I think we do well to take bites of MMT every now and then.
I don’t know about you, but I am almost thinking that the fog is clearing.
Special thanks to ~Z~ for helping this time.
I am going to quote from a John Carney (senior editor CNBC) article, `Can the treasury department really run out of money`, written at the time of last `debt ceiling` fiasco.
It starts -
The White House insists the U.S. government will not be able to stay current on all of its obligations as of Aug. 2 unless the debt ceiling is raised.
But can the government of the United States ever really run out of money?
The question is a bit more complex than it might seem. In some ways the government really is like every ordinary American family. It has a bank account. Every day the funds in that account grow by the amount of deposits that are made and shrink by the amount of withdrawals.
At the start of the day last Friday, the bank account of the United States government at the Federal Reserve Bank of New York had $83 billion in it. That day the bank received $7 billion in deposits, and saw around $13 billion in withdrawals. So by the end of the day we were down around $6 billion, to $77 billion.
Deposits come from tax receipts, air transport security fees, the postal service, Medicare premiums, and earnings from the Federal Reserve itself. Withdrawals go to pay for everything the government does: federal employee salaries, income tax refunds, NASA, interest on our debt, unemployment insurance benefits and paying defense contracts.
A big source of deposits for the government is usually the government selling bonds. And that’s where the debt ceiling comes in: if the government cannot sell any more bonds because it’s hit the debt ceiling, it won’t have the funds to pay for all those things it makes withdrawals for. That includes social security checks and interest payments on the debt.
So, now we know more about the plumbing of treasury monies.
Later he writes -
In truth, the Obama administration is either fibbing or misunderstanding the financial system. The United States almost certainly enjoys unlimited overdraft protection from the Federal Reserve because there is almost zero chance the Federal Reserve would ever bounce a check written by the U.S. government.
Think about it. The check comes into the Federal Reserve. It looks at the U.S. government balance and discovers that we’re at zero. What does the Federal Reserve do?
I’m pretty sure the Federal Reserve would go ahead and credit the bank submitting the check with the deposit to account for the fund transfer.
Legally, this is a bit murky. It’s not clear that the Federal Reserve would be required to clear a check that exceeded the amount on deposit. It may be within its authority to reject the check.
But rejecting a check written by the government of the United States would probably violate the dual mandate of the Fed to pursue maximum employment and price stability. A U.S. government that bounced checks would just introduce so much chaos the Fed would likely be obligated by its core mandates to credit the check.
So now we get to a position of the Treasury running an overdraft at the Fed ….. Carney continues -
The law is not exactly clear on this point. The debt ceiling applies to the face amount of obligations issued under Chapter 31 of Title 31 of the U.S. Code—basically, Treasury notes and bills and the other standard kinds of government debt—and the “face amount of obligations whose principal and interest are guaranteed by the United States Government.” But overdrafts on the Federal Reserve wouldn’t be Treasurys and they aren’t explicitly guaranteed by the U.S. government.
They’re more like unilateral gifts from the Fed.
And guess what? The Treasury is allowed to accept gifts that “reduce the public debt.” Since these overdraft gifts from the Fed would allow the government to spend without incurring additional debt, it seems very plausible to argue that this kind of extension of U.S. credit would be permitted under the debt ceiling.
Notice that this would do something very odd. It would give the U.S. Treasury Department control of the money supply—something usually credited to the Fed. But by writing checks on an empty bank account, the Treasury would be inflating the money supply. It would be printing money to pay its bills, more or less. Monetizing its obligations, rather than borrowing or taxing to pay them.
In order to keep inflation under control, the Fed would have to intervene to soak up the extra dollars by selling securities.
…… and, at the moment, it has a lot to sell~!