Qs and As

July 23rd, 2011 at 3:39 pm

Q: Re the debt ceiling, why can’t we just print the money we need to meet our obligations?

A: In the first pieces I wrote on this mess, I noted that when a government’s debts are in that gov’t’s currency, you could theoretically “monetize the debt,” i.e., print your way out of it.  But I thought it was a bad idea and still think so.

[Allow to add proudly that my 9-yo kid suggested this same idea the other day…I still don’t like it, but am very proud of her for coming up with it on her own.  She’s been on a field trip to the mint where they print sheets of currency, so I guess she just put two and two (raised to the Nth power) together.]

You’d be paying back debtors in inflated dollars so interest rates would have to soar on new borrowing, and I doubt the risk premium associated with this idea would be temporary.  Such a move could increase the cost of borrowing for many years to come and thus do long-term, fundamental damage to the potential growth of our economy.

Dean Baker and his frequent colleague Ron Paul (!?) agree that we could get some ceiling headroom it the Fed would just retire some of the debt it owes the government—burn the IOUs (T-bills) it holds back from when it was buying them up hand over fist as part of quantitative easing.

Definitely clever, but a) the Fed wouldn’t do it, and b) I’m not sure it’s legal.  Someone should check, but I believe the Fed’s charter prohibits the destruction of its assets, even when they’re just kind of weaved out of thin air (e.g., as opposed to say bonds owed to Social Security).

There’s no easy way out of this…oh wait…Congress could legislate the higher ceiling as they’ve done over 70 times since the 60s with no freakin’ big deal—including President Reagan 18 freakin’ times.

Q: Aside from whether the Recovery Act was large enough, could it have been composed of more effective measures?

A: Well, the process by which such bills become laws always means that in getting the votes you need, you can’t let the best be the enemy of the good.  That said, we should have:

–kept the damn AMT patch, around $80 billion, out of the thing.  Would have had to been passed anyway and provided zero fiscal boost, so just took up valuable space.

–less tax cuts, more direct jobs.  I’ve stressed this elsewhere—the tax cuts that went to working folks, like Making Work Pay, surely helped, but even the well-targeted cuts are indirect job creation measures.  You hope the extra money is spent, not used to deleverage, and doesn’t leak out on imports.  But you can’t be sure.

State fiscal relief was more direct and had a solid record in job preservation—which you can see fading fast as Recovery Act funds dry up—so I might have moved some spending out of tax cuts and into more state fisc.

I would like to have tried more direct employment ideas, like FAST!, and in fact, we had something like that in the original bill but a Senator whose vote we needed said ‘no.’

That’s what I mean by politics.

–maybe tried to get mortgage cramdown on primary residences in the legislation, but this probably would have made an already very heavy political lift impossibly heavier.

Q: Re this idea of Fannie and Freddie keeping their foreclosed stock off the housing market (and on rental market), why is the gov’t not being a landlord a useful policy wrinkle?

A: Two reasons.  First, by federal gov’t, I think we both mean Fan and Fred here, since a) they own these foreclosed properties, and b) “they” is 80% us.  They would of course contract out the landlord function, as they’re already contracting out upkeep of these properties.

What’s gained by keeping the properties on their books?  Maybe once their prices appreciate, Fan and Fred could sell them and make back some losses.

But that could take a long time, and it’s cleaner to turn them over to investors.  Even with the landlording contracted out, it still means that federal gov’t has a new function as overseeing the contractors that Fan and Fred hire to oversee the project.  Feels messy to me with lots of downside risk.

But I don’t feel strongly about it—that’s why I called it a wrinkle.


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9 comments in reply to "Qs and As"

  1. Dan Furlano says:

    Q: Re the debt ceiling, why can’t we just print the money we need to meet our obligations?

    There is no reason why the US cannot print more money to meet both our current or future obligations.

    I find it amusing that people like yourself “don’t think its a good idea” but yet cannot actually prove why it is a problem.

    For 4 years he heard from the inflation terrorists, then the bond terrorists, and now it just the debt terrorists becasue basically they have been wrong about all things monetary.

    The current debt situation is the EFFECT of the financial crisis and not the cause. Remember things were pretty good even though the debt was almost a trillion dollars before the crash.

    The issue we face today are unemployment and ideology. And unfortunately we cannot fix the former without first fixing the latter.

    So I would suggest actually learning about how the monetary system does work before making a statement that is contrary to the only existing solution that won’t cause wide spread suffering and 20 years to fix.

    As a wise man once said “Because we think we can be the next Greece, we continue to turn ourselves into the next Japan.”

  2. Stephen Edie says:


    What functional difference is there between:

    (A) Treasury issuing $1 trillion in bonds simultaneous to the Fed purchasing $1 trillion in equivalent bonds from the open market.


    (B) Treasury minting $1 trillion in currency.

    As far as I can see, the only differences are (1) the final account balances of the Treasury and Fed (hence, operation A may not be legally/politically feasible at the moment) and (2) in operation A the bonds are transferred between Treasury and Fed indirectly through the market rather than directly.

    As a consequence of (2), operation A may re-distribute holding of assets, that is if the bond buyers and bond sellers aren’t the same people. But really, the distinction seems fairly unimportant.

    Also theoretically speaking, neither operation (A) nor (B) should be inflationary so long as we’re in a liquidity trap, right? To me the biggest problem with operation (B) is that it would confuse the heck out of people (rational as they are) and no one knows how the market will respond. Hmm.

  3. Russ Abbott says:

    But you didn’t answer the question of why we *couldn’t* just print the money. It may be a bad idea, but is it really a worse idea than destroying the world economy by doing nothing?

    Presumably we won’t really do nothing, but the question is not whether printing the money is a good idea but whether printing the money is one of the legal options.

    It now seems to me that it’s not a possible option. The Treasury doesn’t really create money out of thin air. It’s the Fed that creates money. As I now understand it–although I may be wrong–the only way we could print our way out of the crisis is to do what has been suggested elsewhere: issue one or more $1 trillion dollar coins and sell it to the Fed, which will print the money to buy it from Treasury. That’s almost the same, but not quite.

  4. davesnyd says:

    Please excuse my economic ignorance– but I recall the monetary supply being the amount of physical money divided by the reserve ratio. Why can’t we print money (to retire debt) and raise the reserve ratio?

    I guess the answer is– because then banks couldn’t make as many (supposedly economically stimulating) loans. But I thought that they weren’t making as many loans– that their cash was sitting around or being spent on T-bills or being burned in their Hawaiian pig roasts or something (and that’s why the economy wasn’t recovering)?

  5. GaryD says:

    Is there any empirical evidence as to why they would be inflated dollars? If you go to the St. Louis Fed site and compare the data for M1 and the PPI (data series M1 and PPIACO) for 1975 to the present there does not appear to be any correlation since the early 80’s. Sure, they both trend up, but the money supply increases at a much faster rate than inflation and the PPI does not match M1’s gyrations. From 1980 to 1990 M1 more than doubled while the PPI increased by less than 40%. And in the current situation with massive under-utilization, high unemployment, and almost zero interest rates, would increasing the money supply really increase inflation, which is at very low levels right now?

  6. Cat says:

    Re: Printing money to retire debt.

    I’m confused. Isn’t the Treasury in effect printing money every time it issues debt and the Fed buys it? The Treasury never really pays anyone back in my opinion since the Treasure has been rolling over trillion’s of dollars of debt for decades.

    Maybe there is some model out there that would show how inflationary it would be if we just paid back ourselves in printed money, but I have a hard time believing it would be more catastrophic then a complete default or giving into the GOP demands.

    I don’t think we should do print the money mainly for political reasons though. I think most people forgot how insane the GOP acts when a Democrat is president. There is a double standard that everyone forgets until the GOP threatens to do everyone real harm in order to score political points.

  7. John says:

    Re your answer to your first question.


    I just first read about this idea and so-called MMT when this was posted. You seem to be a QTM sort of guy. I’m not an economist, but the MMT folks, which include Jamie Galbraith, have me convinced at least for now.

    Re your third question, and the post to which it applies. As a socialist who doesn’t believe the private sector necessarily does anything at all better than the public sector (from decades of experience with the private sector), I just want to note my disagreement with you. Bureaucracy is bureaucracy, whether public or private; the difference is purpose. Profit is not always the best purpose. In this case, profit-seeking is what causes capitalist messes. Your line of reasoning would suggest, e.g., that health care is better left in the hands of private insurers. Sounds like something a Republican would believe. Otherwise, it seems to me we have public infrastructure for this, via HUD, if not also FHA. I’d like to see public ownership of foreclosed properties, but I do like the rental idea, and correct me if I’m wrong, it’s a big part of what HUD has always done.

  8. Jim Edwards says:

    I have a question maybe you could address in a future Q&A.

    The GDP has sharply rebounded, but unemployment is over 9%. The housing market is still in a slump. Manufacturing is only up slightly. Companies are sitting on tons of cash because there is no demand. So my question is simple. What the #$&**@@ are we making that costs so much, requires no workers and produces no goods or services? Paper Tigers?

    Thank you,

  9. Frank M says:

    This is an excellent analysis, although these are not new facts (“Republican Leaders Voted for U.S. Debt Drivers”)
    The quote I’m interested in is:
    “Non-defense discretionary spending also grew by 24 percent during the first two years of the Obama administration….” My questions for Jared or someone else who can analyze the budget numbers are: does this mean 12% ave. each year, how does this compare to Bush budgets, how much of this was countercyclical spending like unemployment.