Scott Fullwiler: QE3, Treasury Style—Go Around, Not Over the Debt Ceiling Limit

By Scott Fullwiler, Associate Professor of Economics at Wartburg College. Cross posted from New Economic Perspectives

Cullen Roche’s excellent post at Pragmatic Capitalism explains—via comments from frequent MMT commentator Beowulf (see here) and several previous posts by fellow MMT blogger Joe Firestone (see the links at the end of Cullen’s post and also here and here)—that the debt ceiling debate could be ended right now given that the US Constitution bestows upon the US Treasury the authority to mint coins (particularly platinum ones). Further, this simple change would lift the veil on how current monetary operations work and thereby demonstrate clearly that a currency-issuing government under flexible exchange rates cannot be forced into default against its will and is not beholden to “vigilante” bond markets. As Beowulf explains in a later comment, “The anomaly it addresses is that the US Govt has a debt limit yet an agency of the US Govt (the Federal Reserve) does not have a debt limit. Clearly this is a structural defect.”

The following is a description of how the process would work and the implications for monetary operations:

1. The Treasury mints a $1 trillion coin, or whatever amount is desired.

2. The Treasury deposits the coin into the Treasury’s account at the Fed. The Fed’s assets (coin) and liabilities (Treasury’s account) increase by the same amount. As Beowulf notes later in a comment to the same post from Cullen, were the Fed to resist, the Federal Reserve Act clearly states that “wherever any power vested by this Act in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.” The Fed is legally an agency operating at the pleasure of the government, not vice versa. Regardless, the actions I describe here and below by the Treasury in no way interfere with the normal operations of monetary policy (explained in various places below).

3. The Treasury buys back bonds (thereby retiring them) until total market value purchased is equal to the dollar value of the newly minted coin. The result is a decrease in the Treasury’s account at Fed and an increase in bank reserve balances held at the Fed.

4. Total debt service for the Treasury falls, too, as higher interest earning bonds are replaced with reserve balances earning 0.25%. Effective debt service on purchased bonds now is 0.25% since interest on reserve balances reduces the Fed’s profits that are returned to Treasury each year.

5. The retirement of bonds is an asset swap, no different from QE2, except that the Treasury has purchased the bonds instead of the Fed. But since the Treasury’s account is on the Fed’s balance sheet, there is no operational difference. That is, this is effectively “QE3, Treasury Style.” As with QE2, no net financial assets have been created for the non-government sector. The net effect, like QE2, is to reduce the term structure of US debt held by private investors, as bonds have been replaced with reserve balances.

6. The increase in reserve balances is not inflationary, as Credit Easing 1.0, QE 1.0, and QE 2.0 already have shown. Banks can’t “do” anything with all the extra reserve balances. Loans create deposits—reserve balances don’t finance lending or add any “fuel” to the economy. Banks don’t lend reserve balances except in the federal funds market, and in that case the Fed always provides sufficient quantities to keep the federal funds rate at its target—that’s what it means to set an interest rate target. Widespread belief that reserve balances add “fuel” to bank lending is flawed, as I explained here over two years ago.

7. Non-bank sellers of the bonds purchased by the Treasury now have deposits earning essentially 0%. Again, this is not inflationary. There are three points to make in explaining why.

First, sellers of bonds were always able to sell their securities for deposits with or without the Treasury’s intervention given that there are around 20 dealers posting bids at all times. Anyone holding a treasury security and desiring to sell it in order to spend more out of current income can do so easily; holders of Treasury securities are never constrained in spending by the fact that they hold the security instead of a deposit. Further, dealers finance purchases of securities from both the private sector and the Treasury by borrowing in the repo market—that is, via credit creation using securities as collateral. This means there is no “taking money from one person to give it to another” zero sum game when bonds are issued (banks can similarly purchase securities by taking an overdraft in reserve accounts and clearing it at the end of the day in the federal funds market), as what in fact happens is that the existence of the security actually enables more credit creation and are known to regularly facilitate credit creation in money markets that are a multiple of face value. Removing the security from circulation eliminates the ability for it to be leveraged many times over in money markets.

Second, the seller of the security now holding a deposit is earning less interest can convert the deposit to an interest earning balance. Just as one holding a Treasury can easily sell, one holding a deposit can easily find interest earning alternatives. Some make the argument that the security can decline in value and so this is not the same as holding a deposit, but this unwittingly supports my point here that holders of deposits aren’t necessarily doing so to spend. Deposits don’t spend themselves, after all.

Third, these operations by the Treasury create no new net financial assets for the non-government sector (and can in fact reduce its net saving by reducing interest paid on the national debt as bonds are replaced by reserve balances earning 0.25%). Any increase in aggregate spending would thereby require the private sector to spend more out of existing income or dissaving, as opposed to additional spending out of additional income. The commonly held view that “more money” necessarily creates spending confuses “more money” with “more income.” QE—whether “Fed style” or “Treasury style”—creates the former via an asset swap; on the other hand, a true helicopter drop would create the latter as it raises the net financial assets of the private sector. Again, “money” doesn’t spend itself. Further, by definition, spending more out of existing income is a re-leveraging of private sector balance sheets. This is highly unlikely in the current balance-sheet recession and is aside from the fact that QE again does nothing to facilitate more spending or credit creation beyond what is already possible without QE. The exception is that QE may reduce interest rates, particularly if the Fed or (in this case) the Treasury sets a fixed bid and offers to purchase all bonds offered for sale at that price—though this again may not lead to more credit creation in a balance-sheet recession and has the negative effect of reducing the net interest income of the private sector. (As an aside, a key difficulty neoclassical economists are having at the moment is they do not recognize the difference between a balance-sheet recession and their own flawed understanding of Keynes’s liquidity trap.)

Addendum: From points 6 and 7, QE3, Treasury Style can only be as inflationary as QE2 (which is to say, not at all, aside from indirect, temporary effects of commodities speculators who believed QE2 would be inflationary), since operationally it’s the exact same thing in terms of the effect on the non-government sector’s financial position. Anybody arguing that QE Treasury Style would be inflationary must explain why QE2 wasn’t inflationary. Neoclassical economists are currently saying “interest on reserves” is why QE2 didn’t work (they’re completely wrong; see my update to the post here and also here), but QE Treasury style similarly requires interest on reserves or the Fed to drain reserve balances with time deposits offered to banks if the Fed is to hit an overnight target. In other words, there’s no such thing as QE Fed Style or Treasury Style without interest on reserves (or, alternatively, time deposits).

8. The debt ceiling crisis is averted, as US debt outstanding has been reduced by the dollar value of the minted coin, and can continue to be reduced as desired. This simple asset swap demonstrates that the self-imposed constraints of the debt-ceiling, counting Treasury securities held by the Fed against the debt ceiling, and forbidding the Fed from “lending” to the Treasury directly are just that—self-imposed—and are not operational constraints at all. The only constraint is in the flawed understanding of the monetary system that is standard today among the macroeconomists writing textbooks and advising policymakers, or acting as policymakers themselves. From points 6 and 7 above, this asset swap is not inflationary—spending without issuing bonds is not any more inflationary than spending with bond sales, as I explained here and here.

9. Just as the Fed is the monopoly supplier of reserve balances, the Treasury is the monopoly supplier of coins. Future deficit spending by the federal government could thereby continue to be carried out by minting coins and depositing them in the Treasury’s account at the Fed. It then would be clear to everyone that the Treasury’s spending is not operationally constrained by revenues or its ability to sell bonds. It would be obvious that the Treasury spends by crediting the reserve accounts of banks, who in turn credit the deposit accounts of the spending recipients. Deficits would increase the quantity of reserve balances circulating and currently earning 0.25%. As MMT’ers have explained for years (even decades), the operational purpose of the Treasury’s sale of a bond is merely to aid the Fed’s ability to achieve its overnight target by draining reserve balances created by a deficit. But even selling bonds isn’t operationally necessary if the Fed pays interest on reserve balances at a rate equal to its target rate. On the other hand, if the Fed set the rate on reserve balances below its target and the Treasury no issuing bonds, the Fed could issue its own time deposits (with Congress’ blessing) to drain reserve balances created by a deficit. Whether the Fed’s target rate were set above the rate paid on reserve balances or equal to it, effective interest on the national debt clearly would be a monetary policy variable (as interest paid on reserve balances or on time deposits by the Fed reduces the Fed’s profits returned to the Treasury), as it at the very worst can be even under current operating procedures (see here and here).

10. This approach to dealing with the debt ceiling is far better than the recent proposal by Ron Paul, as again it lifts the veil on current monetary operations and recognizes the currency-issuing status of the US federal government. Instead, Paul proposes that the Fed destroy its holdings of Treasury securities. What’s strange about the proposal is that it shows that Paul either doesn’t understand monetary operations or is trying to have it both ways. Destroying the securities requires reducing the Fed’s capital by the same amount. Given the Fed’s miniscule level of capital (because, again, it has virtually no retained earnings after transferring them all to the Treasury each year), its capital would be way into negative territory. This isn’t a problem operationally, given that the Fed is the monopoly supplier of reserve balances. But recall that Paul was one of those protesting Credit Easing and QE1 the loudest, claiming that these would surely destroy the Fed’s capital and leave it insolvent. (Again, this is only relevant operationally under a gold standard or similar monetary arrangement—Paul and others like him want to analyze the US national debt and the Fed as if a gold standard existed, and then claim that a going on the gold standard is the solution to all of our problems, but I digress.) So, effectively Paul’s proposal would leave the Fed in a state of (in his view) “insolvency”—perhaps he does know what he’s doing and his debt ceiling proposal is just part of his grand plan to “end the Fed.” Otherwise, it would have been simpler to simply propose exempting the Treasury securities held by the Fed from counting toward the debt ceiling.

Lastly, giving credit where it is due, I want to again recognize the efforts of both Joe Firestone and Beowulf in researching and explaining the legal basis for and operational implications of the Treasury’s Constitutional authority to mint its own coin(s). This post benefits significantly from their important, original work.

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  1. Dan Kervick

    Sounds like a great idea. Unfortunately, the Obama administration has no interest in ending the debt ceiling standoff. Instead, Obama and Geithner want to use the fear generated by the standoff to push for some whooper Hooverite budget deal which will shore up Obama’s centrist bona fides by hacking at progressive sacred cows.

    Obama thinks this is going to help him get re-elected. But good luck with that after whatever compromise austerity budget they end up with re-tanks the economy.

    The administration has gone off the deep end. They don’t understand the economic fundamentals that are driving economic events, and really seem to believe its all about animal spirits and confidence fairies and behavioral economics nudges.

    1. Just Tired

      The administration is paralyzed because when the truth comes about what is really going on it will be devastating. Our whole debt ceiling problem stems from B.S. Bernanke and his ballooning of the Fed Balance Sheet (Curious that Balance Sheet is abbreviated BS??) In a recent interview with Maria Bartaromo, Alan Greenspan recommended that the Fed withdraw $500B to $1T of reserves from the banks since they are just sitting there doing nothing. Has anyone thought about the fact that that is exactly what Ron Paul has recommended (and no one has seriously disputed). As Dr. Paul has said, the Fed can simply withdraw the reserves, lower our debt and eliminate any problem with the debt ceiling. At the end of the day the answer will be an accounting entry. An accounting entry. Because the idea was initiated by Ron Paul, who many believe is a crackpot, it is not taken seriously. We are being “threatened” by a ridiculous accounting fiction that has very little bearing on reality and but may possibly have a psychological effect on whatever. Seriously folks, the solution is as simple as Ron Paul suggests and Alan Greenspan supports it! That is what has the administration paralyzed. The idea that enough of us will wake up and realize that we are being threatened by the Bogey Man. The Emperor is naked folks… Wake up!

  2. Craig Austin

    The root of our current economic problems are more operational than ideological – proper monetary management and a properly structured banking system. The only economists on top of these issues are the Kansas City school of folks like the author along with James Galbraith, William Black, Randall Wray, and Warren Mosler. The academic community continues to trip over itself because of their misunderstanding of the fundamental nature of our monetary system.

  3. Attitude_Check

    HOOORAY MMT has created a perpetual money machine allowing us to “borrow” money and spend it without first producing anything!!!!! Obviously modern alchemy is much more successful at producing credit than old alchemy was at producing Gold.

    This “analysis” completely ignores the FX effect of this type of behavior, how “convenient”, and the bleed-trough effect on commodity prices (it wasn’t “evil” speculators as the primary driver to rising commodity prices).

    1. stf

      Wow. You clearly understood virtually nothing in this post.

      There’s no suggestion whatsoever of ever spending more/less than Congress authorizes. That wouldn’t be legal anyway.

      There’s no “money printing,” whatever that is. Any deficit incurred would simply exist as reserve balances, not Tsy’s, and would earn the fed funds rate, or any rate the Fed pays on time deposits, if it does at all. Effectively, this just reduces the term structure of the debt, just as when the Fed did QE, while getting around the debt ceiling.

      Yes, markets would probably freak, just like they did with QE2, given they have no clue how QE works (or doesn’t work, as the case may be, at least in the sense they think it will work). But ultimately these are temporary, as we’ve again just seen with QE2.

      1. Myr

        It’s nonsense like this that scares the crap out of me.

        You ask where does this notion of printing money even come from? Seriously, what planet are you on? For starters, Bernanke said it on 60 minutes!

        If you create new currency to buy something that you couldn’t buy before then that’s what we call “printing money.” It really isn’t that complicated. The Fed didn’t have 2.5t sitting around to buy all that debt so they just created it out of thin air.

        1. stf

          If you actually understood the piece you’d see that I’m well aware of that.

          I was reacting to the crass notion of “printing money” that only applies to a gold standard whereby deficit spending by “printing money” is more inflationary than issuing debt.

          Mr. Bernanke’s actions were an asset swap. Yes, they created the reserve balances as they purchased the assets, but there was no change to the non-government sector’s financial position, just a change in term structure. Asset swaps are not helicopter drops.

          The point here is that the proposed action in the piece is identical to Mr. Bernanke’s asset swap actions for the non-government sector, not to helicopter drops. Indeed, the piece doesn’t propose minting coins for any spending not authorized by Congress, as that would be illegal.

          1. TC

            “Asset swaps are not helicopter drops.”

            Bull! Am I to think, then, that bad assets turned good by the Fed are stuffed down some banker’s pants that he or she might feel better, or are these good assets thrown right back into the leveraged Ponzi scheme the Fed, in truth, is hopelessly incapable of sustaining, as the very presence of this article, exposing a never ending need for infinite gobs of liquidity, reveal?

          2. stf

            Purchasing bad assets could very definitely be a helicopter drop. That’s clearly explained in the article I linked to in the post. That wasn’t the point being made there, which you clearly missed.

      2. Attitude_Check

        I understand the post very well. The concept described is the equivelent of money printing. It is different in form not substance. The creation of more credit in the absence of the creation of something value that the credit can be used to buy is money printing in any real sense. As I said the real problem with this approach isn’t the location of the created reserves, but the FX problems. This will result in dollar weakness and bring inflation through the back door through imports combined with bailing out the criminal class that has taken looting the national economy to a new level. Fraudclosure is just a tip of the iceberg.

          1. Attitude_Check

            Have you ever heard of a time-lag process? or a multi-variable process with non-linear feedback? Oh sorry, I forgot you are an MMT “true believer” and advanced math with more than one variable is a little past your comprehension. I won’t even try to describe the stochastic models with temporal delays and heteroscadastic Variance, let alone chaotic systems and strange attractors. Yes all of these things are real math terms and applicable to the economy and relevant to your simplistic ignorant and arrogant response.

            The fact that you think the Treasury minting a $1T coin by fiat composed of material of far less value, is anything other than “money printing” in poor disguise actually says it all quite clearly. You have completely drunk the MMT kool-aide and are now incapable of rational discourse on the subject. It is outside your cognitive framework and you no longer have the ability to even frame the question let alone answer it.

          2. stf

            Thank you for the ad hominem attacks on my intelligence and complete misrepresentation of the proposal. It really makes your argument so much more persuasive.

        1. Joe Firestone (LetsGetitDone)

          It’s not ‘printing money’ in the sense of that term used before 1971 when the epithet you’re using originated. Your just name-calling without providing any of the history of the use of the term or about common practices in all fiat currency systems. The truth is that all USD now is “printed money” and also that all Government spending involves creating “printed money.” But since this is true there is no distinction today between money that is “printed” and money that is not. What you’re really objecting too is Government deficit spending without debt issuance, and saying that that is more inflationary than Government deficit spending with debt issuance.

          However, this is false. There’s just no empirical evidence supporting this contention, and every reason to believe that Government deficit spending without debt is less inflationary than with it, because, in our system, debt instruments cab be leveraged multiple times.

          1. Attitude_Check

            The “correct” term is monetizing the debt, which is money printing in modern fiat currency terms. The two are identical in substance if not form, which is why I use the term.

          2. stf

            Just because it’s the one everyone uses doesn’t mean it’s the correct one. That’s an outdated, gold standard term, like it or not. What’s happening is a reduction in the term structure of the national debt–that’s the most precise way to say it, regardless what you think.

          3. Joe Firestone (LetsGetitDone)

            Below, attitude_check says that the proper term is “monetizing the debt” which is functionally equivalent to “printing money.” This too isn’t right. In the US context, “monetizing the debt” refers to the Fed directly buying debt instruments from the Treasury with new money the Fed created. In the coin seigniorage application, the Mint makes the money, the Treasury gets the miscellaneous revenue from the profits resulting from deposit at the Fed, and the Tresury then spends Congressional appropriations.

            I’m afraid I don’t see any new debt issuance by Treasury here; and since there’s no debt issuance, how can the Fed be buying or “monetizing” the debt?

            look what’s troubling you is that you don’t like the idea of the Government having the power to create fiat money. OK, so why not? If the reason is likelihood of inflation following use of the coins, then let’s keep arguing about that, and any evidence you have suggesting that will happen. That at least would be a rational discussion; but I’m afraid that just labeling what would go on as “printing money” is just pejorative labeling it’s not a rational or serious line of reasoning.

    2. Tao Jonesing

      Actually, MMT didn’t create the perpetual money machine, neoclassical (neoliberal) economics did that. All MMT did was figure out a way to do it without mugging the little guy to maintain the illusion of a natural business cycle, which is, in fact, always and everywhere a speculative phenomenon driven by the heads-I-win-tails-you-lose FIRE sector.

      Personally, I think MMT, like all schools of economics, including the Austrians, are merely enablers of the speculative excesses of the rentier class, which produces nothing.

      1. stf

        Hmmm . . . have you seen any of the rather extensive MMT research on reforming the financial sector? Or the proposals for monetary policy? Doesn’t sound like it.

    3. Philip Pilkington

      Well that was refreshing.

      You do know that expanding economies need expanding money-supplies, right? Well I assume you don’t. In your mind money is a fixed quantity. Which is why you’ll never understand this stuff.

      Back to alchemy, I should think…

      1. Attitude_Check

        It is certainly reasonable to increase the money supply at the same rate of growth as the economy. We have been increasing the money supply much faster than that for a long time. We have created a Minskian Ponzi speculative economy, and adding more loose credit through any means will only encourage more of this destructive behaviour. There is no pain free solution to the corner we have painted ourselves into.

    4. Joe Firestone (LetsGetitDone)

      Hey Mr. Attitude. Don’t blame us MMT folks. it was the founding fathers coupled with Congress in the 1990s that created the machine. Also, there’s no borrowing, only exercising Congress’s sovereign power (delegated to the Mint) to create Money. Anyway, if you don’t like it, then take it up with them. All we’re doing is saying that this ought to be used to get around this phony debt ceiling.

      1. Attitude_Check

        The constitution authorizes the Treasury to mint money. The Fed is not required. What is proposed sounds like it is consistent with the constitution. That doesn’ make it wise.

        1. Joe Firestone (LetsGetitDone)

          Sorry. The wording of the Constitution is:

          “Section. 8.

          The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;

          To borrow Money on the credit of the United States;

          To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes;

          To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States;

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

          The US Mint coins money by delegation of the authority of Congress.

          1. Attitude_Check

            So I stand by what I said, it may be consistent with the Constitution, that doesn’t make it wise or smart.

  4. mra11is

    Brief thought experiments:

    1) The Treasury mints a 1 oz platinum coin and inscribes its value at $1 billion. Would a holder of $1 billion worth of U.S. Treasury notes sell in exchange for this 1 oz coin?

    2) The Treasury mints $10 trillion worth of these 1 oz platinum coins (denominated at $1 billion each). Would the Treasury be able to purchase all of the publicly held U.S. debt with these coins?

    3) The Treasury announces that it will call all existing publicly held debt at par. By simply writing a check to all note holders. How high does the cost of a barrel of oil go? Or will oil even be available to be purchased in U.S. dollars?

    1. stf

      The coins aren’t for private circulation. They are simply presented to the Fed and deposited in the Treasury’s account there, where they sit as an asset on the Fed’s balance sheet. The Treasury then spends just as it always does, via a debit to its own account and a credit to a bank’s reserve account.

      But this isn’t about spending–the coins don’t enable any additional spending because that must be authorized by Congress. What they do is enable the Tsy to retire debt, again by debiting the account at the Fed (which has been credited via the coin) and crediting reserve accounts of banks selling the securities or whose customers sell the securities.

      The overall effect is to reduce the term structure of the national debt, as retired securities would then be held as overnight balances in reserve accounts and earn the target rate. This is the exact same as QE2 in terms of the balance sheet effects on the non-govt sector. The only difference is legal–reserve balances don’t count against the debt ceiling, but the securities do.

      1. Philip Pilkington

        On the money (harharhar…).

        This point bears repeating ad nauseum as its where the likes of Steve Keen fall down hugely:

        When currency — be it a giganto-coin or a dollar bill — disappears behind the walls of a bank it is out of circulation and becomes a worthless piece of paper. It cannot reenter the economy unless someone extracts it from the banking system.

        I won’t get into this too much, but the key point to understand is that money behind the walls of a bank (or an ATM machine) are worthless pieces of paper until they enter the economy in some way. Ditto for big platinum coins. This is why QE didn’t cause price inflation. The dollars just sat, essentially worthless, in the bank vaults.

    2. Cedric Regula

      Ron Paul wants to audit Ft. Knox too.

      But I have my own Debt Terrorist Plan.

      I say have the NSA and the CIA track down all these Treasury Bonds, send them to Guantanamo Bay, and waterboard ’em until they are unrecognizable pulp. We need to get tough on terrorism in this country, and it sounds like going after those Treasury Bonds is the place to start!

      1. Cedric Regula


        Not that I’m against this coin seigniorage thingy. I got a penny jar here and if I can tell people pennies are $100, that would solve my money supply problem. Then I could even go back to college and get a degree in economics, or something.

  5. Tertium Squid

    “demonstrate clearly that a currency-issuing government under flexible exchange rates cannot be forced into default against its will and is not beholden to “vigilante” bond markets.”

    “…The debt ceiling crisis is averted, as US debt outstanding has been reduced by the dollar value of the minted coin, and can continue to be reduced as desired.”

    To me, such statements indirectly argue that government should do away with taxation altogether and meet its spending needs solely by issuing currency.

    1. stf

      Not at all. You’re misunderstanding.

      First, the tax liability is necessary to give the currency value in exchange–why accept the govt’s money when it spends if it’s not needed to settle any specific payment?

      Second, zero tax revenue only works if govt spending is also very, very small, as otherwise you’ve got inflation. If govt spending is going to be anywhere near historical levels, sizeable tax revenues are necessary to avoid high rates of inflation.

      1. ScottS

        If taxation is a check on inflation, why aren’t Conservatives lining up to increase taxes?

        Stupid question, I know.

        1. Cedric Regula

          Maturity mismatch has been the scourge of the banking system throughout the history of fractional banking (which is why we got securitization – but then the dummy banks bought all the stupid stuff – securitized long term debt – and screwed themselves).

          So now if we announce a big personal income tax hike to control inflation, just after you levered out to buy the house and car – which of course you did because the economy was hot and your job secure – you quickly find out you have a cash flow problem and The Bernank doesn’t return your phone calls.

          Conservatives know this.

        2. Ming

          The honest believers among the conservatives oppose taxation because they see it as confiscation of income from the people, and they are morally opposed to this. ( there is some truth to that point of view)

          The pernicious pro- corporatist and pro- financial elite conservatives oppose taxation because it would take money away from themselves or their wealthy patrons. They oppose taxation for purely selfish reasons. They are also the ones who claim that taxation is a socialist activity that enables the lazy to benefit for the productive…. And they would consider financial/commodity speculator and hedge fund traders to be ‘productive elements ‘ of society.

  6. Debber

    Sounds like you just made Congress and all their blow-hard debt shenanigans a moot point. Love it!

  7. razzz

    Better the US Treasury to start an interest free bank and let the Federal Reserve die a slow death dealing with current bank losses unless you think banks/GSE can erase their current debt with accounting gimmicks.

    As confidence wanes in banking the public would move to private bonds where returns would be greater leaving the Federal Reserve and US Treasury to follow the markets because the market place is never wrong.

    1. financial matters

      Thanks for a well thought out and elegant approach to our monetary dilemma.

      Really amounts to reining in the Fed in the simplest way rather than any free spending panacea.

      Uses the intent of the Constitution to put Treasury and Congress in charge of these issues rather than private banks.

      Also a nice explanation of the temporary nature of the commodity increases as the ‘threat’ of inflation can be controlled under these conditions.

      And I think actually puts the USD on a sounder footing by making it less vulnerable to secret self-serving Fed meetings not accountable to Congress.

  8. KnotRP

    so…..a one trillion dollar coin can be coined and used to replace income paying instruments with zero income cash.

    Less income for old people.
    Same job problem.
    You guys are just awesome with your magical book keeping.
    So why stop at only one coin, if it’s all free lunch, eh?
    Why not coin $100T and buy every asset in sight?
    See the problem yet?

    1. financial matters

      Actually I think this puts money to use more productively. Salvaging social security and medicare will be good for old people. Unemployment insurance and job retraining programs are important transitional programs.

      Also the Koo video on balance sheet recessions is very instructive. We have the problem of corporations not wanting to borrow money at essentially 0% interest. This means in a sense they see no productive investment. This is not healthy for the economy. They need to pay down debt but the govt needs to step in on the spending side to avoid a deflationary spiral.

      1. KnotRP

        Companies are investing plenty….just not on US labor, and not in a loud sort of way.

        1. KnotRP

          And malinvestment is not equivalent to investment, so don’t say corporations should be spending more than they can profitably deploy, as if that will solve anything…..we’re not going to go around breaking windows until morale improves.

    2. Ming

      Your assessment is incorrect…. 80% of Americans only own 20% of financial assets…so interest payments on privatley held treasury bonds would mostly benefit the richer 20%.

      Second… The only purpose of this exercise would be to retire US government Treasury debt…. The treasury intent is not to attempt purchase all assets, which would of course result in massive monetary and asset based inflation.

      To be fair though, the Treasury and the Fed would have to enact credit limiting policies and taxation, to prevent th real rise of inflation; although in the present state of the US economy, with 9% unemployment, an additional 7% partially unemployed, and an additional 12% employed at very low paying retail jobs (I.e walmart economy), the us economy has some fiscal room to stoke inflation.

      1. Attitude_Check

        A large percentage of debt is now owned by foreigners, but the FX effects of this proposed plan will have serious costs to all Americans.

      2. KnotRP

        > Your assessment is incorrect…. 80% of Americans only own
        > 20% of financial assets…so interest payments on privatley
        > held treasury bonds would mostly benefit the richer 20%.

        “The richer 20%” includes everybody who saved for their retirement….so, in order to screw the rich, we’re going to
        also destroy retirees who cannot re-enter the workforce
        at a level above walmart greeter?

        The worst part is that as you approach the top 1%….or even top 0.1%….I bet you won’t find them holding Treasuries at all, so you are really just screwing the less sophisticated elderly.

    3. Joe Firestone (LetsGetitDone)

      No. There’s no problem, because spending is limited by Congressional appropriations. That spending is less inflationary when it uses seigniorage to credit the TGA than it is when uses the proceeds from debt sales.

  9. F. Beard

    It’s a good idea. The entire national debt should be paid off with debt-free money as it comes due. As for debt to the Fed, that is clearly bogus.

    Government and banking clearly need to be separated.

    1. Carla

      @F Beard: Good ideas bear repeating:

      “It’s a good idea. The entire national debt should be paid off with debt-free money as it comes due. As for debt to the Fed, that is clearly bogus.

      Government and banking clearly need to be separated”

      Thank you, F Beard, for summarizing a post that was way too technical for me to understand, with a comment that I can comprehend.

  10. billwilson

    Really? Because QE2 has worked so well. I mean my oil stocks and my safe deposit box full of gold have done well … but anything else?

    Talk about ignoring the problem – no mention of fundamental economic structural reform. Defense costs out of control (50% of world defense expenditures), health care costs double the rest of the world, energy equal to 1/2 the trade deficit (and folks driving pick-ups to the office), and no VAT (consume to the max), and zero incentive to save. Yeah sure print some more money … that will really help.

    I don’t see the end goal here … keep printing until when exactly?

    1. financial matters

      The money is already being printed, this just changes where the benefits go. Fed control gives interest to private banks and Treasury control saves the interest for public expenditures. Doesn’t mean there isn’t a need for Medicare reform or financial regulation but also doesn’t mean that slashing entitlements is the way out of the problem. I think a VAT tax would be useful esp on luxury goods and corporate governance reform would mean we could invest in companies and try and keep executive compensation under control. This isn’t meant to solve all problems but just reversing the trend of free money to central banks.

    2. Deus-DJ

      Why do you even post? The point of this article was to REDIRECT our focus, you CAN’T HAVE “fundamental economic structural reform” if everyone is focused on the national debt and not unemployment, inequality, lack of consumer protections, etc etc etc.

  11. Jefe Pelota

    The symbolic exchange of a single coin, arbitrarily ascribed an astronomical value that even a childs innocent brain would say has no relative value to its stated face value, would shake the very foundations of the system.

    The paper in the world’s hands: currency, promissory notes,stock ceritifcates of ownership, will be seen for what they really are: worthless pieces of paper based on faith, sanctity of contract, and rule of law. The flight to hard assets would be swift. How diverse the market indicators of what has value: guns, bullets, dried foodstuffs, clean water, gold, silver, wine and cigars, arable land, board games, acoustic musical instruments, hand tools, antique cars, second homes at ski resorts? How the single coin solution is a solution at all escapes me.
    All of these resolutions pondered by Bernank, the author, are mincing around the dark reality of our leveraged closed-loop world: there is no painless solution, no free lunch, and the other shoe will drop when the music stops and the scramble for the scarce chairs begins.
    There IS a solution that would avoid the majority of upheavel by the masses: debt jubilee across the board, and a re-set. No one would feel any real pain, and we might avoid wars, bloodshed, rape, pillage, and our uglier selves.
    That solution, too, would lay bare the truth that the paper losses were just that, the paper assets were just that, and the whole thing is a sham.
    The powers that be in the big banks, wall street, and government might not like this challenge to their legitimacy. Think a jubilee would meet any resistance?
    Single coin, jubilee, releasing oil from the strategic reserves: we are rearranging deck chairs on the Titanic. Some we can ponder, some are happening, and the ship is going down.

    1. F. Beard

      A debt jubilee while good would do nothing for savers who have also been cheated by the government backed counterfeiting cartel, the banking system.

      It would be better to “print” up some cheap fiat and bailout the entire population equally after first forbidding the banks from any new “credit” creation.

  12. joebhed

    Good idea, Scott, to solve the funding of the government budget today -almost. (Maybe half a $Tril. short)
    But ultimately those bond purchases put $1 Trillion into the excess reserves of Fed member banks that now hold them.
    Seems like little more than Treasury pushing on the economic growth(demand) string, rather than the Fed.
    Did I miss the certain aggregate demand flow increase from increasing the supply and velocity of M-1 transactions?
    The Kucinich Plan does much more for jobs and democracy.
    But it’s a start on new thinking.

    1. Joe Firestone (LetsGetitDone)

      Joe, I think you missed at least some of the point. Seigniroage can be used for all appropriations spending. So it’s not just paying for bonds when they come due. It’s about spending with no debt issuance and 9eventually) no interest to the wealthy and foreign nations who buy bonds.

  13. Jim Haygood

    ‘The Treasury mints a $1 trillion coin, or whatever amount is desired.’

    Presumably this means assigning a $1 trillion face value to a sandwich coin made from a few cents worth of tungsten cowhide and crapalloy.

    Because if the Treasury actually did it the honest, constitutional way — that is, by minting a trillion dollars worth of platinum into coinage — then there would be no net benefit from the exercise.

    Defrauding the Federal Reserve is a venial sin, in my book. But we shouldn’t kid ourselves that this idea — like the Federal Reserve itself — is erected on a foundation of creating fraudulent purchasing power out of thin air.

    1. F. Beard

      Because if the Treasury actually did it the honest, constitutional way … Jim Haygood

      Actually, pure fiat is the ONLY honest form of government money since government is force and needs no other backing for its money.

    1. F. Beard

      Where does Treasury get $1 trillion in metal exactly? Fred

      Actually, it is a waste of valuable metals to make coins from them. The Treasury should use a cheap base metal instead.

      1. Fred

        right, which means Treasury literally prints bills which might be hard to post as collateral with the Fed. unless timber skyrockets of course……

        1. F. Beard

          unless timber skyrockets of course…… Fred

          Government money is backed by its taxing authority. It needs no other backing and should have no other backing either.

        2. stf

          They don’t need $1T in metal. According to Beowulf (who has significant expertise on this issue from a legal perspective), they are allowed to simply mint platinum coins at whatever value they stamp on them.

      2. Cedric Regula

        Actually, getting back to the legalities of the landmark act of congress that enabled this whole plan (for whatever the reasons congress did it in the first place – pump up the platinum market????), we should probably assume someone will question the legal definition of “coin seigniorage”.

        There has been a vast history on the subject and usually legitimate practices were when the metal content, purity, and price matched up with some reasonable estimate of the price stamped on the coin.

        We should also assume the case will make it to the Supreme Court.

        Just sayin’…’cause you know how they always kill Kenny.

        1. Joe Firestone (LetsGetitDone)

          Who’s going to have standing to take it to Court. No one’s yet been given standing to question the Creation of the Fed and placing it outside the Executive Branch. So, who can question this? A coin that goes into a Fed vault? Who cares?

          1. Cedric Regula

            I’ll start with copying your comment from above, and then we could add the privately held Fed Member banks, the TBTFs, any of their supporters in Congress, then speculate from there.

            “Joe, I think you missed at least some of the point. Seigniroage can be used for all appropriations spending. So it’s not just paying for bonds when they come due. It’s about spending with no debt issuance and 9eventually) no interest to the wealthy and foreign nations who buy bonds.”

          2. Joe Firestone (LetsGetitDone)

            Cedric. You said:

            “I’ll start with copying your comment from above, and then we could add the privately held Fed Member banks, the TBTFs, any of their supporters in Congress, then speculate from there.

            “Joe, I think you missed at least some of the point. Seigniroage can be used for all appropriations spending. So it’s not just paying for bonds when they come due. It’s about spending with no debt issuance and 9eventually) no interest to the wealthy and foreign nations who buy bonds.”

            So, let me see, you’re saying that after the President saved the World financial system from collapse, one of the main beneficiaries of his action, Moody’s, would have standing in Court to overturn the use of coin seigniorage, because the US Government’s refusal to issue any more debt was hurting its business.

            Last time I looked, businessmen don’t have standing to sue the Federal Government because elements of its fiscal policy negatively impact their business.

  14. Jim


    One of the things that has fascinated me about the MMT/Circuit Theory debate is the choice made by each camp as to the order in which they have chosen to portray the logic and detail of the monetary system.

    Both MMT and Circuit theory seem to understand that the operation of the fiat system responds to the operation of the endogenous banking system in the sense that fiat money producers safisfy the requiremnts for reserves attributable
    to the lending and deposit activities of the endogeneous banking system.

    In contrast to the Neo-classical folks, both schools seem in agreement as to the operational causality originating in the endogenours system rather than loan and deposit multiplication based on prior reserve availability.

    Yet the circuit group seems to emphasize the role of private sector credit creation while the MMT group seems to emphasize the strategic dominance of the fiat money producer.

    To what do you attribute this difference in emphasis?

    1. stf

      Yes, they are both using the same model, most of them anyway. Some on the circuitiste/horizontalist side, like Keen, don’t have the govt sector integrated, or at least he didn’t last I checked though might have done so since (I know he was planning to do so).

      The emphasis on the govt side by neo-chartalists comes from (a) research into history of money on the fundamental role played by govt in naming the “thing” that settles transactions with the state, (b) endogenous money/horizontalists/circuitistes hand’t developed the govt side yet, so that’s what was missing, and (c) integration of the work of Wynne Godley, which is based on correct accounting of stocks/flows and shows that the govt sector has a special place and can’t be left out.

      Regarding (a), there is still some disagreement b/n the two, particularly regarding historical significance and importance for understanding current monetary systems. Regarding (b)not much disagreement at all, at least in terms of a paradigm. Regarding (c), complete agreement (leading horizontalist Marc Lavoie co-authored the now seminal text on this with Wynne Godley in 2006 or something like that).

      An interesting addition is MMT’s complete integration of Minsky, also, which is another layer onto both the govt and horizontal sides of the model. Horizontalists/circuitistes don’t seem to find Minsky as useful, particularly for understanding the more recent events (Keen is yet again an exception here, coming down on the MMT side).

      Hope that helps a bit!

  15. Tim

    This article is another eample of discussing the intermediate term concequeses of an action.

    It is not so separate to consider that curries are valued based on assumptions and perceptions. They do not have intrisic worth other than paper, so…

    Tax revenue held constant, do what you want to with the outstanding bonds the currency will respond accordingly in time via exchange rates and any worldwide distributable assets like commodities.

    1. Joe Firestone (LetsGetitDone)

      None of us can tell much about the intermediate or long-term consequences of policies and their unanticipated effects. But we do know some of the consequences of what I suggest. 1) The debt ceiling goes away; 2) The national debt eventually goes away; 3) The natural interest rate will approach zero, lowering US interest costs to near zero, unless it’s policy to pay higher interest on reserves; 4) China, Japan, and other debt owners won’t have anymore new debt to buy, so they’ll have to use their USD reserves in other ways; 5) they might even stop exporting so much which might lead to a resurgence of manufacturing here; 6) the Hooverians, both R and D variety won’t be able to say “we’re running out of money anymore; 7) we’ll run out of excuses for not passing a federal Job Guarantee Program at a living wage of $12.00 per hour w/full fringe benefits; 8) we’ll run out of excuses for not issuing revenue sharing grants sufficiently large to obviate the need for the States to lay off employees in the most serious recession in the post-WWII period; 9) we’ll run out of excuses for not passing Medicare for All and for not reducing the SS full benefit retirement age to 63; and much, much more that the Government of the us will be able to do.

      With all these desirable anticipated consequences, I suggest we ought to do this, and cope with the unanticipated effects (and their certainly will be some) when they become a problem. Right now, they don’t seem to be a problem, and I don’t thing we ought to be frightened away from this on grounds that there might be a black swan we haven’t anticipated.

  16. razzz

    I hope you are getting the part about government giving value to fiat or any other ‘thing’ by just demanding it in payment of taxes (this gives it necessary value). From that point on, it is confidence in the currency i.e. full faith and credit also rule of law, debt load and stable reasonable taxes.

    Once you issue new currency (interest free in this discussion) for payment of taxes then the old currency must be exchanged or valued to the new currency, debt can come and go pretty quick when that happens. Banks now couldn’t charge % only fees which would kill returns but rein in debt (now absent compounding interest). Growth? First hoarding of the new currency then spending.

    Not that there is a way to excise a fibrous tumor intertwined amongst the host like banking is to Congress and not it kill it at the same time but hope always springs eternal in a free society (guess we can forget about any ‘gold clause’ in a contract).

  17. TC

    “6. The increase in reserve balances is not inflationary, as Credit Easing 1.0, QE 1.0, and QE 2.0 already have shown.”

    Would you be so kind to send me whatever fine herb you are smoking? You’re trying to tell me an increase in reserve balances does not free up capital in the banking system which to be leveraged in, say, food-stuff commodities and energy? Must be some good stuff you got there.

    1. stf

      LOL! You have absolutely no idea how any of this works. “Reserve balances free up capital” My side aches I’m laughing so hard! I’d ask you to show me how that works on actual balance sheets but your response might just cause me to laugh myself to death.

      I’d be happy to engage in a more civil manner if you were, too, and we could clear this up. Didn’t look like it from your initial post, though.

      1. TC

        What I know is that, bad assets are being made good, and this is allowing banks to fake their Tier 1 capital. With this fakery, banks — who likewise are freed from supporting Treasury, because Benito’s QE covers the lender of last resort’s need — effectively are able to continue on in their fee-based circle jerk of speculation which, bereft of securities passing the rating agencies wink test, increasingly ends up in operations to consolidate physical capacity the likes of which the fascist at the Fed calls “excess,” thereby sowing the seeds of shortage, which effect, as well, is creating havoc in spot and futures markets whose impact thus makes the Fed’s operations inflationary.

        You go right ahead and keep on selling your snake oil. This is America after all. I’m sure you’ll find buyers.

  18. Crazy Horse

    Amazing how the mention of the word “money” pushes all the irrational buttons in the modern psyche. Let me point out a few obvious facts:

    Gold is an essentially worthless metal, good only for pounding into shiny trinkets because it is so soft. The fact that many humans have assigned great value to it for a brief portion of their history as a species doesn’t alter the fact of its use value. If you insisted that I exchange a 100# bar of the stuff for a good horse 200 years ago you’d likely get a haircut, and not the kind that banksters are trying to avoid in 2011.

    I live in one of the few places left where I can supply my family with a year’s supply of meat with three or four bullets. Once commerce grinds to a halt, try to do that with a 100# bar of shiny metal. And I damn well won’t trade my bullets for your gold.

    Paper currency actually has more use value than gold: at least you can use it to start a fire and roast your venison.

    Currencies, whether they be shiny metal, paper, or giant stone discs, only have value to the extent that humans accept them in exchange for something that they want or need. Gold only differs from paper money in its inherent scarcity and longer history of illusory assigned value. The US dollar can become the Argentina Peso, or the Reichmark of the future under the right circumstances that are no longer unthinkable.

    Which brings us back from the past and possible future to the present fractional reserve banking system. The most basic fact that few people seem to be able to grasp is this:
    In a fractional reserve banking system, MONEY does not exist until it is lent into existence. Until that point it is merely an accounting notation in the central bank’s ledgers. When a retail bank makes the decision to lend money to build a house, fund business operations, or loan money to a drug cartel, the central bank credits the retail bank’s account to fund the loan and the money enters the money supply (ie becomes money in circulation rather than virtual money) paying the salaries of carpenters, office workers, or the guy selling nickel bags on the corner. As it circulates through the real economy it creates additional jobs and economic activity. That was called the multiplier effect back in Econ 101.

    Unfortunately Bernanke, Geitner, Obama, and the howling pack of crazies that populate the Republican party could care less about stimulating activity in the real economy as long as their benefactors can pay huge executive bonuses. Why else would they pour trillions into the hands of their bankster ovelords enabling them to continue to sit at the world financial system casino tables? They can’t be dumb enough to not know where the money goes and how little stimulus effect QE2 and the Bush Billionaire tax cuts really have.

    The clamor for austerity turns rational policy exactly on its head unless the goal is for Europe and the US to become the new third world and undercut Chinese wage rates. Rational policy would do just the opposite: Eliminate fraudulent asset valuation on bank books, nationalize the bankrupt institutions, return to progressive income tax levels of the 1950’s,institute a national single payer medical system, eliminate predatory private health insurance companies, change prescription drug development to funding through universities and gov. research institutes and wipe out the big Pharma drug pushers, legalize all street drugs and put the cartels and the CIA out of the street drug business, and last and most important, change the Department of War to the Department of Defense by closing all overseas bases and cutting the Pentagon budget in half.

    Revenue shortage? Hardly. Now there is plenty of money in the richest country on earth to put people back to work and begin preparing the country for the next century. The money not spent lining the pockets of the bankster and military cabal could fund a 6 million man/woman WPA to build the energy and transportation systems of the future (like China is starting to do), provide free education like Cuba does instead of college graduates emerging into debt slavery, wean ourselves away from unsustainable petroleum based agriculture, rehab our housing stock to cut energy use in half,—– there is no shortage of things we could be doing if we had a vision of the future and could seize political power back from the ruling class that has stolen it and American democracy from the people.

    1. skippy

      Concur…can we get off this make all hands bizzy multiplier effect…marry go around…and deal with ecological…cough planetary reality.

      Skippy…can hunt, skin, preserve and

    2. Fed Up

      “When a retail bank makes the decision to lend money to build a house, fund business operations, or loan money to a drug cartel, the central bank credits the retail bank’s account to fund the loan and the money enters the money supply (ie becomes money in circulation rather than virtual money)”

      Can you expand on that part? Thanks!

  19. Larry B


    Obummer abd Geithner say Social Security Payments will be in jeopardy if debt limit not increased


    If there truely was a Social Security Trust Fund, and it held real marketable securities there would be no problem paying Social Security Benefits if the debt ceiling was not increased. The Obammunist or Geither could just cash some of these securities in to fund any Social Security payments until the Debt Ceiling was dealt with. Isn’t this what the “Lock Box” is all about? Aren’t these supposed to be real assets with real value?


    1. citizendave

      There is no “lockbox”. The Social Security Administration uses FICA tax revenue to purchase special intragovernmental debt instruments from Treasury. Treasury puts the proceeds from the sale of the bonds into the General Fund, mixed in with tax revenue, tariffs, fees, etc.

      When the bonds are redeemed, they are treated the same as marketable bonds, cash paid to the owner on demand.

      Suppose I have obligations to pay five dollars. I have received four dollars in revenue, so I must borrow to pay the fifth dollar. The disinformation being waged these days is that if one of my five dollars is to be used to redeem a bond for the Social Security Admin, that’s the dollar that must be borrowed. But AFAIK, that’s not how it works. The General Fund is a pool of money, from which various obligations are paid. The SS Admin could be paid with revenue dollars or borrowed dollars, the same as any other recipient of Treasury disbursements. The bonds of the SSTF are backed by the full faith and credit etc, and will be redeemed as promised, the same as a bond redeemed by China or my sister. Or not – which is what the debt ceiling problem is all about. But don’t single out the Social Security Trust Fund as somehow undeserving of equal treatment with any other debt obligations of the US gov.

  20. Hal (GT)

    You know what. I’m not sure I understood all of it, but I think the gist is that the Treasury mints coin as they are allowed to do, then they turn around and swap bonds for the coin with the Fed, right?

    That’s actually rather clever if I’m following it all correctly.

    Interesting that platinum is the chosen metal.

  21. Roger

    This looks attractive on surface, but will cause big problem. You buy the treasuries out there, and the sellers get the green bucks; but how do you control what these folks will buy next, with the green bucks that you put in their hand?
    I tell you, they are going to buy oil, gas, food, etc, or at least the options for these stuff, and guess what you will get? A big inflation…

  22. highplainslawer

    I don’t undersand the fuss about this. The debt limit is a gimick being used by the Republicans to wreck the economy. This proposal is a gimick which trumps the Republican gimick. It neutralizes the Republican threat, and maybe, just maybe, they will stop playing games with the nation’s economy.

    If the Republicans are concerned about inflation or any other negative effects, they can raise the debt limit, any time, and we can go back to financing the government debt with U.S. Treasuries.

    The Treasury just withdraws its trillion dollar coin and start issuing treasuries again.

    It’s six one way, half a dozen the other.

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