Can the US Treasury Run Out of Money When the US Government Can’t?

Yves here. One quibble with an otherwise very informative post. Tymoigne claims that informed commentators understood that S&P’s threat to downgrade the US credit rating, which it delivered on, would be a nothingburger. That’s false. The business and even political press had leading stories virtually daily that a downgrade would be a meteor wiping out the dinosaurs level event, with famous deficit hawks leading the hysteria. This site was virtually alone in arguing otherwise. I had to be more cautious that I liked at the time because I thought it was possible that there might be a short-lived downdraft.

By Eric Tymoigne, Ph.D., Associate Professor of Economics at Lewis and Clark College and Research Associate at The Levy Economics Institute. His research expertise is in: central banking, monetary economics, and macroeconomics. Originally published at New Economic Perspectives

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

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

The Consolidation Viewpoint

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

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

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

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

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

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

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

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

The Coordination Viewpoint

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

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

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

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

“[In past Congressional hearings] there was a feeling that […] Government [borrowing] directly from the Federal Reserve bank […] took off any restraint toward getting a balanced budget. Of course, in my opinion, that really had no relationship to budgetary deficits, for the reason that it is the Congress which decides on the deficits or the surpluses, and not the Treasury. If Congress appropriates more money than Congress levies taxes to pay, then, there is naturally a deficit, and the Treasury is obligated to borrow. The fact that they cannot go directly to the Federal Reserve bank to borrow does not mean that they cannot go indirectly to the Federal Reserve bank, for the very reason that there is no limit to the amount that the Federal Reserve System can buy in the market. […] Therefore, if the Treasury has to finance a heavy deficit, the Reserve System creates the condition in the money market to enable the borrowing to be done, so that, in effect, the Reserve System indirectly finances the Treasury through the money market, and that is how the interest rates were stabilized as they were during the war, and as they will have to continue to be in the future. So it is an illusion to think that to eliminate or to restrict the direct borrowing privilege reduces the amount of deficit financing. Or that the market controls the interest rate. Neither is true. (Eccles in U.S. House, 1947, p. 8)

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

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

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

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

Bruce K. MacLaury summarizes all these points quite nicely:

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

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

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

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

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  1. AlexHache

    But couldn’t the Fed raise interest rates sharply in an attempt to “offset” the supposed inflationary effect of high deficits? Didn’t something like this happen under Reagan (I know the situation was more complicated than that, but still)?

    1. Eric Tymoigne

      The post deals with what the Fed does routinely, not an hypothetical monetary financing. Whether deficits (which are the norm) are inflationary or not is a different issues. Deficits are usually not inflationary. If they are then the Fed may raise rates indeed.

  2. GeorgeNYC

    I dislike the term “printing money”. That simplifies the process and plays to underlying fears of inflation by calling up images of wheelbarrows of bills.

    So much of this debate just reflects the embedded meanings of terms like “money” “cost” “value” which have been enforced by orthodox economics. As individuals we think of “money” as separate and apart from ourselves. It is therefore hard to accept that the same is not true for the government. (The government as household fallacy).

    MMT seems to be an attempt to go back to basics. Markets are there to “efficiently” allocate limited resources but economics then goes on to revere the mechanism and forget the goal.

    1. Wukchumni

      Don’t confuse 20th century fears with 21st century reality, if anything the mouse clique has it much easier, heck, i’ve expended more energy pressing my fingers down on the keyboard writing this missive than they do in making money magically appear, and unlike physical currency, where if all of the sudden too much of it was on the street and the public got hep, nobody’s the wiser.

    2. bruce wilder

      I agree: the “printing” metaphor is mind-numbing at best.

      The OP asserts:

      Everyone nodes in agreement until someone in the room raises his hand and says: “Hey! But hold on a second! This is not how things work, the Treasury needs to tax and issue bonds first before it spends, it can’t print money at will.”

      First of all, in the U.S. system — in technical contrast to most other countries and systems — the Treasury actually does literally print the currency and manufactures coins. (My understanding is that typically, central banks handle the actual printing of currency.)

      Second, managing the supply of currency for the banking and payments system, is a routine matter and demand for currency is pretty much always met. Isn’t managing the supply of currency somehow distinct from and detached from managing the marketable national debt or the value of the unit of account? (Just asking.)

      Third, what do these imaginary skeptics think happens when the Treasury issues a bond: the Treasury prints the bond, right? (I suppose in the brave new digital age, the bond may never get printed, living its life as a registered number somewhere in the cloud.)

      It seems like some kind of perpetual process of re-discovery that a fiat money is just pieces of paper or bits and bytes in a computer-based accounting system.

  3. Roberto

    A couple of basic things that I don’t yet understand about MMT…
    What does MMT propose to limit the ‘printing’ of money so that hyper inflation is avoided? Maybe another way to ask that is what exactly are the ‘very real constraints’ we often hear mentioned, possibly in order to pre-emptively answer this question? I understand that MMT believes that inflation is not a problem absent full employment.
    Also, even if the US govt were to completely stop issuing debt (some MMTers have suggested that such debt is not necessary) and relied solely on ‘printing’ to finance expenditures, what other tools are they going to use (beside taxation to lower the level of money supply) to prevent loss of confidence in the dollar?
    It would seem to me that loss of confidence in the dollar would be a more likely inflation culprit than increased money supply.

    1. TroyMcClures

      There is currently no limit. The amount of money created is a political choice.

      All money is debt. You must pay tax to the currency issuer at some point. It’s not a voluntary system.

      Countries can’t stop buying treasuries. They can either buy things priced in dollars or actually build their internal economies so their people can buy the goods they produce (never gonna happen.) So they’ll keep selling to us.

      1. Roberto

        My understanding is that when they sell to us, a dollar credit is created in their account at the Fed. From there they have the option of buying US debt (bonds for instance) Or buying something else entirely. For instance if they wanted to own govt debt they could buy Japanese Govt Bonds instead. Or they could buy a boat load German goods. If I want to own debt and I have more confidence in the Yen than in the USD then I will buy the Japanese debt.

        1. Grebo

          What exactly does ‘confidence’ in a currency mean? You think it will not go down in relation to other currencies. Or you think it will not go down in relation to goods and services. Can it go down in one and up in the other? I believe so. Which should the government care more about?

        2. Adam1

          FED reserve balances can only be used for 4 things… 1) Lent to another financial institution short reserve balances (Federal Funds Market); 2) Settle inter-bank transactions; 3) Buy US Treasuries/Debt; 4) Buy US currency or coin from the FED.

          If you want to buy Japanese government debt, your underlying transaction is really an interbank settlement. You must first buy Japanese Yen which means you have to find a person who wants US Dollar balances and has Japanese Yen to sell. When your transaction takes place all that happens, within the US currency environment, is that your US bank account declines, his US bank account increases and FED reserve balance swap bank balance sheets (your bank to his bank).

          FED Reserve balances never leave the FED’s balance sheet. Even when you buy a US Treasury all that happens is that the reserve balance amount gets moved to a different liability account on the FEDs balance sheet called US Securities. The only way US dollars leave the US is if you physically drive, fly, sail, etc… them out of the US.

          1. Roberto

            Thanks. My point is that as a Chinese goods seller I am not forced to hold US Govt debt for long (as payment for my goods) . And since I have diminishing confidence is US currency because I expect it to be devalued by ‘printing’ I will gladly exchange it for others that I have more confidence in by whatever mechanism is available. I did not mean to imply that I think the US govt can go broke.

            1. jsn

              If you are a Chinese goods seller and you want to sell your goods in the US you will hold your reserves in US currency or the US dollar will depreciate and your goods won’t sell in the US because US residents will not be able to afford them.

              This is not true on the micro level where, but is necessarily true on the macro level: to the extent that exporting countries lose confidence in the dollar and empty their reserve accounts, they will no longer be exporting to the US. This is why the central banks of US trading partners all have massive US Treasury holdings. Their local businesses may not have confidence in the US dollar, but their central bank knows that if it doesn’t hold the Treasuries it will kill its export market.

              To the extent that another country is willing to finance trade deficits adequate to absorb the intended exports, that country would need to be willing to finance trade in the same way the US currently does with a “reserve currency”.

              No other country is willing to do this because it has the effect of exporting domestic demand which destroys jobs and create inequality and growing political instability just as the US has done for the last 40 years.

            2. Adam1

              I think you’re making the most common mistake in thinking about trade. It’s a mistake I made over and over again until explained by Scott Fullwieler to me.

              Think of yourself specifically as a Chinese goods seller. Do you pay your workers in US dollars? No you don’t. You likely finance your operating inventory with a Chinese bank. Your operations are completely in Yuan. The import-export company you work with is the one that the one that is navigating the two currency spheres. Each currency is really a closed system. If I’m an import-export company I’m likely borrowing Yuan to buy your goods. Then I’m selling them in American and acquiring US dollars. US dollars are not good for paying Yuan debts. I need to acquire (at some point) Yuan anyhow to pay my Yuan debts. On top of this, in China no business is allowed to hold US Dollar deposits; that’s why the Chinese Central Bank holds so much US dollar assets. Chinese companies are forced to sell any US dollar holdings to the Central Bank at a fixed/mandated exchange rate.

              Anyhow, my point is as a goods seller you are not dealing in foreign currencies normally unless you’re a multi-national and then you hire people to care more about these these things because then you can move all your profits to the country with the lowest taxes even if you don’t sell anything there. And if you’re the import-export company and you are too afraid to hold US dollars then what the hell are you doing selling in America.

    2. Grebo

      Merely ‘printing’ money is not sufficient to create hyperinflation. You also need foreign currency debts and a collapse in productive capacity.

      The real constraints are the availability of physical resources, especially labour. If the government tries to buy things that are in short supply the price of those things will rise. That’s how it knows it is time to back off.

      Confidence in the dollar is due to the government’s power to tax. As long as it retains that people will need dollars.

      1. Roberto

        Thanks. “The real constraints are the availability of physical resources, especially labour”. To my question about $$ confidence, I would not want to supply my labor only to be paid in a devalued/devaluing currency. So I think you are saying that diminishing dollar demand will signal the govt that it is time to stop ‘printing’. Does that mean that congress/budget is no longer in the loop? Who makes the decision to halt ‘printing’?

        1. Grebo

          As Grant says below it is not the printing that matters but the spending. Congress may decree a certain size of balance sheet but the executive may decide not to spend it all. What the actual arrangements are is a political rather than economic question.

          Suppose there is some inflation. Will you: a) refuse to work; b) refuse to accept dollars; c) ask for a pay rise; d) spend all your money before the prices go up; e) invest your spare money in inflation proof bonds; f) beg the nearest empire to overthrow your government? It probably depends on how much money you have.

          1. Odysseus

            Congress may decree a certain size of balance sheet but the executive may decide not to spend it all.

            Post Nixon, that is very limited in the US Federal structure.

            Wikipedia: Impoundment of appropriated funds

            Impoundment is an act by a President of the United States of not spending money that has been appropriated by the U.S. Congress. Thomas Jefferson was the first president to exercise the power of impoundment in 1801. The power was available to all presidents up to and including Richard Nixon, and was regarded as a power inherent to the office. The Congressional Budget and Impoundment Control Act of 1974 was passed in response to perceived abuse of the power under President Nixon. Title X of the Act removed that power, and Train v. City of New York (whose facts predate the 1974 Act, but which was argued before the U.S. Supreme Court after its passage), closed potential loopholes in the 1974 Act. The president’s ability to indefinitely reject congressionally approved spending was thus removed.

        2. John Zelnicker

          March 8, 2019 at 11:45 am

          It’s not about devaluing currency or diminishing dollar demand. When we import goods from other countries, they are obligated to take our dollars as payment whether they like it or not. As long as we have a trade deficit there will be plenty of “demand” for dollars. Of course, they can then go to the forex market and acquire whichever other currency they prefer, but those dollars remain in circulation as Treasuries or cash deposit accounts at US banks.

          There is also the issue of printing money versus spending that money. When the US Government pays its bills, it sends instructions to the payee’s bank to increase their bank balance and the bank’s reserves. This is the “printing” process. However, if that increase in the payee’s bank balance remains unspent, there can be no inflationary effect. It’s the spending (by any sector, private or government) when the economy is at full employment that can produce inflation. At that point, if the government wants to acquire additional real resources, it has to tax back some of the spending power held by the private sector so real resources are freed up for the government to buy. Either that or the government has to cut back on its spending.

      2. Grant

        Whether we are at full productive capacity and full employment is important, but even with that, you could still have the state creating money and inflation not increasing by much, if anything. What has happened here in this country since the crash is a case in point. Hypothetically, all money created could go to interests that never re-inject the money back into the economy in a way that increases inflation. Hoarding is an obvious example of something like this, but you could imagine a lot of other scenarios where money is injected into the economy but doesn’t really go to channels that would increase inflation. A given amount of money will have radically different impacts in regards to inflation, depending on who gets that money. If the money finds its way to poor people, it will impact inflation differently than going to Jeff Bezos.

        We also shouldn’t ignore the role of private banks in regards to money creation and inflation too. If we define money more broadly than just the money created by the state, and why wouldn’t we?, then most money is created by private banks. So, if someone is thinking about inflation and where money in the economy goes, it is the banks that are more responsible for that stuff than the state. I think that is a huge part of our problems in modern society.

        As explained in ‘Money in the modern economy: an introduction’, broad money is a measure of the total amount of money held by households and companies in the economy. Broad money is made up of bank deposits — which are essentially IOUs from commercial banks to households and companies — and currency — mostly IOUs from the central bank.(4)(5) Of the two types of broad money, bank deposits make up the vast majority — 97% of the amount currently in circulation.(6) And in the modern economy, those bank deposits are mostly created by commercial banks themselves.

    3. notabanktoadie

      what other tools are they going to use (beside taxation to lower the level of money supply) to prevent loss of confidence in the dollar? Roberto

      Well, we could actually allow the population to use fiat in account form as the government-privileged usury cartel does and abolish all other privileges for “the banks”.

      That would greatly increase the DEMAND for fiat and thus make the SUPPLY of fiat less likely to cause price inflation.

    4. paulmeli

      Virtually everywhere MMT is discussed, by academics and informed proponents, it is made clear, almost to the point of being monotonous, that the constraint on spending is the availability of real resources, not financial, so I’m not sure how you missed it.

      A competent government would not try to buy something that was not available for sale. There’s no fail-safe for stupidity.

      1. JBird4049

        A competent government would not try to buy something that was not available for sale. There’s no fail-safe for stupidity.

        What happens when, as is apparently true for now, the United States Federal Government is increasingly less competent everyday?

    5. Rodger Malcolm Mitchell

      Hyperinflations are not caused by money “printing.” The reverse is true. Money “printing” is caused by hyperinflations.

      So what causes hyperinflations? Shortages of goods and services, usually shortages of food.

      The shortage comes first, and then the government tries to deal with it by “printing” money, which doesn’t solve the shortage problem.

      1. Schofield

        Absolutely correct. The stagflation (abnormal inflation plus increased unemployment) in the United States of the 1970’s which supposedly gave Keynesianism a bad name seemed to be a consequence of too much money created for the Vietnam war, extraordinary oil price hikes, attempts to buy-off organised labour rather than compromise over control of capital, and the deterioration of the US trade balance commencing in 1975.

    1. La Peruse

      That is a really basic question that never seems to get answered. Most people understand debt in terms of the extra cost imposed by interest payments, where eventually income will be overwhelmed by interest outgoings. There are two questions? Why not borrow directly from the Fed, so interest receipts are amortised across the whole population? And why does the government pay interest on treasuries when it doesn’t have to? This seems like a massive transfer of wealth to the investor class.

      I can understand why a treasuries market could be important to the economy as a stable store of wealth, and even why treasuries can be held when the interest rates are below inflation… an effective negative return rate, but as far as financing government, I see no relationship at all.

      1. bruce wilder

        A marketable national debt really isn’t about financing government per se; it is a means of financing everything else — a kind of public good or utility used by private enterprise as stabilizing ballast, making money finance itself possible and practical as a coordinating mechanism.

        The quantity of money has a certain unwarranted fascination. If you imagine money as tokens to facilitate exchange of goods, then managing money is all about quantity and velocity in relation to the pace of exchange of goods and services.

        But, mostly money and credit exist to just sit there like a lump, smoothing and hedging and insuring. In some important ways, Treasury notes and bonds are the most useful form of money, a hedge and a reference standard for money as useful lump. Dysfunction might show up in changes in standards of leverage rather than inflation in the price of consumption goods.

        Just a thought.

    2. Adam1

      The FED as a central bank and lender of last resort is a very vital role to ensure a healthy operating payment system. It’s stature as omnipotent entity is just an illusion. It’s important to have, but it should be relegated to some minority department status within the Treasury. Legally I believe it is subservient to the Treasury, but elite people like to pretend otherwise.

    3. rob

      That is what would make the most sense.
      Dennis kucinich proposed a bill in 2011 and 2012 in the 112th congress . It was HR 2990 and ??? ,respectively. This was the “NEED” act. national emergency employment defense act.
      This plan is the older version of what the green party is now calling “greening the dollar”. And I guess it was a newer version than the old chicago plan in the thirties to end the private banking interests in the public money creation function.
      This article does a great service to shows many of the people with a profession that would no longer be needed , and would no longer have access to such cheap money, with nothing to do but extend that credit for more interest than they are charged… big deal…. All these inside baseball kind of financial services all to service debt we don’t have to make in the first place…. and this is wall street making this money for nothing…..And people wonder why all the wrong causes have financial backing…..

  4. Andrew Thomas

    It sounds like the only problem is the so-called debt limits that have been created by the GOP for the political purpose of crushing what is left of the new deal and the Great Society. But, what was the reason for the ridiculous interest rates in the 1979- 1980s? What was the Fed actually trying to do? What did it actually accomplish (aside from creating a massive boom in personal bankruptcies, which was then improperly blamed on the new 1979 bankruptcy code)? Thanks to all for your contribution to my education.

    1. Adam1

      FED Chairman Paul Volker and team attempted to institute Monetarist theory on controlling inflation. They believed if they could control the money supply they could control inflation. The way their experiment went was that the FED would no longer target an interest rate, but the volume of FED reserve balances it would make available to the money market each day. What happened was that interest rates spiked and as each banking day ended the lack of sufficient reserve balances would force dozens of banks to crash into the FED discount window. The FED knew that they couldn’t close the discount window without seriously risking the collapse of the financial system. In the end the FED did not achieve its goal as planned. They were not able to control the money supply which meant they couldn’t impact inflation via the money channel as theorized. What they did accomplish was 1) extending the bought of inflation by driving up interest rate costs which got passed on as a cost; 2) Very high interest rates which eventually crushed demand and brought on the worst recession since the great depression (this helped tame inflation, but it was NOT an intended effect of the policy choice/experiment); 3) increased instability within the financial system (technically worked against one of their mandates). The policy approach was eventually abandoned.

      1. Grant

        I think your link is problematic. To argue that inflation in the US was caused simply by too many dollars and that interest rates alone reduced inflation is problematic. Where is the role in private banks and private money creation? Lower income people have high propensities to spend. So, you give them money and they spend that money into the economy pretty quickly. But there were pretty consistent attacks against working people and poor people throughout the 1970’s and the 1980’s. The unemployment rate also increasing also increased the reserve army of labor, which weakened workers relative to capital. Keep in mind that real wages haven’t grown for most in decades. Some of the Marxist economists have talked about a profitability crisis in capitalism around this time, and I know that is debated, but it the case that what we now call globalization was already well underway by then, and the relative power of workers and unions was already on the decline. One way that inflation was reduced was less money going to people that would have increased effective demand. Austerity also set in, at least for poor and working people. I think the decades long stagnation in real wages has been key in keeping inflation low, and the great increase in private debt was huge. For every dollar spend on servicing debt, a dollar less is there to spend on goods and services. Austerity, globalization and financialization have played roles too.

        The Swedish social democratic system required on solidarity-based wage bargaining. It was a system that tried to balance full employment with low inflation. The state here seemed to have lowered inflation, more than anything, by picking a side in the class war and intensifying that class war. We could have had a democratic form of national planning that could have balanced these things in a way that was far more equitable. But the unionization rates are dozens of times higher in Nordic countries than the US.

        The link also says this, “However, it is clear that monetary policies, which financed massive budget deficits and were supported by political leaders, were the cause. This mess was proof of what Milton Friedman said in his book “Money Mischief: Episodes in Monetary History”, inflation is always “a monetary phenomenon.””

        This is, at the very least, highly contested. Many of the things that Friedman said in regards these matters proved to be wildly off, others are very much contested. Bernanke liked his theory on the Great Depression, for example, Steve Keen did not. It is also true that some of the Great Society programs were good programs and are still with us, but many of them also were never funded like Johnson wanted them to be. I am not saying that increased interest rates played no role, they did, or that fiscal deficits played no role at all in this stuff, but there are many factors that went into reducing inflation and there are many factors that went into why inflation was high. The oil shocks, for example, did cause the price of oil and gas to increase, but the costs of those things are embodied in almost everything produced. So, when something like gas increases, it isn’t just you paying more at the pump, it is you paying more for every commodity that required that energy source to be produced.

  5. Adam1

    I even think it would be operationally very difficult for the Treasury to effectively run out of money regardless of the debt limit. I unfortunately can’t recall the blog post I read a couple months ago (linked here at NC), but it me thinking about the technical operations involved. While I don’t work for the FED I do work for a financial institution and was able to ask some detailed questions of people whose job involves managing payments and settlement with the FED. In our discussions a key item came up. Settlement happens at the end of the day. Unless the FED has existing processes for managing the US Treasuries FED account that are different from how it manages normal everyday interbank clearing and settling then it would be very difficult for the FED, alone, to bounce a US Treasury check – operationally.

    I’ll start with an example to help illustrate the predicament the FED would be in. If I write my electric company a bad check, here’s what happens… The electric company deposits the check. Their bank sends the check to the FED. The FED say this check draws on my bank and puts it in a pile with similar checks drawing on accounts at my bank. At some point the FED then sends a file of all these checks to my bank. It also nets out the differences between all inter-bank checks between my bank and the electric company’s bank and adjust the FED reserve balances between the 2 banks accounts at the FED. It is NOT until after my bank processes that file that it is known that the check is bad. However, both banks are still whole relative to their balances at the FED. What happens is that my bank then sends the check backwards through the same process and my electric company finally finds out my check was bad. In both directions each bank ends the day with balances in its FED account as expected.
    The FED is just intermediating the clearing of transactions between my bank and the electric company’s bank. When dealing with the US Treasury the FED is now a direct party involved! When people say the FED can’t allow an overdraw of the US Treasury account at the FED the logic is usually assuming 1 transaction. Like the transaction comes in and the FED can say, nope not enough money. But the reality is that the FED is probably handling thousands of US Treasury transactions every day. Money is moving into and out of the US Treasury’s account. The FED, alone, doesn’t know ahead of time if the US Treasury will end the day, settle, at a positive or negative balance. It’s already said it has no legal authority to prioritize the processing of transactions, and I’d suspect they have no existing processes to do it either.

    So now let’s assume we end the day and the US Treasury effectively is negative, what are the FEDs options? It can’t leave the Treasury’s account below zero as it is not legally allowed to do that. So it becomes a game of accounting. Where is it going to get those reserves from? It can’t reverse transactions as it doesn’t have the authority to do that. It could just short one or more banking institutions. But this likely has knock on effects like law suits and/or quite possibly the shorted bank(s) being negative too, which would trigger lending via the FED discount window!!! In the end, I believe, the FED would invariably have to fund the overdraft the question just boils down to the accounting. Now it is possible the FED could choose to do something else, but it would invariably be messier, likely involve violating its mandates and risking creating havoc in the financial markets which is why I feel they’d find another solution.

    1. Eric Tymoigne

      The Fed and Treasury have dealt with this issue in two ways. From 1914 to 1935 and from 1942 to 1981, the Treasury could have an intraday overdraft. If the TGA did not go back to zero or positive at the end of the day, the Treasury would issue a “special certificate of indebtedness” to the Fed and the Fed would credit the TGA to close the overdraft. There was a $5 billion dollar limit on the dollar amount of certificates the Fed could hold on its balance sheet
      After the overdraft facility was closed, the Treasury set a target of $5 billion on the TGA balance. It would move funds in and out of its private bank accounts (TT&Ls) to ensure that the TGA stayed positive around $5 billion.
      After the crisis, Treasury closed its TT&Ls and move all funds to the TGA.

      1. Adam1

        Agreed. The current restriction on Treasury overdraft have not always been in place. That said my comment was more about what would operationally happen if the TGA went to zero. And not I said the FED was limited in knowledge in making decision “alone”. More could be done assuming the Treasury coordinated as they are the ones issuing the payments and have more insight into incoming transactions as well. But absent that the FED would be left holding the bag and trying to figure out how to balance its congressional mandate to keep the payment system whole and paying bills congress has authorized and not over-drafting the TGA – all within day to day processes that likely do not support such actions.

        1. Eric Tymoigne

          Given the size of the TGA balance it is unlikely, but if it ever came close to that I think Fed would simply ask Congress to reopen the overdraft facility with the argument that it can’t fulfill its mission otherwise. Maybe another work around could be found. Fed and Treasury can be very creative when self-imposed constraints get in the way.

          1. Adam1

            LOL!!! Re-Open the Overdraft?!?!? No offense Eric, but do you live in America? Yes that would be the logical operational thing to do, but it would deny far too many politicians the political drama of a government shutdown, debt ceiling crisis, etc… What is MSNBC supposed to report on if you take away all the fun stuff. Aint going to happen until the toddlers are brought in and spanked by someone and sent to their rooms without dinner.

            I’ll bring the paddle if you you promise to bring a finger to wag at the naughty little bast@rds. The USA is only tiny degrees away from the level of political incompetence going on in the UK. We just yet haven’t really hit our Brexit wall, but we’ll get there eventually.

  6. Chauncey Gardiner

    As Stephanie Kelton said pertaining to the 2008 financial crisis:

    “MMT didn’t deregulate the banks,” … “MMT didn’t bail out Wall Street and let millions lose their homes. MMT didn’t push a too-small stimulus over price tag fears.”

    There is a continued unwillingness to adequately fund public education, infrastructure, social programs and many other beneficial public policies based on the argument of a “lack of money”. At what point should the damage inflicted be considered intentional?

  7. Susan the Other

    Some resources are created by demand. Like services. Like medical services and research, etc. So to say that resources are the thing that limits spending because when they run low inflation rises is begging the question a little bit, no? Lithium and cobalt and soybeans can become scarce, but human populations and needs seem to remain locked in a certain balance. So for Congress, the arbiter of all things fiscal, to confuse the two with an all-inclusive “debt ceiling” is getting annoying. I honestly think most of our reps and senators don’t understand the first thing about their debt ceiling. It’s just how they extort each other for pet projects. They all need to be educated.

  8. Matt Young

    Well duh, Fed and Treasury work together, and the Fed and Treasury can work together to plan on running out of money, it is called devaluation and it is a standard component of MMT, we MMTers devalue once a generation if you look at our MMT history.

    Why would MMTers want to run out of money and devalue? So as to correct any resource imbalances when a correction is Pareto efficient, that is why we did MMT in the first place.

    1. Adam1

      Defaulting and devaluing are not the same thing. Defaulting is saying you wont pay someone you owe money. Devaluing is allowing the currency to decline in value relative to other currencies. Devaluing can be forced or natural FOREX market occurrence.

  9. Arthur Dent

    I have two primary concerns about Trump backing out of the Iran nuclear agreement:

    1. It may be the impetus for a major alternate payment set up so that major international clearing deliberately avoids the US. Europe, Russia, China, and other countries participating could whittle away at the reserve currency status of the US.

    2. It made it clear to Kim and others that the US won’t take you seriously unless you have a nuclear weapon. Iran didn’t have one, so they can be reneged on. Backing away form the Iran deal is further proof to Kim that he should never give up his nukes.

  10. rob

    This system that exists because the federal reserve act has structured the creation of our money, based on the private banking system creating all the money we use (except for coins),be it the @ three percent in cash, or the rest of the electronic money filling accounts that is made by the banks when they make loans, and “balanced” after;and then the debt the treasury system needs to create and peddle, to pay the private banking system for the money they create, is cumbersome, and unnecessary.
    This article highlights a lot of bells and whistles that don’t need to exist.
    MMT talks about a monetary sovereign. If we were , we wouldn’t need to create this debt in the second place.The american dollar is worth something because the united states is the best lot in the world. Even after the financial crisis of 2008, the rest of the world was in such a bad state that even our corrupt to the bones system was still the best of all the worst….
    The US dollar is strong because the American brand is strong. The political system we have is the greatest danger to our currency. Right now the political system is so corrupt, it is tearing the fabric of this country apart. Even so, our brand, “the US dollar” that the federal reserve banking system gets to use, is still stronger than the rest of the choices in the world.
    If we want to protect the value of our dollar, we need to get rid of the do nothing good congress which is run by republicans and democratic party leadership, all to the detriment of the citizens of this country. If we were to adopt the monetary reform options that are out there where we could put the federal reserve function into the treasury and just create our “US dollars” and not have a debt for the money we create by an act of law. We could spend the money by paying for a national healthcare system, and school from pre-k to post graduate, we could build infrastructure and sane energy production facilities…. we could fund a start on the road to a green new deal…. this would elevate america to where it ought to be heading… and this would only strengthen the outlook of the brand “the US dollar”. All the little people who make this country move forward are the strength of the brand. Despite the ignorance, and propaganda that is the crux of our modern daily situation, we could be even stronger…
    And this article only illuminates the need to get rid of the debt based money system the federal reserve act created. It has only made the rich richer, and perverted the political system with the money that wall street gets while abusing the brand of the american people.


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