Re: your question, In theory yes but in practice no.
But the same rules that apply to you and I are not applicable to the US federal government. This is because the government is itself the sole issuer of US dollars. There is no numerical limit to how many dollars the government can create, just like there is no limit to how many points a scorekeeper at a football game can assign either team. When one team scores, the scorekeeper marks up the appropriate number on the scoreboard. Those points didn’t have to “come from” anywhere, and the scorekeeper cannot “run out” of points.
I’d encourage you to take a step back for a moment and forget the tropes we’ve all been told about “Fed Independence” and banks “lending money” to the US government. First, the Fed is a public institution that was created by Congress and ultimately answers to Congress. Congress was granted the power of the purse via the constitution - there’s a reason Hank Paulson had to get on his knees and beg Nancy Pelosi for a bailout. When Congress passes a spending bill, it effectively votes the dollars into existence. That is the money equivalent of scoring a touchdown. The Fed cannot question the authority of Congress; it cannot tell the Treasury “no,” just like the scorekeeper cannot question the authority of a referee when he/she raises their hands signaling a score.
The Fed serves as fiscal agent of the US government and operates the payments system for commercial banks. Commercial banks require special licenses (charters). The OCC, a branch of the Treasury that was voted into law by Congress, issues federal bank charters. The Fed clears payments between banks by debiting and crediting their reserve accounts. Reserves are liabilities of the Fed and assets of the banks. If I write you a check, I am sending instructions to the Fed to debit my banks’ reserves and credit your banks’ reserves, FOR FURTHER CREDIT to your deposit account at your bank.
Tax payments and bond purchases likewise are cleared by the Fed. Treasuries are only issued in book-entry form, and can only be purchased with reserves. When you or anyone else buys a treasury security, the Fed debits your banks’ reserves and credits their securities account, FOR FURTHER CREDIT to your account.
Step back and think about it like an accountant for a moment: buying treasuries is a USE of funds (reserves). The Fed issues reserves - they are a liability on its B/S. The Fed is therefore the SOURCE of funds. If there are insufficient reserves in the banking system for primary dealers to “competitively” bid at Treasury auctions (i.e. at a level acceptable within the Fed’s monetary policy goals) then the Fed advances the reserves to them. There is no numerical limit to how many reserves the Fed can keystroke into existence.
So no, commercial banks do not supply funds to the government in order for it to operate. It is the other way around: the OCC issues bank charters, granting them the legal privilege to issue deposits, and the Fed, an agent of the government and a legal creation of Congress, supplies the banks with the funds it demands to to pay taxes and buy treasuries. Commercial banks make up what some have dubbed the Finance Franchise - the government is the franchisor and the banks are the franchisees, expanding the government’s credit money in pursuit of the public purpose, and earning a fee (profits) for their efforts. For further reading, see this 2017 paper published by Cornell Law School (https://scholarship.law.cornell.edu/cgi/viewcontent.cgi?article=2660&context=facpub).
As the only entity in the world with the legal authority to issue US dollars, the US government is a currency monopolist - it is the sole supplier of the currency that it requires the non-government sector to pay taxes in. You can’t pay taxes or buy treasuries with a currency that doesn’t yet exist! It outsources money-issuing privileges in a franchise arrangement with the commercial banks, which requires a special government-issued charter. The banks themselves leverage the government’s “base money” - physical currency and reserves - to issue deposits to fund purchases of credit assets denominated in the government’s unit of account.
I understand why issuing a trillion dollar coin seems primitive and hack-y. It shouldn’t. It’s a sensible solution to an otherwise stupid problem. Yellen’s objections are purely political. Governments have been minting coins in denominations it chooses for thousands of years. It is no more of a “hack” or a “gimmick” than the Fed booking “deferred assets” to offset operating deficits. At least there is something tangible with a platinum coin! The system is unnecessarily complex to obfuscate the truth from the public. They’ve been fooling the media, most on Wall Street (including myself for a while and smart analysts like yourself), and academics for decades, if not longer (our industrialist capitalist forefathers like Thomas Edison used to understand and write about these matters).
Hope that all helps and feel free to reach out at rjb@moderncreditventures.com if you’d like to speak more offline.
I agree that the fiat can be printed by the government, and indeed this is what the Fed has done via QE.
I think where we disagree is in exactly who in the government should have authority. Presently, it is the Fed. The Coin would effectively give that power to the Treasury (and effectively the President).
I think that keeping monetary policy "independent" (as has been the case since the 50's) is the wiser choice.
QE and The Coin are similar but not the same. QE is technically a loan, and is indirect debt monetization. The Coin is simply direct debt monetization.
I’m not arguing whether the government CAN “print” (keystroke) its own money. My point is that it already DOES keystroke it’s own money as part of its normal operations.
I’m not arguing the Treasury SHOULD have the authority. I’m arguing that it HAS the authority, and is obligated by law to use it.
My opinion or political belief is that the government should avoid breaking the law. Do you disagree?
Describing things as they are is not necessarily an endorsement. The government spends money by instructing the Fed to credit banks’ reserve accounts. This is an operational fact. Arguing against this is like arguing the Bureau of Engraving and Printing doesn’t physically print dollar bills (even if they’re legally issued by the Fed). The government can avoid violating the 14th amendment by minting a $1 trillion platinum coin. This is also an operational fact.
Could you please clarify what you mean with the characterizations of QE and the coin as examples of “debt monetization?” QE replaces Treasury liabilities with Fed liabilities. Both of these are obligations of the federal government. Just because reserves and physical cash don’t have maturity dates doesn’t mean they aren’t ostensibly forms of government debt. The dollar bill in your pocket reads “Federal Reserve Note” at the top. “Note” is a legal term of art that’s short for promissory note, which legally is considered a form of debt. It also reads “this note is legal tender for all debts, public and private.” When you present the US government with cash (or reserves) to pay for tax debts, it is obligated by law to accept them as legal tender and cancel your tax debts.
Btw for a great history of the origins of our monetary system and things like legal tender and “fiat” currency I highly recommend Roger Lowenstein’s latest book “Ways and Means: Lincoln and His Cabinet and the Financing of the Civil War” (https://a.co/d/8OtHufD).
Interesting.
If I open a bank account that allows overdrafts, does that give me unlimited spending power?
BTW I appreciate the information, difference of opinion and healthy discussion!
Absolutely agreed! Appreciate the engagement.
Re: your question, In theory yes but in practice no.
But the same rules that apply to you and I are not applicable to the US federal government. This is because the government is itself the sole issuer of US dollars. There is no numerical limit to how many dollars the government can create, just like there is no limit to how many points a scorekeeper at a football game can assign either team. When one team scores, the scorekeeper marks up the appropriate number on the scoreboard. Those points didn’t have to “come from” anywhere, and the scorekeeper cannot “run out” of points.
I’d encourage you to take a step back for a moment and forget the tropes we’ve all been told about “Fed Independence” and banks “lending money” to the US government. First, the Fed is a public institution that was created by Congress and ultimately answers to Congress. Congress was granted the power of the purse via the constitution - there’s a reason Hank Paulson had to get on his knees and beg Nancy Pelosi for a bailout. When Congress passes a spending bill, it effectively votes the dollars into existence. That is the money equivalent of scoring a touchdown. The Fed cannot question the authority of Congress; it cannot tell the Treasury “no,” just like the scorekeeper cannot question the authority of a referee when he/she raises their hands signaling a score.
The Fed serves as fiscal agent of the US government and operates the payments system for commercial banks. Commercial banks require special licenses (charters). The OCC, a branch of the Treasury that was voted into law by Congress, issues federal bank charters. The Fed clears payments between banks by debiting and crediting their reserve accounts. Reserves are liabilities of the Fed and assets of the banks. If I write you a check, I am sending instructions to the Fed to debit my banks’ reserves and credit your banks’ reserves, FOR FURTHER CREDIT to your deposit account at your bank.
Tax payments and bond purchases likewise are cleared by the Fed. Treasuries are only issued in book-entry form, and can only be purchased with reserves. When you or anyone else buys a treasury security, the Fed debits your banks’ reserves and credits their securities account, FOR FURTHER CREDIT to your account.
Step back and think about it like an accountant for a moment: buying treasuries is a USE of funds (reserves). The Fed issues reserves - they are a liability on its B/S. The Fed is therefore the SOURCE of funds. If there are insufficient reserves in the banking system for primary dealers to “competitively” bid at Treasury auctions (i.e. at a level acceptable within the Fed’s monetary policy goals) then the Fed advances the reserves to them. There is no numerical limit to how many reserves the Fed can keystroke into existence.
So no, commercial banks do not supply funds to the government in order for it to operate. It is the other way around: the OCC issues bank charters, granting them the legal privilege to issue deposits, and the Fed, an agent of the government and a legal creation of Congress, supplies the banks with the funds it demands to to pay taxes and buy treasuries. Commercial banks make up what some have dubbed the Finance Franchise - the government is the franchisor and the banks are the franchisees, expanding the government’s credit money in pursuit of the public purpose, and earning a fee (profits) for their efforts. For further reading, see this 2017 paper published by Cornell Law School (https://scholarship.law.cornell.edu/cgi/viewcontent.cgi?article=2660&context=facpub).
As the only entity in the world with the legal authority to issue US dollars, the US government is a currency monopolist - it is the sole supplier of the currency that it requires the non-government sector to pay taxes in. You can’t pay taxes or buy treasuries with a currency that doesn’t yet exist! It outsources money-issuing privileges in a franchise arrangement with the commercial banks, which requires a special government-issued charter. The banks themselves leverage the government’s “base money” - physical currency and reserves - to issue deposits to fund purchases of credit assets denominated in the government’s unit of account.
I understand why issuing a trillion dollar coin seems primitive and hack-y. It shouldn’t. It’s a sensible solution to an otherwise stupid problem. Yellen’s objections are purely political. Governments have been minting coins in denominations it chooses for thousands of years. It is no more of a “hack” or a “gimmick” than the Fed booking “deferred assets” to offset operating deficits. At least there is something tangible with a platinum coin! The system is unnecessarily complex to obfuscate the truth from the public. They’ve been fooling the media, most on Wall Street (including myself for a while and smart analysts like yourself), and academics for decades, if not longer (our industrialist capitalist forefathers like Thomas Edison used to understand and write about these matters).
Hope that all helps and feel free to reach out at rjb@moderncreditventures.com if you’d like to speak more offline.
Cheers!
GH
I agree that the fiat can be printed by the government, and indeed this is what the Fed has done via QE.
I think where we disagree is in exactly who in the government should have authority. Presently, it is the Fed. The Coin would effectively give that power to the Treasury (and effectively the President).
I think that keeping monetary policy "independent" (as has been the case since the 50's) is the wiser choice.
QE and The Coin are similar but not the same. QE is technically a loan, and is indirect debt monetization. The Coin is simply direct debt monetization.
I’m not arguing whether the government CAN “print” (keystroke) its own money. My point is that it already DOES keystroke it’s own money as part of its normal operations.
I’m not arguing the Treasury SHOULD have the authority. I’m arguing that it HAS the authority, and is obligated by law to use it.
My opinion or political belief is that the government should avoid breaking the law. Do you disagree?
Describing things as they are is not necessarily an endorsement. The government spends money by instructing the Fed to credit banks’ reserve accounts. This is an operational fact. Arguing against this is like arguing the Bureau of Engraving and Printing doesn’t physically print dollar bills (even if they’re legally issued by the Fed). The government can avoid violating the 14th amendment by minting a $1 trillion platinum coin. This is also an operational fact.
Could you please clarify what you mean with the characterizations of QE and the coin as examples of “debt monetization?” QE replaces Treasury liabilities with Fed liabilities. Both of these are obligations of the federal government. Just because reserves and physical cash don’t have maturity dates doesn’t mean they aren’t ostensibly forms of government debt. The dollar bill in your pocket reads “Federal Reserve Note” at the top. “Note” is a legal term of art that’s short for promissory note, which legally is considered a form of debt. It also reads “this note is legal tender for all debts, public and private.” When you present the US government with cash (or reserves) to pay for tax debts, it is obligated by law to accept them as legal tender and cancel your tax debts.
Btw for a great history of the origins of our monetary system and things like legal tender and “fiat” currency I highly recommend Roger Lowenstein’s latest book “Ways and Means: Lincoln and His Cabinet and the Financing of the Civil War” (https://a.co/d/8OtHufD).