Should the Government Just Keep Spending?

July 3rd, 2011

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.


  1. July 5th, 2011 at 18:39 | #1

    This does seem like one of those “through the looking glass” situations that Paul Krugman always talks about where, when you’re up against the zero lower bound on interest rates, vice then becomes virtue.

    Because this would not work in normal times. It’s too good to be true. Governments do have to appease the market Gods. Otherwise, people really will lose faith in the currency and you really can create hyperinflation. And their are historical (Weimar Germany) as well as current examples (Zimbabwe).

    But in these abnormal times it makes sense that the Fed and Treasury could just dispense with the rigamorale. The banks are sitting on phenomenal amounts of cash and doing nothing with it. The government could just cut out the middlemen.

  2. jkljkljk
    July 5th, 2011 at 21:24 | #2

    @Leroy Dumonde “you really can create hyperinflation”

    I’m not clear whether it’s the flow of new money or the increased stock that poses the real inflation threat. And to what extent sopping it up buy selling bonds ameliorates that issue. I don’t think the MMT folks are really clear on it either. I think it’s the crux question.

  3. littlemissmuffet
    December 22nd, 2011 at 10:16 | #3

    money gives me boners, and beer, and nascar, and guns.

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