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 Asymptosis.
Also see the related topic of Platinum Coin Seniorage.
The Platinum Coin Option
By Matthew Yglesias on Jul 28, 2011 at 5:35 pm
I keep hesitating to write about this because it sounds insane, but Jack Balkin’s a professor at Yale Law School so I’ll let him say it:
Sovereign governments such as the United States can print new money. However, there’s a statutory limit to the amount of paper currency that can be in circulation at any one time. Ironically, there’s no similar limit on the amount of coinage. A little-known statute gives the secretary of the Treasury the authority to issue platinum coins in any denomination. So some commentators have suggested that the Treasury create two $1 trillion coins, deposit them in its account in the Federal Reserve and write checks on the proceeds.
http://thinkprogress.org/yglesias/2011/07/28/282471/the-platinum-coin-option/?mobile=nc
An alternative approach would be to just stop issuing debt moving forward, and leave the existing stuff there.
All of this gets to something I have addressed in blog posts and comments here and there: Public Debt as a percentage of GDP is on its own, i.e. without all kinds of context, a mostly meaningless figure. This is particularly so if we don’t immediately deduct both Intragovernmental Holdings AND holdings by the Fed. Indeed I would go beyond that and deduct those proportions of legally mandated reserves of Fed member banks held in Treasuries.
That is Public Debt is distorted directly by Intragovernmental Holdings and even Debt Held by the Public (Public Debt minus Intragovernmental Holdings) is distorted by those holdings which on net will never actually be redeemed (member bank reserves) or whose earnings are actually rebated to the Treasury (the Fed’s $1.5 trillion).
Instead the number that matters is one that combines net redemptions and actual debt service paid in cash and equivalents. And the latter is of course not just determined by outstanding holdings by non-US sovereigns and what we could call the public public (i.e. people and institutions) but also by the average interest rate across all maturities.
What percentage of productivity is going to pure debt rentiers (or in that now outdated term ‘coupon clippers’) and so in that sense a near dead weight on the total enterprise (here the U.S. productive economy)? Because to the extent that is going down as a result of lower interest rates across the board with a further drag by the Fed buying higher interest existing long bonds by selling new zero bound short bonds the overall debt burden is reduced even though the gross (in both senses) measure of nominal debt or debt/GDP is increasing.
In Clinton’s best year the General Fund ran an actual largish surplus even as Social Security ran a much larger one. Yet Public Debt still managed to go up. And the bookkeeping reason it did is less important than the fact that the overall fiscal position of the U.S. was improving. No matter what this top line metric seemed to show.
Back in 2005 (a time that the world wide housing crash driven recession was invisible to just about everyone not named Roubini or Baker) it was perfectly plausible that Social Security’s financials would more closely resemble those of the Low Cost Alternative than the standard Intermediate Cost model. Indeed if you just plugged in Bush Admin supply side driven projections such a result was practically inevitable. With the result that Social Security projected to actually be over-funded. A good thing on the whole. On the other hand it equally would have meant Intragovernmental Holdings for SS alone at the end of the 75 year actuarial period of $100 trillion. Every penny of which would officially score as Public Debt. Even as Unfunded Liability was in negative figures (i.e. perma-surplus).
Those top line numbers do funny things is all I am saying.