Mitchell’s laws: Reduced money growth never stimulates economic growth. To survive long term, a monetarily non-sovereign government must have a positive balance of payments. Economic austerity causes civil disorder. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
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As readers of this blog know, I often have written to Chicago Tribune executives about the illogic of their continual debt-hawk editorializing. They seldom have responded. Perhaps too busy? Or perhaps my Monetary Sovereignty ideas were thought to be so ridiculous, they felt no need to dignify my comments with a response.
On 9/26/11 however, (surprise!) they answered this letter I sent to Bruce Dold, editorial page editor and to Tony Hunter, president, publisher and CEO of Chicago Tribune Company:
Monday, September 26, 2011
Subject: Time to end farm subsidiesThe Chicago Tribune continues to parrot the popular wisdom. Its 9/26/11, editorial titled, “Plow ‘em under: Time to end farm subsidies,” included this short paragraph:
But the giveaways at taxpayer expense must stop. They’re an unaffordable drain on the Treasury.
One can argue about whether farm subsidies should be eliminated, reduced or re-directed, but they do not cost taxpayers one cent, they are not unaffordable and they do not drain the Treasury. Federal taxes are not related to federal spending.
Our Monetarily Sovereign federal government spends by marking up creditors’ checking accounts, a process not related to tax collections. If taxes fell to $0 or rose to $1000 trillion, neither event would affect the government’s ability to spend by even one penny.
There is no limit to the federal government’s ability to mark up creditors’ checking accounts; therefore nothing is “unaffordable.” And the Treasury does not store money. It creates money ad hoc, by spending, i.e. by marking up checking accounts. Therefore, it cannot be “drained.”
Unfortunately, the Tribune does not understand the difference between the federal government and state/county/city governments, which do spend taxpayers’ money, and for which spending can be unaffordable and can drain their treasuries.
One wonders when, if ever, the Tribune editors, who write about economics, will bother to learn economics.
Rodger Malcolm Mitchell
I received the following response from Mr. Dold, with a cc. to Mr. Hunter:
9/26/11: Dear Mr. Mitchell,
Thank you for your note and for your other emails on this subject to Tony Hunter and to me. I want to assure you that I have shared your views with other members of the editorial board and discussed them with Mr. Hunter. The editorial writers understand your position on monetary sovereignty. We respectfully disagree with your views on the likely economic impact if federal policy were based on those views.
Again, thanks for corresponding with us.
Bruce Dold
Editorial page editor
I responded:
Thank you for your note. Briefly, Monetary Sovereignty says:
1. Following 1971, the end of the gold standard, federal government spending has not been limited by taxing or by borrowing, but only by inflation considerations.
2. Therefore, federal spending does not use “taxpayer money” or borrowed money. Even were taxes and borrowing to fall to $0, the federal government would retain the unlimited power to create dollars (again, limited only by inflation).
3. The states, counties, cities, businesses, you and I are monetarily non-sovereign. They do use taxpayer money and borrowed money, to pay their bills. Beliefs about federal financing therefore must differ from beliefs about state, local and personal financing.
With which of these facts do you disagree?
Rodger Malcolm Mitchell
They responded:
I think you answer your own question. Yes, the federal government can print dollars, which state and local governments cannot do. But to do so at will would have staggering inflation implications. To say federal spending does not use borrowed money seems to ignore the $9.5 trillion in U.S. public debt, half of which is held by foreign entities. S&P wasn’t willing to ignore that.
Bruce Dold
cc: Tony Hunter
I answered:
Yes, Bruce and Tony, that is the important thing to remember. The only implication of federal money creation is inflation, not the federal government’s ability to pay its bills. The federal government cannot be “broke” (as Boehner claimed), nor can it ever be unable to service its debts — all without inflation.
Here is how the federal government borrows, for instance, from China.
1. First, China must deposit dollars (not yuan) into its checking account at the Federal Reserve Bank.
2. Then, to “lend” to us, China asks the U.S. federal government to debit its checking account and to credit China’s T-security account, also at the Federal Reserve Bank. (A T-security account is similar to a savings account.)
3. Then, to “pay off” the loan, China’s T-security account is debited and China’s checking account is credited– all at the Federal Reserve bank.
And that’s it. Federal “borrowing,” which is much different from personal borrowing, consists of nothing more than debiting and crediting accounts at the Federal Reserve bank. There never is a time when federal debt is a burden to the federal government. It can debit and credit accounts at the Federal Reserve Bank, forever, and it can do so without inflation.
The entire $9.5 trillion federal debt could be “paid off” tomorrow, if the federal government chose to do so. It merely would credit all the checking accounts of T-security holders and debit all their T-security accounts.
S&P ignored the fundamental difference between a Monetarily Sovereign nation and monetarily non-sovereign entities like you and me.
Now, I suspect your next two questions are:
1. Why do you know this, while Congress, S&P and many economists don’t?
2. What about inflation?If you are interested in learning the answers to these questions, and to all your other questions about economics, please let me know. Merely ask your questions and I will answer them. I suspect you will find this enlightening and interesting.
Rodger
And then I added:
I neglected to mention that the federal government “borrows” (i.e. issues T-securities), not because it needs dollars. It doesn’t. It issues T-securities because of obsolete laws, created during times of monetary non-sovereignty, which require the Treasury to issue T-securities in an amount equal to the federal deficit.
When the government was monetarily non-sovereign, it relied on taxes and borrowing, just as the states, counties and cities do. No longer. A fundamental quality of a Monetary Sovereign nation is that it does not require or use income to pay its bills. It pays by sending instructions to creditors’ banks to mark up creditors’ checking accounts. It can send these instructions endlessly, without any need for taxing or borrowing or income of any sort.
Rodger
So far, no further responses. Notice the key, nonsensical phrases in their response: “Yes, the federal government can print dollars, which state and local governments cannot do. But to do so at will would have staggering inflation implications. To say federal spending does not use borrowed money seems to ignore the $9.5 trillion in U.S. public debt, half of which is held by foreign entities.”
Why nonsensical? Because first he acknowledges that the federal government can create dollars (He wrongly calls it “print dollars.”) Then he says I “ignore the $9.5 trillion in U.S. public debt . . .” Since the federal government can create dollars, why does it borrow, and why is borrowing (or repaying) a problem that should not be ignored?
Therein lies the problem. Debt hawks have the uncanny ability to hold two opposing views, simultaneously. Obviously, a nation that can create its sovereign currency does not need to borrow its sovereign currency, nor would it have any difficulty servicing any sovereign debt. These Tribune top executives don’t understand the illogic of their position.
So today, I sent them this note:
Since as you say, “the federal government can print dollars,” why does it need to borrow, and why is S&P concerned about federal borrowing?
Think about it.
Rodger
I don’t expect an answer, but if one comes, I’ll fill you in. Meanwhile, my hope is that by some miracle, I can convince one major newspaper to print economic fact rather than myth — or at least engage in a rational dialog about economics. What a step forward it would be. Perhaps you can attempt the same with your local paper.
Rodger Malcolm Mitchell
http://www.rodgermitchell.com
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No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. The key equation in economics: Federal Deficits – Net Imports = Net Private Savings
MONETARY SOVEREIGNTY
#Monetary Sovereignty - Mitchell 
I had almost the exact same correspondence with a local news talk host. It ended roughly the same way. Except his responses continually tried to rope me into ideological debates, vs. factual ones.
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Me and my big mouth. No sooner did I say Bruce Dold wouldn’t answer, than I received this note:
Of course I am delighted at the prospect of having a real dialog. Here was my immediate response:
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Rodger, you didn’t really address the inflation issue in your emails. You agree that inflation is the only restriction on monetary sovereignty, but I suspect that if you don’t explain it then the Trib will just blow you off.
There are lot of other elements of MMT which are very persuasive, so I sometimes feel that if its proponents left out the taxes-don’t-mean-anything and monetarily-sovereign-countries-will-never-run-out-of-money arguments you might be have more influence in policy debates. The sectoral balance issue is very powerful, I think, as well as the bank-reserves-don’t-cause-inflation-or-increased-interest-rates issue and the bank-loaning-is-not-limited-by-reserve-requirements issue.
I may very well be wrong, but as I understand it MMT says that inflation will not become a factor until one runs into the limit on the amount of real things which can be bought. At that point you have more and more money chasing a limited amount of real goods and you get inflation. So at that point does the government have to stop adding money to the economy? And then what? After that, what does the government use to spend without increasing inflation? An amount equal to taxes?
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GaryD,
You make good points, but we are so far away from the limit you describe, it’s like resisting spaceflight because we don’t have Pluto-ready housing.
I should mention however, that Monetary Sovereignty differs from MMT regarding inflation. MMT would stop spending or increase taxes, which I believe would cause a recession. MS would increase interest rates to increase demand for money, but MMT says that actually would cause inflation by increasing costs.
Neither side has good proof, though when I look at a graph comparing interest rates and inflation, I less support for the MMT side, and do see what one would expect from the Fed’s actions:
http://research.stlouisfed.org/fredgraph.png?g=2tP
When the Fed predicts inflation, it begins to raise rates, after which inflation falls. The correspondence isn’t clear however, because for the past 50 years, inflation has been caused mostly by oil prices. So the statistical “noise” is quite loud.
Rodger Malcolm Mitchell
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My question is: How much additional government spending can occur without unacceptable inflation. I believe that you agree that unlimited spending with zero taxes would cause inflation. Therefore, I believe that debt hawks would want to know the amount of additional government spending/tax reduction that would not cause inflation. Is it 5 trillion, 10, 20, 100?
You say that all T-securities could be paid off and it would not cause inflation – so that’s about 10 trillion (money that would then be active in the economy instead of sitting at the Fed). I understand that you show that inflation relates to raw material prices (oil) and not government spending, but 10 trillion is about 2/3 of the annual US GDP. Has loosing that much currency ever been tried (or anything close to that) here or elsewhere to show evidence that it didn’t cause inflation?
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Just noticed your question:
The answer is: There is no answer. Too many variables. Instead, keep increasing deficit spending, to stimulate the economy, until inflation begins to exceed the Fed’s target. Then, increase interest rates. If that proves insufficient, decrease deficit spending.
In short, feed the starving patient until we feel he may become too heavy; then cut back on his food. Don’t cut his food while he still is starving.
Re. ” . . . active in the economy instead of sitting at the Fed.” That’s not entirely true. To buy T-securities, the “lender’s” checking account is debited and his T-security account is credited. A T-security account is very much like a savings account.
So, to pay off a T-security, the lender’s quasi “savings account” is debited and his checking account is credited. I do not think the act of debiting savings accounts and crediting checking accounts has been shown to be inflationary.
Rodger Malcolm Mitchell
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My understanding (which may be flawed, I know) is that the government can spend until it starts to compete with other buyers for the same product, at which time inflation kicks in. With almost 10% official unemployment, there’s a LOT of unused capacity. Look at it this way, the government is ALREADY stimulating the economy to the tune of over $1 trillion per year (the deficit), and we STILL have record low interest rates.
Regarding treasuries, the difference between them and cash is the same as the difference between your savings account (which earns interest) and your checking account (which does not). When you move money from you savings account, you haven’t spent it, right? The same thing is if the Fed tells China that we’ve debited your savings account AT THE FED and credited your checking account AT THE FED. People like treasuries because the market for them is very liquid, i.e. you can convert them to cash very easily. So the two are already very similar.
Anyone can feel free to correct me if I’m full of it!
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Regarding what would happen if all treasuries were paid off:
I understand the analogy of transferring money from the Fed’s savings to the Fed’s checking account. However, the Federal Reserve Bank is not a commercial bank. Would buyers of T-Securities be content to leave their money in the “Fed Checking account”?
Or would they invest the money elsewhere, like a commercial bank, municipal bonds, stocks, commodities? I suggest that they would invest the money elsewhere – thus having a impact on the real economy.
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Ooops, after I wrote that I saw that he DID reply. Good for you!
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Great, you’ve engaged them. I’ve found that most debt-hawks learned economics based on outdated gold-standard theories & their first main objection is fear of inflation due to ‘increasing the money supply’
I’ve found that by telling them that they’re IGNORING THE OTHER HALF OF THE EQUATION ..Law of Supply & Demand, which is a 2-sided equation:
If you increase the supply/production of goods & services, you can increase the money supply without increasing inflation
And that businesses respond to increased demand(increased spending from increased money supply) by increasing production/supply to meet increased demand so as to increase sales as well as increase marketshare (as long as there is competition & there is no supply shock like oil/OPEC prices jacking up oil prices 400% as in the 1970s)
If they invoke Weimar Germany/hyperinflation, it’s due to myth that Germany printed money to inflate it’s way out of debt (all this is researched & backed up by official history, google or I can provide links
:
Allies only accepted gold or hard goods for payment of reparations. Germany couldn’t hyperinflate it’s way out even if it wanted to.
What caused hyperinflation was France & Belgium invading Germany’s industrial sector Ruhr Valley to confiscate steel, coal, etc as well as kicking out 85,000 German families, etc.
To protest, Germany’s workers went on strike for 8+ months, dropping production of Germany’s coal, steel,refineries,etc & other industrial goods by 90%, creating a huge shortage of energy(coal was the source of electricity/power generation), steel, fuel, causing huge price hikes on all goods
To compound that inflation from shortages, Germany’s gov paid for 8 months the striking workers & 85,000 displaced families by just printing money
Thus, you had a huge 90% shortage exacerbated by money printing without the normal rise in production since the workers were on strike
Similary, Zimbabwe’s production dropped by 30% to 57% depending on sector, creating huge shortages, due to it’s years of civil war & Mugabe kicking out all the whites(who were the managers, professionals, owners, & other production professionals) & installing cronies & peasants who had no education in running a factory or farm for maximum production, resulting in huge shortages while Mugabe wasted/spent 30%+ of his gov’s budget on security/military & buying foreign-made weapons (ie, money flowing out of his country)
–see MMT economist Bill Mitchell’s blog for more info on this http://bilbo.EconomicOutlook.net
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Also, as Gary noted, you have to have taxes as an offsetting factor to keep the value of the dollar up as well as curtail any inflation (because advocating no taxes is too extreme & conservatives will automatically dismiss your views –small baby steps if you want them to consider your views)
ie, “gov deficit spending adds money to the private sector to fund hiring & spending (instead of ‘crowding it out’ since gov doens’t have to share from a limited supply of gold or borrow from the private sector to fund it’s spending) while gov taxes remove excess money from the private sector” is easier to swallow .. to paraphrase Warren Mosler “deficit spending creates money while taxation uncreates it”
Also, you have to show them how MMT is correct in that deficit spending ADDs to bank reserves & that gov deficit spending actually drives interest rates down to zero (or whatever the central bank sets the discount rate/overnight rate to) because banks will compete to lower their interest rates on their overnight interbank rate as they try to loan out their excess reserves since reserves pay no interest (unless the central bank pays interest on reserves as they do now at 0.25%, thus, banks will always loan out reserves to other banks as long as the overnight rate is over 0.25% or whatever the rate is set by the central bank)
The above is the killer reason that contradicts & kills the outdated conservative gold-standard economic theories that says that gov deficit spending drives up interest rates –and the recent record low interest rates despite lowered credit ratings prove how those old outdated theories are wrong whereas MMT is correct
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Also, to allay inflation fears, point out as historical fact that the GAO shows the Federal Reserve created $13-16 TRILLION dollars circa 2008 to bailout the banks (yet there’s “no money” for Social Security, Medicare, or jobs programs, etc? it’s bankers protecting bankers) thanks to Ron Paul forcing the Fed Reserve to show their books ‘Federal Reserve audit’ yet there was no hyperinflation :
http://www.scribd.com/doc/60625832/GAO-Fed-Investigation
“We have now learned that the Federal Reserve lent $16 trillion to both domestic and overseas financial institutions during the height of the financial crisis!
Let me rephrase that while the number sinks in – $16,000,000,000,000.
In less than three years.
From Dec. 1, 2007 – July 21, 2010, the Federal Reserve “created reserves in the banking system” (Bernanke slang for printing money) that exceeded not only the entire U.S. GDP for a year, but also the entire U.S. national debt that’s accumulated over the past 224 years!
More than $3 trillion dollars were lent to overseas financial institutions in numerous countries, including in the U.K., Germany, and France.
In addition, we learned just how much the big banks who contributed heavily to the crisis were rewarded – including nearly $8 trillion to banks like Citigroup, Morgan Stanley, Merill Lynch, and Bank of America. ”
More discussion at political forum: http://uspoutland.yuku.com/topic/1643/Federal-Reserve-Audit?page=1#.ToN_0s2tW3E
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Reasoning as a would-be business person in a competitive market, I would say that pushing aggregate demand beyond capacity will cause inflation.
Because, if my factory is at 60% capacity and I would receive orders that would put it at 80% capacity I would not rise prices with fear that I would lose business to my competitors – actually I would have an incentive to lower prices, as the bigger the capacity utilization, the smaller the unit costs.
Sure if the factory is at 100% – and I’m confident that all my competitors’ factories are also at 100% – I would charge greater prices on incoming orders. That, in a sense, may result from higher costs – over-utilization of capacity or investment in capacity’s enlargement.
Raising interest rates puts pressure on consumption and investment, therefore aggregate demand is reduced – if the raised rates are not recycled in purchases, which should be the case. In this condition, an increase in interest rates is functionally analogous to an increase in taxes, it squeezes money out of the productive economy. So, maybe both MS and MMT are right. It is only the case that increasing taxes was never experimented, given the spurious distinction between monetary and fiscal policy.
On the subject of letters… It is called cognitive dissonance, or logical dissonance, the human capacity to hold two mutually irreconcilable views… 🙂 It just shows that humans often become irrational in defending valuation (emotional) or ethical choices…
In such a situation I would suggest that no chance of convincing an opponent exists unless there is a possibility that s/he will change the valuation choice… No amount of logical reasoning or evidence will do the trick…
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Rodger,
I’m really enjoying this exchange. One thing I never see mentioned about our “borrowing” is how do we borrow money that doesn’t exist yet?
For example, after WWII the M2 money supply was about $250 Billion. How did we borrow from $250 Billion and end up at $9.5 Trillion (plus another $4 Trillion held by foreign entities.) Talk about pulling up bootstraps.
Obviously some entity had to create the money first before it could be “loaned” to the government.
Wonder who that mysterious entity is?
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PaulJ
Federal deficit spending creates dollars by marking up checking accounts. That is the source of dollars.
Rodger Malcolm Mitchell
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That’s what I was getting at. Hopefully there will be further communication with your friends at the Tribune. They obviously aren’t aware of that.
I guess my point was that there is a huge disconnect in the conventional wisdom logic of how money is created. They don’t seem to get that you can’t “borrow” that which doesn’t yet exist, just like the govt can’t tax until money is spent into the economy. Government debt has no real meaning in a fiat monetary system like ours.
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Rodger,
You also didn’t volunteer Fed Monetary Policy as it relates the the debt. The Fed offers a place for people to store their dollars risk free and get interest, as opposed to earning no interest in their checking accounts. This system allows them to target and maintain interest rates by draining and adding reserves as needed.
I’m sure there is a method to your madness. Besides, being pen pals with the Trib is likely more fun than rooting for the Cubs.
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Well, I guess the facts became too much for the Tribune editors to bear. I wrote to them:
And his response:
Thus does the Chicago Tribune, not by accident but by choice, elect to remain in ignorance about the single most important topic in the world: The economy.
Rodger Malcolm Mitchell
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Keep it up Rodger someone is bound to listen, I really think at some point this is going to catch on with people. You never know when though just gotta keep on keeping on.
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eventually , I think, they will have to change their views. Especially as all that neo-liberal economics has wrought comes tumbling down. Even then they will listen to the wrong people.
I see George Soros is funding the development of economic modeling software by Steve Keen who’s thinking is similar to MMT/Monetary Sovereignty but ignores exogenous money. Should be interesting.
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Still trying to penetrate the cement, on 9/29 I wrote to Dold and Hunter:
And on 9/30/11, I followed up with:
And later that day I wrote:
I continue to be amazed that a newspaper, which dedicates itself to uncovering the truth, is so resistant even to hearing, much less learning, the truth.
Rodger Malcolm Mitchell
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Have you tried financial publications, like WSJ or Barron’s or the Economist or IBD?
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I had tried WSJ numerous times to no effect — also many other papers. Then got lazy. Probably a good idea to resume.
I don’t know of a single major publication that routinely (i.e. more than once per decade), publishes articles decrying the popular economic wisdom.
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kardon,
” . . . the government can spend until it starts to compete with other buyers for the same product,”
Actually, the only product with a sufficiently broad inflationary effect is oil. All other products are mere pin pricks in the overall economy. Inflation is related to oil prices, which are monopoly priced.
Your comment of Treasuries is correct. Count yourself as one in a thousand who understands this.
Rodger Malcolm Mitchell
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Steve,
You are correct. Just as the purchase of T-securities has an impact on the economy (reduces liquidity), so does their redemption (increases liquidity).
Since we already have seen that federal deficit spending (which does more than merely increase liquidity; it increases money supply) has not been related to inflation, what impact do you think the redemption of T-securities would cause?
Rodger Malcolm Mitchell
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Although you show that federal deficit spending does not cause inflation, each dollar that is deficit spent requires a corresponding dollar to be deposited at the Fed to be used to purchase a T-Security (for sake of discussion, lets assume that the Treasury or Fed don’t just create half of those). Those dollars are unable to be used for other purposes.
The way I see it, because of the requirement to have T-securities in equal amounts to deficit spending, the beneficial extra money is just sucked back into the Fed – thus defeating the stimulus goal.
Put another way – when helicopter Ben drops a crate of dough on my front lawn and I lock it in my garage instead of spending it – there is no stimulus effect. Same thing as if the government deficit spends but I take the money and deposit it into the Fed to buy T-securities.
Right / Wrong?
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Wrong. Think about what you’re saying. Deficit spending has no effect on the economy??! In essence, you are saying that buying a T-bill is identical with paying taxes.
While the Fed buys only a minuscule amount of T-bills, even that isn’t the point. A T-security account is almost exactly like a bank savings account. When you buy a T-bill, the government debits your bank checking account and credits your T-bill account (at the Federal Reserve Bank).
Do you feel transferring dollars from your checking account to your savings account defeats the stimulus goal? Do you feel poorer after that transfer?
Rodger Malcolm Mitchell
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I guess what I am saying is that – when I deposit money into a checking / savings account, that money can at least be used for something (meeting reserve requirements if nothing else). And I have the option of withdrawing the money and spending it. Not only does money at the Fed have zero velocity, but it doesn’t cause the bank fulfill it’s reserve requirements, thus lowering interest rates and causing others to do something else with their money.
What is money deposited at the Fed used for? I do see it as the same as paying taxes. True that you will get it back some day, but the treasury will re-auction more at the same time, for a net of zero money returned to the economy. The difference between my bank and the Fed in this respect, is that I can withdraw my money without someone else having to deposit more (my money will have velocity without someone else’s needing to sit idle).
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Steve,
You said, “. . . when I deposit money into a checking / savings account. . . “. But that’s not what we’re talking about. We’re talking about transferring money from a checking account to a savings account.
Anyway, are you are saying that federal deficit spending has no effect on the economy?
Rodger Malcolm Mitchell
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I am not necessarily saying that federal deficit spending has no effect. I am trying to get my head around this issue.
What I am referring to is not the transfer from money at the Fed into a T-security. I get it that that has no effect.
What I am talking about is having money at the Fed at all. The government can spend all it wants, but if that money needs to be offset with deposits into the Fed, what’s the point? What if the government wanted to spend 10 trillion tomorrow. There would need to be 10 trillion more t-securities issues. Is there that much on deposit at the fed now? If not, then it would need to be deposited, thus negating the stimulating effect.
If t-securities were not issued, would the same amount be kept at the Fed, or would it be kept/spent somewhere else? I posit that it would be somewhere else.
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Simplified the transaction works something like this I think:
1. The Fed creates new reserves in the banking system (out of thin air) and the banks buy T-Bills from the Treasury (which are created out of thin air just like dollars) using the reserves (dollars). This has the effect of adding net financial assets to the economy because the Treasury spends the money by paying for the budget deficit.
2. The Treasury also issues T-Bills to private bond holders but in my view this is not necessary – it is a convenience (figure out how many savings accounts insured for $250,000 Apple Computer would need to open to safely save their $80 Billion stash of cash). In this case they swap an asset for an asset, both of which were created by the Fed, but Treasuries are a risk-free asset that also pays interest. Wow!!
3. When the bond reaches maturity this operation will be reversed and new Treasuries issued per item #1 to replace them. The magic of fiat.
4. The National Debt™ is not really debt in the normal sense because the liability is held by the Fed and the Fed can’t run out of money, just like dollars are IOU’s to the taxpayer with the liability held by the Fed.
The interest on this “debt” is paid to the economy through deficit spending, so it is a net gain to the economy.
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Steve,
There is a difference between the Fed and the Federal Reserve Bank. Money deposited at the Federal Reserve Bank is like money deposited at your corner bank. There also is a difference between foreign dollars and domestic dollars.
You are correct that T-securities sold to domestic buyers reduces liquidity, thereby reducing (though not eliminating) the positive effect of federal spending. T-securities sold to China have no such reduction.
A T-security is similar to a bank CD. It’s just a less liquid form of money. Creating and selling T-securities doesn’t “lock up” money, it just reduces liquidity. People still can spend T-securities the same way the spend all types of money — by changing the name of the holder.
Rodger Malcolm Mitchell
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Steve,
I think I see your confusion.
The federal deficit is the difference between taxes and spending. The deficit is not reduced by “borrowing” (T-securities). The deficit is an annual measure. It returns to $0 at the start of each year.
Federal “debt” is separate from deficits. “Dept” is a debit to a “lender’s” checking account and a credit to the same lender’s T-security account. When the T-security matures the checking account is credited and the T-security account is debited. This is a closed operation that does not affect federal deficits.
Perhaps, the key to answering your question is to separate the deficit process from the T-security process.
Rodger Malcolm Mitchell
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“When the T-security matures the checking account is credited and the T-security account is debited. This is a closed operation that does not affect federal deficits.”
But because we are operating a yearly deficit, isn’t a new security issued for each that matures – i.e. the money to pay the redeemer comes from the funds collected to issue another?
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Steve,
No, there is no “money to pay.” It has nothing to do with deficits, which are related to spending and taxes. When a T-security matures, the holder’s checking account is credited and his T-security account is debited. It’s a simple transfer of his dollars from his left-hand pocket to his right-hand pocket.
As I said, it’s a closed system, not related to deficits, which also are a closed system. Even without deficit spending, the government could issue and close T-securities.
Rodger Malcolm Mitchell
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