Recent Items

What’s the difference between government bonds and bank notes?

Posted on by

Here’s something I wrote in 2009. In light of a recent post by Randy Wray, I’d love to have some readers here answer my question.

Here’s what I wrote:

The Treasury doesn’t have to issue [government] 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?

P.S. – This is Edward Harrison, not Yves.

P.P.S. – the constraint on the Treasury’s ‘just printing money’ is a self-imposed legal one; the Treasury can’t have overdrafts at the Fed.

Print Friendly
Twitter15DiggReddit1StumbleUpon0Facebook2LinkedIn5Google+0bufferEmail
This entry was posted in Currencies, Guest Post, The dismal science on by .

About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward

130 comments

  1. Charles Wassell Jr

    The federal government can issue coins, and can also “borrow money on the credit of the United States.” As far as paper currency goes, the Treasury cannot technically just print money — they have to borrow it. Right now the Fed Reserve Banks have the authority to print paper currency, and this currency is “an obligation of the United States” and “shall be redeemed for lawful money.” FRN’s are essentially 0% nominal bonds, usable as legal tender (i.e., to pay taxes), and redeemable for coins should you choose to do so.

    Right now there’s little substantive difference between short-term T-bills and FRN’s, since the interest rates are so low. Thus, but rolling down so much debt these days, the government is effectively “printing money” in a practical sense. Ultimately, though, those bills are tied to the creditworthiness of the U.S. government, and will presumably go down in price. In the end, the government is still restricted to borrowing funds on credit, and cannot simply decree that they will be borrowing at a 0% nominal rate.

    1. Edward Harrison Post author

      I wrote: “P.P.S. – the constraint on the Treasury’s ‘just printing money’ is a self-imposed legal one; the Treasury can’t have overdrafts at the Fed.”

      Are you saying there are real constraints that are not self-imposed?

      1. Charles Wassell Jr

        Other respondents have touched on some of the relevant points, but “yes and no” to your question as to whether there are real constraints. Article 1, Section 8 of the Constitution says that the Congress has the “Power To… borrow Money on the credit of the United States.” Same section, Congress can “coin Money.” The key word is “coin”. Technically, the Treasury can issue all the coins it wants, and that can be our currency. They could issue millions of gold coins, for example. But you’re probably thinking of paper currency, which the Treasury does NOT have the ability to issue. They CAN, however, sell all the bonds they want, or delegate to another authority (i.e., the Fed) the ability to issue debt backed up by the full faith and credit of the U.S. government. I don’t see how the Treasury can sell zero coupon bonds with zero nominal rate and zero duration, since those by definition must be redeemed immediately. If they could find suckers to “buy” zero coupon bonds with non-zero duration, then theoretically yes, they can “print money.”

        1. Edward Harrison Post author

          Actually, I was really thinking of electronic credits even though the post talks about bank notes. So, I don’t think those other issues are relevant. The Treasury already instructs the Fed to credit bank accounts. If it wanted to do this without issuing bonds it could do so. The only constraint is the legal restriction from allowing the Fed an overdraft.

          Jesse rightly pointed out that this is done to keep the Fed and the Treasury at arm’s length. But, as we can see with QE, these lines can be blurred.

          1. Charles Wassell Jr

            The electronic issue is irrelevant, I believe, though the point concerning overdrafts isn’t. It is a subtle one, however.

            The Fed is the Treasury’s bank. To the extent that the Treasury orders the Fed to credit others, the Treasury is limited by it’s balance at the Fed — thus, no overdrafts. I would submit that the Treasury overdrawing its account at the Fed in order to pay the bills, so to speak, would be tantamount to issuing a bill of credit, and thus unconstitutional. The Treasury can, however, sell bonds to the Fed and subsequently spend the proceeds. So again, the key point is that the Treasury can mint coins, but must _sell_ debt.

          2. Edward Harrison Post author

            The electronic credit issue is not irrelevant as you led by saying the federal government can issue coins. It can also issue electronic credits. The question of constitutionality of Treasury overdrafts is open to debate. You have your view. To each his own.

          3. traderjoe

            @Charles – the idea that the Treasury can issue coins but not paper notes is a farce. The Lincoln Greenback and the Kennedy Silver Certificate are two recent examples of direct Treasury issued currency.

            The Federal Reserve is a privately held banking cartel. The link provided as the genesis of this article suggests Treasury bonds are a measure of private wealth, and therefore higher government debts represent higher private wealth. But, this is a huge subsidy to bankers and elites through interest paid to them (essentially transferring the nations’ wealth to them). In addition, in the the fractional reserve system, the private member banks create FRN’s out of thin air. http://www.rayservers.com/images/ModernMoneyMechanics.pdf

            So, a private bank creates money out of thin air and loans it to the Treasury, getting interest in the process. It amazes me that more citizens (and liberals) are not jumping up and down about this fundamentally unfair and ludicrous process.

            The Fed and fractional reserve banking were the creation of a select few of the banker class, and everything we have learned/have been programmed to understand as money is designed to support this ‘scam of the century’.

            See http://www.bigeye.com/griffin.htm for an excellent speech on the history and true reasons for the creation of the Federal Reserve System.

        2. Stealth Blimp


          American fiver. “Ce billet a cours legal/ This note is legal tender.”

          I have some Euros

          Your difference lies between your guise. Different disguise for different guys.

          The wealthy man’s legal currency pays interest twice annually, but the poor man’s currency is eaten up by the fungus of inflation. Lying too long in his pocket the fiver buys less each year. Can you see the conspiracy against the poor person’s incentive to save? More she/he saves more inflation gig’s his buying power. More wealthy save in notes, bonds, and bills, more they become wealthier.

          Tell me something, “Are zero coupon bonds issued at a discount to compensate for absence of interest payment?”! Could governments the World Over simply issue *zero coupon fiver-s*? At a discount? You give me $4 and government gives you a fiver that is not legal tender until 2019. Would large chain stores and franchises then say, “we will accept your immature non-legal currency one month early as a special promotion of our merchandise.”? Soon, as immature zero-coupon-fiver-s are circulated more and more before maturing the old currency will disappear as the currency which appreciates in value becomes the preferred device. But why go through the exercise of this transition? Why not simply maintain deflation on the currency we now have. By maintaining deflation, the fiver in pocket becomes an value appreciating as much as a t-bond. Thus no more incentive to buy t-bonds. Just keep the money in your pocket. Pays just as much to save. Pays poor people same as wealthy bond holders. But what is wrong with deflation? in-elasticity of wages is the drawback. Just teach people that for the benefits of deflation their wages will shrink each year, but their savings will mushroom.

          MicroFinancing eat your heart out
          !

        3. Matt

          So will the US coin 20 coins worth 1 Trillion dollars each and sell them one at a time to the Federal Reserve?

          1. F. Beard

            It is a convenient fetish to preserve wealth during times when the FR bankers have wrecked the economy.

            But yes, it is a fetish; I won’t have anything to do with it.

            But the gold-bugs are a persistent lot and have an entire school of economics, the Austrians, dedicated to promoting the “gold is money” meme.

            Real money is backed by either force in the case of government fiat or performing assets in the case of private money.

          2. Nathanael

            Real money is backed by trust. It’s money if someone else will accept it.

            Money has three aspects: medium of exchange, store of value, and unit of account. The first is the most important, while the third is the least replaceable. The loss of trust can be a loss of trust for each of the three aspects *separately*; thus, many people have lost trust in the US dollar as a store of value, but still trust it as a medium of exchange. As a unit of account, I will note that certain countries have started denominating their oil sales in Euros.

          3. Jardinero1

            F. Beard,

            You are incorrect in your assertion about Austrians. Austrian theory is premised from the idea that money is merely a commodity. Some commodities are more desirable and tradeable than others. Austrians are perfectly agreeable to the idea that seashells and buttons and strips of paper are money. It’s just that seashells and buttons and strips of paper fall out of fashion, from time to time, and become worthless for trading. Gold never has. Read chapter 1 of Mises “The Theory of Money and Credit” for the details.

      2. Paul Tioxon

        * Budget 2010: $13,361 million
        * Enacted 2009: $12,685 million
        The Budget provides $13.36 billion to support the Department of the Treasury’s mission to promote economic prosperity and the financial security of the United States while boosting effective management of the Department’s vast array of activities that are critical to the core functions of government, including collecting revenue and disbursing payments, managing federal finances, and protecting the financial system from threats. The budget supports the Administration’s new Financial Stability Plan as well as the management of the TARP, emphasizing effective, transparent, and accountable program management. The 2010 budget will also expand funding for effective IRS enforcement and invests in high return-on-investment activities that generate improved compliance and fairness in the application of tax laws. The Administration will pursue plans to improve the responsiveness and efficiency of taxpayer services to boost the accuracy of taxpayer filing and the quality of taxpayers’ experience. The budget will expand lending in underserved neighborhoods by more than doubling funding for the Community Development Financial Institutions Fund.

        FROM: http://www.whitehouse.gov/omb/fy2010_department_treasury/

        There is a political dimension to this question.
        Treasury has a budget. It is funded by Congress. If Congress does not authorize its funding, it has no money to do anything. Printing or coining money is not the production of a commodity, it is meta-system of the economic system. This is not money produced by profits or taxation, but the act of creation of a system, which is self imposed as you say or self organizing as I would say. Selling debt is underwritten, by what process? Is that the question that needs to be asked to clarify this issue?

    2. nonclassical

      I seem to recall from Geisst’s book, “Wall $treet-A History”
      that government bonds involve middle-men=profit$, for we should all by now know whom..? Yves discussed bonds a bit
      in “ECONned”, but I will have to look up her thinking..

  2. JKH

    You’re missing two more critical and logically prior questions.

    The first question is the difference between bank reserves held as deposits with the central bank and currency (notes issued by the central bank).

    The second question is the difference between bank reserves held as deposits with the central bank and bonds.

    Your question is tertiary to those first two from a logical perspective – i.e. the difference between central bank notes and bonds.

    The first question is the most critical, because central banks can set policy interest rates by paying interest on bank reserves. They can’t do that with currency. Mainstream economics misses this critical, fundamental point on the heterogeneous composition of the monetary base, insofar as its importance to monetary policy implementation.

    The second question is interesting, because central banks have the option of issuing bonds to drain reserves. They then have the further option of paying zero interest on reserves at all times, provided they expertly manage the level of excess reserves in order to produce trade prices that correspond to the federal funds rate target. The bond market then prices the bonds that have been floated in accordance with expectations for the future policy rate.

    Your question – logically the third – is a composite of the first two. Bonds may be part of the overall policy/market interest rate mechanism as answered in question two. Currency has no role in policy interest rate maintenance as answered in question one.

    1. Edward Harrison Post author

      My question is geared more toward those who make gold-standard based assumptions on so-called national bankruptcy and taxes as a funding mechanism in an environment of nonconvertible currencies with floating exchange rates.

      However, I appreciate your answer and it is certainly good for others to hear. Those are the kinds of answers I am soliciting.

  3. Jim A

    I used to have an older federal reserve note with the legend “This note is legal tender for all debts public and private and is redeemable in lawful money at the united states treasury or at any federal researve bank.” Near as I can tell, that meant that you could exchange it for coins, which ARE issued by the treasury and not the Federal Reserve system. There also used to be “US Notes” which were direct obligations of the Treasury and not the federal reserve. ISTR something like 10-20 years ago somebody proposed issuing them as a way around one of those “debt limit,” impasses that the Congress is so fond of.

  4. Moneta

    As long as they issue bonds, they are sending a signal that each dollar of debt is productive and will be paid back with future production/taxes.

    If they stop issuing the bond, the message is that they are in over their heads, the system is toast and they are not paying back.

    1. Peripheral Visionary

      Exactly! Well said.

      The simple issue is that fiat currency is worth only what people think it is worth. Since the currency is only worth what people think it is worth, the government is in the difficult position of attempting to maintain the common belief that it is worth something.

      When the government prints money, the belief that the currency is worth anything is destroyed, and the general public abandons the currency en masse.

      The process of issuing bonds is a demonstration of good faith on the part of the government; namely, that the government will attempt to maintain the value of the currency, even if it means limiting future government expenditures in order to repay government obligations at some future point.

      What we have now, however, is an elaborate ruse on the part of the government, where it is attempting to print money without being detected as doing so. The creation of money to purchase government bonds is, in effect, a simple creation of money to pay government expenses. It has not triggered a panic (well, a general panic anyway) because the Federal Reserve has attempted to maintain the fiction that the entire operation will be unwound at some point. When it becomes clear, however, that the Fed will never risk the real damage to government finances that would be cause by unwinding its purchase of Treasuries, and that in all likelihood the Treasuries in question will quietly be burned in an incinerator behind the Federal Reserve, the public view of the value of the fiat currency may be in for major adjustment.

      1. Jason X. Ray

        So what is the difference in gold? Do you believe there is some inherent value in gold other than its malleability and conductivity?

      2. Ming

        You have missed the real forest for the paper money tree? Do you know why people and countries accept US money? Excluding military and poliical coercion, people accept US money because the US has some products, services, natural resource, man made assets or knowledge that they want to buy. So what makes our money valuable is that we have something that other nations may want, or we are developing some resource, capability, Capitol or product/service, that they may want in the future. If the money issued us backed by debt or nothing, it is is irrelevant.
        Conversely, if the government issues money, backed by debt, in order to purchase a useless asset ( say trillions of dollars of lawn furniture) or support a useless initiative, ( like allowing bankers to pay 166 billion dollars in bonuses in 2008, even more in 2009 and 2010), then the government has acted in an irresponsible manner and devalued all exisiting dollars in the nation.

        1. Nathanael

          Ming has got it. If those who print money get a reputation for irresponsibility and untrustworthiness, for slathering money on the useless while starving the productive of it, *then* the money will become untrusted….

      3. Nathanael

        “When the government prints money, the belief that the currency is worth anything is destroyed, and the general public abandons the currency en masse.”

        Untrue! This is where you go wrong. Look through history and you will find a marvellous lack of correlation between money-printing and the abandonment of currencies….

  5. jake chase

    At the heart of your question is the premise behind the Federal Reserve System: that private banks can be trusted to print money but government cannot be. Events of the past twenty odd years have proved that banks cannot be trusted, and that the bigger the bank the less it can be trusted to serve any interest but that of its executives. It is difficult to imagine any government blowing up the economy by financing credit default swaps and other derivative contracts. These days our banker government has delivered a world which offers insolvency to homeowners, a zero return to savers, shrinking wages and consumer usury to workers, fat lifestyles to toadying academics, media pundits and politicians, and financial aggrandizement to predatory business school charlatans and hedge fund impressarios (at least until they blow up or have their ponzi schemes exposed). I have not mentioned business credit, that wonderous commodity which sustains the energies of so called entrepreneurs. I understand there no longer is any business credit, since bankers have looked around and noticed the non existence of economic opportunity outside the derivatives casino.

    I do not particularly trust the type of person who injects himself into government, but perhaps such people as a group are likely to do less damage than our celebrity bankers with unlimited withdrawal rights at the Fed?

    1. F. Beard

      Debt-free legal tender (for government debts only) fiat is definitely 1/2 of the solution. The Green Backers have that correct. But private monies supplies are needed too. Politically, the gold-bugs will not be denied. Better they be allowed to learn the folly of commodity monies first hand but ONLY in the private sector where we can at least escape them by choosing a more sensible money form.

      But more importantly, optimal economic growth will require the kind of flexibility that only a free market in private money creation would allow.

      And last but not least, a true free market in private money creation would allow usury, that age-old problem, to be reduced to insignificance. At least one money form, common stock, requires no borrowing at all so it requires no usury either.

  6. Tom Crowl

    Money is a very difficult concept for most people to understand… and I believe that adds to the confusion.

    To the extent that the condition of human society is controllable by humans (in other words barring meteor strikes, earthquakes, tsunamis, etc…

    That condition is ENTIRELY dependent on decisions… ENTIRELY!

    Individual and group decision operating within the constrainsts of natural law. (literally ALL decisions but like flapping butterfly wings most have negligible effects)

    MONEY is a TECHNOLOGY!

    That’s the first thing people don’t quite get… and it doesn’t stand in for ‘stuff’ though it may seem so…

    What it actually does at its root… is impel decision.

    Money is a decision technology… and that’s true whether fiat or commodity based… Its roots are SOCIAL. (A hammer you can use by yourself… with money you need at least one other and a whole body of shared belief behind it.

    And that’s also why trying to separate economics from politics is not only wrong but very dangerous… it leads to very, very bad social science open to tremendous bias.

    Recognizing its root in decision has implications… certainly including. but well beyond the issue of campaign finance… Its also inherently and eternally incapable of functioning perfectly which doesn’t mean we don’t need it… but it needs a wiser approach for repairing the damage when it breaks.

    Decision Technologies: Currencies and the Social Contract

    BTW, on a slightly different topic… when economic purists talk about ‘markets’ as some perfect mechanism for deciding values…

    I’d like to suggest this:

    Those that assume that markets establish ‘rational prices’ have to concede that the rationality is bounded by human perceptions of time and its relationship to those values.

    Anyone but a complete idiot will realize that EVENTUALLY… oil will be orders of magnitude more expensive. Now that could be in 2 years or 200… but it’ll come.

    SO a hypothetical investor with a 1000 year lifespan would likely be buying oil (and helium along with a few other things) and know that he was making a pretty safe bet that somewhere along that line he’d be way, way in the black on his investment…

    My only point is to recognize that markets are inadequate mechanisms which cannot be reliably depended on to do the kind of pricing necessary to promote the best human condition longterm.

    And until the common political wisdom confronts and will deal with that… we’re essentially screwed.

    (This has nothing to do with Left/Right ideological fantasies… it arises out of a seemingly discredited way of looking at things…. PRAGMATISM.)

    There are all too many economic arguments made that are ridiculous and should have long ago been over and have no place in honest political discourse (ridiculous things like the Laffer curve, or that the FED is a neutral body w/o a pro bank/financial services bias).

    I’ve only been looking at this economics world in any serious way for a couple of years and I know I don’t know a lot… but really… this field is clearly messed-up…

    And we’re stuck with an establishment not much interested in looking for real answers.

    1. F. Beard

      Money is a very difficult concept for most people to understand… Tom Crowl

      If anyone understood money do you think we would still be having problems with it in the year of our Lord 2011?

      Is money was a science, would we not have figured it out by now, 300+ years after calculus was invented?

      Our basic problem is we are trying to mix the concept of government money (based on force) with the concept of private money (based on voluntary acceptance).

      There is no single definition of money because there are two basic forms of it, government (“Render to Caesar…”) money and private money (“Why should I accept this voluntarily?”)

      Jesus as much as told us this 2000 years ago in Matthew 22:16-22.

    2. Nathanael

      “SO a hypothetical investor with a 1000 year lifespan would likely be buying oil (and helium along with a few other things) and know that he was making a pretty safe bet that somewhere along that line he’d be way, way in the black on his investment…”

      I’ve thought about this, and the problem is storage and control. If I could figure out how to safely control an appropriate sort of warehouse with trustworthy armed guards, I’d do it in a flash.

      Unfortunately, every other form of investment is dependent on the vagaries of the legal system and the degree to which locals respect it, which changes a lot more frequently than every 1000 years.

      Note that Shell “owns” lots of oil in Nigeria, but in practice a good large fraction of it is taken by rebel groups… some investment, that.

      1. nonclassical

        Like Tom C, I’ve only been learning on the subject for a couple years (and it shows)..I like the “decision technology” aphorism..

        For Nathaniel,
        Shell Oil CEO Carrol in London discussed Iraq oil before Bushit invasion, with Bush. He told Bush he didn’t want to “own oilwells on perpetual fire”, and that “OPEC has made us more $$$$ than ever..”

        So Shell and Carrol wanted nothing to do with what was going
        to happen..this documented by Greg Palast. So Shell Oil makes business decisions without “nationalism=nationalistic”
        consideration. There are several lessons in that…

    3. Jardinero1

      “SO a hypothetical investor with a 1000 year lifespan would likely be buying oil (and helium along with a few other things) and know that he was making a pretty safe bet that somewhere along that line he’d be way, way in the black on his investment…”

      You fail to consider the substitution effect. Here is a different scenario: You live in the stone age and some wisely recognizes that they aren’t making any more stone. Obciously the price of stone will go through the stratosphere eventually. SO a hypothetical investor with a 1000 year lifespan would likely be buying and collecting stone and know that he was making a pretty safe bet that somewhere along that line he’d be way, way in the black on his investment.

      Have you checked the price of stone lately? Nobody wants it. It’s completely worthless. Oil will eventually be completely worthless as well for reasons and for substitutions we cannot fathom yet.

  7. Moopheus

    I’m not exactly sure what Mr. Crowl means by decision technology, but yes, money is fundamentally a human creation, a social construct. It doesn’t exist in nature; we make it up to suit our needs. Once you get past direct barter, you’re dealing in tokens that have arbitrary value. Some people don’t like the arbitrary, abstract nature of money, and it makes them feel better if they can make some magical connection to some real item. So it becomes a kind of game: a virtual commodity, but in order for it to be useful, it still has to be finite in supply and controllable in some way. So if the Fed or the Treasury just printed tons of money the jig would be up.

    1. Tom Crowl

      Let me explain what I mean by “decision technology”… or at least make a stab at it…

      And the effort here is to create clear, usable definitions which have operational utility for some kind of analysis…

      So my definitions:

      A Decision is an Idea + an action…

      Its important to realize that the ‘idea’ here may be rooted in emotion, rationality or even instinct and often all will play some role in any decision… so let’s not assume ‘rational players’ here all the time…

      And without an associated action or actions an idea is not a decision… even a great idea has to be at least communicated or has no substance.

      Okay, so what motivates an “idea” to take some action?

      A lot of things… hunger, greed, boredom, concern for another, curiosity, money, torture, an advertisement, love, loneliness, etc…

      So for instance…

      Pain is a drive… but a torture device is a decision technology (an undesirable one)… it taps into a drive to impel a decision… (I’ll TALK!!!)

      Sex is a drive… brands using advertising to suggest you’ll get women by having a fancy car are using ads as a decision technology.

      Money (which has been proven to act on a biological level) taps directly into survival drives (uniquely so) and its core function is similarly to impel decision.

      What money does (like ads and torture devices) is drive decision by tapping into more fundamental drives and essentially we’re not understanding that root.

      BTW, that analogy between money, ads and torture devices describes a commonality more important than the ‘store of value’ idea… in my opinion.

      And all three exploit lizard-brain appeals.

  8. F. Beard

    “The Treasury doesn’t have to issue [government] 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?” Edward Harrison

    This shows how much we have been conditioned by the usury cartel.

    Of course it isn’t counterfeiting. Who else should issue government money but the government? And what backs that government money? Ultimately, nothing more than that it is legal tender for government debts, taxes and fees. This way of looking at money is called Chartalism or MMT (Modern Money Theory).

    The trouble with our money system is that government money (FRNs are legal tender) is de facto legal tender for private debt too. But that is beyond their legitimate use, it should be obvious.

    Because FRNs are essentially a government enforced money monopoly for private debts, there is no escaping them for US citizens. Since the banks issue “credit” that behaves for most intents and purposes like FRNs then there is no escaping the folly of the banks either.

    Jesus hinted at the solution 2000 years ago in Matthew 22:16-22 (“Render to Caesar …”), separate government and private money supplies.

    Simply put, government money should only be legal tender for government debts and private monies should only be acceptable for private debts.

    However, it is not sufficient to simply repeal legal tender laws for private debts. The capital gains tax must also be repealed so that potential private money alternatives are not penalized wrt to government money.

    Once we have genuine separation between government and private money supplies then any excess money creation by government will only hurt the government and those who depend on its money (government workers and contractors, the military, SS recipients, etc). The private sector, would, in fact, benefit from excessive government money creation since it would make government money cheaper and thus taxes would be easier to pay.

    1. Obsvr-1

      This is nonsensical, since most of our ‘money’ is digital accounting credits/debits how would you effectively track the two different money supplies. This would create at a minimum a two money system and set up a FX exchange between the monies. Ex. if you pay SS benefits in FRNs the beneficiary needs to purchase from the private sector so the FRNs would need to be converted to spend in the private sector. When a worker needs to pay taxes he/she would have to convert into FRNs to pay taxes.

      The suggestion that the FRN would lose value to the private money stock is without certainty as the gov’t can raise taxes to a high enough level to maintain the value of the FRN.

      Separating the money supplies does not eliminate the involuntary use of fiat FRNs nor any threat of punishment from the gov’t.

      1. F. Beard

        This is nonsensical,

        “First they laugh at you.”

        since most of our ‘money’ is digital accounting credits/debits how would you effectively track the two different money supplies.

        Computers and modern communications should make this easy.

        This would create at a minimum a two money system and set up a FX exchange between the monies. Ex. if you pay SS benefits in FRNs the beneficiary needs to purchase from the private sector so the FRNs would need to be converted to spend in the private sector.

        Correct. However, I envision not two but 51 government money supplies (Federal + States) plus any number of private currencies, perhaps hundreds, as corporation discovered they had to issue and spend their common stock to buy assets and labor.

        When a worker needs to pay taxes he/she would have to convert into FRNs to pay taxes.

        Yes. He/she would have to buy government fiat on the open market from those who had it – government workers, the military, SS recipients, etc.

        The suggestion that the FRN would lose value to the private money stock is without certainty as the gov’t can raise taxes to a high enough level to maintain the value of the FRN.

        Yes, good of you to notice. But that would require EXPLICIT tax increases not the sneaky stealth inflation tax.

        Separating the money supplies does not eliminate the involuntary use of fiat FRNs nor any threat of punishment from the gov’t.

        Wrong. No longer would the private sector be subject to the “stealth inflation tax”.

        As for punishment from the government why should it? Optimum stable economic growth, without the nationwide boom-bust cycle, requires private money supplies, I would bet. Only the capital gains tax would need to be repealed; the Income Tax could remain.

        1. Obsvr-1

          why introduce such complication, imagine going to the store to purchase something and you have a pocket full of CA money, TX money, VA money, IBM money (backed by common shares) – gets ugly fast, people have enouthg trouble converting US$ to CAN$, etc. Or I guess you can just deposit into the bank and covert to a common exchange (US dollar) that would be commonly accepted.

          1. F. Beard

            why introduce such complication, imagine going to the store to purchase something and you have a pocket full of CA money, TX money, VA money, IBM money (backed by common shares) – Obsvr-1

            The free market would determine the correct balance between convenience of a few money supplies and the flexibility and improved stability of many.

            Also, common stock money (CSM) would not be backed by shares, it would be shares.

        2. F. Beard

          Well, the “stealth inflation tax” would be abolished with separate government and private money supplies but “bracket creep” (people forced into higher tax brackets via money debasement) would remain.

          The solution to that would be a flat income tax. However, the progressive income tax makes sense for now since it is the rich who benefit from the government enforced money monopoly. Let them pay for it then.

          1. Toby

            The free market would determine the correct balance

            There is no such thing as a free market. All assertions that it Just Works refer to The Invisible Hand, a non-empirical, non-falsifiable, religious faith.

  9. yoganmahew

    I suppose one of the differences comes down to the nature of the bargain.

    On the one hand we have dollar bills, which are instant zero-coupon money. You get them in exchange for something (robbing a bank, say) and you use them for paying your taxes and insurance on your bank account (against robbery, say).

    On the other we have bonds which are effectively loan money. The government says – give me your instant money and I will give you a loan agreement with an interest payment (coupon) and a repayment schedule (at the end of the loan term).

    How ‘people’ use the two forms of obligation is different, though. Bonds are much more a form of confidence money than currency. The price varies depending on the future outlook for interest rates (which is itself a view on future economic activity levels) and repayment ability (again a view on future outlook). So while bonds are traded as money and could be used as debt settlement, really they are acting as a futures market on money – if economic activity is high, real money will be plentiful and interest rates will rise, so existing bond prices will fall and vice versa.

    One of the alarming things about the current crisis is how short-term governments have become in their outlook. Because it is cheaper to borrow short, governments have done so until they cannot borrow at all (see Greece, Ireland, Portugal). They are then left in a technically bust situation where the belief in the repayment of future loans is non-existent.

    In theory, this should have very bad implications for money, in practice it tells us something about bonds – they are designed to be defaulted on. Or at least for default to be a possibility. Money, however, is designed to be always payable, in the knowledge that its purchasing power will vary over time (deflation = increase, inflation = decrease, roughly speaking!).

    Since we appear to be in a situation where it cannot be countenanced that sovereign bonds from ‘serious’ governments can be defaulted on, you are right to say that sovereign bonds are indistinguishable from currency. Which then makes you wonder why they have coupons at all…

    Cui bono? Well, it might be Bono, but it sure isn’t me!

  10. Parvaneh Ferhadi

    Two things come to (my oversimplifying) mind:
    A) Bonds bear interests paper money (usually) doesn’t; and
    B) Bonds are used to bring paper money into circulation.

    In short, bonds are a present from the government to the banks. They don’t serve any other purpose.

    The banks buy bonds from the government and make a profit when the bonds are redeemed (principal+interest). When the bonds are redeemed the banks get paper money for it, which in turn they can use to pay bills, salaries, bonuses, or make loands.

    It’s a middle man thing. You could well live without that, if you figure out how you bring money into circulation.
    Which wouldn’t be too hard if you just paid every US citizen a monthly Guaranteed Basic Income, which they than could go an spend into the economy. No debt at all, not interest, no fat-cats, no oversize bonuses, and no hunger.

    1. Nathanael

      Guaranteed Basic Income — now we’re talking!

      Mind you, even if we understand that the government can simply print money to pay for what society needs, we still need taxes.

      One crucial purpose of taxes on the rich is to extract money from the hands of those who have so much of it that they can use it to subvert the democratic process. This is what our elected officials have failed to do for the last 40 years, and the result is likely to be the total collapse of the rule of law and democracy in the US. Some of the Forbes 400 need to have their wealth *confiscated* before they buy any more Senators or Congressmen or Governors.

      1. Parvaneh Ferhadi

        Absolutely. Getting the GBI doesn’t preclude anyone from having a job or earing additional income in other ways (investing, for example). However, this income will have to be taxed – in my view progressively.

  11. Jesse

    http://jessescrossroadscafe.blogspot.com/2011/03/us-employment-and-wages-modern-monetary.html

    Technically it is now illegal for the Treasury to perform direct issuance, but that law could be changed.

    All debt issuance must pass through the ‘discipline’ of the market on its way to the Fed’s balance sheet. This is the rationale for the existence of the Fed, to provide an independent ‘governing’ mechanism on Treasury issuance.

    This was the compromise reached in going off the external standard of requiring the Treasury to hold gold and silver reserves. As Greenspan said, while the Fed emulates the rigor of a gold standard, while maintaining flexibility, the system works.

    Now, as I pointed out some years ago, all the Fed needs is one or two compliant primary dealers, and the discipline becomes a mere pass through.

    And so here we are…

  12. charles 2

    I think you are confusing between government real debt and nominal debt.

    It is true that the government is never in a position to default on its nominal debt, and in that narrow sense, you are right, the government could easily “pay back” in printed fiat money.

    However, when people fret about government debt, they are worried about REAL debt either because nominal debt is going to be paid in a fiat money that buys real good, or because the government has taken a real commitment (through a mandated COLA adjustment). Gaming with the maturity of nominal liabilities is not going to help in this regard.

    1. Edward Harrison Post author

      I’m not confusing anything here. I never made any statements about currency depreciation, inflation or the real/relative value of government liabilities.

      The fact is that real short-term yields are now negative. This is why Bill Gross is shunning treasuries and why some investors have increased risk to hit nominal return targets.

  13. Jesse

    The Federal Reserve Notes are bonds of zero interest and zero duration. What makes them difference is that they are the product of Treasury bonds passing through the interest rate mechanism.

    They are zero coupon bills, if that helps.

  14. Brick

    Maturity duration and risk are the main differences. With currency you can persuade your local population to forgo the risk of holding it, while a bond will pay you to take the risk for a period of time. Foreign populations and risk adverse institutions will opt for a bonds. Gold backed currencies transfer the risk to the value of gold which can be volatile. Central banks would spend more time controlling gold reserves, with a potential to exagerate price moves due to limited supply. Perhaps currency should be backed by gold ETF’s? You could swap bonds for currency but this increases the risk to currency in that the risk duration is unlimited and the lender might ask for 2 dollars for every dollar of credit. It is that risk duration limit which reduces cost.
    Perhaps you should ask if currency could be replaced with bonds. The answer seems to me that the local population pays for the risk regardless, so currency is really a simplification of a bond. You also need to take into account maturity which guarantees payback within a time frame which gives the option to limit the risk time period. Would you want a ten dollar note which you could not exchange for goods for 2 years and would need to be sold first.

  15. Jackrabbit

    Maybe the easiest way to understand it is Income Statement vs. Asset/Liability Statement.

    Long-term Assets (highways, bridges, aircraft carriers) should be funded with long-term obligations (Bonds).

    1. Jackrabbit

      I had to step away so I wasn’t able to complete the analogy.

      So in a business sense, “Money” (Federal Reserve Notes) represents “cash on hand” needed for transactional purposes.

      If there was no common “money” standard then companies (or banks holding company assets) would issue short-term IOU’s for payroll, raw materials, etc – backed by their assets. The Fed centralizes that and controls credit by doing so.

      In this way, the Fed is a proxy for the Banks which are a proxy for private/productive enterprise. Thus, FR Notes are essentially backed by the economic activity of the Nation.

      The advantage of convertibility to gold is discipline. The advantage of not using gold is flexibility.

      As a side note, Keynesians recognize that economic activity, as measured by GDP, is an asset. Thus, issuing bonds for deficit spending during a downturn is akin to purchasing a long-term asset (my previous comment only listed hard, tangible long-term assets like aircraft carriers).

      1. F. Beard

        If there was no common “money” standard then companies (or banks holding company assets) would issue short-term IOU’s for payroll, raw materials, etc – backed by their assets. The Fed centralizes that and controls credit by doing so. Jackrabbit

        Yes, and they would be severely limited in the amount of IOU’s they could issue because their cash reserves would be limited since there would be no lender of last resort or buyer of assets with new money (open market purchases).

        So the Fed is ultimately to blame for the excessive of the banks. Eliminate the Fed and banks would be limited to about 2-1 leverage from what I read. However this would depend on the number of banks so many small banks are preferable to keep each other in check.

        1. Jackrabbit

          The problem with central banks is not just possible excesses of fiat money (that’s something of a feature – I call it “flexibility”).

          Centralization of monetary policy/regulatory function makes capture easy/ier. A captured regulator is then likely to turn a blind eye to collusive industry practices (mergers, similarity of products and risks, etc.) leading to high correlation risk to any shock (they all get into trouble at the same time) resulting in recurring Fed/taxpayer bailouts.

          In that light consider Dodd-Frank. The firm resolution provisions are designed to resolve single firms that get into trouble. When the entire industry is at risk (or can benefit by making such a case) we’ll have more bailouts. Hoocoodanode?

          1. F. Beard

            The problem with central banks is not just possible excesses of fiat money (that’s something of a feature – I call it “flexibility”). Jackrabbit

            I agree. Money creation is an art, not a science. The US Treasury should be able to create and spend as much money as the market will bear. However, that money should only be legal tender (in fact as well as law) for government debts, taxes and fees, not private ones. That way, people would be free to accept or reject it as they saw fit. That is the kind of market discipline we need.

            Flexibility is of course a virtue which is one reason I am no gold-bug. With separate government and private money supplies then each sector would have unlimited flexibility yet without counterfeiting the other sector’s money.

        2. Obsvr-1

          yes – End the FED, end debt based FRNs, replace with US Dollar that is spent into existence by the gov’t. Deficits increase the “National Tax Due” account, taxes reduce the account balance. No need to pay interest on US Dollars issued by the US Treasury, they are backed by the Full Faith and Credit of the USA, which exists because of the productive output of the workers (and the big guns of the military).

          This would not stop the big banks from over leverage and failure, that would require an end of the TBTF doctrine. ALL businesses, including TBTF banks, would be subject to competitive free market dynamics, their stockholders, bond holders and owners would be exposed to the risk of the corporation. If the business fails the investors lose.

          1. F. Beard

            This would not stop the big banks from over leverage and failure, that would require an end of the TBTF doctrine. Obscr-1

            Actually, it would. Without the Fed as lender of last resort and buyer of assets with new money, where would banks get liquidity if they over-leveraged? Now admittedly, the larger the bank, the more liabilities (“credit”) it can create without worrying about cash reserves.

            But let’s take worse case: One single huge private bank with no Fed. In that situation, the US Treasury would be the only source of new government money. Since government taxation would have to be roughly equal to government spending then the average amount of government money in circulation would be 1/2 Federal spending. That would be it. If the one single bank over-leveraged, there would be no one to borrow from = bankruptcy = receivership.

          2. Obsvr-1

            With no FED, the UST would issue US Money, so the gov’t (UST) could provide liquidity (bailouts). This doctrine TBTF doctrine would have to be eliminated.

            I believe we both agree here – let failure meet the resolution of bankruptcy, let the investors assume the risk and losses – no public sector support/bailouts.

  16. ep3

    So basically it doesn’t matter what we call money. Money is the medium of exchange. We could decide tomorrow that we want to change that medium to pizza. As long as we all agree one pizza is worth “X”, we can all have a happy economy.

    1. Edward Harrison Post author

      What matters for paper currency to have ‘value’ is the ability to enforce taxation plus the legal tender laws which put it in general circulation.

      If currency revulsion becomes so extreme that government loses its ability to collect tax, even if that currency is legal tender, you have a problem. So, taxation (a coercive power of government that none of us has) is central to fiat money’s use.

      1. F. Beard

        What matters for paper currency to have ‘value’ is the ability to enforce taxation plus the legal tender laws which put it in general circulation. Edward Harrison

        Bingo!

        Which raises the question of what would back private monies? PMs? But they are non-performing assets that depend on usury for a return. Plus they have the inherent contradiction of commodity money which is that if used as money then it is not a commodity and vice versa.

        My bet is that common stock is the ideal private money form. It requires no borrowing or lending hence no usury. All price inflation is born by the stock holders because the money is stock!

      2. Nathanael

        Interesting points. However, *I* would argue that some of our private banks have arrogated to themselves the power to tax. Consider their practices of slapping fees onto people’s bills — fees which people do not owe and have no legal obligation to pay. This happens with mortgages, this happens with credit cards, this happens with bank accounts. In the vast majority of the cases, the banks successfully extort these “fees”. Even when the individual thus abused goes to COURT, the bank is usually successful. As Yves has documented, the banks have even talked some courts into helping the banks steal people’s HOMES based on such unilaterally imposed fees.

        If they are able to do this universally, to simply demand money from people and use the power of the state to enforce their demands, do they not have the power to tax, effectively speaking?

        And isn’t this a *big, big problem*? I would much rather that only democratically controlled governments had the power to tax.

  17. Random lurker

    The difference is that, since bonds carry interest, you can use them as a for of invetiment, as opposed to delayed consumption.
    For example, if I had enough money, I could buy a lot of bonds, live withouth working from the interest on the bonds, and never deplete principal.
    On the other hand, with banknotes I would be forced to deplete principal (or else invest in the material economy).
    As a consequence, it seems to me that “printing debt” is in itself more inflationary than “printing money”, and that printing debt increases the quantity of rents extracted from the system.

    1. F. Beard

      Yes, it is counterfeiting PJ

      What would you have? That private citizens be able to take their PMs to the Mint and have them converted to legal tender for government debts (taxes and fees)? Is that not counterfeiting?

      The solution to government counterfeiting of private money is NOT the private counterfeiting of government money. The solution is to eliminate counterfeiting.

  18. But What Do I Know?

    Great commentary and comments! I’ll try to put it another way. The difference between the two is a necessary fiction, just as the value of money itself is a necessary fiction. It’s darn useful to believe that money has value, that bonds are different than currency and force some kind of constraint on government spending. I’ll happily play this game, as long as everyone else does too. The problem is that TPTB aren’t playing the game fairly, and that is undermining the system which beings me food and oil and all the other stuff I need.

    This isn’t a question of truth, but rather of belief. Two quotes that I think are relevant.

    “Rationality is not the gold standard against which all other forms of thought are to be judged. Adaptation is the gold standard against which rationality must be judged, along with all other forms of thought.” – David Sloan Wilson

    “The point is that we are all capable of believing things which we know to be untrue, and then, when we are finally proved wrong, impudently twisting the facts so as to show that we were right. Intellectually, it is possible to carry on this process for an indefinite time: the only check on it is that sooner or later a false belief bumps up against solid reality, usually on a battlefield.” – George Orwell

    Let us hope this bump doesn’t occur anytime soon.

  19. indio007

    The US can not directly issue bills of credit.Doing it via bonds is an indirect method.

    The language permitting it was in the wording of the Constitution and specifically removed by vote.

    Notes of Debates in the Federal Convention of 1787
    by James Madison
    Thursday, August 16

    http://teachingamericanhistory.org/convention/debates/0816.html#8

    Mr. Govr. MORRIS moved to strike out “and emit bills on the credit of the U. States”-If the United States had credit such bills would be unnecessary: if they had not, unjust & useless.
    Mr. BUTLER, 2ds. the motion.

    etc….

    On the motion for striking out

    N. H. ay. Mas. ay. Ct ay. N. J. no. Pa. ay. Del. ay. Md. no. Va. ay. N. C. ay. S. C. ay. Geo. ay.

  20. Dan Duncan

    Edward, the answers you seek to the questions you ask are found in repositories of Forbidden Knowledge. I direct thee to Toonopedia, the Wikipedia of Cartoons.

    There, you shall learn about Mandrake the Magician.

    Appearing on the scene years before Superman, Mandrake the Magician was the first true Super-Hero with special powers.

    Mandrake the Magician’s special power was making people believe anything, simply by gesturing hypnotically. When Mandrake “gestures hypnotically”, his subjects see illusions…

    Mandrake the Magnifico` is gone now, but his spirit lives on in Central Bankers and MMT’ers everywhere.

    So in asking your question: “Am I missing something?”…your entire perspective is off and its messing everything up….

    “Am I missing something?” implies a situation where something either exists or it doesn’t. With fiat money, however, the answer isn’t so neat and clean. Fiat money is like a quantum (or virtual) particle that instantaneously bubbles into existence.

    At the time you ask “Am I missing anything?”, you might not be missing anything at all…but ask the question 10 minutes later, and sure enough…you missed it. It all depends on when you do the asking.

    In a world where “Ex nihilo nihil fit” does not apply you are left with “Ex nihilo fit…ex nihilo nihil fit”, and something does come from nothing.

    And in this world, the Mandrake The Bernank does whatever the f*ck Mandrake The Bernank wants to do… and parsing whether there really is a distinction between Treasury securities and bank notes amounts to nothing.

    1. F. Beard

      Mandrake the Magnifico` is gone now, but his spirit lives on in Central Bankers and MMT’ers everywhere. Dan Duncan

      That is probably true with Central Bankers but MMT (Modern Money Theory) is sound.

      Government fiat allows one to pay the gasoline tax which enables one to drive. Is that nothing? Government fiat allows one to pay his Income Tax and stay out of prison. Is that nothing?

      Government fiat is far more real than PMs so long as government can collect taxes.

    2. AndyC

      Dan

      MMTers have discovered that money is actually made of readily available paper and ink.

      “get your money for nothing….and your chicks for free…”

      Mark Knopfler

  21. Schofield

    Jake Chase’s comment is a good one. Several points occur to me as a result of it.

    Firstly, given that only about 3% of money is in the form of paper and metal and the rest is in the form of electronic credits and debits would it not be better for MMTer’s to use the term “issue” rather than “print” money. For many individuals new to MMT arguments it’s surely better to get them thinking about economic activity being driven by electronic activation with accompanying computer databases for accounting purposes than scraps of paper and pieces of metal.

    Secondly, since accountability is the key issue for the issuance of this electronic activation (money) surely the key is to stop monetary inducements to political representatives to pimp themselves (campaign finance reform). In addition why do we have to think in terms of Congress being in control of money issuance when representatives from a nation’s various industrial and service sectors could be directly elected by citizens to the Monetary Policy Committee of an independent central bank trust mandated to pursue key objectives such as maximizing employment and minimizing inflation and deflation of the currency?

  22. Jon O.

    “For all intents and purposes, bank notes, reserve deposits, and Treasury securities are fungible”

    Try paying for groceries with a t-bill.

    A Federal Reserve Note is an irredeemable claim on the fed collateralized by treasuries held at the fed, essentially a bill of credit(token money, fiat money etc). It’s not really a note because it has no maturity. It garners a higher liquidity premium(hence bank runs). A treasury is a claim on the treasury, redeemed at maturity, collateralized by future tax revenue.

    In a weird, circuitous way one is subordinate to the other but they both depend on each other for their value.

    Bank reserves are simply “inter-bank money” used to collateralize (well not really anymore because of sweeps, the use of vault cash, shadow banking etc) bank liabilities in the form of checkable deposits, savings accts etc. One way to think of them is the potential to create bank liabilities(spendable money).

    Also, I believe the Bureau of Printing and Engraving is not autonomous but prints currency at the behest of the fed and the cost is remitted to the fed and becomes an operating cost. They gave the “independent” fed the only authority to print public money in order to keep the government from directly monetizing the debt, or at least to prevent the appearance of such.

    1. Edward Harrison Post author

      The question actually was “what is the functional difference for the federal government”. I am not asking from a currency user’s perspective, but from the creators perspective. Functionally there is no difference. Operationally, there are differences.

      As I said in the piece, from the government’s perspective “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.”

      That – and the term maturity of bonds makes it distinct from currency operationally. That would be the simple answer.

      On reserves, right now, excess reserves are piling up. These are government liabilities too. Operationally, if the Fed ever wants to put up the policy rate, it will have to pay higher interest on reserves to hit that rate if it doesn’t drain them first. You have heard noises from Bullard saying he thinks exiting QE2 and then getting rid of excess reserves comes before interest rate hikes. That’s why. This tells you the Fed will be at zero percent for a while to come.

      The overall point is that these different liabilities types serve different operational roles but they are all functionally speaking liabilities equivalent in value.

      1. Jon O.

        My point(I think) was that the emitting agency must adopt the currency users’ perspective. If the market values the cash differently than the treasury (which it does) then they can not be functionally or operationally equivalent from the governments of the feds perspective. The point of monetary policy is to impact, and be impacted by, the real economy. How it does this matters.

        Short answer is the treasury can not print money. It can only borrow. If it wanted to it would have to completely nationalize the fed(not a big jump from here anyway). Federal Reserve notes are not a claim on the gov, they are techinically a claim on the asset side of the feds balance sheet, really they are a claim on nothing. They are no ones liability except the holder(little joke there). Under the pre-bretton woods gold standard they were an actual liability.

        “As I said in the piece, from the government’s perspective “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.” ”

        The first function of the treasury bond is for the government to raise money. The fed conducts monetary policy, not the treasury; a treasury security is just one form of collateral banks can pledge to borrow from the fed. It’s not necessary for keeping the EFF inline with the target. TOMOs via REPOs can be, and were, collateralized with Agencies or MBS. They can also effect reserves – and thereby the EFF – by lending at the window against municipals, ABS, Corporates, MM funds, almost any type of consumer/commercial loan etc.

        “On reserves, right now, excess reserves are piling up. These are government liabilities too”

        No, they are liabilities of the fed.* Liabilities of the treasury can be paid off either by taxation or creating new liabilities which are then monetized by the fed. Liabilities of the fed can not be paid this way. The fed can only draw on itself to buy assets or lend against collateral. If those assets were to drop enough the fed ccould actually go bankrupt, in which case it would be fully nationalized.

        *(Really, in our current system, reserves are meaningless as most financial firms can operate with almost 0 reserves.)

        1. Nathanael

          The “Greenbacks” issued under Lincoln are a key example of the fact that if Congress allows it, the Treasury most certainly can issue its own money. The nationalization of the Federal Reserve would clearly be an improvement over the *current* situation, which has all the disadvantages of nationalization and most of the disadvantages of privatization. :-P

        2. Edward Harrison Post author

          Jon,

          When you say “The first function of the treasury bond is for the government to raise money.” the logic is circular. We are talking about whether the treasury has the ability in a fiat money system to credit bank accounts, laws permitting. You have made a neoclassical assumption that bonds must fund government spending. I think the point here is that this is not functionally true. The overdraft rule is what makes bond issuance necessary.

          As to reserves, you say “No, they are liabilities of the fed.” The Fed is an arm of the federal government. So when I say that reserves are government liabilities, this would certainly be true.

          Some argue (as you seem to) that the Fed is not a part of the government. I don’t agree with this. But, fine, it’s semantics as far as reserves as government liabilities go. The reserves may be liabilities on the Fed balance sheet but ultimately they are backed by claims against government and thus liabilities of the Treasury.

          Remember, that the Fed’s accounts are double entry and that means there are equivalent assets to back those reserves on the Fed’s balance sheet. Those assets are liabilities of the Treasury.

          See here:
          http://www.federalreserve.gov/releases/h41/current/h41.htm

          1. Jon O.

            “You have made a neoclassical assumption that bonds must fund government spending. I think the point here is that this is not functionally true. The overdraft rule is what makes bond issuance necessary.”

            Sure, if we changed the current system the treasury could do what you say. For a large part of U.S. hisotry a CB didnt create the currency; there were private bank notes, specie from the treasury, or U.S. notes from the treasury that served as money.

            Personally I think a system where you allow congress to print and spend is a recipe for disaster (mroe so than the current system). Under the current system there is an inherent check against public over-issuance: the process I described in earlier posts.

            “Some argue (as you seem to) that the Fed is not a part of the government. I don’t agree with this”

            When the fed was first created there were a million proposals and ideas from various groups: academics, politicians, populist activists, commercial interests, and of course the warburgs, vanderlips, morgans etc. The academics wanted an elastic currency, the populists an inflationary currency, and the bankers something of a cartel. They each got something and the initial system was de-centralized and private/independent(12 privately owned reserve banks with putative governance from the board in D.C.). When FDR went on his crusade against the Morgans – who at the time dominated the NY fed, which dominated the system – he changed the structure of the fed, taking power away from the NY fed and putting it in Washington. He also ended the domestic gold standard. Both of these moves turned the fed from a largely independent(orthodox,somewhat deflationary) CB into the quasi-nationalized (inflationary) system we have today where the power is mostly in D.C.

            With all that said it is technically independent of the treasury. In reality the board of governors work with and for the executive branch. But the 12 reserve banks are still owned by the consituent commercial banks, receive a 6% different based on their paid-in capital, elect mostly their own boards(1/3 are selected by the board of governors I believe), manage seperate balance sheets, run operating budgets etc. The three Miaden Lane portfolios sit on the NY Fed balance sheet. It’s also why the regional bank websites end in .org rather than .gov

            When we talk of the fed balance sheet we’re reallly talking about the consolidated balance sheets of the regional banks. On that link you provide scroll down to Section 9. and you can see how the assets are apportioned relative to the paid in capital. New York is obviously the biggest because of the size/number of banks in that district.

            The point of all that is when it comes down to the functioning of monetary policy operations the fed is du jure independent of treasury. When it comes to monetary policy mandates, goals, and priorities, it is de facto an arm of the state. But your original point refered more to the operations side. This is why I say a liability of the gov. is different than a liability of the fed, regardless if they are only one degree removed.

        3. Edward Harrison Post author

          Jon,

          One thing. Now that the Fed has taken to buying up non-treasury assets like MBS paper, not all the reserves the Fed is creating are backed by government liabilities. So, if you believe the Fed is a private banking organization, then the reserves are not effectively backed by government paper.

          For others on this thread,

          MMTers don’t use the term “printing money” when talking about the Fed. In their view money printing is what the fiscal agent does by spending money into existence and creating a net financial asset for the private sector.

          Because I view the Fed and fiat money with great scepticism, I do use that term for the Fed’s buying existing financial assets. My view is more aligned with Austrians, meaning that I see the Fed as creating a misallocation of resources by inflating the supply of reserves which I see leading to asset price inflation when demand is slack and also consumer price inflation in sectors where demand is tight.

          What the U.S. needs in my view is to restrict the Feds interference in the real economy by limiting its role to lender of last resort. Having the Fed control interest rates gives us a centrally planned financial system at the heart of a so-called capitalist economic system. Clearly, the Fed has not done a good job in this role as private sector debt has spiraled out of control ever since the U.S. left the gold standard.

          I think MMT does a wonderful job of describing the mechanics of our monetary system. However, what the U.S. needs is to help erect a new monetary system that puts a check on the ability of the Fed to produce an unlimited supply of reserves and distort the real economy.

          I believe that day will come when the flaws of the present system bring us another crisis.

          1. Philip Pilkington

            “My view is more aligned with Austrians, meaning that I see the Fed as creating a misallocation of resources by inflating the supply of reserves which I see leading to asset price inflation when demand is slack and also consumer price inflation in sectors where demand is tight.”

            Interesting. Why do you think this? I mean, it could be argued that this would occur under certain policies (QE2 being on?), but do you assume that this would happen under ANY fiscal policy that credits bank accounts without worrying about bond issuance?

            To the best of my knowledge, the MMTers support Jobs Guarantee programs. The purpose of these is twofold: (a) to add aggregate demand when it is lacking and (b) to provide full employment. Both, as you can see, are linked.

            But it’s in the nature of the JG program – at least in theory – that, when the private sector during economic recovery steps in it shrinks. So, how can a ‘misallocation of resources’ take place with such a flexible fiscal mechanism?

            In my understanding, if you’re to take the Austrian view you also have to assume that a capitalist economy ALWAYS allocates resources with the greatest efficiency – even in a depression when capacity is massively underutilised and unemployment is anywhere up to 25%.

            I don’t think you can pick and choose bits of the theory, either. Either a capitalist economy is ALWAYS utilising resources perfectly (which seems a fantastic and almost religious assumption) – even in a depression (which seems even more fantastic) – or you have to concede that under certain conditions a capitalist economy can underutilse resources. If you accept the latter then its pretty hard not to defend that a flexible fiscal mechanism should be in place to assist the economy in utilising (or ‘allocating’, if you like) its resources…

            …or have I completely misconstrued your argument?

          2. Jon O.

            Philip,

            I’m not an Austrian but I dont think that is how they would explain their position(obviously!). They don’t see it as an aggregate demand problem (in fact they don’t see aggregate demand at all); to them the slump is simply the markets eventualy, necessary response to the mis-allocations/mal-investments of the boom. So I guess you’re right to think they believe that during a slump the market is allocating resources effeciently, but they would probably argue that the unused resources are not the markets failure but the natural result of the bubble collapsing and the time it takes for the markets to clear and re-allocate resources. Ex. It takes time for a layed off construction worker to develope new skills and find new work, it takes time for real wages to fall, it takes time for machinery to be retooled etc. I think they would also say that counter-cyclical policy is not correcting the previous mis-allocations but simply side-steping the necessary deleveraging/re-allocation/deflation in an attempt to reflate the bubble, dragging the process out rather than fixing it. From their perspective gov. arbitrarily hiring a bunch of people – based on the wisdom of beurecrats, technocrats, whomever – to boost income/demand does not fix the problem of people being in the “wrong” jobs producing the “wrong” stuff to begin with.

          3. Edward Harrison Post author

            Philip, one can certainly pick and choose based on the logical consistency of the argument. You don’t have to accept the edifice of an entire economic school of thought. Even within schools of thought, there are competing ideas and emphases.

            On the malinvestment issue, the first distinction to make is between monetary and fiscal policy. The argument I am making has to do with loose monetary policy. A loose monetary policy creates a credit boom. In the boom, less credit is available for productive assets because credit and resources are diverted to marginal debtors and high-growth/high-risk activities as investors chase yield. Low interest rates and an expansionary credit environment give the illusion of profitability to unproductive investments and high-risk activities in the economy, that would appear foolish in an appropriate monetary environment. When the asset price bubbles pop, revulsion steps in, credit contracts and the bubble currency depreciates, as hot money flees the depreciating assets. That’s what happened in housing.

            Trying to prop up the economy’s aggregate demand with loose monetary policy invites a recurrence of the same pattern, but in a different segment of the economy. It is very distortionary. It’s not just about demand in the aggregate but resource allocation.

            On the fiscal side, there is certainly some benefit to the government’s trying to help close the output gap as the private sector repairs its balance sheet. I am onboard with that aspect of MMT. Depending on how the programs are structured, the money can be allocated by the private sector.

            See:
            http://www.creditwritedowns.com/2009/11/unemployment-insurance-for-the-21st-century.html

            But there is nothing magical about stimulus. We are coming out of a period of extremely distorted resource allocation. As Jon says, it takes time for people to reorient themselves. It takes time for industries to reduce excess capacity.

            See here:
            http://www.creditwritedowns.com/2010/06/stimulus-is-no-panacea.html

            Krugman took issue with this last post because he says East Germany’s situation is not analogous to ours. Tyler Cowen linked out to this post pointing to the limits of stimulus. Obviously I agree with Cowen and after losing a huge export market, East Germany is now coming around. It takes time.

          4. Philip Pilkington

            @ Jon O.

            “…but they would probably argue that the unused resources are not the markets failure but the natural result of the bubble collapsing and the time it takes for the markets to clear and re-allocate resources.”

            I’m aware of this. But it’s a nonsense argument. It would mean that the market should be inherently violent. If they agree that bubbles are inevitable but that outside interference shouldn’t take place they are forcing the economy to act violently.

            The reason that this is a nonsense theory is that it doesn’t take into account political repercussions. So, if we remove all fiscal stabalisers (welfare etc.)and we start to see Great Depression-era unemployment there will be political repercussions – that’s just a fact. The Austrians deny this – they do so by effectively denying the existence of the State.

            This is fantasy. Similar in many respects to Anarchism or some other vague political ideology. This is not a science. It does not seek to explain reality – but to judge it. It is first and foremost a political ideology, not an economic analysis.

            “It takes time for a layed off construction worker to develop new skills and find new work, it takes time for real wages to fall, it takes time for machinery to be retooled etc.”

            Yes, this is the argument. But it flies in the face of evidence and so I don’t think it deserves to be taken seriously.

            “From their perspective gov. arbitrarily hiring a bunch of people – based on the wisdom of beurecrats, technocrats, whomever – to boost income/demand does not fix the problem of people being in the “wrong” jobs producing the “wrong” stuff to begin with.”

            Yes, and they don’t tend to back this up with facts (in fact, Austrians often seem to loathe facts). Instead, they tend to make a moral judgment and refer to State job as ‘wrong’ – in the sense of ‘right’ and ‘wrong’. Once again, I don’t think this argument should be taken seriously outside of a discussion of political ideology or moral philosophy.

            “So I guess you’re right to think they believe that during a slump the market is allocating resources effeciently…”

            This is the crux of the issue. They really do. Because their argument is a moral one – not an economic one. When faced with high unemployment they invoke the future. This is common to many ideologies and religions. Its a central feature, for example, of Communism.

            My understanding is that they don’t really understand ‘efficiently’ in the sense that most people do. I understand ‘efficient allocation of resources’ as what takes place in the here and now. The Austrians allow anything to happen in the here and now – pretty much anything at all can be explained away in their ideology – and invoke the future… usually a utopian looking future.

            I could make some very, very unfair historical comparisons with this sort of thinking, but lets just say that it’s definitely traceable to Western religious thinking…

          5. Philip Pilkington

            @ Edward Harrison

            “You don’t have to accept the edifice of an entire economic school of thought.”

            I don’t really want to have this discussion in a comments section – as it would be fairly complex – but I disagree. I think there are some pretty fundamental presuppositions underlying all types of economic thinking, or any type of thinking generally. And I think that it’s often hard, if not impossible, to tear elements of a theory away from these underlying presuppositions.

            “The argument I am making has to do with loose monetary policy.”

            “Trying to prop up the economy’s aggregate demand with loose monetary policy invites a recurrence of the same pattern, but in a different segment of the economy. It is very distortionary. It’s not just about demand in the aggregate but resource allocation.”

            Well, I absolutely agree with you – I wouldn’t advocate the use of monetary policy to prop up aggregate demand as I think it would likely have exactly the effects that you’ve said.

            Perhaps the Austrians think this – but I’m pretty sure MMTers would agree too. Considering that most non-mainstream would, I think, agree with this statement I don’t think you can blame me for construing that you’re… I dunno… advocating a return to the gold standard and an end to government when you say that you’re ‘with the Austrians’ when it comes to issues regarding fiat currency and central banking…

            Mainly misunderstanding on my part though – I suspected as much…

      2. Obsvr-1

        The bonds held by the FED due to QE are not subject to interest rate fluctuation as the interest paid to the FED by the UST is remitted back to the UST, so the interest rate is effectively zero. Rising interest rates do affect all the bonds held by non-FED holders.

        The constraint of no overdraft at the FED, requires the UST to sell bonds (borrow). The “virtual’ Nat. Debt Limit somehow makes people believe there is some limit to fiscal spend. Eliminating both these political constraints would eliminate the bond game and interest on money issuance (fiscal spend) and political theater of “National Debt Limits”.

  23. Schofield

    Potentially it’s the excessive money creation by both the government sector but predominantly the private sector that can create the scary conditions of not knowing the value of the “activation” (money) you hold. The problem we now face after the latest financial crash is, therefore, one of how to best create cooperative solutions that will stop the free-riders from continuing to put us into scary situations.

  24. Jason X. Ray

    I’ve argued this with fellow MMTers.

    A few years ago, I started asking myself why we still issue bonds when we have no need to soak up bank reserves. Serously, the Fed stresses the point of strengthening reserves (incorrectly, BTW), yet still issues bonds. I asked this question over and over again (to myself and others) and never was satisfied with the answers.

    One day I ran across an interview of Michael Hudson. I can’t remember the subject of the interview, but Prof. Hudson stated that foreign central banks were flush in dollars and were tiring of placing them in US treasuries that gave such poor returns. Something clicked in my head upon hearing this.

    So, after reading much of Hudson’s work, the best I can make of this is that we still use bonds to soak up bank reserves, but it’s not JP Morgan or Chase, but rather foreign central banks in countries where we have a large trade imbalances (Japan, China) and in countries that hold large amounts of US dollars.

    The implications are twofold: 1) for domestic needs, there is no constraint on spending (MMT 101 here); 2) large trade imbalances lead to excess dollar reserves that effectively ‘remove’ dollars from the system allowing for the effects of excess spending (inflation or dollar deflation) to be delayed until the day that foreign holders of US debt flood our system with dollars or use them to drive up assets, all commodities, or manipulate the one commodity that is managed solely by the dollar: oil.

    I don’t think it’s all gloom and doom, but a large balance of payments deficit poses risks that we have in way attempted to mitigate.

    1. Philip Pilkington

      That’s really interesting. So, am I right in assuming that you see the trade-deficit as the biggest danger to the US? Would I also be right in assuming that you think that this trade-deficit cannot be balanced with fiscal policy and US Dollar devaluation?

      P.S. Would it not be correct to point out that there is probably no risk in a holder of large amounts of US Dollars suddenly flooding the market with them? I mean if, say, China did this, it would completely ruin its base of aggregate demand (i.e. US consumers). I’d presume that the shock would be so great that it would send China into depression – and probably precipitate the social revolution that the CCP dread. So, maybe there isn’t any danger here at all…

  25. DragQueen Capitalism

    That was awesome. I’ve been enjoying Zero hedge lately, but the comments … OMG!, so toxic and nasty, like a bunch of High school drop-outs. This discussion, on the contrary was very informative, measured, and adult (is that really asking so much?)

    Thank You thank You thank you.

  26. Jose

    I hope I’m not repeating some previously raised point in this long and fascinating thread but I have the following question.

    If the Government stops issuing bonds how is the private sector supposed to be able to accumulate Net Financial Assets on the public sector? According to MMT, in a situation of equilibrium in the current account, this would indeed be the normal position – a budget deficit with net saving of the private sector, that will thus build a creditor position against the government.

    But if no interest-paying T-bonds or notes are available and the natural interest rate really is zero (another MMT point) then unless the inflation rate is also zero or below zero – something I know MMTers definitely do not endorse – the private sector will be unable to have growing claims against the Government. It would be reduced to deposits at zero interest, alongside a positive if low inflation rate.

    Isn’t it then the case that issuing T-bonds will always be necessary in order to enable the private sector to build claims on the public sector and thus keep its “animal spirits” and investing behaviour alive?

    1. Nathanael

      Your analysis is correct as far as it goes, except that I don’t understand why you think the private sector “needs” to have claims against the public sector. Unless that was satirical.

      In a functioning economy, the private sector is supposed to be producing things itself, and doesn’t need claims against the public sector.

      Government bonds, however, may provide a safe way for the aged and invalid to attempt to store and increase their wealth if they don’t trust the private sector. (This is why they exist “to give holders a return on their investment”; the idea is that people who prefer to trust the government with their wealth rather than hoard valuables in vaults or trust the private sector should be rewarded.)

      1. Jose

        I see it this way: Government bonds are the only asset that is simultaneously risk-free and interest-bearing. All players in the private sector – individual investors, corporations, banks – need to have some part of their portfolios invested in a risk-free investment. If you scrap this instrument it is quite possible that the private sector as a whole will end up losing confidence in the system.

        Just imagine a world where portfolios necessarily have to be composed of risky assets, 100%. It would be vastly different from our world. Who knows what would happen to capitalism under these circumstances?

        In a sense one could say that the Government is the ultimate insurer of society. That’s the reason functional (as opposed to dysfunctional) neoliberal societies will never exist in the real world. Financially, the government has to offer society an interest paying asset, because it is the only entity with the capacity to issue that asset and honour its promise. After all, as MMTers rightly say, the Government can never go broke!

        So, yes, I see some inconsistency between the (correct!) MMT claim according to which the normal condition of an economy is to operate with a private sector surplus and a budget deficit – with the private sector soundly building NFAs over the public sector – and the statements of some of the proponents of MMT appealing for an end to debt isssuance, the integration of the Central Bank into the Treasury department and the pure and simple crediting of bank accounts via computer keyboards every time the government spends.

        To make it clear, I don’t think these proponents are wrong from an operational point of view. The government could end debt issues if it wanted to. It’s just that it does not make sense to implement a measure whose immediate practical consequence would be to deprive the private sector from a much-needed risk-free, interest-paying financial asset.

        1. Obsvr-1

          It is hard to believe folks really trust the gov’t over the private sector for ROI. If there are gov’t proponents then buy State or Muni general obligation bonds. State/local gov’ts have the power to tax but not issue money.

          As someone stated the US Bond is the only instrument that provides a risk free, interest bearing characteristic. For most investors, buying longer term bonds, the reality is they are not risk free, they carry interest rate risk. The US gov’t will never be insolvent, but you may not like the purchasing power of the returned principle if monetary devaluation is allowed or price inflation exceeds the bond rate.

  27. scraping_by

    One notable difference is that issuing money is a sovereign act. The Junk Sociology of the New World Order is against a nation acting like a nation. The Fed, being part of a de facto international organization of central banks, has the genius for money, not the government. Following our Constitution and coining money is way too unilateral.

    Then, too, you take it out of the hands of brilliant technocrats and put it in the hands of sleazy, dumb politicians. So what if Allen Greenspan occupies much of the beginning of William Lutz’s book The New Doublespeak: Why no one know what anyone’s saying anymore. Just imagine winners like John “Cryin’ and Lying’ ” Boehner with the power of the printing press. They’d starve the middle class workers and small businesses of credit while pumping a series of asset bubbles so their cronies could cash in. Wait a minute…

    1. scraping_by

      Oh, from Article 1, Section 8 (Congress) of the Constitution.

      “To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measure.”

    2. F. Beard

      The problem isn’t so much who has the printing press (though government money should be debt-free) but that we are forced to use government money for ALL debts, not just private ones.

      1. F. Beard

        make that “but that we are forced to use government money for ALL debts, not just government ones.”

  28. F. Beard

    Real money is backed by trust. It’s money if someone else will accept it.

    Money has three aspects: medium of exchange, store of value, and unit of account. Nathaniel

    True. But how does money come to be used in the first place before trust is established?

    1. Nathanael

      “True. But how does money come to be used in the first place before trust is established?”

      It actually doesn’t, if you look at history: trust comes first, money comes afterwards. Unless you have a sufficiently large group of people who you trust will accept a particular form of money, you won’t use that form of money. If you do have a sufficiently large group, you will.

      The presence of the government collecting taxes means that it, alone is often capable of constituting that “sufficiently large group”.

      The collection of people who like rare, shiny metals was the group used for the “bootstrapping” of the trust of gold and silver currency.

      But if you look back in early Sumerian history, you see that money — initially, clay tokens — was established through a slow process of establishing trust between merchants and farmers of individual kingdoms, and then between kingdoms. In contrast, Egypt established everyone’s trust of the reliability in the royal bureaucracy, which effectively established “bank accounts” for everyone.

      Trust can be “bootstrapped” in numerous different ways.

      1. F. Beard

        It actually doesn’t, if you look at history: trust comes first, money comes afterwards. Nathanael

        Well, now we are reliant on money and trust in the current form of it is diminishing. How shall new forms of money be “boot-strapped” rapidly?

        Government money is easy; just require it for taxes. But what about private money before trust in it can be established?

        Well, consider movie tickets. They are just cheap paper but can be exchanged for a movie performance. That basic function could in theory eventually be dropped much as the gold backing for money was eliminated once faith in the money was established.

        Common stock is an another private money form that has immediate value now simply because it is a share in a corporation’s assets.

  29. rps

    Paper currency, shells, shiny metals, clay coins, beads, beany babies, etc… as the accepted bartering tool of exchange is based on the same fundamental platform of all religions; the irrational trinity: belief, faith, and hope. With a heavy dose of coercive collective psychosis.

    1. F. Beard

      You cynic!

      The following money forms are perfectly sensible:

      1) Government fiat – backed by force. Sorry! God warned us in 1 Samuel 8:4-22.
      2) Store coupons, movie tickets, etc. – backed by present value.
      3) futures contracts – backed by future value.
      4) common stock – backed by present value + expected appreciation + part ownership of the corp.

      PMs as money are NOT sensible. A commodity money is either a commodity or money; it can’t be both at the same time.

  30. rps

    What’s the difference between government bonds and bank notes?
    Seigniorage

    More dollars in circulation means more treasury bills at the Fed. And unlike dollars, the treasury bills earn interest. So the Fed profits. It’s holding onto those treasury bills, which pay off with interest. Basically, when you hold onto U.S. cash, you’re giving the Federal Reserve an interest-free loan.

    1. Obsvr-1

      US cash (currency, FRN) zero interest loan. What will the FED pay you when you present back to the FED for payment ??

      What you are holding is the most liquid form of money, change be used to purchase anything, pay any debt or tax.

      1. Obsvr-1

        What you are holding is the most liquid form of money, can be used to purchase anything, pay any debt or tax.

  31. F. Beard

    I believe we both agree here – let failure meet the resolution of bankruptcy, let the investors assume the risk and losses – no public sector support/bailouts. Obsvr-1

    Absolutely. However I am uneasy about arbitrary size restrictions.

    But with true liberty in private money creation, I think we would find that banks and conventional money (except for government fiat) and so-called “credit” is mostly obsolete along with fractional reserves, PMs and even usury.

    Thanks for the critique. Good night. It’s off to bed for me.

  32. Tom Hickey

    A monetarily sovereign that is the monopoly provider of a nonconvertible floating rate currency of issue directly funds itself. Deficit spending injects nongovernment net financial assets and taxation withdraws NFA. The government can simply issue notes if it pleases. Issuance of interest-bearing obligations is operationally unnecessary.

    What we have now is a combination of a left-over from the gold standard and an unnecessary subsidy for bondholders. It’s imposition is political rather than operationally required. This subsidy should be eliminated as inefficient and preferential.

    1. Ralph Musgrave

      Agreed. Others who have advocated a “no debt” policy include Warren Mosler. See 2nd last para here:

      http://www.huffingtonpost.com/warren-mosler/proposals-for-the-banking_b_432105.html

      And Milton Friedman. See last para, p.250 here: http://nb.vse.cz/~BARTONP/mae911/friedman.pdf

      Abba Lerner, often said to be the founding father of Modern Monetary Theory, thought govt debt served a purpose. But I have criticised his reasons here:

      http://ralphanomics.blogspot.com/2011/03/abba-lerners-flawed-ideas-on-interest.html

  33. Ralph Musgrave

    Edward, The “functional difference” between cash and govt bonds is that cash can be spent NOW – which raises demand. In contrast, bonds are much more difficult spend. Bonds, particularly those near maturity are accepted in the world’s financial centres instead of cash, but you cannot spend bonds in the local convenience store.

    Thus if govt can persuade the private sector to take bonds in lieu of cash, that means demand will be lower than it otherwise would, which enables govt to spend more. But that is not to say govt debt is desirable. I.e. Tom Hickey above is right to pour cold water on the whole govt debt idea. Others with a similar jaundiced view of govt debt are thus.

    A “no debt” policy is advocated by Warren Mosler (see 2nd last paragraph) here:

    http://www.huffingtonpost.com/warren-mosler/proposals-for-the-banking_b_432105.html

    The “no debt” policy was also advocated by Milton Friedman (see last para, p.250) here:

    http://nb.vse.cz/~BARTONP/mae911/friedman.pdf

    The irrelevance of government debt is very much at the heart of Modern Monetary Theory at least in that MMT consists of the idea that given a recession, the government / central bank machine should simply create new money and increase its net spending (and do the reverse when inflation looms, i.e “unprint” money). Or in your words “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?” My answer: they could and should.

    Abba Lerner, often seen as the founding father of MMT, did advocate retaining some government debt (so as to control interest rates) but I don’t think his reasons stand inspection and for reasons I set out here:

    http://ralphanomics.blogspot.com/2011/03/abba-lerners-flawed-ideas-on-interest.html

    Note that MMT (at least as set out just above) implies re-arranging the responsibilities of central banks and politicians. But that’s not a big problem. See heading “Re-arranging government and central banks’ responsibilities.”, here.

    http://ralphanomics.blogspot.com/2011/03/why-separate-monetary-and-fiscal-policy.html

    Or as Jesse above said, “the law can be changed”.

  34. hermanas

    Great comments all. I’m left wondering what would be the effect of loading those cash pallets back on the planes and flying back home?

    1. Ralph Musgrave

      AndyC, You are quite right: MMT is dead simple. And that’s the big problem. That is, there are lots of people, especially academics and economics commentators, who want to keep themselves employed dreaming up complexity where complexity is not needed. That improves their bank balances and/or makes them feel important. I.e. produce a simple solution to a problem, and a whole series of time wasters then wade in, and mess up the solution.

      Prof. James Galbraith, one of the leading lights of MMT said of MMT “The process… is so simple that the mind is repelled”.

      And Abba Lerner, the “founding father of MMT” made much the same point here (see p. 39).

      http://k.web.umkc.edu/keltons/Papers/501/functional%20finance.pdf

  35. AndyC

    MMT, such high level discussion for such a stupid subject

    Hey, money is actually pieces of paper with ink on it so in theory the government could issue these at will and NEVER GO BROKE!

    No shit, really?

    Somebody contact the Nobel Committee and recommend an award for Cullen Roache, he talks about this idiotic financial sophistry as if he invented the wheel.

  36. F. Beard

    There is no such thing as a free market. All assertions that it Just Works refer to The Invisible Hand, a non-empirical, non-falsifiable, religious faith. Toby

    And what is the alternative? Some philosopher-god-kings to make decisions for the rest of us? From whence these since we are all human?

    1. Toby

      Well, I share your cynicism regarding “philosopher-god-kings”, since all they are is centralized power in another form. Because there’s no such thing as a free market, leaving things to Hand, The Invisible results, inevitably, in concentrated wealth enabling concentrated state power. The two are joined at the hip.

      In my humble opinion the only way forward is to democratize money fully, remove from it all value (not easy I know, but there appear to be solutions out there I’m still learning about), to ‘decommoditize’ it completely, as one part of an overarching process towards resourced-based economics. This process must include revolutionizing education, transport, housing, energy generation and consumption, city building, governance, and so on. The goal/direction is a sustainable and globally aware socioeconomics. Until we have that we can only be, by definition, on a path to self-destruction.

      I am nearing the end of a book called “Das Ende des Geldes” (“The End of Money”, by Professor Franz Hoermann, an Austrian economist), which calls for exactly this; money-creation at the local/individual level in a globally connected network, without usury, a money which cannot itself earn more money, and which bypasses all banking. It would be money-creation directly and immediately connected to social contribution. Sadly I don’t have all the details (this is a blog comment anyway so can’t be thousands of words long), but strongly believe the logic compelling this direction is unassailable. To be sustainable we have to be focused, through our socioeconomics, on the health of the environment and society. Any money-type or money-system which does not focus our energies and ingenuity in this way cannot be sustainable, since then our reactions are too influenced by money-profit for money’s sake–The Invisible Hand becomes god. We see the results of that unwise focus all around us now, encapsulated in the stupid phrase, “We can’t afford it.” If we believe we cannot afford to live healthily and sustainably, then the system giving rise to this belief is dangerously broken and erroneous.

      1. F. Beard

        Because there’s no such thing as a free market, leaving things to Hand, The Invisible results, inevitably, in concentrated wealth enabling concentrated state power. Toby

        We have never really had a true free market for long. Instead, the usury class and royalty have insisted that money creation is their prerogative and have fought to maintain it.

        I am nearing the end of a book called “Das Ende des Geldes” (”The End of Money”, by Professor Franz Hoermann, an Austrian economist), which calls for exactly this; money-creation at the local/individual level in a globally connected network, without usury, a money which cannot itself earn more money, and which bypasses all banking Toby

        But this is exactly what I propose – complete liberty in private money creation. As for usury, I detest it. I point out that common stock as money requires no usury; it shares wealth rather than loots it.

        1. Toby

          I was about to apologize for a poor response and for not directly answering your question, then saw your reply. So, another stab from me…

          The type of money I’m stumblingly learning about is not many monies created randomly by all individuals which then compete on the market and live or die there, or even get traded there. It would be a global ‘currency’ (if currency is the right word) not created via debt, specifically to enable tracking and ‘rewarding’ of social contributions, not to enable wealth/power accumulation. For example it would not be ‘government created’ and there would be no tax. Indeed the orientation/impetus would be more towards cooperation generally, would get us off our addiction to growth, would include some form of guaranteed income, or guarantee of housing, energy, food, water and so on, whichever is more sensible and/or democratically preferred, and require the other revolutions I mentioned above.

          Where ‘market’ processes might remain I picture them more in the form of the Internet, where supply actually exceeds demand. That is, production and contribution would not be motivated by ‘profit’ in the sense of ‘my success’ at others’ expense, but in the sense of societal profit generally, benefiting each locally. Informing me here, e.g. is the statistic that above an income of $60,000 happiness flatlines–$60,000 being merely a number that denotes access to a certain quality of life. For me this means we need a new set of motivations, a new vision for why we are members of society at all.

          The neoliberal ‘free market’ myth is therefore inappropriate for this kind of a world, this kind of socioeconomics. The kind of market that might emerge in such radically different circumstances is so unlike our current, force-fed idea of what markets are about, that I am reluctant to call it market. However, I am also neither wise nor intelligent enough to foresee how that side of things will pan out.

          I hope that was a better answer!

          1. F. Beard

            The type of money I’m stumblingly learning about is not many monies created randomly by all individuals which then compete on the market and live or die there, or even get traded there. It would be a global ‘currency’ (if currency is the right word) not created via debt, specifically to enable tracking and ‘rewarding’ of social contributions, not to enable wealth/power accumulation. Toby

            That sounds suspiciously like the “666″ money system, no offense intended. But under liberty in private money creation one would certainly be free to set up any kind of money system one desired that people could voluntarily adhere to.

            For example it would not be ‘government created’ and there would be no tax.

            Good luck with no taxes!

            Indeed the orientation/impetus would be more towards cooperation generally, would get us off our addiction to growth,

            It is usury, more specifically compound interest, that REQUIRES exponential growth. Growth itself is not bad if not forced. Voluntary cooperation is good which is why I promote common stock as money; it removes the distinctions between capital, labor and consumers.

            would include some form of guaranteed income,

            I have no problem with that in the short term. Later, as genuine liberty flourished, the need for charity should diminish till private charities could easily cope.

            or guarantee of housing, energy, food, water and so on, whichever is more sensible and/or democratically preferred, and require the other revolutions I mentioned above.

            It’s best to just give needy people money and let them decide how to spend it. It avoids bureaucracy, waste and senseless meddling.

          2. Toby

            It obviously wasn’t a better answer, since your reaction does not quite correspond to what I hoped to convey.

            It’s not about luck, nor is it about me, it’s about the need for a radically different way of organizing society, or rather gathering the courage to let society self-organize. Of course this is not realizable tomorrow morning, but I think the direction and vision should be bold, such that only those steps which make longer term sense be taken. Nor is this direction going to be grasped enthusiastically by the existing power structures; it means their demise, being about a wide and deep distribution of power. Taxes become unnecessary via the new money system, as does waged-labour, as does compulsory education etc., because these things change organically if we decide to take this challenge on. Such things aren’t demands, they are logical consequences of embracing this type of idea. The flowering of such a system is of course a long way off, but the sight of it, at least, is now.

            You say “avoid bureaucracy, waste and senseless meddling,” as if I’m talking about government hand-outs. Government in that sense does not come into it. Resource-based economics can only be global, requires no nation state, in that it’s starting point is planetary carrying capacity allied to abundance, intelligent sharing of, as opposed to market-based competition for, resources. This is a fundamental departure from the neoliberal mindset, a reversal in fact, although, at the same time, what we today vainly call The Individual would be far ‘freer’ and more empowered than ‘free’ markets can ever allow.

            If humanity does attempt to pursue such a direction, the process can only emerge from the ground up; it has to be willingly and knowingly pursued. If it doesn’t, and we stay too glued to the current paradigm, I fear civilizational collapse will be the result. How deep I don’t know, nor do I know when, but so much points to this outcome it is impossible to conclude otherwise. Hence this advocacy is pragmatic rather than fantastical. It follows the logic of prioritizing sustainability on this one planet to its deepest conclusions. It is in my view absurd to believe things can stay as they are much longer, e.g. hierarchical, top-down control of as much as possible while linearly exploiting resources with no sense of generated waste in an endless growth paradigm. Changing that changes everything else, whether we can accept that yet or not.

  37. F. Beard

    @Toby,

    While I agree with many of the goals you espouse, the rub is the means by which they shall be attained.

    I look at the money system and see that it is based on government backed theft of purchasing power from all money users including and especially the poor. How can that NOT be the root cause of so much that is wrong in the world?

    What I propose would allow you and anyone else to try their favorite money ideas. What more could you want?

    1. Toby

      The devil is always in the detail, and, frustratingly, what we need to define in advance–as far as we can–has never been tried before, requires a total rethinking of how we organize ourselves and distribute the fruits of our ingenuity. We will not be able to avoid uncertainty, which is a good thing in my opinion. Trying to nail things down to the final detail is an exercise in futility; there is no final detail. What matters is the vision, which includes the recognition that sustainability must be top priority, which then necessitates globally aware cooperation and sharing, and all that follows on from that. Money is changed as a consequence of the vision, not the other way around. Reorienting economics away from finance towards a more ecological and wise assessment of planetary carrying capacity would be a profound change whose consequences we cannot see in full. The money system is but one thing that will be affected.

      The money system is a root cause of what ails us, but deeper still is our sense of separation from nature, that we have a magical dominion over The Other (environment, ‘animals,’ ecosystems etc.), that we are somehow apart from ‘Out There,’ that ‘Out There’ is expressly given us as our play-thing to exploit in pursuit of profit. What I understand of your proposals does not appear to address this deeper cause, nor do they appear to acknowledge that capitalism itself falls away in the wake of what makes most sense; in my view Resource Based Economics. Capitalism is about scarcity, RBE is about abundance. Capitalism is about competition, RBE is about cooperation. Until that is clear to a huge number of people across the planet, and until sustainability is widely understood and wanted, tweaks to the money system cannot go far enough.

      1. F. Beard

        The devil is always in the detail, and, frustratingly, what we need to define in advance–as far as we can–has never been tried before, requires a total rethinking of how we organize ourselves and distribute the fruits of our ingenuity. Toby

        Instead of just eliminating the government privileges that enable the bankers to systematically and with relative safety violate “Thou shalt no steal” on a global scale?

        Liberty in private money creation would allow you and anyone else with ideas on how society should be to voluntarily organize and try those ideas out. Or should we plan carefully, put all our eggs in one basket and hope for the best?

        1. Toby

          Instead of just eliminating the government privileges that enable the bankers to systematically and with relative safety violate “Thou shalt no steal” on a global scale?

          I don’t think that would be enough, but who am I to decide? Like I said later in the comment, the vision is more important, but I won’t be fanatical on the order in which these things are implemented. ;-)

          Or should we plan carefully, put all our eggs in one basket and hope for the best?

          My take on this is that open discussion is the process that generates the new vision, and I’m certainly against putting all eggs in one basket. I’m not sure what it is in what I’ve said here that would make you write that. What matters to me at this stage is the logic and wisdom of what we variously propose, and how we go about probing each other’s thinking, here and across the world. Not only am I a poor planner of details, we are not there yet in my view. First the unfolding sea change needs to find clearer focus. After that details will quickly emerge in a cultural environment conducive to change deep enough to be effective and lasting.

          Capitalism/socialism/fascism/communism have had their day. Exactly how the famous and cliched New Way will be trodden no one can know, but it will be–should we survive/succeed–profoundly different from what we have known so far in recorded history. That is the most important part of this in my opinion; that the required depth of change be culturally recognized/embraced across the planet. Until that happens my belief is that change to the money system will not be radical enough, nor will other required societal changes.

          1. F. Beard

            Until that happens my belief is that change to the money system will not be radical enough, nor will other required societal changes. Toby

            So many bad things can be traced to the crooked money system that we need look no further,imo. Ben Bernanke admits that the Fed caused the Great Depression and by extension, WWII which killed 50-86 million people.

            Not everyone agrees on social policy but we should all agree on “Thou shalt not steal.” Besides advocating debt forgiveness or a general bailout of the population, that’s as far as I will go. Let’s fix that undeniable flaw (systematic theft) and we shall see that many branches of evil shall wither away of themselves, imo.

  38. beowulf

    Sorry for the late hit. Congress has divided its seigniorage power between Federal Reserve and Treasury. Fed prints dollars, Tsy mints coins. What’s interesting is when coins are presented for deposit Fed actually buy them, so its an asset sale not a debt swap. That’s how the Mint Public Enterprise Fund can self-fund without appropriations with its Public Enterprise Fund profits swept into Tsy General Fund by Secretary. Without changing any laws, Tsy can create unlimited sums of coin money at Secretary’s discretion (yes, one hopes he is cognizant of inflationary risk, so sending everyone a check for $1 million is a bad idea), he simply orders West Point Mint to produce, say, $100 billion in platinum coins, platinum coins may be issued in any quantity and denomination by Secretary– denomination (or “face value”) has no relationship to metallic and other productions costs (or $1 coins would only be worth 12 cents). Lets say he orders a single $100 billion coin, when its deposited at Fed (and they can’t refuse a Tsy deposit of legal tender) at face value, the Mint PEF is credited $100 billion, profits (“coin seigniorage”) can be swept immediately into Tsy General Fund as miscellaneous receipts (same category as Fed earnings refunds).

    2. Secretary still has authority to mint gold coins of any quantity and denomination (and since we’re off gold standard, he can set a jumbo size face value). He could deposit gold coins like he can platinum, but that’s lame. Easier to use “gold certificate” law still on books, when Mint (forget offhand if its West Point or Philadelphia) sends him coin, he keeps it in Tsy vault and writes a gold certificate against its value, which he can deposit in Tsy General Fund. Whether by direct deposit or gold certificate, the money created does not add to statutory debt limit and is within Secretary’s authority today.

    Bonus option 3. United States currency notes (Lincoln Greenbacks) are, like undeclared wars, something that perhaps should be unconstitutional but isn’t (the Supreme Court addressed the issue over a century ago). Right now, federal law limits circulation to $300 million and forbids their use as bank reserve. If Congress deletes one code subsection, 31 USC 5115(b), Tsy could simply create US Notes in the quantity, denomination and form (presumably, then paper or electronic) Secretary prescribes for deposit in Tsy General Fund like its money from home. Unlike coins, US Notes are considered public debt but are specifically excluded from debt ceiling. Of course Fed will lose control of Fed Fund rate if those newly created excess reserves aren’t, to coin a term, tranquilized. This can be done on a net debit to Tsy basis– paying interest on excess reserves, or on a net credit basis– imposing a tax on non-monetary base. Call it a “user fee” instead of a tax, and Fed governors can levy and adjust it themselves (Monetary Control Act of 1980). It goes to the same place… Tsy General Fund.

    1. beowulf

      Just to clarify, Tsy is not authorized to spend without a congressional appropriation. So use of seigniorage power simply replaces Tsy-issued bonds with Tsy-issue dollars and we all remember what Thomas Edison said about that! Oh, on the off chance you don’t…
      If our nation can issue a dollar bond, it can issue a dollar bill… If the Government issues bonds, the brokers will sell them. The bonds will be negotiable; they will be considered as gilt edged paper. Why? Because the government is behind them, but who is behind the Government? The people. Therefore it is the people who constitute the basis of Government credit. Why then cannot the people have the benefit of their own gilt-edged credit?
      http://prosperityuk.com/2000/09/thomas-edison-on-government-created-debt-free-money/

Comments are closed.