This article is excerpted from my new book Banking on the People: Democratizing Money in the Digital Age, available in paperback June 1.
The U.S. federal debt has more than doubled since the 2008 financial crisis, shooting up from $9.4 trillion in mid-2008 to over $22 trillion in April 2019. The debt is never paid off. The government just keeps paying the interest on it, and interest rates are rising.
In 2018, the Fed announced plans to raise rates by 2020 to “normal” levels — a fed funds target of 3.375 percent — and to sell about $1.5 trillion in federal securities at the rate of $50 billion monthly, further growing the mountain of federal debt on the market. When the Fed holds government securities, it returns the interest to the government after deducting its costs; but the private buyers of these securities will be pocketing the interest, adding to the taxpayers’ bill.
In fact it is the interest, not the debt itself, that is the problem with a burgeoning federal debt. The principal just gets rolled over from year to year. But the interest must be paid to private bondholders annually by the taxpayers and constitutes one of the biggest items in the federal budget. Currently the Fed’s plans for “quantitative tightening” are on hold; but assuming it follows through with them, projections are that by 2027 U.S. taxpayers will owe $1 trillion annually just in interest on the federal debt. That is enough to fund President Donald Trump’s trillion-dollar infrastructure plan every year, and it is a direct transfer of wealth from the middle class to the wealthy investors holding most of the bonds.
Where will this money come from? Crippling taxes, wholesale privatization of public assets, and elimination of social services will not be sufficient to cover the bill.
Bondholder Debt Is Unnecessary
The irony is that the United States does not need to carry a debt to bondholders at all. It has been financially sovereign ever since President Franklin D. Roosevelt took the dollar off the gold standard domestically in 1933. This was recognized by Beardsley Ruml, Chairman of the Federal Reserve Bank of New York, in a 1945 presentation before the American Bar Association titled “Taxes for Revenue Are Obsolete.”
“The necessity for government to tax in order to maintain both its independence and its solvency is true for state and local governments,” he said, “but it is not true for a national government.” The government was now at liberty to spend as needed to meet its budget, drawing on credit issued by its own central bank. It could do this until price inflation indicated a weakened purchasing power of the currency.
Then, and only then, would the government need to levy taxes — not to fund the budget but to counteract inflation by contracting the money supply. The principal purpose of taxes, said Ruml, was “the maintenance of a dollar which has stable purchasing power over the years. Sometimes this purpose is stated as ‘the avoidance of inflation.’”
The government could be funded without taxes by drawing on credit from its own central bank; and since there was no longer a need for gold to cover the loan, the central bank would not have to borrow. It could just create the money on its books. This insight is a basic tenet of Modern Monetary Theory: the government does not need to borrow or tax, at least until prices are driven up. It can just create the money it needs. The government could create money by issuing it directly; or by borrowing it directly from the central bank, which would create the money on its books; or by taking a perpetual overdraft on the Treasury’s account at the central bank, which would have the same effect.
The “Power Revolution” — Transferring the “Money Power” to the Banks
The Treasury could do that in theory, but some laws would need to be changed. Currently the federal government is not allowed to borrow directly from the Fed and is required to have the money in its account before spending it. After the dollar went off the gold standard in 1933, Congress could have had the Fed just print money and lend it to the government, cutting the banks out. But Wall Street lobbied for an amendment to the Federal Reserve Act, forbidding the Fed to buy bonds directly from the Treasury as it had done in the past.
The Treasury can borrow from itself by transferring money from “intragovernmental accounts” — Social Security and other trust funds that are under the auspices of the Treasury and have a surplus – but these funds do not include the Federal Reserve, which can lend to the government only by buying federal securities from bond dealers. The Fed is considered independent of the government. Its website states, “The Federal Reserve’s holdings of Treasury securities are categorized as ‘held by the public,’ because they are not in government accounts.”
According to Marriner Eccles, chairman of the Federal Reserve from 1934 to 1948, the prohibition against allowing the government to borrow directly from its own central bank was written into the Banking Act of 1935 at the behest of those bond dealers that have an exclusive right to purchase directly from the Fed. A historical review on the website of the New York Federal Reserve quotes Eccles as stating, “I think the real reasons for writing the prohibition into the [Banking Act] … can be traced to certain Government bond dealers who quite naturally had their eyes on business that might be lost to them if direct purchasing were permitted.”
The government was required to sell bonds through Wall Street middlemen, which the Fed could buy only through “open market operations” – purchases on the private bond market. Open market operations are conducted by the Federal Open Market Committee (FOMC), which meets behind closed doors and is dominated by private banker interests. The FOMC has no obligation to buy the government’s debt and generally does so only when it serves the purposes of the Fed and the banks.
Rep. Wright Patman, Chairman of the House Committee on Banking and Currency from 1963 to 1975, called the official sanctioning of the Federal Open Market Committee in the banking laws of 1933 and 1935 “the power revolution” — the transfer of the “money power” to the banks. Patman said, “The ‘open market’ is in reality a tightly closed market.” Only a selected few bond dealers were entitled to bid on the bonds the Treasury made available for auction each week. The practical effect, he said, was to take money from the taxpayer and give it to these dealers.
Feeding Off the Real Economy
That massive Wall Street subsidy was the subject of testimony by Eccles to the House Committee on Banking and Currency on March 3-5, 1947. Patman asked Eccles, “Now, since 1935, in order for the Federal Reserve banks to buy Government bonds, they had to go through a middleman, is that correct?” Eccles replied in the affirmative. Patman then launched into a prophetic warning, stating, “I am opposed to the United States Government, which possesses the sovereign and exclusive privilege of creating money, paying private bankers for the use of its own money. … I insist it is absolutely wrong for this committee to permit this condition to continue and saddle the taxpayers of this Nation with a burden of debt that they will not be able to liquidate in a hundred years or two hundred years.”
The truth of that statement is painfully evident today, when we have a $22 trillion debt that cannot possibly be repaid. The government just keeps rolling it over and paying the interest to banks and bondholders, feeding the “financialized” economy in which money makes money without producing new goods and services. The financialized economy has become a parasite feeding off the real economy, driving producers and workers further and further into debt.
In the 1960s, Patman attempted to have the Fed nationalized. The effort failed, but his committee did succeed in forcing the central bank to return its profits to the Treasury after deducting its costs. The prohibition against direct lending by the central bank to the government, however, remains in force. The money power is still with the FOMC and the banks.
A Model We Can No Longer Afford
Today, the debt-growth model has reached its limits, as even the Bank for International Settlements, the “central bankers’ bank” in Switzerland, acknowledges. In its June 2016 annual report, the BIS said that debt levels were too high, productivity growth was too low, and the room for policy maneuver was too narrow. “The global economy cannot afford to rely any longer on the debt-fueled growth model that has brought it to the current juncture,” the BIS warned.
But the solutions it proposed would continue the austerity policies long imposed on countries that cannot pay their debts. It prescribed “prudential, fiscal and, above all, structural policies” — “structural readjustment.” That means privatizing public assets, slashing services, and raising taxes, choking off the very productivity needed to pay the nations’ debts. That approach has repeatedly been tried and has failed, as witnessed for example in the devastated economy of Greece.
Meanwhile, according to Minneapolis Fed president Neel Kashkari, financial regulation since 2008 has reduced the chances of another government bailout only modestly, from 84 percent to 67 percent. That means there is still a 67 percent chance of another major systemwide crisis, and this one could be worse than the last. The biggest banks are bigger, local banks are fewer, and global debt levels are higher. The economy has farther to fall. The regulators’ models are obsolete, aimed at a form of “old-fashioned banking” that has long since been abandoned.
We need a new model, one designed to serve the needs of the public and the economy rather than to maximize shareholder profits at public expense.
_____________________
An earlier version of this article was published in Truthout.org. Ellen Brown is an attorney, founder of the Public Banking Institute, and author of thirteen books including Web of Debt and The Public Bank Solution. Her latest book is Banking on the People: Democratizing Money in the Digital Age, published by the Democracy Collaborative. She also co-hosts a radio program on PRN.FM called “It’s Our Money.” Her 300+ blog articles are posted at EllenBrown.com.
Filed under: Ellen Brown Articles/Commentary | Tagged: federal debt, Federal Reserve, modern monetary theory, public banking |
WEB OF DEBT BLOG 
[…] The Bankers’ “Power Revolution”: How the Government Got Shackled by Debt […]
The quote by Wright Patman seems to include some gibberish and need correction.
Fixed, thanks.
If the economy has idle resources the government can access them without taxation; if the economy is operating near full capacity the government can get resources only by transferring them from private use. That requires either borrowing or taxation, which can either be open, explicit taxation or by inflation, an implicit tax that reduces the value of private sector assets
The problem with using money creation to finance government spending is the practical one that it is not clear when to stop. If the indicator that you are overdoing it is inflation, you have the problem of lags in the system. By the time that inflation becomes a serious nuisance it is too late; it will continue and accelerate. The government will then have to damp demand by raising taxes above expenditure. The US political system does not find it easy to alter either spending or taxes quickly and easily, certainly not in a restrictive direction. This approach is a recipe for instability. It is not unreasonable for the government to finance current spending from taxation and to finance investment by issuing both interest and non-interest bearing liabilities. It can determine the balance by targeting the real interest rate, i.e. the bond rate minus the actual and expected rate of inflation.
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By the way, I doubt if the seriously wealthy hold many government bonds. They are held overwhelmingly by institutions like pension funds and insurance funds. The wealthy probably pay more tax than they receive in interest payments from the US government. The middle-class tax payer is financing payments into his pension or insurance fund. The qualification to that is that many government bonds are held abroad by foreign institutions so the US taxpayer is paying them. Foreign purchases of US bonds though are financing the US trade deficit. If foreigners could not buy US bonds they would buy up other US assets or sell the dollar.
You make good points, but the government NEVER pays off the debt, and it has no intention of paying it off. Congress will spend what it needs to, and if it doesn’t have the money it will drive up the debt. The question is only whether we need to be paying interest on it. Whether inflation will result depends on where the money goes. If it goes into productive pursuits so that supply increases along with demand, prices will remain stable. The Chinese money supply has increased by a factor of 8 in 20 years, and the Japanese money supply has increased by 50% in the same period, and neither is experiencing consumer price inflation. Both are using the new money productively.
In the book I just finished, I argued that we could replace the income tax with a financial transaction tax of 0.1% on all financial trades and generate substantially more tax than the government is getting now, plenty to cover its needs. Since virtually all transactions are now digital, the tax could be set by computer program to fluctuate according to inflation, acting as a direct thermostat on the economy, preventing overheating and runaway inflation.
“but the government NEVER pays off the debt, and it has no intention of paying it off. Congress will spend what it needs to, and if it doesn’t have the money it will drive up the debt.”
The reason why most governments won’t pay the debt, although they can, is because they are under the clutches of the INTERNATIONAL PRIVATE BANKING CARTEL partly controlled by the CITY OF LONDON. In addition to the solutions you propose, getting rid of the PRIVATE Central Banks(designed to privatize profits and socialize the debt) should be part of the overall solution.
And you miss the point that even non-interest-bearing currency is debt, and appears on the books of the Fed as such. That debt is like bank debt, not household debt. Bank debt is your account (your asset). The interest paid on treasury debt inures to the benefit of the people with, in effect, that savings account.
Everyone is down on inflation. It helps the debtors, and induces people to avoid the paradox of thrift–you had better spend that money before its value diminishes further. Both help the economy and are to be preferred to the alternative–deflation–that produces Great Depressions. Preventing inflation is a bizarre mission, especially since most inflation is caused not by financial transactions, but by shortages. The inflation of the ’70s occurred because the Arabs used the “oil weapon” to protest the Yom Kippur war. Zimbabwe had a food shortage, and the French took over Germany’s Ruhr after World War I, leaving Germany short of the industrial goods that region produced. The shortages are essential, the money printing not so much.
We should not design our lives around accounting concepts, IMHO. I also disagree with your characterizing inflation as helpful. In a debt-based money system the debts must be paid to maintain credibility. Inflation is necessary to “provision” the debtors with sufficient money to pay their debts. When the goal is to maintain debt with compounding interest, then monetary inflation becomes an absolute necessity. Those who receive the added money will likely see it as a benefit, but overall it is a sign that the hopeless debt situation has worsened.
Indeed, Ellen, the Universal Exchange Tax of 0.1% (or less) on all financial transactions would be the ideal tax. With an estimated tax base of $5 quadrillion, that would yield up to $5 trillion in revenue. And even if transaction volumes were to somehow drop by half, that would still be a whopping $2.5 trillion.
http://universalexchangetax.com/
It would indeed act like a thermostat to prevent overheating, automatically taking more liquidity out of the economy when it is too “hot”, and less when it is relatively “cool”. It would also discourage excessive speculation and money laundering as well, and would be highly progressive in practice.
Of course, taxes are not the only way to prevent and cure inflation due to overheating. The Fed can do so simply by raising interest rates (which increases the value of the currency by increasing the reward for holding dollars) and/or draining and sterilizing excess bank reserves (which reduces the available money supply at a given time), even if there were no federal taxes at all. Rodger Malcolm Mitchell would argue that is in fact a better method. Also, raising the reserve ratio would do so as well. But a financial transactions tax like the UET would be a good fail-safe regardless.
The classic canard from the government about debt is, “It’s not a problem because we owe it to ourselves!” That’s how it was 100 years ago, prior to the unconstitutional Federal Reserve Act, but not since. For a century, we’ve been paying interest on money borrowed out of thin air from private, for-profit bankers. If that sounds nuts, you understand it perfectly.
The so-called “national debt” is really nothing more than a collection of savings accounts in the form of T-securities. To pay it requires nothing more than a keystroke to transfer the existing funds already in them. A Monetarily Sovereign government can never default on a debt denominated in its own currency, since it is the issuer of that currency and by definition has infinite money. But never, ever borrow in a foreign currency, something the USA fortunately has never been stupid or desperate enough to do, and most likely never will since the US dollar is the most trusted currency in the world and can always create more of it.
We badly need new language for this: the word “debt” is used for two different things, causing much confusion.
The first part of the article, including the discussion of MMT, is very clear and shows are problem: the growing difficulty in paying the INTEREST on the debt, and its role in increasing inequality. Repaying the debt (avoiding default) is not an issue if the debt is in your own currency. Rolling it over can be a problem if it increases the interest payments, or if it is done with newly-created money which can be inflationary.
But then we get to Greece, which has debt in Euros, a “foreign” currency it does not control. Other countries (e.g. Argentina) have similar issues. Those countries need to devote their real resources to repayment of PRINCIPAL, as well as interest, and they cannot print money (Greece); or they can, but the effect is nullified by the currency falling (Argentina) so they have to print more and more money to buy the same amount of foreign currency, leading to hyperinflation.
Re the confusion, it is not clear whether the BIS warning against “debt-fueled growth” refers to the first or the second kind of debt; my guess is the second.
Holy Shmackerel! You (correctly) note that taxes do not provision the money creating government(s), they manage inflation (and make the money valuable), but then you say something like this: “The truth of that statement is painfully evident today, when we have a $22 trillion debt that cannot possibly be repaid.”
WTF! Of course that debt can be repaid! Sovereign, fiat money creators (with a floating exchange rate) can no more run out of money than the scorekeeper at the ballgame can run out of points!
Here’s one example of possible repayment: The treasury issues 60 trillion-dollar coins and deposits them at the Fed. Presto! The previous liability is now more than balanced by an asset! Would there be any inflation? Obviously not. The only thing that might start inflation is if government spent the money. This “repayment” amounts to a cipher, really.
You also do not appear to understand that National ‘Debt’ is like bank debt. If you have a bank account, that’s your asset, but to the bank, it’s a liability (i.e. debt). When you write a check, you’re assigning a portion of the bank’s debt to the payee. Currency is simply checks made out to “cash” in fixed amounts. The dollars issued appear as a liability on the Fed’s books, too.
Now imagine a mob of depositors marching down to their bank to demand it reduce its debt (i.e. the size of their accounts). Not very sensible, is it? That’s the kind of meme you promote in telling people to worry about National ‘Debt’ — again, it’s nothing like household debt. It’s like bank debt…it’s the dollar financial assets of the economy, or the citizens’ savings.
A bigger problem is who gets the money, not whether the government will “run out” (the excuse for austerity). The government will run out of dollars when the bureau of weights and measures runs out of inches.
Please…get some clarity here.
It is true that the national debt can be repaid but the INTERNATIONAL BANKERS behind the Central Banks won’t allow this to happen. Unfortunately, All the corrupt, criminal, and unscrupulous players of the financial casino (high finance clique, central banks, banks, debt states) will emerge from the game as the clear winners. The losers, on the other hand, are the taxpayers of this and the next generation, the owners of medium-sized businesses, employees, savers and pensioners. And once again: outrageous profits are privatized, but all the debt consequences are socialized.
Sure but paying with trillion dollar coins is the same as just rolling over the debt from year to year without paying it at all. It’s just a perceptual difference. The only thing that hurts the taxpayers is the interest. If the debt is owed interest free to the Fed, which never intends to collect, it’s the same as just printing the money. That’s pretty much what the Chinese do with their non-performing loans. They get away with it because they avoid the perception that they’re “just printing money.”
Even the interest need not hurt the taxpayers, since the federal government simply creates the money on an ad hoc basis everytime they pay a creditor. That is true for interest payments on the “debt” (i.e. those numerous T-securities that are really just savings accounts) as well as all other federal spending–taxes don’t actually pay for it. Only due to the arcane and archaic rules left over from when we actually had the now-defunct gold standard is there any link between federal spending, taxes, and the “national debt”. But if they want to reduce that big, scary number, they can make it disappear with a few keystrokes. The trillion-dollar coin is just a giant functional workaround (due to a loophole that allows unlimited denominations of platinum coins) until Congress officially changes the aforementioned rules and decouples taxes, spending, and “debt”.
The two co-founders on MMT, Warren Mosler and Bill Mitchell have been advocating an end to governemnt debt for several years. Milton Friedman also advocated a “zero government debt” regime.
Geezum, Ralph.
MMT ? What’s the theory?
Mosler is a banker-libertarian who wants both larger deficits and lower taxes ….. AND in his earlier (2009) Policy Positions, an end to public borrowing. So, just like Grover. And not the Muppet.
Sooooooo, HTF do we fund the government?
Keystroking ? Do you by any chance believe that government creates new money BY spending?
This is exactly what progressives Kucinich and Conyers proposed in 2011? But, like with Greenbacks, we need to change our money laws to do that ?
https://www.congress.gov/bill/112th-congress/house-bill/2990/text
MMT objects. No need for upsetting the Bankers Status Quo.
All you need is a friggin MMT lens.
It’s true that Bill Mitchell has long espoused against public debt as a form of corporate socialism, but I don’t hear him crying ‘foul’ whenever Kelton and Wray say just borrow til the cows come home.(inflation) Because, you know, public debt isn’t really a debt. LOL
MMT’s a zero. If we had an MMT President and Congress tomorrow, then how do we pay for the Green New Deal? All I hear from Kelton is ‘borrow’ – even well beyond that multi-Trillion Dollar CBO forecast.
MMT was.
For OUR Public Money System Common.
Most of the conversation on inflation involves money supply or employment and wages. Actually most inflation is the result of interest layed down like sediment a little at a time until it results in a huge deposit of shale.
There is what I call the Hershey Bar Standard. In 1965 minimum wage in CA was $1.50/hr. An hours work could buy 30 Hershey Bars or 2 first run movie tickets plus popcorn or 6 gals. of gas or 10 tokens on NY Transit. 800 hrs could buy a new VW bug. 40 hrs could pay for a years fees at Cal. Today minimum wage would have to be at least $25-$30/hr and in the case of Cal $300/hr.This has happened in spite of dramatic increases in productivity a portion of which is supposed to be passed on to labor.
The case of Cal is different because the supply has been purposely kept down and the overall funding has been reduced, so the elite are happy to pay the increased fees for their children knowing the competion from the 90% is less. When Reagan was asked why he reduced funding to higher education he responded “Why should I support those who oppose me?” A Public Bank of California would be able to fund construction of new campuses. At the least the newer generations deserve that and the increased productivity would help support aging generations.
Interest is a dangerous tool for the parasitic private banksters. If Judas had invested one silver piece, say a dime, at 5% interest and it was rolled over down the generations doubling every 14 years it would now be $1 with 43 zeros behind it. Millions of times the money supply of the world. If silver had accumulated at that rate it would fill the volume of the Earth many times over.
Obviously borrowing at interest cannot continue. Public Banking and creation of money without interest is a solution. If it is done properly so that it is allowed by the parasitic banksters a violent revolution just might be avoided.
You miss the upside of inflation… Not a big surprise since conventional, neoclassical economics ignores money, credit and debt (and land). The benefit of the creeping inflation you describe is that it induces people to spend, since the money “expires”…or at least its value diminishes. It also makes life easier on debtors since they can pay back with that diminished-value money.
The alternative–deflation–cruelly punishes debtors and makes for Great Depressions.
I’d also add that housing is one of the prime culprits in producing inflation, and house price inflation is only possible when a fixed quantity of land meets an elastic credit system. Since most of the price of real estate, particularly housing, is financed, the price increases inure to the benefit of the financial sector.
Margrit Kennedy did work that showed that hidden interest accounted for 40-50% of every dollar or Euro spent in Germany. That is an astounding real world assessment of the inflationary power of interest. Germany you may recall started at ground zero as all debt was canceled after WWII. The US economy has been accumulating debt at least since the end of the Civil War. The hidden cost of interest to prices in the US must be well over 50%.
The price of housing is not the result of supply and demand. The supply has been artificially suppressed. Banksters determine what they are willing to lend and thus the price. They puposely lent to risky borrowers knowing full well that many would fail and then they could foreclose (steal) the property and then rent it back into the market thus enslaving the 99%. In the 1800s the banksters on occasion actually printed that plan. They are much wiser and quieter now else there might be a revolution as Henry Ford warned about.
People don’t spend more when prices go up. They spend less, because their money doesn’t go as far.
Yep. As many a recovering Austrian gold-bug would lament, “Deflation *sounded* like a good idea at the time”. Because on paper it does. Who doesn’t want falling prices? But then, aggregate demand for goods and services drops when consumers decide to wait for prices to keep falling, dragging down the economy even further in a vicious cycle and downward spiral…
I remember 5 cent Mounds bars that were bigger than the $2 version today.
I believe the chocolate industry is pretty much a cartel, with Hershey, Mars, and Nestle being the controlling actors. Does the Hershey Bar Standard take monopoly pricing into account? I agree that compound interest is dangerous and trying to support such debt is eventually impossible (as in now). The public has been supporting an aristocracy for generations and is now much more poor for it. Public banks are one way to make public wealth serve the public.
Right. I think collusion and cartels predominate, in banking too. Is there competition for our deposits resulting in paying us decent interest? No– collusion, the opposite of competition, keeps the interest rates low so the banks get to use our deposit money virtually for free. Without competition there is no “free market”, only rule by capitalists.
I am still trying to get my head around this whole thing! I have read, cursorially, the piece on Modern Monetary Theory in Wikipedia and then have gone on to the bibliography. In the bibliography and criticism’s there are comments by both Paul Krugman and Warren Buffett et al that they have fundamental disagreements with Stephanie Kelton, Bill Mitchell et all who are the proponents of MMT. Then, I perceive that Krugman wants mathematical or otherwise proof that the theory will work! To that end, the phrase crowding out versus crowding in comes up. The difference is hard for me to conceptualize. Also vertical vs horizontal transactions which seem to be at the heart of Krugman’s disagreements. Any Answers? Or do we have to try it?
I appreciate the call for a new model, but the implication that MMT is such a model is unfortunate. There are reform models that are not mentioned. This article ignores the needs of democracy and how concentrated power operates. The theoretical doctrines of MMT are wholly inadequate to address this vital issue. Wright Patman had more insight in the 1960’s than MMT will ever have. There was a proposal by Denis Kucinich in Congress, called the NEED Act, which would place the money power squarely with Congress, following the Constitution. The federal debt would stop growing and be reduced over time. Banks would lose the power to create money. The money supply would be managed to prevent inflation. Unlimited money without public control and democratic accountability will worsen inequality and further empower the financial elites. The parasites do not simply collect interest. They manipulate the entire society by deciding which activities are funded and who is funded.
Right, the NEED Act exists as proof MMT is fraud. MMT says government should just spend the money into existence which the NEED Act would allow Congress to do, changing the law so they can, but MMT does not support it becasue they do not support changing from a private money system issuing money as debt for profit to a public system that issues money as a permanently circulating public asset for the public good, which is what Greenbacks were and why all the progressives and Coxey’s Army were clamoring for them. MMT distributes ‘confusury’; economic double-speak in defense of usury. Their mission seems to be to suppress Monetary Reform and dominate the dialogue. Galbraith was right. “The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. ” This is why it is only independent researchers who know about it, no school or university teaches monetary science.
If the US has a lower deficit, interest rates would go negative. Germany can borrow at negative rates up to 10yr now. The better govt finances are in shape, the lower interest rates can be.
If interest rates on govt bonds go negative, interest rates on quality bonds and mortgages might follow suit. That could be ‘the end of usury’.
See also:
http://www.naturalmoney.org/endofusury.html
I agree with PCR regarding negative interest rates:
“Neoliberal economists in service to the financial sector have created a rationale for why interest rates can be negative in the face of massive debt and money creation and a slew of troubled financial instruments from corporate junk bonds to sovereign debt. The rational is that there is too much saving: The excess of savings over investment forces down interest rates. The negative interest rates will discourage people from saving and encourage them to spend, because the price of consumption in terms of foregone future income from saving is zero. It even pays to consume, because saving costs more than it earns.
Economists argue this even though the Federal Reserve reported that a majority of Americans are so low on savings that they cannot raise $400 without selling personal possessions.
That economists would concoct such an absurd explanation for negative interest rates, an explanation obviously contradicted by empirical evidence, shows that economists are now prostitutes just like the media. The economists are lying in support of a Federal Reserve policy that benefits a handful of mega-banks at the expense of the rest of the world.
The absence of integrity in Western institutions and politicized professions is proof that Western civilization has declined into total decadence just as Jacques Barzun said.”
https://www.globalresearch.ca/free-financial-markets-are-a-hoax/5451963
The core of the matter, as Ellen has well defined it: We’ve no intention or capability to ever pay off the $22T-and growing national debt, let alone the $15-16T or so that’s held by the public. (And yes, it’s all about the interest, don’t you know.) So let’s monetize it. The public portion. Slowly. At the rate of say $200B annually. Pay off that amount of maturing bonds annually instead of rolling them over. So we’re looking at a 60-80 year program. Bond payoffs paid directly by the Treasury, with its new internal public bank.
As we go about the slow monetization, we will, at least for some years to come, be running current deficits that results, of course, in new debt. But this new debt will be different: The Treasury, with its new public bank, will print these funds directly. No Fed involvement in federal government borrowing, no issuing new interest-bearing government bonds. No new interest obligations, period. Just issue the funds as needed. Note of caution here: Our $20T+ economy can very likely accommodate the $200B monetization, but it’s unlikely to absorb a new $T each year without trouble. So we’ll need a transition period while Congress whittles down the annual deficits. (Don’t laugh; more on this below.) Perhaps to deal with the new deficits Treasury prints $200B or so directly and sells bonds for the rest. So now we’re inventing maybe $400B total annually. Likely still very doable, absorbable without lighting an inflation fire. We’ve lots of data capability now that we can monitor things better than folks like, say, Arthur Burns could have hoped to do in his day, the 1970s.
OK, now about Congress. The problem is that there are no consequences for deficits. Absurdly, there’s incentives in the wrong direction: Free Stuff gets votes, gets re-elections. So we make some incentives. (Agree; the money printing programs described above is the easy part. It’ll be a tough hoe-job to do this next part.)
Here’s the deal. We set up a sliding scale where the bigger the deficit in a given year, the more members of the House are barred from running in the next election. Divide the House members into deciles following each election. By seniority. The 1st decile would be the most senior. If the deficit is under $100B, no change, no re-election limitations. Then, consider the following table:
Deficit $B Deciles prohibited from the next election
Between 100 and 200 6th
200 – 300 6th and 7th
300 – 400 3rd, 5th, and 7th
400 – 500 2nd, 4th, and 6th
Over 500 1st, 3rd, 5th, and 7th
I’m showing this left column in dollar amounts for simplification. The actual law should be in percent of GDP, or possibly numbers with inflation adjustments. Of course, a transition period will be required; say, 5-8 years?
Further, this would have to be a Constitutional amendment, else Congress would change such a law as they go. And we’d not really want all this tabular detail in the Constitution. So we’ll need to verbalize this scheme better, or one like it. (Suggestions welcome.)
Over the next six or so decades, the federal government is weaned of its public debt. The Fed remains in business, but it and its subservient banking system is transitioned to serving the commercial financial needs of our economy. The reaping of taxpayer-paid interest goes away. Except, of course, for the servicing of any state and local needs that aren’t provided by similar state or local public banks.
There needs be a hard caveat that the Treasury’s bank not service the needs of states or any entity other than our federal government. The dispersal of our public banking system will minimize the potential for any mischief by the Treasury.
Too radical? I think the idea of paying ever increasing interest to the huge benefit of the banking community is much more radical – to everyone but them, of course.
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Ellen, I think that both you and Rodger Malcolm Mitchell are correct, albeit in different ways.
Interes rates are, of course, a razor-sharp, double-edged sword. But they are not nearly as toxic as MMT makes them out to be, when done properly. Monetary Sovereignty (MS) believes that interest rates are a better tool for fighting inflation than taxes, while MMT considers interest to be practically blasphemy, relying instead on taxes. And MS, with some nuance, seems to be closer to the truth in that regard, as long as the *creation* of money itself is not tied to such interest, when the federal government (the Treasury, with Congressional authorization) spends money into existence (as they already do) more so than the FERAL Reserve lending it into existence. And the so-called National Debt is really just a collection of T-securities, which are essentially glorified savings accounts much like CDs, the money inside not touched but simply returned to the holder at maturity.
My recommendation? Decouple “deficit” spending from the national debt, and keep interest rates low until inflation exceeds 3% or so, and only then raise such rates. As long as there is enough “deficit” spending, higher interest rates will not kill the economy but will quash inflation rather quickly. But cutting “deficit” spending reduces the growth of the money supply if not the money supply itself, which will kill the economy if cut far enough.
And just like that, the universe did not explode.
The federal public debt is of course really a non-problem, as it is really not “debt” but morw like a collection of savings accounts whose contents can be easily returned to their holders with a few keystrokes. That is because our federal government is Monetarily Sovereign, and thus by definition has infinite money. Private-sector debt, however, is the real elephant in the room, as is state and local government debt, both being monetarily non-sovereign and unable to just keystroke the money into existence. At this point, we need a debt jubilee to save the economy.
[…] government to have the ability to simply print money into existence, for free—some critical legal changes are needed: 1) the prohibition Congress passed in 1935 ending the practice of the Treasury […]
[…] to have the ability to simply print money into existence, for free—some critical legal changes are needed: 1) the prohibition Congress passed in 1935 ending the practice of the Treasury […]
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