Should the Government Just Keep Spending?
Greg Mankiw, Dean Baker, and Tyler Cowen all light upon the surprising suggestion by Ron Paul: simply evaporate all the government bonds ($1.6 trillion worth) that the Fed has bought up of late. They’re just debts of one part of government to another part of government, so why not simply vanish them, reducing the treasury’s outstanding debt by $1.6 trillion. (Paul, for some strange reason, equates this to the U.S. “declaring bankruptcy.” ???)
This is totally in keeping with the central thinking of Modern Monetary Theory, which says that the U.S. doesn’t need to borrow — issue bonds — in order to spend. It can just “print money” through the simple expedient of spending it. Treasury credits your bank account and it’s done. Bonds are an at best unnecessary (but legally required) sideshow that allows the Fed to manipulate interest rates, and banks to earn interest on risk-free investments.
So suppose the loonies actually do refuse to up the debt limit? Suppose Obama then tells Geithner, “pay everything on time. Don’t change a thing. But don’t worry about issuing bonds to replenish your account at the Fed.” (Can Geithner do so? Is there a law against Treasury kiting checks to the Fed?) The spending has been authorized by congress…
Is Bernanke going to bounce Geithner’s checks? (Does he have any choice, statutorily?) Or does he just issue additional reserves and funnel them into Treasury’s account?
Crazy notion, never gonna happen, but it would be a much more straightforward, out-in-the-open way to do what we’re already doing, unobscured by the byzantine double-entry machinations that Treasury and Fed go through to manage all those bonds.