Tuesday, July 26, 2011

The myth of U.S. debt

Excellent article by Chris Cook in the Asia Times, which explodes the myth of U.S. debt. Yes, that's right, the MYTH. It's what I've written about here many times.

A very secret agent
By Chris Cook

There is a charade playing out in Washington at the moment in respect of the completely meaningless "debt ceiling" which the US maintains as a relic from the days of the gold standard.

We are told that at the US Treasury's account at the Federal Reserve Bank there will soon be no more taxpayers' dollars, and therefore the Fed will soon be unable to make any more payments or issue any more cheques on behalf of the Treasury. The money has run out.

This is nonsense. It is a myth, and moreover it is a myth that Federal Reserve chairman Ben Bernanke exploded in his recent testimony to a US congressional committee. Read more.


Anonymous said...

This was picked up in the FT blog as well

Matt Franko said...

"finance for the creation of a new generation of US infrastructure; the transition to a low carbon future which the US can, and should, be leading;"

Sounds good!!!!

Tom Hickey said...
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Anti said...

What's really, really unfortunate is that it's not just a myth from the MMT perspective, which I don't favor and frankly don't even understand, but also just from a conventional macro one.

Debt isn't a problem now and there's no debt crisis on the visible horizon. This is all manufactured, perhaps at least in part to consciously allow the wealthy to steal the many decades of payroll taxes the middle class and poor have paid into a system the Republicans and even Obama seem desperate to destroy.

We should be expanding benefits now, and not raising anyone's taxes. This is a weak economy and people act like they've forgotten how the government's supposed to behave. They're suppose to drive demand any way they responsibly can.

But, this is just part of the larger 30+ year narrative in which the wealthy continue to seize an ever larger percent of national output. Even in an extremely weak job market, this trend continues.

Райчо Марков said...


"But, this is just part of the larger 30+ year narrative in which the wealthy continue to seize an ever larger percent of national output. Even in an extremely weak job market, this trend continues."

The wealthy don't realize that they can take smaller percent of bigger national output and have the same wealthy life style.

SchittReport said...

Dear Mike, SR was all over this topic at least 7 months ago if not more.... You should really create a link on your site to the most informative page regarding economics and finance on YT today:



Seriously, its disconcerting to know that not only average Americans, but "financial commentators" also don't know how our monetary system works.

beowulf said...

Bernanke confirmed the staggeringly simple reality that not a single taxpayers' dollar is actually spent or lent when the Fed follows the Treasury's instructions to credit any account, anywhere, for anything. This is because the Fed is creating - as an agent on behalf of the Treasury - an exact "look-alike" of a Treasury IOU or promissory note. ie the Fed is simply pledging the Treasury's credit by creating tax credits.

Excellent way to frame it. The public debt is simply the total of tax credits outstanding.
If there were no taxes, the tax credits would be worthless and if there were no tax credits it'd be impossible to pay your taxes (or anything else).

Anonymous said...

Why does MMT continue to distort the meaning of that Bernanke quote?

He wasn't talking about treasury spending, or he would have said taxpayer dollars are definitely involved - because there is no net reserve creation from that.

He was talking about central bank asset swaps under QE, where taxes obviously aren't involved. Entirely different.

Yet you twist the meaning into something that he had no intention of applying it to. It's a complete fabrication by MMT.

Ryan Harris said...
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Tom Hickey said...

Anonymous, when the Congress appropriates expenditure then the relevant department of the executive branch makes the deal and the Treasury pays the bill by directing its bank the Fed to credit the appropriate bank accounts. The Fed does this and simultaneously debits the Treasury's account at the Fed. While the operations are different between fiscal and monetary, the keyboard is the same and the spreadsheet doesn't know the difference between monetary and fiscal.

Tom Hickey said...

Tomato Basil, the leading indicators have not yet turned up and are now wobbly. That does not presage a recovery.


Ryan Harris said...

I deleted my comment. I think you are right but I hope you are wrong! :P

SchittReport said...

dear mike, SR was all over this topic at least 7 months ago... you should really put a link on your site to the most informative page regarding economics and finance on YT :)



seriously, its disconcerting to know that not only average americans but also "financial commentators" don't know how our monetary system works.

Anonymous said...

"the keyboard is the same and the spreadsheet doesn't know the difference between monetary and fiscal"

You're missing the point.

Bernanke's point was that taxpayers' dollars weren't involved when the Fed buys assets.

But they are involved for fiscal transfers from non government to government.

He obviously wasn't referring to fiscal transfers when he said he creates reserves to buy assets, not taxpayer dollars.

But the Fed does access taxpayer dollars when it moves money from reserves into TGA.

It's a completely different operation.

One uses the reserve creating power of the Fed. The other uses the clearing operation responsibility of the Fed.

It's a completely different banking function. And its quite slippery for MMT to confuse the two.

mike norman said...

SR: Will do!

Tom Hickey said...

Anonymous, I disagree. The operational reality is the same. The difference is in political restraints. The Fed has fewer political restraints than the Treasury, and if the right has its way in Congress, this too will change. But it a fiat system, all that happens is marking up different accounts on the same spread sheet. The political restriction is that the Treasury cannot overdraft their account whereas commercial banks can. Does that make any sense? It is purely political.

The taxes that add to the balance in the Treasury account don't "pay for" anything. Their meaning is that they reduce the purchasing power and savings of the private sector. Taxes don't fund anything, Issuance does, and issuance is currency issuance. Issuance of tsys is not operationally necessary. In fact, under the present system, government expenditure is not funded by interest-free currency issuance but rather by interes-bearing tsys issuance, a complete rip-off since, being operationally unnecessary, it is a essentially a subsidy for the rentiers and as soon as the public wakes up to this the game will be over.

Manasia said...

My coworkers are talking about the budget, and clearly do not understand US Debt.

widmerpool said...

Have a question. Enjoyed the article but can't wrap my mind around this paragraph:

"Private banks create these tax credits, and then charge borrowers for the use of them. The key point is that the tax credits are not the loan: they are the things that are loaned, or the object of the loans. Deposits of privately created tax credits are simply accounting entries in the banking system, which are distinguishable from the tax credits created by the Fed only by the set of books in which they are recorded."

I just can't unpack that. I don't get the "key point". I think this goes to "loans create deposits" which I also struggle with.

widmerpool said...
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Calgacus said...

Widmerpool: You are right - this is "loans create deposits". As usual, it is so simple it repels the mind.

What happens when you get a loan? On Jan. 1, 2011, you write on a piece of paper: I owe U, Mr. Bank, $110 on Jan. 1, 2012. In exchange, Mr. Bank gives you $100 in Mr. Bank's bank deposits = banknotes = check drawn on Mr. Bank = debt/IOU of Mr. Bank.

We are just exchanging IOUs. Aside from the time value, why would you give a $110 IOU to get only a $100 IOU? Because Mr. Bank's IOUs =deposits at his bank = Mr. Bank's debt to you are not just debt, they are MONEY that you can use for anything.

The only thing they are not good for is Mr. Bank's "personal" payments to the government. But the government does take checks from you which are drawn on Mr. Bank, drawn on "deposits of privately created tax credits". This means they are just as good as government money = government IOUs = cash and if you want, you can exchange the bank deposit for cash anywhere.

Anonymous said...

"Anonymous, I disagree."

The issue was not whether you yourself are able to compress all of MMT into two paragraphs.

It was what Bernanke actually said, and MMT's dishonest and out of context hijacking of that quote, ubiquitously, for its own purpose.