Apparently, most economists believe that the U.S.government can, in principle, pay its bills by printing money on some mythical printing press.
Today, per Alan Greenspan said on Meet The Press:
David Gregory, moderator of “Meet The Press” on NBC: “Are U.S. treasury bonds still safe to invest in?”
Alan Greenspan, Former Chairman of the Federal Reserve: “Very much so. This is not an issue of credit rating, the United States can pay any debt it has because we can always print money to do that. So, there is zero probability of default.”
And, on November 21, 2002, Greenspan’s successor-to-be, Ben Bernanke, told the National Economists Club in Washington, D.C. that:
Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.
And, April 21, 2011 at 10:57 am, Paul Krugman wrote in his blog:
It’s true that in the short run, if we ignore the legal restrictions on state borrowing, [Chris Christie] can spend more than the state takes in in taxes; but over the longer run the state must, one way or another, collect enough revenue to pay for its spending.
Does the same thing hold true for the federal government? Well, the feds have the Fed, which can print money.
And, on April 18, 2011, per David Lindorff, James K. Galbraith burst out laughing on hearing about the S&P announcement that they were considering downgrading the U.S. government’s credit rating: “They did what?” Galbraith went on to say:
“This is remarkable! It certainly will confirm the suspicions of those who have questioned S&P’s competence after its performance on the mortgage debacle.”
S&P, as well as the other two big ratings firms, all notoriously failed completely to spot the looming disaster of the banking collapse and financial crisis, and famously issued A ratings to mortgage-backed securities that later proved to be virtually worthless paper, as well as to the banks that had loaded up on the financial dreck.
[...]
US debt consists of bonds issued in US dollars, which I assume the S&P analysts know. How can the US possibly default on its own currency? The obligation is in nominal dollars, which is to say when the bond retires, the US issues a check in dollars to cover it.”
[Since the US prints its own currency (or actually just issues electronic payments to create new money) whenever it needs it, as Galbraith puts it] “As long as there is diesel fuel to power up the back-up generators that run the government’s computers, they will have the money to back their own bonds.”
And, so far as I can tell, these economists don’t know what they’re talking about.
If the U.S. government has such a printing press, why, for instance, does it borrow money, with interest, to cover its tax deficits? In 2010, it paid $414 billion dollars in interest, which is more than the revenue lost to the Bush tax cuts ($367 billion per year) and more than Obama’s fondest dream of deficit reduction ($400 billion per year average over 10 years). And, per the CBO, during the next decade the U.S. will pay $5.6 trillion in interest, and during the next 15 years, over $12 trillion. If it is so obvious that the government has a magical printing press, why are we paying this outrageous amount to cover our deficits?
But, ever since we went off the gold standard in 1971, we’ve had a soverign fiat currrency. Per the Wikipedia:
Fiat money is money that has value only because of government regulation or law. The term derives from the Latin fiat, meaning “let it be done”, as such money is established by government decree. Where fiat money is used as currency, the term fiat currency is used.
Fiat money originated in 11th century China, and its use became widespread during the Yuan and Ming dynasties. The Nixon Shock of 1971 ended the direct convertibility of the United States dollar to gold. Since then all reserve currencies have been fiat currencies, including the dollar and the euro.
In other words, the government, via an act of Congress signed by the President, can turn any piece of paper, chunk of metal, or lump of coal into a token worth say $100 trillion. So, then, why are we paying hundreds of billions per year to borrow dollars to cover our deficits?
The government has authorized the Federal Reserve to confer fiat value on pieces of paper up to some relatively small limit and to credit Fed accounts in exchange for assets, e.,g. bonds. But, it has forbidden the Fed from loaning or granting money to the Treasury, e.g., from directly purchasing Treasury bonds even though the Fed can and does purchase Treasury bonds on the secondary market and now holds over $1.6 trillion (i.e., 11%) of the national debt.
Also, the government has authorized the Treasury to confer fiat value on coins, and a 1996 act of congress signed by the president, Title 31, Section 5112, item (k), has given the Treasury power to issue coins of unlimited fiat value:
The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.
So, in principle, the Treasury can mint a $100 trillion coin and deposit in the Fed account from which all government bills are paid, thereby eliminating the need for further borrowing to cover deficits (for many years) and granting the Treasury the ability to pay off the $14 trillion national debt in full.
But that 1996 provision seems to have gone unnoticed until FDL commenter Beowulf mentioned it last year and letsgetitdone encouraged him to post it, which he did on January third of this year.
So, the bottom line is that these economists are accidentally correct except for the distinction between “printing” and “minting.” But, they should be making a much bigger deal of the hundreds-of-billions per year that could be saved by excericizing our rights as issuers of fiat currency. And they should acknowledge the fact that, except for a loophole found by an FDL commenter, their claims would be dead wrong.
UPDATE: Per a Dkos comment by clonal antibody:
The [1996] staute was written specifically … to be able to retire the National Debt. This was deliberately worded the way it was.
Ellen Brown on page 372 in the 2008 edition of her book “the Web of Debt” says
In the 1980s, a chairman of the Coinage Subcommittee of the U.S. House of Representatives pointed out that the national debt could be paid with a single coin. The Constitution gives Congress the power to coin money and regulate its value, and no limitation is put on the value of the coins it creates.8 The entire national debt could be extinguished with a single coin minted by the U.S. Mint, stamped with the appropriate face value. Today this official might have suggested nine coins, each with a face value of one trillion dollars.
Tracing back the references, the book “You be the judge,” in Chap 3 “Ponzi Scheme” quotes extensively from 1990 correspondence with the US Mint, corroborating the whole trillion dollar coin paradigm. Thus I believe, that when the opportunity arose in 1996, this strategy was deliberately written into the playbook.
UPDATE 2: Some people claim that paying off the national debt with fiat money would cause inflation. But, note that all dollars are fiat money and that the Fed has done exactly that to 11% of the national debt with no such consequences, i.e., paid for $1.6 trillion of Treasury bonds with nothing more than numbers in a computer. When the Fed goes to the secondary market to buy up Treasury bonds, it exchanges freshly created credit in accounts at the Fed for those bonds. That credit, like all dollars, is fiat money.
The point is that in doing so, the Fed is exchanging one government-backed asset, credit at the Fed, in exchange for others, Treasury bonds. Everyone’s wealth stays the same, and since there is an efficient bond market that will interconvert bonds and money, both assets are liquid. Here is a more scholarly treatment of coin seigniorage and inflation by Scott Fullwiler. Here is another interesting treatment of inflation (by Maddogg).
UPDATE 3: The bottom line question here is: if these economists think that we have a (possibly virtual) printing press with which we can issue money to pay the governments bills, why aren’t they protesting the fact that we are scheduled to spend over $5.6 trillion over the next decade in unnecessary interest. If that printing press or an equivalent capability exists (which it does in the form of coin seigniorage), why cover our deficits with borrowed money.
I suspect that their answer will be that such borrowing somehow inhibits inflation. The MMT people disagree, and that is a five-trillion-dollar debate that this nation ought to have immediately.



9 Comments

One huge problem is that bankers convinced us to back our fiat currency with Fed debt. Under the current system we incur 1 to 1 debt for every dollar we print (yes print). The coin seignorage idea is a way around that. In reality we should be talking about abandoning the debt-backing of our dollars. MMT sort of starts to pave the way to this…
According to letsgetitdone, the MMT people searched in vain for some legislation that requires deficits to be covered via borrowing. The only thing they turned up was a law that prohibited the Fed loaning money directly to the Treasury.
The practice of covering deficits with borrowing made sense in the days of the gold standard, since issuing money to cover deficits would dilute the ratio of gold to dollars in circulation. But now it is what biologists call “a detrimental vestigial organ.” It’s needlessly costing us about half a trillion per year.
Half-a-trillion here, half-a-trillion there, and pretty soon you’te talking real money.
Okay, fuck you, Greenspan.
Tech hint, wigwam? No time to read just now….but if you hit the Edit button, and figure out a place to add the Page Break feature, it will shorten what’s visible, then add a ‘Read More’ feature. If you hover your mouse over anything with liney thingies, you’ll see it. Then more diaries fit on the left.
Looking forward to reading. ;o)
[Ed. note - apologies; meant to do that when promoting this diary to MyFDL front page, and overlooked that. Should appear per usual on MyFDL front page now.]
Oops! I think that in the course of editing, I edited out that line, wondering where it came from. ;-)
Thanks for that tip.
Thanks Wigwam; keep hammering away at the illogic of the PTB’s.
Another Rec’d.
Keep at it wigwam:
“UPDATE 3: The bottom line question here is: if these economists think that we have a (possibly virtual) printing press with which we can issue money to pay the governments bills, why aren’t they protesting the fact that we are scheduled to spend over $5.6 trillion over the next decade in unnecessary interest. If that printing press or an equivalent capability exists (which it does in the form of coin seigniorage), why cover our deficits with borrowed money.”
Don’t forget that the amount, if one extends CBO projections out to 15 years is near;y $12 Trillion dollars for interest — Basically welfare for the rich and foreign nations.
Also, please don’t forget that we can mint a $60 Trillion coin, pay off ALL the national debt and pay for ALL deficit spending on jobs and other needed programs, over the next 15 years without borrowing any additional money.
Thanks! Exactly!
We spent the last three months debating what to cut and what to hike, and we were talking numbers smaller than $5.6 trillion per decade and much smaller than $12 trillion over a decade and a half.
If our reason for not issuing fiat money to cover our deficits and debt is the belief that borrowing somehow decreases inflationary pressure, let’s have that debate: LET’S GET IT ON!
That’s the five-trillion-dollar debate and I suspect that the MMT folks and Jamie Galbraith would be interested in a piece of that action.
Sure. The MMT position is that borrowing doesn’t decrease inflationary pressure. Scott Fullwiler treated the issue in the piece you linked to above and this one as well:
http://www.nakedcapitalism.com/2011/07/scott-fullwiller-qe3-treasury-style%e2%80%94go-around-not-over-the-debt-ceiling-limit.html
And it’s also addressed in my piece here: http://my.firedoglake.com/letsgetitdone/2011/07/20/beyond-the-debt-ceiling-the-30-trillion-plan-for-ending-borrowing-and-the-national-debt/
And it’s also addressed in the discussion of this great piece by Stephanie Kelton:
http://neweconomicperspectives.blogspot.com/2010/11/yes-government-bonds-add-to-private.html