The New Republic

The risk from not raising the debt ceiling is printing money, hence inflation, not debt default. It is literally impossible for the US to default because it prints the money with which it pays its debts and its bills. With inflation or the threat thereof, nominal interest rates would rise, perhaps sharply, and bonds would decline in value. Holders of outstanding bonds, including lots of rich Americans, would take the hit in the event the debt ceiling is not raised both from decline in market value and depreciation of the dollars with which they are paid. This is the reason why it will be the Republicans will not push this button. If the Republicans could figure out a way to do this without screwing the wealthy, you can be sure they would, with relish.

- roidubouloi

May 3, 2011 at 9:28am

I do see the difference, but it's not very convincing, and whatever else you may want to argue, does not reflect positively on Obama and the other Democrats - not one of whom actually believed the limit should not be raised. Whatever else it is, voting against something you believe is necessary and right to score cheap points is far from honorable. The real difference, to my mind is somewhat different. If Congress passes a budget - the spending side of the equation - then they are obligated to fund that spending. Period. Since the Republicans drove the budget bargain they did, and agreed to pass it on their own recognizance, they have no ethical choice at this point but to fund it - and since they've ruled out revenue enhancement, they are left with borrowing. They took ownership of the spending, they can't duck the financing.

- IowaBeauty

May 3, 2011 at 10:08am

A more important difference is that in 2006 we were running deficits in a "full employment" economy because Congress had enacted massive tax cuts heavily tilted toward top-bracket tax payers. Now we a running large deficits because revenues have been devastated by a great recession. We wouldn't be in the situation of having to raise the debt ceiling at this point if we hadn't engaged in the flagrant fiscal irresponsibility that Senator Obama was protesting. And now Senator Rubio is proposing something that's orders of magnitude more irresponsible. Marco Rubio is no Barack Obama.

- gurwia

May 3, 2011 at 10:47am

Roi said: "The risk from not raising the debt ceiling is printing money, hence inflation, not debt default. It is literally impossible for the US to default because it prints the money with which it pays its debts and its bills." No Roi, as I understand it the US does not literally print money. Rather, it expands the money supply by borrowing from the Fed, just as banks do. The US uses the borrowing from the Fed to pay its bills, just as the banks use the borrowed money for their business purposes. I think that those borrowings are subject to the debt limit -- tell me if I'm wrong.

- PeteBeck

May 3, 2011 at 11:42am

I see a different difference. You shouldn't cut taxes like the Republicans did prior to 2006 and expect compliance from their opponent on the debt ceiling, but if 41 Senators sign a letter threatening to bring business to a halt if those tax cuts are not extended, they should comply when their opponent seeks to raise the debt ceiling.

- Nusholtz

May 3, 2011 at 11:57am

R. is correct and I believe that he uses the phrase "printing money" metaphorically to cover the various practices of the Fed which expand the quantity of money. More posts like this, r., please. It is intelligent and calm and non-vituperative and it doesn't flatten out complex realities but rather, it explains them.

- liberalref

May 3, 2011 at 12:09pm

"R. is correct and I believe that he uses the phrase "printing money" metaphorically to cover the various practices of the Fed which expand the quantity of money. More posts like this, r., please. It is intelligent and calm and non-vituperative and it doesn't flatten out complex realities but rather, it explains them." Yes the Fed has various ways to expand the money supply. But the expanded money supply is only available to the Treasury to pay the US government's bills if the US government literally borrows the money from the Fed. That borrowing is, I think, subject to the debt limit. If the option of "printing money" were actually available as Roi says, there would be no impending crisis, which all sides acknowledge exists. True, there may be sources of money available to the Treasury other than borrowing, but "printing" -- i.e., creating -- is not one of them.

- PeteBeck

May 3, 2011 at 12:20pm

Someone should tell Rubio that HIS party is the one that abolished the Balanced Budget Amendment that was law back in 00-01. If he's going to be a good party shill, he needs to keep up on his party's actual platform.

- GSpinks

May 3, 2011 at 1:51pm

GSpinks: "Someone should tell Rubio that HIS party is the one that abolished the Balanced Budget Amendment that was law back in 00-01." There was never a Balanced Budget Amendment, at least as a provision of the Constitution that so many keep advocating. There was statutory "PAYGO" for a while, which Republicans did get rid of during the Bush administration and was reinstituted when Democrats retook congressional majorities in 2007. Of course, Congress still had the power to exempt certain actions from pay-go and did so for AMT patches and the 2008 stimulus, plus there were other work-arounds. http://en.wikipedia.org/wiki/PAYGO Still, the point is valid: Democrats, though hardly pure in the matter, have been far better on fiscal responsibility than their Republican counterparts.

- dsimon

May 3, 2011 at 4:17pm

thanks for the correction, dsimon. I was never sure on the particulars of PAYGO, just knowing it was around was good enough for me back then.

- GSpinks

May 3, 2011 at 4:42pm

PeteBeck - actually, creating (or printing) money is the nature of central banking. It is what central banks do that make them different. This is what has to happen to get money into the economy; the great irony is that the government actually creates all of the wealth :) See the opening para on Wikipedia's page on Quantitative easing: "The central bank buys government bonds and other financial assets, with new money that the bank creates electronically" See also the Fed's mortgage backed security purchase program in 2008 & 2009 where it literally created over 1.6 Trillion dollars. This money didn't get added to the deficit, and it's not TARP, the Stimulus or any of the things we hear all about. Magic isn't it?

- Nari224

May 3, 2011 at 5:00pm

Nari224 - I fully understand what you are saying. My only point was that the US Government (Treasury) cannot simply create money for itself to avoid the problem posed by not raising the debt limit. The money is created by the Fed, not the Treasury, and the only way the Treasury obtains it is by by borrowing from the Fed -- which, unless the limit is raised, it will not be able to do in any significant amount. Even if the debt limit is not raised, the Treasury will still have receipts in the form of tax payments, withdrawal of bank deposits, etc., so that much (I have no idea how much) business can be conducted and payments made. The problem is caused by the fact that such a high percentage of the federal budget is currently financed by borrowing. Maybe I was not clear, but in my posts above I referred several times to the government borrowing from the Fed the money created ("printed") by the Fed, which will (unless there is some loophole that no one anywhere has mentioned) have to substantially stop if the debt limit is not raised.

- PeteBeck

May 3, 2011 at 7:40pm

Petebeck - I get what you're saying, but I don't know if there's a need for a loophole. The Fed credits the treasury with the interest in receives from the treasury bonds it sells with the money it's created, so I don't see the problem with crediting the treasury directly. But to be honest, I guess I don't really know - you may be right!

- Nari224

May 3, 2011 at 8:59pm

Plus what gurwia said. Its not like theres any other macro economic differences between 2006 and today. It's clearly the same to raise the debt ceiling at the peak of a massive boom, and to raise it at the bottom of a massive trough.

- Nari224

May 3, 2011 at 9:45pm

Nari224 - Yes, the profits earned by the Federal Reserve go to the Treasury. But despite receiving those profits every year, the Treasury has been borrowing hundreds of billions every year -- last year more than a trillion dollars. The profits (low two digit billion range) are not enough to finance the federal government's excess of expenses over income.

- PeteBeck

May 3, 2011 at 11:23pm

There is absolutely nothing I know of that would prevent the Fed from paying off Treasury bonds at maturity. This is barely distinguishable from its open market operations in which it buys up Treasury bonds. The bondholder gets a credit with a bank. The bank gets a credit with the Fed. The bond is then "owned" by the Fed. Even if we accept the fiction that the bond has not been retired because one arm of the federal government owns the debt issued by another arm, there is no default. As to the financing of the federal government's operations, when you pay the Treasury your taxes, the check is presented to your bank and, I believe, the bank debits your account and credits its account with the Fed. This reduces the bank's reserves, the amount of deposits it has with the Fed. In effect, this transaction pays down the Fed's liability to the bank. I believe that while it sometimes holds deposits with banks, in order not to mess up bank reserve ratios when tax receipts are high by extinguishing their Fed reserves, for the most part payment to the Treasury extinguishes reserves and hence reduces the high-powered money supply. When the Treasury pays a bill, the opposite happens. The claim on the Treasury turns into a claim by a bank on the Fed, an increase in reserves. It is almost certainly the case that the Fed keeps accounts that separate its own balance sheet from the Treasury, and there may be rules or laws that would get in the way. In principle, however, the Fed can just keep monetizing checks that the Treasury writes, no different than monetizing the debt the Treasury issues. Is the Fed prohibited by the debt limit from monetizing checks issued by the Treasury? I don't know. My guess would be that it is not.

- roidubouloi

May 3, 2011 at 11:34pm

I just spent a bit of time perusing Title 31 of the US Code wherein the debt limit resides. This is a fairly arcane subject, but nothing there appears to me to limit the ability of the Treasury to write checks. These do not appear to me to be debts subject to the debt limit, although they are certainly liabilities. If the Treasury can issue them, I think the Fed can likely monetize them. The result is that the money supply increases (not particularly a problem at the moment) rather than that the government defaults or shuts down. Without much research, I am still betting that, with the cooperation of the Fed, the Treasury can pay for amounts appropriated by Congress indefinitely. Then the crisis really hits when the appropriations run out, not when the debt ceiling is reached. I don't think the people who wrote the finance and borrowing provisions of the law ever anticipated this situation and hence did not write so as to prevent the Treasury from writing checks by application of the debt limit. Of course, the impact on public confidence is another matter entirely.

- roidubouloi

May 3, 2011 at 11:59pm

Roi, The answer lies in 12USC355. Under that provision, the Fed is prohibited from directly purchasing bonds from the Treasury. But it is permitted to do so in the bond market. So, to finance the debt the Fed purchases Treasury bonds from banks, giving them the funds to buy more Treasuries to replenish the bonds they sold to the Fed. As a practical matter, the effect is absolutely the same as though the Fed had purchased the bonds directly from the Treasury ... but there is no doubt that the bonds themselves are obligations of the federal government subject to the debt ceiling.

- PeteBeck

May 4, 2011 at 6:49am

But it doesn't need to purchase bonds from the Treasury. My point was that it can retire bonds previously issued by the Treasury, hence no default, and that it can pay checks issued by the Treasury in the ordinary course because they do not appear to come under the debt ceiling. Hence, "printing money" without any newly issued debt.

- roidubouloi

May 4, 2011 at 6:58am

Indeed, as I think about it, I don't see why the Treasury cannot just issue checks to pay maturing debt as it does now. The check is presented to a bank that credits your account. The bank presents to the Fed that credit's the bank's reserve account -- reserves increase. The Fed debits the Treasury account. Is that an increase in public debt? I don't think so. Normally reserves are levered to increase lendable funds. The Fed could even increase the reserve ratio to prevent the additional, unintended reserves from increasing loans. The increase in money supply would be limited to the new reserves themselves. Given the minimal impact of quantitative easing, not even clear we would see much inflation in the short-term although inflation fears might have many of the same effects. The point is not that refusing to raise the debt ceiling is without problems, but I don't believe it leads either to default or inability of government to pay its bills. But the appropriations run out reasonably soon and the Treasury cannot issue checks to pay for something without it having been appropriated. All of which shows the stupidity of even thinking about the debt ceiling apart from the appropriations themselves.

- roidubouloi

May 4, 2011 at 7:12am

Roi, sorry you're absolutely wrong. If the Fed debits the Treasury account in an amount in excess of the Treasury's deposits at the Fed, that is call an overdraft. Which is to say it is called a loan. Which is to say that it is subject to the debt limit. In any event, the Treasury is not allowed to borrow from the Fed -- 12USC355. end of discussion

- PeteBeck

May 4, 2011 at 8:47am

If the Treasury were running out of the ability to make payments, I doubt very much it would default on the debt. Rather, it would apply tax collections first to pay the debt and there would be a partial shutdown of the government. However, the more I think about it, the more it seems to me that that will never happen, even if the debt ceiling is not raised. The Treasury recently announced that "emergency measures" would allow it to keep going until August, which I believe is almost the end of the budget cycle anyway. In light of the foregoing discussion, I am wondering whether there really are any such measures other than issuing Treasury checks that the Fed then pays in the ordinary course. I think they may be making this announcement to condition the market's expectations to the reality that nothing is actually going to happen if the debt ceiling is not increased. They don't want to say out loud that they will, in effect, just be printing money in order not to roil markets. So, they pretend that there are "measures." If the debt ceiling is not raised, things just go on pretty seamlessly and they talk about how well they are coping by using their emergency measures. Before August, they announce that they have bought a little more time because their measures have worked so well and we reach the end of current appropriations. Basically, nothing happens until the budget cycle and appropriations run out, at which point we are back in the government shutdown scenario anyway.

- roidubouloi

May 4, 2011 at 9:06am

I don't think so, Pete. It is less than perfectly clear, but very far from "end of discussion." Read 12 USC 355. It pretty clearly intends to prevent direct loans from the Fed to the Treasury, but allows open market operations in ALL Treasury liabilities, which would include checks. This goes to my point above about the Fed retiring Treasury debt if necessary. In any case, paying a Treasury check may be neither an open market operation nor a purchase from the Treasury, but, if it is either, it is surely the former since the check is acquired from a third party in the open market. Hence, 12 USC 355 is irrelevant. The real question is whether the debt ceiling applies to Treasury checks. It does not appear to me that, as written, it does. Moreover, since the Congress appropriated the money, there is a very strong case that the Treasury is entirely correct to make payments in accordance with the act of Congress. The inaction of a house of Congress cannot be construed to override enacted law. Of course, we don't know the answer because there is no precedent, but I think the better argument, unless there is some relevant provision other than 31 US 3101(b) and 12 USC 255, is that the Treasury can continue to issue checks in the ordinary course for appropriated monies, and the Fed can give reserve credit for them in the ordinary course. That might indeed be end of discussion unless you know of another relevant code provision. I don't.

- roidubouloi

May 4, 2011 at 9:26am

PeteBeck - My example was less about the interest that the Fed earns paying for anything and more to illustrate that the mechanism exists for the Treasury to simply monetise cheques drawn on the Fed. So unless it is otherwise prohibited, I don't see why the Fed can't just create the money as normal and transfer it to the treasury. You normally wouldn't (for obvious reasons) but there's no need for bonds or any other instruments to be involved, or for the Treasury to be "borrowing" from the Fed. It can just be given.

- Nari224

May 4, 2011 at 10:12am

To Roi, Can you find a provision anywhere that says that the Fed is permitted to let Treasury run up huge overdrafts, and can you find a provision that authorizes the Treasury to issue checks when it knows that the checks would bounce without an overdraft at the Fed, and in the alternative where in the law is the Treasury authorized to borrow by running up overdrafts? The purpose of the two statutes is (a) to state the methods available to Treasury to borrow money -- they are explicitly laid out and I don't think overdrafts (which are simply borrowings from the bank), and (b) to prevent the Fed working with Treasury to simply create money by direct transactions between the two. Here's an idea -- send your theory to several dozen responsible officials and writers who are cocerned about the debt crisis and see what reply you get.

- PeteBeck

May 4, 2011 at 10:32am

To Nari 224 If the Fed were to just give money to the Treasury without any consideration (such as bonds, etc.) everyone involved would get to join Bernie Madoff in the big house. You guys just don't get it. The Treasury can only obtain funds by means authorized by law. It is not authorized to coordinate (i.e., conspire) with the Fed to create money out of thin air. If the Fed and Treasury had that ability which they do not now have the dollar would immediately -- two minutes at most -- become a worthless currency.

- PeteBeck

May 4, 2011 at 10:52am

PeteBeck - I am presumably missing something but I did just give two examples where the Fed created over 2 Trillion dollars out of thin air. That money got into the economy without needing to go through the Treasury. Now as I conceded before, perhaps there is some limitation in terms of inventing money and just giving it to the Treasury. However I'm not seeing it. If the Fed sees printing money and giving it to Treasury as required to meet its charter, what's to stop it? The Fed is not part of the Federal Government, and the Treasury doesn't necessarily need to care where the money comes from.

- Nari224

May 4, 2011 at 12:34pm

Pete, When the Treasury makes payments, no matter the reason, it creates money. When the Treasury received payments, whether of taxes or for anything else, money is destroyed. We have for a variety of reasons given the management of the money supply to the Federal Reserve. For that reason, the norm is that when the Treasury makes payments in excess of its receipts, it issues debt for the difference. Because it receives payment for the debt it issues it therefore has no net effect on the money supply. The Fed then does a variety of things, including buying and selling the Treasury debt, to manage the money supply. If the Treasury writes checks for appropriated expenditures, it is creating money. In the ordinary course, I believe that it is the Fed that pays these checks, as the Treasury's banker so to speak. The check is presented to the Fed through a bank and the Fed credits the bank's reserve account. This substitutes the Fed's reserve liability for the Treasury's check liability. Hence, the Treasury is not obtaining funds, it is creating funds. Just as a bank creates funds when it credits your checking account for the proceeds of a loan. Money is created out of thin air, whether by the Treasury on a temporary basis in the course of paying and receiving or by the Fed in the course of paying and receiving. That is just a fact. The debt limit restricts the face amount of debt instruments that the Treasury can have outstanding (which includes those owned by the Fed I believe even thought they are not outstanding in the normal sense that when one buys one's own debt it is retired). The technical question is whether that debt limit applies to checks that the Treasury writes in the ordinary course, as otherwise authorized by law. I don't think it does. Therefore, the Treasury can create money, as it always does by writing checks, without also destroying a like amount by issuing debt. If the Fed keeps honoring the Treasury's checks by giving reserve account credit, which converts the not easily usable Treasury check into an easily usable bank deposit, the functional money supply goes up. That does not instantly render the dollar worthless any more than the Fed buying up a trillion of securities does, even though that creates a trillion of money in circulation. Also, as I have pointed at before, if the Fed were unhappy about the amount of money being created by the Treasury in the course of paying its bills, the Fed currently has an enormously swollen asset portfolio. It can sell off assets to soak up what it regards as excess dollars or, if it sees no signs of excessive inflation, it can just live with the Treasury's addition to the money supply. I don't see any conflict with 12 USC 355 that allows the Fed to buy up Treasury liabilities (which would include checks) and I just don't see that the definitions in the debt limit apply to checks written by the Treasury. It might if a court (ultimately the Supreme Court) saw it that way, but I don't think that is a foregone conclusion at all. I would agree that the likely outcome of printing money to pay bills is increased inflation, the amount of which is hard to predict. But that is the very reason why bondholders will prevent the Republicans from playing this game.

- roidubouloi

May 4, 2011 at 1:20pm

Last reply: 1) When the Fed put out over a trillion in the mortgage backed securities program, it got the securities in return. It didn't just hand money out for free -- it got consideration. 2) When the Treasury issues a check it must be backed by real cash somewhere. It does not just create the money from thin air. Mainly, its sources of cash are tax revenues and borrowing by selling bonds (notes?, I'm not sure). The Fed buys those bonds, as do other central banks around the world, notably China. The Fed does not just hand out money -- it gets something in return. If the debt limit is not raised, the Treasury will still receive tax monies and funds from miscellaneous sources -- it won't be broke. But the taxes, etc. will not be enough to meet current obligations, which is why everyone sees a risk of default. Good luck guys.

- PeteBeck

May 4, 2011 at 1:40pm

Well, Pete, the Federal government's non-interest-bearing liabilities ARE money. When it issues a check, there is nothing with which to back it as the check is just another liability of the Federal government, a slightly different form than a Federal Reserve note. I am pretty sure that the Fed does keep books of account for the Treasury so that it can separate the impact the Treasury is having on the money supply from the Fed's own actions to manage the money supply. But I question whether this is anything more than proper housekeeping, that is whether it is a restriction on the Treasury's ability to write checks or the Fed's ability to give reserve account credit for those checks when they are presented. I do not see that either of the two USC provisions discussed prevent the Treasury from writing checks or the Fed from honoring them. There may be other provisions that we are mutually unaware of. Money is in fact created out of thin air. If too much is created, then inflation results. But thin air is where it comes from, today, tomorrow, and whether the budget is in balance or the debt ceiling is raised.

- roidubouloi

May 4, 2011 at 2:44pm

Indeed Pete, we are unlikely to resolve anything here. However you point 1, while true, would appear irrelevant. That the Fed received a whole bunch of things in return for its Trillions has no bearing on how those Trillions were created. And from thin air they did come, without anyone joining Madoff or the currency becoming valueless. Recall that The USD is the worlds reserve currency; it is not back by anything other than everyone's faith in it. It is by definition nothing but thin air, except that people accept it.

- Nari224

May 4, 2011 at 4:40pm

All of this completely misses the point that raising the debt limit is necessary, because of spending bills negotiated and passed, that cut taxes to reduce the Government's income, and increased spending for two wars which increased the Government's expenditures. And economic policies that resulted in almost 10% unemployment, further reducing taxable income and increasing unemployment payments. The point is, this money has already BEEN OBLIGATED, debated and approved in spending bills. Holding approval of raising the debt limit hostage to FURTHER concessions is trying to take a second bite of the apple. It's like getting a home loan and at closing demanding a more expensive home for the same price.

- AllanL5

May 5, 2011 at 1:56pm