Should Central Banks Burn All Their Government Bonds?

In June of 2008, Ron Paul made a radical proposal: the Fed should simply burn all the U.S. Treasuries it’s currently holding, reducing the government (U.S. Treasury) debt by $1.6 trillion, or about 10%. (Yes: bonds held by the Fed are counted as part of “Debt Held by the Public,” even though the government basically “owns” the Fed.)

Paul called this “bankruptcy,” but it’s actually pure MMT thinking, acknowledging that 1. the Fed and the Treasury are most reasonably viewed as a single consolidated entity (“the government”), and 2. that government debt is something of a side issue in the big monetary picture (bonds are a vehicle for interest-rate management by the Fed), compared to the matter of central importance: how much newly created money the government puts into the economy by deficit spending, or takes out with a surplus (destroying more money by taxing than it creates by spending).

This is pretty radical talk, for sure. (I wonder if Paul and Kucinich ever eat lunch together.) But now Gavyn Davies tells us in the Financial Times that such notions are at least floating about in some decidedly traditional circles (emphasis mine):

Two separate journalists (Robert Peston of the BBC and Simon Jenkins of The Guardian) said that Lord Turner’s “private view” is that some part of the Bank’s gilts holdings might be cancelled in order to boost the economy. Lord Turner distanced himself in public from this suggestion on Saturday. However, the notion will now be widely discussed. It is easy to see how the idea could appeal to a finance minister facing the need to tighten fiscal policy during a recession in order to bring down the public debt ratio. [that’s “Adair Turner, the Chairman of the UK Financial Services Agency, and reportedly a candidate to become the next Governor of the Bank of England.”]

Davies doesn’t like the idea (inflation worries), and apparently Lord Turner has his qualms as well. But the fact that these ideas are getting any consideration at all in the world of central banking is pretty radical in itself. Heck, the fact that Davies is even writing about it (and explaining it rather well, IMHO, with some caveats) speaks volumes. He has been, after all, a partner, Managing Director, Chief Economist, and Chairman of the Global Investment Research Department at Goldman, Sachs. Not your typical internet econocrank.

For those who follow these discussions, Davies’ two footnotes might be the most significant:

[1] Similar proposals have however been widely debated by economists in the past. This goes back at least as far as the works of Abba Lerner in the 1940s on “functional finance” and the role of fiat money. More recently, the Modern Monetary Theorists have reawakened Lerner’s ideas. See this explanation of MMT, and Paul Krugman’s rejection of the approach as being likely to lead to hyperinflation in the long run.

[2] Samuel Brittan makes the case that part of the budget deficit should be money financed in this column. Martin Wolf makes a similar case in this column. Both argue that money financing of deficits is preferable to “everlasting austerity and slump”.

Cross-posted at Angry Bear.






4 responses to “Should Central Banks Burn All Their Government Bonds?”

  1. Tom Hickey Avatar

    The concern is how the Fed can reduce its balance sheet without raising rates across the yield curve as it sells tsy and agencies back into the market. Is there any rule saying that the Fed must divest itself of those assets in any time frame? The simplest way for the Fed to deal with the assets it acquired during QE is to hold them to maturity and continue to manage the overnight rate by paying IOR.

  2. Ramanan Avatar


    I thought Gavyn Davies’ post was complete nonsense and full of Monetarist intuitions.

    Most Keynesians are more Monetarist than Monetarists themselves.

    The idea of burning government debt doesn’t make any sense in terms of usefulness. It was discussed last year as an accounting gimmick to circumvent the debt ceiling. (i.e., if the Federal Reserve burnt the bonds, the amount of public debt issued so far would have fallen, allowing the US Treasury to issue more debt for a while and hence spend and not default.)

    If the Bank of England or the SPV which holds the bonds purchased in the QE burns the bonds, the private sector’s health doesn’t improve in any sense and neither is it a stimulus.

    The only way to stimulate is to increase government expenditure and/or decrease tax rates.

  3. The Arthurian Avatar


    “The only way to stimulate is to increase government expenditure and/or decrease tax rates.”

    I always have trouble with the word “only”.

    1. Increasing government expenditure increases circulating money in the private sector.
    2. Decreasing tax rates leaves more money circulating in the private sector.
    3. Private debt forgiveness leaves more money circulating in the private sector.

  4. […] about whether government debt held by central banks should be torn up. See here, here, here and here. (h/t to Mike Norman). What took those article writers so long? I advocated the idea last Febuary […]