Background. Currently, the Treasury sells bonds, notes, bills, etc. (treasuries) to cover deficits. I propose that we simply decouple those activities, i.e., that we sell whatever amount of treasuries is optimal from an economic perspective taking into account interest costs, inflation, interest rates, etc. And, that we then cover any remaining deficit with freshly issued Treasury dollars, which is permitted by existing law.
Problems with the current policy. First of all, the U.S. government currently pays about $500 billion per year in interest on the national debt, and that will significantly increase when interest rates return to their normal levels. Secondly, “our crushing mountain of debt” is used as an excuse for cutting government benefits and services for the 99%. Third, the GOP Tea Party repeatedly tries to use the debt limit to force the cutting of government benefits and services for the 99%.
What about inflation? There is an on-going debate over the proposition that wealth in the form of treasuries is less inflationary than the equivalent amount of wealth in the form of dollars. There can be no doubt that there are delays and costs in liquidating treasuries for dollars, which are the very definition of “liquidity” and that those will increase in times of inflation. From there, however, it becomes an empirical question: How much do those delays and costs inhibit inflation? My proposal is that we sell the optimum amount of treasuries taking all such economic factors into account.
What if current policy turns out to be economically optimal? Even so, it remains suboptimal to let the GOP Tea Party crazies hold the nation’s credit rating hostage to their agenda of impoverishing the middle class. All I’m asking for is that Obama use existing law to go around them. And, there is no down side unless he shares that agenda. During the campaign, he needs to be asked:
Mr. President, if the GOP Tea Party again tries to hold the nation’s credit rating hostage to their agenda of impoverishing the middle class, will you direct your Secretary of Treasury to use his authority under Title 31 Section 5112 Item k to issue money to pay the nation’s bills?
UPDATE: Here is a concrete implementation plan. Since the possibility of inflation is the only the argument against funding deficits with Treasury-issued money and the Federal Reserve is the agency charged with controlling inflation, let’s let the Fed decide how many of which kind of treasuries to sell. In fact, let’s put them in charge of selling them, with the proceeds going directly to the Treasury just as now. After that, we’d cover any remaining deficit with “freshly issued Treasury dollars.”
UPDATE 2: Couldn’t the same thing be done via “quantitative easing”? Quantitative easing involves the purchase of treasuries on the open market with freshly issued Fed-dollars (a.k.a. “reserves”). But:
- Treasuries owned by the Fed still count toward the debt limit, so the GOP could still hold the U.S. credit rating hostage.
- Although interest paid on Fed owned treasuries flows back to the Treasury at the end of the year, some amount of overhead is taken by the Federal Reserve banks.
- The Fed cannot purchase treasuries at auction. Rather it must purchase them from a dealer, which involves various fees.
If the Fed were to buy up all treasuries in excess of the optimum, the two plans would be equivalent except for the three bullet points above.