If the U.S. stopped issuing treasuries, would it go broke?

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

  1. hbl says

    That’s the gist of it, I think (i.e., government bonds and reserves are all just financial assets, with the bond uses you mentioned). Bill Mitchell (another modern money theory blogger for those not aware) covers this frequently and suggests if he were running Japan’s policy the last two decades he wouldn’t have bothered with much bond issuance. Of course the other interesting MMT observation is that opting for more reserves vs bonds (e.g., via QE) is net *deflationary* since it deprives the non-government sector of that extra interest income!

  2. everson says

    So from a technical, how the system works, point of view this is correct. The question I have for the MMT crowd is how would all of the market participants who do not believe in MMT react to this? Since the non-believers are the majority I suspect it would end poorly.

  3. dansecrest says

    I’ve been intrigued with this Chartalist perspective ever since I first ran across it a month or two ago, possibly via a reference from this site. I don’t have anything to add right now, other than I appreciate your attention to this perspective…

  4. Anonymous says

    Thanks Edward. No, I do not think you are missing anything. When you submit your 10 pound note to the queen for redemption she will either hand you another 10 pound note, or if you prefer she will reduce your tax liability to her by 10 pounds. I would emphasize the second as the more important–that is what “drives” modern monies. Legal tender laws (requiring the private sector to accept govt notes in private transactions) is nothing but a “pious hope” in the words of Knapp. That is why Euroland does not ever bother with them. So long as Eurogovts accept euro notes in payment of taxes, that will drive them without legal tender laws.

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