:35 PM

[David Levner]

If the U.S. government were to stop issuing Treasury bonds, then the primary dealers in government bonds (i.e. Goldman Sachs and JP Morgan Chase) would make less money. Doesn't the whole system exist for their benefit?

And what would China (and other exporting countries) do with all the excess dollars they are accumulating?

2009 Nov 20 01:38 PM

[bob adamson]

One the face of things you and Mr. Wray are not missing anything, Mr. Harrison. The key, though, is that a US dollar (or Euro, Pound etc.) has attributes that a bond or other security issued by the US Treasury (or by the corresponding foreign government agency) does not have and these attributes matter.

While such a bond is a store of value it is not legal tender or, in the technical sense, a medium of exchange. Is this significant for the purposes of the thrust of your article? Arguably, the answer is maybe not if, for example, on a one-off or occasional basis the US Treasury simply recorded electronic bank credits to cover new government obligations or redeem outstanding bonds. Even here, the assumption is that the value of legal tender issued for these purposes is not significant measured against the total values of either government bonds generally or legal tender generally. Why, therefore, would it matter if the US Treasury issued a significantly greater amount of legal tender rather than bonds (than described above) to cover government debt as it became due?

The difference for purposes of our discussion between legal tender and other forms of government debt is that the government promises to pay for legal tender on demand while, for other forms of government debt, it promises to make payment at some future date on the terms specified in the debt instrument. This distinction is masked by the fact that in all these cases the Treasury’s obligation is simply to pay dollars (either on demand or as specified) but the timing is critical. It is also masked by the fact that no one expects a run on the US Treasury.

What is somewhat lost sight of, however, is that US government bonds generally do not represent an obligation of the US Treasury to make immediate payment in legal tender and these bonds are not really part of the international current balance of payments equation in the immediate sense that US dollars are. For these purposes, the bonds are latent while dollars are active. When such bonds are issued, one often characterizes this as an act of monetizing debt but, for purposes of our discussion here, it would be more accurate that such issuance is characterized as a latent monetizing of debt because actual monetizing will only occur at some point in the future if the Treasury redeems the bond for cash that is not derived as actual government revenue. So What?

This only would become significant if domestic and international users of the US dollar became concerned that the US legal tender they hold was in imminent danger of significant devaluation by a large expansion of that legal tender on the market. A wholesale conversion of debt into legal tender, by increasing the supply of US legal tender significantly within a short period, could have this effect (a simple supply and demand issue). Government bond issues, because of this latent aspect discussed, mutes and defers this reaction.

In short, the US debt ceiling does mean something as it is seen as an implied undertaking by the US government’s agencies that there will be acceptable limits on the creation of US legal tender from time to time into the future.

I am sure there are more concise ways of saying the forgoing but I don’t have the facility with the technical terms for this purpose. That said, have I missed something?

2009 Nov 20 02:00 PM

[flow5]

good explanation adamson

2009 Nov 20 02:11 PM

[Tony Petroski]

Mr. Harrison:

From the article,

"University of Missouri-Kansas City (that same school which employs Bill Black of “The Best Way to Rob a bank is to own one” fame)."

I'm near the same bank where they took down Jesse James.

If your title is a vote, I vote no.

Surely Castro and Hugo Chavez should flee from the masses before my elected countrymen do.

2009 Nov 20 02:24 PM

[sidney]

The only thing you are missing is the timing. Printing money has an immediate impact on the supply of money in circulation thus should impact inflation assuming everything else held constant of course. Whereas if the fed borrows money via a treasury they presumably are getting money from investors with the agreement they will pay interest plus pay the return of principle later. The assumption is that they will turn around and spend that money via transfer payments or some other item that would put the borrowed money back into circulation. So there is a pretty big difference in the amount of new money going into circulation is there not? In the case of longer term treasuries they would be injecting the new money in the form of interest over longer periods of time. Unless the interest payments are covered by taxes(revenue) or additional borrowings from new treasury issues the interest payments would have to be a result of "quantitative easing" ie printing money(electronically) to cover the interest. As long as there are new lenders to buy the US$ treasuries then the interest payments could continue to be funded by the new issues and perhaps not be considered inflationary...what it does do however is crowd out investment dollars that might have been used for other more productive purposes than transfer payments. Whereas printing money doesn't crowd out investment dollars but rather lower the purchasing power of the currency(it should take more $ to buy the same thing if more $ are printed) perhaps increasing the costs of every investment denominated in US$...

2009 Nov 20 02:25 PM

[Jeff Nielson]

Bob, the net worth of the U.S. economy is a large, NEGATIVE number.

Given that, how could U.S. bonds possibly be a "store of value"? In fact, PRETENDING that debts are "assets" has been THE most successful delusion foisted upon the world by the banksters.

Had they not successfully created this mass-delusion, their fiat currency house-of-cards would have collapsed many years sooner.


On Nov 20 02:00 PM bob adamson wrote:

> One the face of things you and Mr. Wray are not missing anything,
> Mr. Harrison. The key, though, is that a US dollar (or Euro, Pound
> etc.) has attributes that a bond or other security issued by the
> US Treasury (or by the corresponding foreign government agency) does
> not have and these attributes matter.
>
> While such a bond is a store of value it is not legal tender or,
> in the technical sense, a medium of exchange. Is this significant
> for the purposes of the thrust of your article? Arguably, the answer
> is maybe not if, for example, on a one-off or occasional basis the
> US Treasury simply recorded electronic bank credits to cover new
> government obligations or redeem outstanding bonds. Even here, the
> assumption is that the value of legal tender issued for these purposes
> is not significant measured against the total values of either government
> bonds generally or legal tender generally. Why, therefore, would
> it matter if the US Treasury issued a significantly greater amount
> of legal tender rather than bonds (than described above) to cover
> government debt as it became due?
>
> The difference for purposes of our discussion between legal tender
> and other forms of government debt is that the government promises
> to pay for legal tender on demand while, for other forms of government
> debt, it promises to make payment at some future date on the terms
> specified in the debt instrument. This distinction is masked by the
> fact that in all these cases the Treasury’s obligation is simply
> to pay dollars (either on demand or as specified) but the timing
> is critical. It is also masked by the fact that no one expects a
> run on the US Treasury.
>
> What is somewhat lost sight of, however, is that US government bonds
> generally do not represent an obligation of the US Treasury to make
> immediate payment in legal tender and these bonds are not really
> part of the international current balance of payments equation in
> the immediate sense that US dollars are. For these purposes, the
> bonds are latent while dollars are active. When such bonds are issued,
> one often characterizes this as an act of monetizing debt but, for
> purposes of our discussion here, it would be more accurate that such
> issuance is characterized as a latent monetizing of debt because
> actual monetizing will only occur at some point in the future if
> the Treasury redeems the bond for cash that is not derived as actual
> government revenue. So What?
>
> This only would become significant if domestic and international
> users of the US dollar became concerned that the US legal tender
> they hold was in imminent danger of significant devaluation by a
> large expansion of that legal tender on the market. A wholesale conversion
> of debt into legal tender, by increasing the supply of US legal tender
> significantly within a short period, could have this effect (a simple
> supply and demand issue). Government bond issues, because of this
> latent aspect discussed, mutes and defers this reaction.
>
> In short, the US debt ceiling does mean something as it is seen as
> an implied undertaking by the US government’s agencies that there
> will be acceptable limits on the creation of US legal tender from
> time to time into the future.
>
> I am sure there are more concise ways of saying the forgoing but
> I don’t have the facility with the technical terms for this purpose.
> That said, have I missed something?

2009 Nov 20 02:27 PM

[tdiaz]

the debt is never meant to be paid. US is going to default, then recieve an IMF loan with lots of strings attached, the IMF loan will just serve to pay the interest owed to the fed and foreign govts. and the game continues on as long as governments surrender the privelege of printing money to bankers.

2009 Nov 20 02:33 PM

[Gary A]

I would rather see us default on what we owe the Fed than on what we owe China. Then we could just show the Fed the door and hope it doesn't hit them on the backside as they walk through it.


On Nov 20 12:54 PM Jeff Nielson wrote:

> Edward, the only thing "missing" in your article is to extend the
> reasoning slightly further - and to fully explain this scam.
>
> Yes there is NO benefit to the American public for the government
> to BORROW the paper called "money" from the private bankers of the
> Federal Reserve. However, there is a HUGE incentive for these private
> bankers to continue this scam.
>
> The U.S. government now "owes" the Federal Reserve over $4 TRILLION
> for doing NOTHING except printing money - with the annual INTEREST
> alone which the Fed takes in from this scam at roughly $200 BILLION.
>
>
> Indeed, one way for the U.S. to combat its massive insolvency (CAUSED
> by the reckless policies of the Fed) would be to simply RENOUNCE
> ALL DEBTS owed to the Federal Reserve.
>
> There can be no possible justification for paying these banksters
> $4 trillion for nothing more than ink on paper (plus the hundreds
> of BILLIONS in annual interest). And unlike the foreign governments
> which hold TRILLIONS in U.S. debt, there would be NO repercussions
> for renouncing debts owed to the Fed.
>
> Remember that the Fed "owns" no assets of its own - except for the
> U.S. Treasuries which it has "misappropriated" (i.e. stolen) from
> the American people. This means there is NOTHING "backing" money
> printed by the Fed - meaning that the American people have LITERALLY
> received NOTHING of value in return for their $4 trillion of debt.
>
>
> It is a LEGALLY unenforceable contract - because there has been no
> "consideration" provided for these trillions.

2009 Nov 20 02:50 PM

[Tack]

National debts are NEVER paid back and never have to be, as long as GDP advances, and the balances, as against total GDP, remain within reasonable ratios. (We can all debate what's reasonable.)

Just as a simplistic example, if someone is making $100K per year and has $50K of debt, they can pay that interest ad infinitum without ever paying down principal. Furthermore, if their income expands to $200K per year, then, they can even expand, not pay back, their debts and be in no worse shape than they were to begin with. Depending on the uses of the debt, they may be in better shape.

Analogously, governments can increase their debts, as long as the proportion does not overtake their ability to service the debt.

None of the above is an argument for ever-higher debt levels or to decide what ratio of debt to income is appropriate. It's merely to illustrate that national debt isn't intended to be, doesn't have to be and never will be "paid back." As long as government's income grow from growing economies, they can increase debt levels ad infinitum.


On Nov 20 01:25 PM yellowhoard wrote:

> Given the massive current and future obligations that our government
> is on the hook for, I'm not sure it matters who is printing the money.
>
>
> I like the idea, but how do we pay for 100+ trillion dollars that
> we are currently on the hook for without massive inflation and/or
> massive increases in taxes?
>
> Obviously, interest free is appealing. But, even without interest,
> we're boned.

2009 Nov 20 02:53 PM

[Tack]

As long as debts are denominated in its own currency, a government can never default. That's the beauty of having a reserve currency or borrowing in your own currency, whatever it may be.

Any discussion of "IMF loans" is nonsense. The reason the IMF has made bailouts to other countries is because they borrowed money in currencies other than their own, so when their excahnage rates collapsed, they needed more dollars, euros or whatever was the basis of the loan.

Take the exchange-rate issue out of the equation and add a printing press, and technical defaults are impossible.


On Nov 20 02:33 PM tdiaz wrote:

> the debt is never meant to be paid. US is going to default, then
> recieve an IMF loan with lots of strings attached, the IMF loan will
> just serve to pay the interest owed to the fed and foreign govts.
> and the game continues on as long as governments surrender the privelege
> of printing money to bankers.

2009 Nov 20 02:57 PM

[bob adamson]

Jeff –

The US readers of this article and resulting comments will, I’m sure, be variously amused, annoyed or both by the gratuitous comments that you and I, two Canadians, exchange about the US national debt and dollar. At least they’ll see that all Canadians don’t think alike by any stretch!

I expect that you and I differ on a whole range of monetary policy issues and that each of us is sufficiently stubborn and well informed so that there is little point in our parading out the long list of standards arguments raised by the gold standard vs. fiat money debate. I will, however, try to deal in a narrow and focused way with the point you raise with your question “…how could U.S. bonds possibly be a "store of value"?”.

You, in my opinion, overstate your case by suggesting that US bonds store no value. You would be right to say that the capacity of the US to meet its future payment obligations is reduced by the growth of its debt and that at some future point this trend could place in risk the US dollar reserve currency status, stability of the US dollar international exchange rate and the capacity of the US authorities to control the rate of inflation without resort to draconian monetary and fiscal measures.

The US is fast approaching the debt/GDP ratio that Canada had in the early 1990s and there are clearly problems for any country, particularly one whose currency is the world’s reserve currency, if this ratio becomes too high. At it’s simplest, I would argue that US bonds now, like Canadian bonds in the early 1990s, remain a store of value because the total wealth of the nation in question at the relevant point in time stands behind them and because that nation continues at the relevant point in time to be able to meet its payment obligations AS THEY BECOME DUE and is so seen by its domestic and the international communities.

Arguably the foregoing holds whether or not one might favour adoption of the gold standard in some form from a broader perspective.

By the way, I thought that 'sidney' made some very useful observations.


On Nov 20 02:27 PM Jeff Nielson wrote:

> Bob, the net worth of the U.S. economy is a large, NEGATIVE number.
>
>
> Given that, how could U.S. bonds possibly be a "store of value"?
> In fact, PRETENDING that debts are "assets" has been THE most successful
> delusion foisted upon the world by the banksters.
>
> Had they not successfully created this mass-delusion, their fiat
> currency house-of-cards would have collapsed many years sooner.<br/>

2009 Nov 20 03:24 PM

[richard_e_newton]

Before Ronald Reagan the treasury acted out that scenario. It would just "print" the budge deficit. The result of this was the runaway inflation of the late '70s and early '80s. Reagan's innovation was to borrow the shortfall. Borrowing, by issuing treasurys, allowed the government to continue to spend while ameliorating the inflationary pressure. The dollar was supported because interest was paid to the bond holders for their dollar holdings in treasurys. Issuing treasurys was not considered inflationary even though the monetary base was increased because when the treasury redeemed its bonds the monetary base was supposed to contract again - in perfect automatic compensation. Obviously, however this whole process can be circumvented by issuing even more treasurys to redeem and pay interest on maturing treasurys -- not much different than a government sponsored Ponzi scheme!

2009 Nov 20 03:28 PM