Summer rerun – If the US stopped issuing treasuries, would it go broke?

This is another summer rerun piece. I wrote the following post “If the U.S. stopped issuing treasuries, would it go broke?” in November 2009. At the time, I was getting to grip with how the government designed constraints in order to prevent deficit spending. What was and still is clear to me is that while different types of federal government obligation served different operational purposes, they all are identical in that they are a promise to pay the holder of that obligation a specific sum of the money unit of account.

In a world in which government is the creator of that currency and in which the currency has no tether to a physical product like gold, this promise has no tangible financial support other than the full faith and credit of the issuing government supported by its monopoly power to tax in its jurisdiction of control. Put more simply, there is nothing supporting fiat currency besides the coercive power of the state to impose tax and to entrench its obligations’ circulation as legal tender.

When thinking about the debt ceiling debate, the reality then is that the debt ceiling is a purely artificial constraint; Treasury notes or bonds are substantively the same as every other US government obligation. It is interesting that no other major developed economy has such a constraint. I would be interested in readers’ with knowledge of the debt ceiling history explaining why this is so.

In any event, some economists recognize that the US government obligations are all substantively identical promises to repay a specific amount of the currency unit of account backed by nothing but taxing authority. A a result, there has been a lot of chatter about ways of circumventing the debt ceiling by issuing other forms of US government obligations and swapping those with outstanding Treasuries to diminish the number of Treasuries outstanding. Some of these proposals are fairly inventive. See Scott Fullwiler’s here for instance.

I doubt Secretary Geithner would implement any of these schemes, of course. But the larger question I have goes to the reason the debt ceiling exists at all: all deficit spending must be accompanied by the issuance of an equivalent unit of currency amount of Treasuries. Mentally, this ties the deficit spending and the treasuries together so that the layman thinks the Treasuries ‘fund’ the deficit spending.

But, I just told you that all government obligations are promises to repay the currency unit of account backed by nothing but taxing authority. It’s as if you march down to the local government office with your paper IOU with $100 printed on it demanding ‘your’ money and the government hands you another paper IOU with the exact same amount printed on it. That’s substantively how fiat money works. Last summer, I wrote “The Government’s Bank” showing that if I were the monopoly issuer of currency, printing Benjamins in my basement print shop, unless you put artificial constraints on me, I could simply buy things, no funding necessary. So, Treasuries don’t ‘fund’ anything. The US government issues Treasuries only because it is forced to do so to create the artificial tie between Treasuries and deficits and the mental connection we make as a result.

Now, with a default looming, we are seeing that, as artificial as this constraint is, it has real world implications. So the answer to the question in the title is yes.

Original post below.

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

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

This is what I found most interesting:

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

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

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

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

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

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

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

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

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

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

Am I missing something?


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

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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


  1. joebhed

    As far as the debt-CEILING debate goes, Moodys has just called for its elimination due simply to the obvious truths contained in Yves and Randy’s posts.

    It is an artificial construct no other nation has.
    So, that should be a foundation issue from now on.
    Supra-politicization of the government’s budgeting process is history.
    It’s done.

    As far a issuing no national debt instruments, well, there are a couple of fundamental issues needing resolving first.
    Endogenous money notwithstanding, at present, the fractional-reserve banking system is founded upon the reserves deposited at Regional Fed Banks by its commercial bank members.

    The BULK of those holdings are Treasury securities, and collateral satisfying reserve requirements would have to be changed along with the ending of GUVBond issuances.

    Of course, we would be FAR, FAR better off to just eliminate the fractional-reserve requirements and move to full-reserve banking, as proposed in the Monetary Reform Bill of Congressman Dennis Kucinich.
    Read it here:

    Not only does the Bill end FR banking, it abolishes the GBC, eliminates government debt upon maturity and makes it both unnecessary and illegal for the government to borrow.
    Seems like a much better notion than tinkering piecemeal with trying to achieve future prosperity with this broken debt-money system.
    For the Money System Common.

  2. Cedric Regula

    Yves, you’ve been talking to those MMTers too long.

    For one thing, I doubt the treasury can legally just issue electronic credits to banks without issuing some sort of debt instrument. That’s just a guess on my part. But forcing banks to accept it sort of stretches the limits of the modern usage of “fiat”. Then there would be the nock-on effect of what financial markets would think of that.

    Then there is the apparent belief by MMTers that electronic money and all debt with maturity out thru 30 years is the same and fungible. The world governments are attempting that in recent years, and have been more successful at it than I care for, but the truth is a long term commitment from a creditor is advantages to a debtor, and the creditor has to be given yield, and compensated for other credit risk like default, interest rate risk and currency risk.

    1. lambert strether

      Uh, Cedric? I know, the trigger words — they do make it hard to actually read the post, but if you take a moment, you’ll see that the post was written not by Yves, but by Ed Harrison.

      1. Cedric Regula

        Oh, now I see. There weren’t any credits in the body and I missed/forgot the the author reference in the post list.

        Ok, Yves…you’re not the dummy. It’s Ed.

    2. dude mcgiles

      yes they could and do- in the form of coins, petty change. and there have been issues of “u.s. notes”, the original ‘greenback’. so electronic, paper or pot-metal, its all the same: mcdonalds coupons and subway tokens, “legal tender for all debts public and private”.

      i wonder how few understand this is to our great benefit? because the same government makes gold and silver legal tender as well (“american eagles”), @$50/ oz gold, and $1/oz silver.

      so to owe the value of an ounce of gold is to owe $50. think about it… wouldnt you like to pay off the equal of an ounce of gold in debts, for a mere 50 bux? 2 twenties and a ten?

      think about it!! thats how this works, now go out and make some waves.

  3. Charlotte Winslow

    As I mentioned in the comments another blog post, let’s just go back to Colonial Scrip. That was the most prosperous half century the country’s ever had.

    Credit it into existence and tax it out of existence as needed.

    As an aside, why couldn’t Greece do something similar? Announce that its current outstanding bonds can be used to pay taxes at face value. Perhaps the sheer size of the outstanding debt is too big, but it could jack up the price of the bonds. Wouldn’t you buy a bond for $90 if you could use it to pay $100 worth of taxes?

      1. Charlotte Winslow

        Bretton Woods? If Trichet can ignore Maastricht surely we can ignore an archaic agreement that was voided decades ago when Nixon used it to wipe his butt.

  4. wh10

    “Am I missing something?

    For the purposes of this entry, I don’t think so. Thank you for being brave, thinking for yourself, and challenging the economic orthodoxy. Your efforts to push these perspectives into the mainstream is much appreciated.

    Hopefully, soon, this economic perspective (MMT) will be incorporated into university curricula and economic policy making.

  5. BlackBox

    Isn’t there another constraint in the separation of powers between the Fed and the Treasury. As long as the Fed is required to balance its books, the government cannot spend out of its account at the Fed without topping it up from time to time. It does this by selling Treasuries for dollars and depositing those dollars in its account at the Fed.

    This separation means that the Treasury creates any deficit and the Federal reserve cannot arbitrarily create obligations. All the Fed can do in that respect is the misnamed quantitative easing which simply exchanges one sort of obligation (bonds) for another (dollars).

    The ability of the Fed to set interest rates is a separate matter from the mechanics of government spending.

    1. Edward Harrison Post author

      That is an artificial constraint. The Bank of England was made independent only when Tony Blair was Prime Minister. The central bank is a part of government.

      I like having some artificial constraints and am not enamoured with fiat money for that reason. When I made a vague reference to counterfeiting, that was my subtle way of indicating this. I like gold but I don’t think a return to the gold standard is practical or desireable since the gold standard has its own problems. But I am trying to look at this neutrally.

      The reason MMTers like fiat money is because it gives government fiscal space and we see what that means with the euro zone sovereign debt crisis. On the other hand, fiscal space also allows the few well-connected to be favoured at the expense of the many, which is neither fair nor efficient. Ultimately, this is a political philosophy question.

      One commenter made some emotional remarks about MMters and their contention that all government obligations are fungible. I am not an MMTer, but the point they make and that I agree with here is not that they are fungible in an operational sense but in a real sense i.e. they are a promise to pay the holder of that obligation a specific sum of the money unit of account. The fixation on Treasuries fails to recognize this.

      I am running a post shortly on Credit Writedowns that gets to some of thee issues.

      1. BlackBox

        I agree that the constraint is artificial. However it would be a very tricky system if both the Fed and the Treasury were free to add to the debt independently. Arguably they could already be at cross-purposes with QE, where the Fed changes the mix of maturities held by the public from that chosen by the Treasury.

        Of course, the Fed is fully part of the government because its profits are turned over to the Treasury. So, in that sense the Treasury and the Fed are two complementary parts of a whole, but that is even more reason for keeping their powers distinct.

  6. indio007

    Why don’t we all just pitch to solve the debt by endorsing FRN’s and scratching out the name of the Sec. of the Treasury.

    We can all play the ponzi game of non-redemption.

  7. Charlotte Winslow

    “It’s as if you march down to the local government office with your paper IOU with $100 printed on it demanding ‘your’ money and the government hands you another paper IOU with the exact same amount printed on it.”

    Actually, it’s what we do to the entire world as outlined by Michael Hudson in “Super Imperialism”. You buy a pair of shower flip-flops made in China at Walmart . Walmart sends the dollars to the Chinese company that makes them. They deposit it in their Chinese bank account, and now their bank has dollars. The bank takes those dollars to the central bank and gets yuan.

    Now the central bank has these non-interest-bearing IOUs. They go to the US and try to cash them in and they’re told “All we can give you for these non-interest-bearing IOUs are some interest-bearing IOUs that will pay you more non-interest-bearing IOUs”.

    So you have tangible assets of real worth (a pair of flip-flops) and China has pieces of confetti that just go in circles. Such a deal!

    1. MyLessThanPrimeBeef

      The last time China insisted on something tangible for their silk, tea and porcelain, they wanted silver.

      And when the British ran low on silver, they gave China opium.

      So, being smart guys, they know now not to ask for silver, but pieces of confetti.

  8. Don Levit

    What is more valuable; cash or Tresaury securities?
    Would it be Treasury securities, because they pay interest?
    Does it make a difference if the interest is paid in cash, as for debt held by the public, or by issuing additional debt, as for the Social Security trust fund (intragovernmental debt)?
    How valuable is the principal if it is never paid off?
    What if the full faith and credit of the federal government was backed primarily by faith and partially by credit, the taxing authority?
    States are also backed by their taxing authority. Does that mean they cannot go broke?
    Does that mean their faith and credit will always be honored?
    Don Levit

    1. MyLessThanPrimeBeef

      When it comes to faith, one has to sort out the deity hierarchy.

      There is on supreme God and He’s omnipotent…all good on his money, AAA+++.

      The less gods, well, they have to listen to the Big Guy. It’s possible they have trouble borrowing from Wall Street.

  9. LillithMc

    California has been issuing IOU’s for a number of years when they had a budget stalemate. The banks redeemed most of the IOU’s until last year when the pattern had become the “new normal” and the banks protested. Voters passed a new law reducing the budget vote requirement from 2/3rds to a majority. They also stopped pay for Congress until the budget was passed. This year the budget passed on time.

  10. /L

    Well in Sweden there is so called budget ceiling, no matter how much money they collect in taxes no more than so is allowed to be spent.

    This year the consolidated government is expected to have amassed $111,501,133,617 in dead so called public savings in the IOUs it’s monopoly issuer and can produce without limit. Both the right wing government and the left opposition think this is great and we “save” for the future to fend of bond vigilantes. Albeit I have the suspicion that the some of the more clever (a rare few) in right wing gov. know its charades and see it for what it is tights fiscal policies that keep unemployment at a permanent high level at present official 8% and broader and hidden much higher.

    By 2014 the amassed “savings” is estimated to be over a trillion Swedish crowns ($151,673,270,424) or 26% relative to GDP.

    The leftists including social democrats doesn’t have a clue, they actually do nothing than talk about raising taxes and that it’s need to get better public service like schools and medic care. The entire economic debate is totally weird, even Swedish economists are in on these nonsensical charades, that is the same that appoint central banks Nobel economic award. A complete madhouse.

    1. Foppe

      Intriguing. Could you elaborate a bit? I don’t quite follow what you’re trying to say after ‘albeit’

      1. /L

        What I’m trying to say is that what ones was common economic knowledge can’t completely have disappeared, a country (what the gov. and public sector represent) can’t save by piling up its own IOUs. A country can only economically prepare for the future by optimize its productive capacity. The only reason for have a surplus is when the economy is in danger of inflation and have to be cooled off.

        1. Foppe

          A few weeks ago I encountered this in David Harvey’s a brief history of Neoliberalism. Would you agree with this characterization of swedish economical development?

          From the mid-1970s onwards, the Swedish Employers’ Federation (doubtless emulating its counterpart in the US) increased its membership, mobilized a massive war-chest, and launched a propaganda campaign against excessive regulation and for the increasing liberalization of the economy, the reduction of the tax burden, and the rolling back of excessive welfare state commitments which, in its view, caused economic stagnation. But when a centre-right Conservative Party came to power in 1976, replacing the Social Democrats for the first time since the 1930s, it failed to act on the employers’ proposals. The labour unions were too strong and the public was not persuaded. When it became clear that direct confrontation with the labour unions through lock-outs and non-collaboration in wage negotiations did not work either, the employers moved more towards undermining rather than confronting
          the institutional arrangements of the corporatist state. In 1983 they refused to participate in central bargaining. Thenceforth, wage and benefits negotiations would have to proceed on a company-by-company basis. They managed to persuade one union to go along with this, and so seriously damaged the collective power of labour.
          But most efficacious of all was the propaganda campaign waged by the employers. They used their control over the Nobel Prize in Economics to consolidate neoliberalism within Swedish economic thinking. Long-standing complaints on the part of intellectuals and professionals regarding the oppressive universalisms and high taxation policies of the Swedish state were assiduously cultivated through a rising tide of rhetoric lauding individual liberties and freedoms. These debates reverberated throughout the media and gained increasing currency in the popular imagination. Above all, the employers’ think-tank––the Center for Business and Policy Studies (SNS)––funded serious research on economic structures and prospects (like the NBER in the US) that again and again proved ‘scientifically’ to policy elites and to the public that the welfare state was the fundamental cause of economic stagnation.37
          The real shift towards neoliberalism came with the election of a Conservative government in 1991. But the way had already been partially prepared by the Social Democrats, who were increasingly pressed to find ways out of the economic stagnation. Their partial implementation of some parts of the neoliberal agenda suggested acceptance of the persuasive analyses of the SNS. It was the left rather than the right that now lacked ideas. The unions were persuaded to exercise wage restraint in order to raise profits and encourage investment. Deregulation of banking (which led to a classic speculative bubble in credit allocation and the housing market) and tax cuts for the wealthiest (again supposedly to encourage investment) had already occurred in the late 1980s. The central bank (always Conservative) finally switched its mission to fighting inflation rather than maintaining full employment. The collapse of the speculative bubble in asset prices that followed upon the oil price rise of 1991 led to capital flight and internal bankruptcies that cost the Swedish government dear. The blame for the crash was instinctively placed upon the inefficiencies of the welfare state and the Conservative government that came to power listened sympathetically to the Swedish Chamber of Commerce’s plan for the complete privatization of the welfare state.
          Blyth considers that the proposed remedies were wholly inappropriate to the circumstances. The problem, he argues, was ‘cognitive locking’––the inability to think of any other policy solution than that prescribed by neoliberal orthodoxy. ‘It was this homogeneity of personnel and ideas, coupled with the politicization of business, that thrust these new ideas onto the agenda and ultimately led to the transformation of Swedish liberalism.’ The practical result was a serious depression that diminished output and doubled unemployment rates in two years. With the government losing public confidence, another way had to be found to sustain the neoliberal reforms. The answer was to join the European Union, a move that is ‘perhaps best understood as an attempt by business and the Conservatives to let the economic ideas and institutions of the EU achieve by international convergence what they had failed to do through domestic reform’. Joining the EU in 1993–4 deprived the state of many of the tools it had previously maintained to fight unemployment and advance the social wage.38
          The result was that even when the Social Democrats returned to power in 1994, the neoliberal programme of ‘deficit reduction, inflation control and balanced budgets rather than full employment and an equitable distribution of income became cornerstones of macroeconomic policy’.39 Privatization of pensions and of welfare provision was accepted as inevitable. Blyth interprets this as a case of ‘path dependency’––a certain logic of decision-making powered by hegemonic ideas carries all before it. Embedded liberalism was eroded, but by no means fully dismantled. The public still remained broadly attached to its welfare structures. Inequality certainly increased, but by no means to the levels seen in the US or the UK. Poverty levels remained low and levels of social provision remained high. Sweden is an example of what might be called ‘circumscribed neoliberalization’, and its generally superior social condition reflects that fact.

          1. /L

            When Corporations Rule the World
            by David Korten
            published by Kumarian Press, 1995
            A “short” chapter from that:

            The Case of Sweden

            Sweden is known among the Western industrial countries for its success in achieving prosperity and equity through mixing elements of both capitalist and socialist models within a strong framework of democratic pluralism. Sweden’s experience offers in-structive insights into the dynamics of pluralism and the consequences of globaliza-tion.

            Few realize that industrialization came a hundred years later to Sweden than to Eng-land. And until the years following World War II, Sweden remained an extremely poor country. In the countryside, many people lived on small farms that, given the poor soil and climate, barely provided them a living. Some died in famines or emigrated. Many others, even well into this century, lived in serf-like conditions on large estates. Illiteracy was widespread. In the late 1940s, it was still common for a family to live in an apartment consisting of one room plus a kitchen (toilet facilities were shared with other families). Even the Swedish royal house was relatively poor by the standards of most of its European cousins.

            Sweden’s modern success was a creation of the Swedish Social Democratic Party, which melded and sustained a national consensus that kept it in power for forty-four years, from 1932 to 1976. The Social Democrats built Sweden’s elaborate social wel-fare system. Their wage policies brought working people into the middle class and created a substantial degree of wage equity and greater equity between the wages of women and men than in any other capitalist country. The Social Democrats placed a high priority on maintaining full employment. To encourage Swedish transnational firms such as Volvo, Electrolux, Saab, and Ericsson to concentrate their operations in Sweden, the applicable real effective tax rate was much lower for profits generated in Sweden than for those generated abroad.

            An alliance between the major Swedish industrial corporations and organized labor served as the party’s political base and supported the centralized and peaceful negotiation of wages and working conditions y national union and employers’ organizations. This alignment produced significant benefits for both big labor and big capital. The arrangement had important structural flaws, however, that eventually destabilized it. One was a tax system that subsidized larger firms that were expanding and investing at the expense of small-scale and family firms. This led to increasing concentration and monopolization of ownership of the Swedish economy. Although wage policies stressed equality within the working class, the gap between the working class and those who controlled capital grew substantially. At the time, this was considered the price of maintaining the industrialists’ commitment to the coalition. In the end, it brought about the coalition’s destruction.

            When the first shock of rising oil prices hit in 1973-74, the resulting economic slow-down brought a fiscal crisis and triggered popular resistance to higher taxes. During this same period, Sweden was opening its economic borders and becoming a more active player in the international economy. This loosened the bonds that tied capital to local labor and weakened national labor movements.

            In the early stages of globalization, the outward expansion of Swedish firms generated new employment at home, and the objectives of the two sides of the alliance did not significantly conflict. But once Sweden’s transnationals began to define their own interests as global ether than national, the alliance between blue-collar workers and the owners of capital began to disintegrate. By this time, Sweden’s highly educated white-collar workers outnumbered blue-collar workers, and “the younger generation was taking the welfare state for granted- Further weakening the political base of Sweden’s Social Democrats.

            The growing contradiction between government support for the global expansion of Swedish transnationals and the need to create employment and rising real wages at home could no longer be sustained. In 1976, the Social Democrats lost the election to a three-party center-right coalition government.

            When the Social Democrats returned to power in 1982, they were a chastened party intent on promoting policies that would allow Sweden’s industrialists sufficient profit margins on domestic investment to keep them “believing in Sweden,” a phrase coined by P. G. Gyllenhammar, the chairman of Volvo. Maintaining a belief in Sweden meant increasing the share of the national product going to profits compared with wages so that Sweden’s industrialists would find it worthwhile to invest at home. This was accepted as the price of maintaining full employment at a time when unemployment elsewhere in Europe was running at 8 to 9 percent or higher.

            The resulting policies pushed corporate profits to previously unimaginable levels. With so much more money in their pockets than could be absorbed by productive investments, Swedish investors turned to speculation, driving up the prices of real estate, art, stamps, and other speculative goods. To stop the upward spiral, the government loosened monetary controls so that the excess funds could spill over into Europe. Money flowed out at such a rate that it helped push real estate prices in London and Brussels to record highs. As the speculative bubble fed on itself, the quick profits offered by speculation drained funds away from productive investments within Sweden. When the bubble in Swedish real estate finally burst, the Swedish banking system lost $18 billion. The bill was picked up by the state and passed on to the Swedish taxpayers.’!

            During this period, Sweden’s major industrialists played an active role in dismantling the “Swedish model” that had been constructed by the Social Democratic alliance. The Swedish Employers’ Federation rejected centralized wage bargaining, which had been one of the model’s cornerstones, and allied itself with the Conservative Party. It also bankrolled think tanks espousing a corporate libertarian economic ideology and conducted a major public-relations effort praising individualism and the free market while denouncing the Social Democratic state as oppressive and inept. This led to a weakening of the political apparatus of the state and its ability to define long-term policies.

            In 1983, Volvo chairman P. G. Gyllenhammar stepped in to fill the void by forming the Roundtable of European Industrialists, made up of the heads of the leading European transnationals, including Fiat, Nestle, Philips, Olivetti, Renault, and Siemens. The purpose was to define long-term policies for the state and to serve as an international lobby to press for their implementation.

            By the end of 1992, the richest 2 percent of Swedish households owned 62 percent of the value of the shares traded on the Stockholm stock exchange and 23 percent of all wealth in the country. While the average Swedish household grew poorer from 1978 to 1988, the richest 450 households doubled their assets. Unemployment had been below 3 percent when the Social Democrats were first voted out of office. It rose to 5 percent in 1992 and was projected to reach 7 percent, even though another 7 percent of the workforce was already engaged in counter-cyclical retraining programs and public employment projects.

            From the beginning, the Swedish model contained the seeds of its own destruction. It built a powerful financial elite whose interests were far removed from those of the majority middle class. It bred a sense of welfare complacency among the Swedish people. It failed to install in the younger generation an awareness of democracy’s need to be continually re-created through constant citizen vigilance and political activism. And its prosperity had been built on the unsustainable exploitation of Sweden’s natural resources of timber, iron ore, and hydroelectric power.

            As the elites gained more financial power, they were able to pyramid their claims on the resources of society without making a corresponding productive contribution. As the economic borders were opened, the jobs of those who depended on earning wages for doing productive work became hostage to those who controlled capital. The more the government, in its desperation to keep jobs at home, gave in o the demands of the financial elites, the greater the amount of money hat passed into their hands, the greater their power to dictate public policy in their own interest, and the greater the stresses on the social fabric. The parallels to the U.S. experience … are striking.

            The Swedish experience reveals a lesson of fundamental importance: democratic pluralism cannot long survive extreme inequality.

  11. Johnny Clamboat

    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”

    I’m looking at a $1 fiatski right now and some of the above was crossed out. It now says “This note is fraudulent fiat.” It also crossed out Timmy’s title of SecTreas and replaced it with “Tax Cheat.”

    Not too subtle.

    1. indio007

      Uniform Commercial Code

      (a) A person entitled to enforce an instrument, with or without consideration, may discharge the obligation of a party to pay the instrument (i) by an intentional voluntary act, such as surrender of the instrument to the party, destruction, mutilation, or cancellation of the instrument, cancellation or striking out of the party’s signature, or the addition of words to the instrument indicating discharge, or (ii) by agreeing not to sue or otherwise renouncing rights against the party by a signed record.

  12. Sungam

    The debt ceiling is there for precisely the purpose it is being used for now; to allow the legislature to have an additional check on the spend of the federal government and the executive branch. It used to be even more stringent (a long time ago). The legislature used to have to sign off on every bond issue and every bond was raised for specific projects (i.e. the clearing of the upper Mississippi for shipping). The current deficit hawks have been around for a very long time it’s a shame that the zero government dent people don’t seem to have changed whilst the economic and monetary system is now totally different.

    I would add the caveat though that just running the printing presses is a very bad idea. As you mentioned in the article the only thing backing a fiat currency is a government’s tax take and the faith that said government will god its bargain. Nothing destroys that faith more quickly than just running the presses (be they print or electronic).

    1. joebhed

      Um, it’s the Legislature’s budget that’s adopted that needs the funding, not the Administration’s.
      The legislature already had its shot at the level of spending and approved it.
      Why do they need another shot.

      In days of old, rather than pretending there was some magic to the government’s debt-management capabilities, the Legislature bit the bullet and ID’d the amount of borrowing.

      As long as there’s been the GBC, there’s the need to borrow.
      No other sovereign government has the Debt Ceiling limit. It serves no purpose, and, in case you haven’t noticed, it is capable of supra-politicization of the operations of the government sector of our national economy.

      Like Moodys says, “Chuck It !”.

  13. Jonathan

    Take it one step further, and you can easily see that the Fed exchanging dollars for mortgage securities transformed a large amount of dross straight into money.

    Noted economics show ‘Southpark’ covered the financial crisis better than many. “And… it’s gone.”

  14. hermanas

    I’m reminded that ,”You can’t fool ll the people all the time.”
    Now it’s time for my nap.

  15. Birch

    That was a genius South Park episode. “The Jew” kid saves the day by paying off the debts of everybody in town with an American Express card he applied for to show how stupid the system is – then the economy goes back to normal.

    I think the best idea of all here is to give Yves the absolute monopoly power to print U.S. currency. I would feel much safer if this were the case. Hope you have a big basement, Yves.

    The first function of Treasury Bonds is to re-distribute money from tax payers to investors. As rich people steadily pay less tax and save more money in secure government (tax) backed instruments, this function results in exponenitally increasing wealth inequality. Any other function of Treasury Bonds is incidental.

  16. Jim


    On your own site you add to the analysis posted here that a key to the issue of confidence in a fiat currency is the issue of of whether its citizens believe that the government will manage its finances in such a way that it promotes general life, liberty and prosperity.

    You add that this is ultimately a debate about political philosophy and that makes it “emotional, intractable and potentially violent.”

    As this crisis continues to deepen it seems to me that it will become more and more clear to more and more people that combatting corruption in both the public and private sectors should be the top priority.

    The “right” had been hoping for salvation from Big Capital and the “left” from Big Government.

    Meanwhile the structure of power seems to have evolved to a point where a new formation has emerged where Big Capital, Big Finance, Big State and Big Bank (Federal Reserve) collude together to further their own private bureaucratic interests and concern on their part for the “public purpose” is only rhetorical.

    The strategic alliance which the left/liberal community made with Big Government/Big State in the 1930s as the chosen means of amerliorating social injustice becomes, in effect, in 2011–an endorsement of the corrupt status quo.

    Similarly, the strategic alliance which the Right made with Big Capital(especially since World War II)–in 2011 also becomes an endorsement of the corrupt status quo.

    This new concentration of political and economic power must now be confronted by a political movement(from sections of both traditional left and right) which has the courage to reflect on and revise some of its most cherised assumptions.

    1. Edward Harrison Post author


      I am having a hard time figuring how we get out of this without some sort of violent break. You outlined the hold that a big government/big capital duopoly has in siphoning off real resources for the benefit of the well-connected multinationals which run the US.

      Clearly we would like to see some check on this but to date none have come as a result of the crisis. Amazingly, the crisis seems to be entrenching the status quo even more. I am amazed – cutting (discretionary and entitlement but not military) spending to deal with the debt ceiling issue, for instance seems likely to INcrease income inequality.

      Some economists argue that you need serious political upheaval to see real change and that economic crisis alone is never sufficient:

      We have a long way to go in my view.

      1. Benedict@Large

        Wow. That’s a lot coming from you, Ed. I agree, but but I wasn’t expecting to hear this from you.

  17. PghMike

    Although I’d guess it won’t help in this case, where Congress is refusing to increase the debt limit, this article does point out that the US government’s debt can be erased any time that it wants, and without coin seignorage, either.

    Just issue 12.3 trillion dollars in 500 year / 0% interest bonds. Deposit them into the US Treasury’s account at the Fed, which bumps the account’s balance by the same $12.3T. Use that money to pay off Treasury debt as it comes due.

    Will it cause inflation? Hell, I dunno — it’s hard to imagine inflation heating up until unemployment comes down or a growing economy starts adding to demand for scarce natural resources. But if there was too much money circulating in a healthier economy, you could always reverse the process.

    1. Birch

      I like that idea.

      How about have some eager lawyers draw it up so the bonds only come due in the event that the government that issued them dissolves. Then we won’t end up in some weird sticky position 500 years from now.

  18. Benedict@Large

    “Put more simply, there is nothing supporting fiat currency besides the coercive power of the state to impose tax and to entrench its obligations’ circulation as legal tender.”

    Put even more simply, the purpose of taxation in a fiat currency is, after initially establishing the currency as having value, to establish what the value of that currency is by controlling how much of it is available and to whom.

    (Note in particular that it is NOT to fund the government, as the government’s access to its currency is unlimited.)

    1. Nathanael

      There is an extra purpose of taxation in a fiat currency. Not just to determine the value of the money, but to fix the *allocation* of the money. Taxation is fundamentally for *redistribution*. If you didn’t need to redistribute the currency, you could run a fiat currency without taxation.

      But you *do* need to redistribute it, because excess concentrations in the hands of unproductive people and organizations — as is happening right now — and too little in the hands of the people living hand-to-mouth — as is happening right now — create social and economic problems which wreck the system.

      Taxation is what creates *equality* and equality is what keeps the system functioning. (The only known reliable way to consistently, constantly, and repeatedly redistribute wealth from the rich to the poor, even as new rich people appear — taxation.)

  19. Ronald J. Pires

    The US does NOT incur a liability when it borrows money. The liability was incurred when the borrowed money was first created. The fact of the matter is that the liabilities of the US government are exactly the same both before and after it borrows in its own currency, as the borrowing is merely a debt swap. (Think of giving someone an IOU, and then exchanging it later for a different IOU. The liability is incurred on the first IOU, not the second. The second is merely window dressing.)

    This is EXTREMELY significant, as it means that what we are claiming to be passing on to future generations to be paid by them are ZERO SUM TRANSACTIONS. (Yes, this means that Kotlikoff is an asshole.) In fact, if future generations (or us!!!) do decide to “pay down” these “obligations”, they will be collapsing the money supply and bringing on their own depression.

    Just like Obama is planning to do for us as we speak.

    1. indio007

      And they have to do it this way because the US gov’t can not issue/emit bills directly. It was specifically voted down in the Constitutional Convention. This is why they use a private party to issue them.

      Incidentally, there is no statute that says that Federal Reserve Notes are the ONLY legal tender and the Uniform Commercial Code’s officials comments say that the definitions of money is not limited to legal tender or any gov’t currency.

      The USA is an endorser on FRN’s because they are negotiable instruments.

      If you look at any gov’t legal tender note there is always a left and right signature.

      I was really wondering about the new 100’s because they only had one signature.

      The Treasurer’s signature can’t get there without the deposit of collateral by the Federal Reserve.

      Which brings me to your point.

      US bonds are acceptable collateral.
      So we have paper to paper to product.
      pretty good deal.

      1. Nathanael

        Wrong about one key thing. The US government, under the Constitution, CAN issue bills directly (though the states can’t). And it *has*. Look up “US Notes”.

        The problem is that currently Congress does not authorize the issuance of unlimited numbers of US Notes. There is no Constitutional restriction, but there is a legal restriction.

        Congress has, however, authorized the minting of platinum coins of arbitrary face value, so that’s close enough….

  20. rps

    Yves says, “government is the creator of that currency”

    My limited understanding is that government prints the currency. However, Banks are the creator of money with the flick of their pen by issuing debt obligations; loans, mortgages, etc…. So what is money? Money is Debt. The economy’s engine runs on continuous debt creation. When private industry, small businesses, entrepreneurs, and individuals stop borrowing, government steps in to create new debt (money). Thus the debt ceiling is a positive step forward in preventing economic collapse. Frankly, remove the bankers tithings/profiteering (interest) and greed is tempered. But that’s another story.

    Hmmmmm, all this angst about the debt ceiling, banks, federal reserve, and treasury is as nefarious as the holy trinity; the father, the son, and holy ghost. I never understood it as a kid, and still can’t wrap my logical self around the convoluted rationalizations. I hear holy ghost and I still think of Casper the friendly ghost. Which brings us back to what is money. Money is the original religion based on hope, faith, and belief. Lots of promises but its gonna cost you upfront; collection of the tithings until the bankers foremost wish of until death do you part.

    “Economics exists to make astrology look respectable.”
    — John Kenneth Galbraith

  21. razzz

    Yes money is debt because you need growth, that is, future growth which requires going into debt unless you want to leave in the stone-age with no modern lifestyles of the rich and famous besides growing population requires debt attached before becoming productive. Stone-age wouldn’t bother me but the elite expect 20%, 100% or more returns on their money in a short amount of time. That has to come out of some poor slob’s pocket (read taxpayer) to support large returns besides Congress never stops spending.

    The US has been doing mini defaults for years with changes in the monetary system, adjusting and readjusting indicators such as the cost of living with its consumer price index to lessen retiree payments and the banks get their accounting changes to show full value of paper assets that are worthless, all these things and more are defaults per se.

    All the talk of China, Japan, Russia, Euroland and still the hamstrung with broken leg arm in a sling blind in one eye and with continuous world police actions: The United States still rules. For now.

    No way Euroland survives if the Members have to pay their debt off in Euro. Every new bailout increases the interest to paid back in Euro much to the delight of the bankers. Stick and carrot loans until Members are forced to leave the Euroland behind so they can default on their loans and reprice any remaining debt and start anew.

    The US will have to default to foreign creditors eventually as simple math shows interests on bonds/loans will consume most if not all the GDP in time.

    The market place, not the government(s), will decide where to invest in next even if it’s an underground economy.

    The market place is never wrong.

  22. anon

    Good post. Good thing you are not an MMTer, as that allows you a balanced view of their issues. MMT deliberately obscures current institutional arrangements (a distinct Treasury and Fed), and resists making a formal, unified case for legal consolidation. The question is why. Perhaps to sustain the enigma.

  23. The Historian

    The U.S. Treasury has twice issued currency directly, to my knowledge. The first time was during the Civil War with the infamous “Greenbacks” which traded at a substantial discount to gold-back currency but were finally redeemed at par in the 1870s . The second time was an interesting episode in the early 1960s where Kennedy administration prepared to issue “U.S. Treasury Notes” — you can find photos of them — but decided against doing so at the last minute.
    Having the Treasury print money is pretty obvious. The two-step involving the Fed goes down easier, but it’s hard to see the net difference.

    1. indio007

      Those currency where both redeemable on demand for specie coin. They where really in effect ,warehouse receipts.

      The US has never directly emitted bills of credit to pass current. Like I said , it was specifically voted down.

      Minutes of the Constitutional Convention

      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.

      Mr. MADISON, will it not be sufficient to prohibit the making them a tender? This will remove the temptation to emit them with unjust views. And promissory notes in that shape may in some emergencies be best.

      Mr. Govr. MORRIS. striking out the words will leave room still for notes of a responsible minister which will do all the good without the mischief. The Monied interest will oppose the plan of Government, if paper emissions be not prohibited.

      Mr. GHORUM was for striking out, without inserting any prohibition. if the words stand they may suggest and lead to the measure.

      Col. MASON 20 had doubts on the subject. Congs. he thought would not have the power unless it were expressed. Though he had a mortal hatred to paper money, yet as he could not foresee all emergences, he was unwilling to tie the hands of the Legislature. He observed that the late war could not have been carried on, had such a prohibition existed.

      Mr. GHORUM. The power as far as it will be necessary or safe, is involved in that of borrowing.

      Mr. MERCER was a friend to paper money, though in the present state & temper of America, he should neither propose nor approve of such a measure. He was consequently opposed to a prohibition of it altogether. It will stamp suspicion on the Government to deny it a discretion on this point. It was impolitic also to excite the opposition of all those who were friends to paper money. The people of property would be sure to be on the side of the plan, and it was impolitic to purchase their further attachment with the loss of the opposite class of Citizens

      Mr. ELSEWORTH thought this a favorable moment to shut and bar the door against paper money. The mischiefs of the various experiments which had been made, were now fresh in the public mind and had excited the disgust of all the respectable part of America. By witholding the power from the new Governt. more friends of influence would be gained to it than by almost any thing else. Paper money can in no case be necessary. Give the Government credit, and other resources will offer. The power may do harm, never good.

      Mr. RANDOLPH, notwithstanding his antipathy to paper money, could not agree to strike out the words, as he could not foresee all the occasions which21might arise.

      Mr. WILSON. It will have a most salutary influence on the credit of the U. States to remove the possibility of paper money. This expedient can never succeed whilst its mischiefs are remembered, and as long as it can be resorted to, it will be a bar to other resources.

      Mr. BUTLER. remarked that paper was a legal tender in no Country in Europe. He was urgent for disarming the Government of such a power.

      Mr. MASON was still averse to tying the hands of the Legislature altogether. If there was no example in Europe as just remarked, it might be observed on the other side, that there was none in which the Government was restrained on this head.

      Mr. READ, thought the words, if not struck out, would be as alarming as the mark of the Beast in Revelations.

      Mr. LANGDON had rather reject the whole plan than retain the three words “(and emit bills”)

      On the motion for striking out

      N. H. ay. Mas. ay. Ct ay. N. J. no. Pa. ay. Del. ay. Md. no. Va. ay.23 N. C. ay. S. C. ay. Geo. ay. 22

      The clause for borrowing money,25 agreed to nem. con.

      1. Nathanael

        The Constitutional Convention quotes are quite irrelevant; the fact is that the US Treasury has issued US Notes (“greenbacks”) and their validity is unquestioned, and has been confirmed by the courts.

  24. Charlotte W

    Fareed Zakaria asked Larry Summers what government could do to encourage companies to create more jobs – Summers said – Companies like orders – they want orders on the books.

    Implying that more business means more jobs. But that’s an out and out lie. American companies are booming… stocks are paying dividends, and CEO’s and management are making record salaries – RIGHT NOW – because they are producing offshore, for pennies on the dollar.

    American companies want customers – not employees. The have no interest in employing their customers – unless made to do so as a condition of selling in this market.

    So there you have it… Summers almost implies that government can print money – give it to consumers – and they will spend it in the world market place.

    It is not the obligation of capital to underwrite its customers.

    The End Of Work – Jeremy Rifkin – 1995. He said the third sector… government subsidized non profits, will employ the detritus – otherwise, the planet will break down into roving bands of pirates and terrorist gangs.

    It’s the future.

  25. PETER

    an economy cannot survive on monetary policy alone. after a certain point, pushing more money into the system increasingly resembles ‘pushing on a string’. for in the end, just as with the stock market, it is the real factors that will dictate the shape of things to come.

  26. Nathanael

    The reason why the US government is forced to “issue debt” rather than simply printing money is this:

    …so that the private banks will earn the economic profit from the seignorage (money printing) instead of the government earning the profit.

    This was clearly established during the original fight between the Greenbackers and the private-banker “Money Trust” back circa 1913. The good guys lost on that one. (In fairness, the Money Trust also wanted the power to control the size of the money supply, and the government got that power, so the good guys won that one.)

    Since then the Money Trust types have made progress and the good guys have lost ground, mostly due to people in general not paying attention to money the way people did in the 19th century.

  27. Don Levit

    When you wrote about economic profit, I assume you meant “interest.”
    We are so focused on interest rates, that we foget that there is also principal in the loan.
    When the Fed borrows from the Treasury, how is that different than when the Social Security trust fund does likewise?
    Is an asset and liability created at the same time, resulting in a “wash”?
    Don Levit

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