Here's another interesting piece from Randall Wray, the economics
professor from University of Missouri-Kansas City (that same school
which employees 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 deposits? 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 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. 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's colourful, it has a bunch
of French on it and a picture of the Queen. But, it is no different
than the 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
their 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 in my own 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 its target 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?
