There are three fairly radical ideas floating around the monetary policy world
right now. The first is economist Ellen
Brown's belief that governments should stop borrowing money and simply
create the currency they need, thus bypassing central banks and government
bond markets. The second is Australian economist Steve
Keen's debt jubilee, in which governments give newly-created money
to individuals with which to pay back their debts, in the process resetting
the system with lower leverage. The third is that trillion dollar platinum
coin thing, where Washington just conjures that much money out of thin air
and uses it to evade statutory debt limits -- which looks like an ad hoc mash-up
of the first two ideas.
Until yesterday these proposals seemed like provocative curiosities, fun to
think about but too far off the mainstream radar screen to become official
policy anytime soon. Then reader Bruce C responded to a DollarCollapse
post about the impact of rising interest expense on US and Japanese
All of the Treasury bonds owned by the Fed are at effectively zero interest
because all interest payments from the Treasury to the Fed are returned to
the Treasury. That actually means that total net interest expenses for the
Treasury are currently decreasing with time as the Fed buys about $85 billion
worth of Treasuries each month (which is about 90% of all new issuances).
As long as the Fed is willing to do this the current deficit spending by
the US can continue for a lot longer than most analysts think possible (I
mean for decades).
I don't know if Japan's central bank (the BOJ) reimburses the Japanese Treasury
of its income from government bonds but if it does then there won't be any
need to sell JGBs to outsiders who may demand higher interest rates. For
the same reason explained above the Japanese government could literally enjoy
decreasing debt servicing costs despite rising price inflation. Again, that
can't last forever but I wouldn't hold my breath.
This got me to thinking about the way in which the Fed buying bonds and returning
the interest payments resembles the three proposals above - and wondering if
they're all really the same thing accomplished with different mechanisms. In
the Fed interest repayment, debt Jubilee, and trillion dollar coin strategies,
the money is filtered through various intermediaries, while in the Brownian
scenario it is just created and spent. But in each case, the government creates
and spends money without reference to the bond market or budget deficit or
Is this debt monetization? Or the elimination of the concept of government
At first glance, the flaw in all scenarios in which government takes direct
control over the money supply is that, well, government has control of the
money supply. That would remove the last vestige of external pressure to control
spending and open the floodgates for every vote-buying scheme now festering
in the minds of blue-state senators, neo-con chickenhawks, corporate CEOs,
and public sector unions. Why would a government that doesn't have to answer
to the bond markets ever limit its spending? Taxes, it seems, could be cut
to zero while Medicare and the military rise to infinity, all paid for with
newly-created cash. Steve Keen, to his credit, couples his debt jubilee proposal
with strict new limits on lending and the elimination of fractional reserve
banking. But there's no guarantee that such changes would pass as part of that
Have we already put such a system in place, waiting only for the guys sitting
around the debt ceiling negotiation table to recognize the cornucopia they've
Is this the unexpected last act of the fiat currency experiment, in which
the pretense of outside control falls away and big government really lets fly?
What would happen to the currencies of countries that free themselves from
budgetary restraint and simply buy whatever they want when they want it? Will
the dollar, yen and euro become the last barometers of public faith in government,
or will they be managed via derivatives fueled with Treasury cash?
Is this the Austrians' crack-up boom on a global scale?
And finally, precious metals. How would gold behave in a world of literally
unlimited money creation?
These are brand new, not-fully-formed thoughts and questions, so implications
and answers will have to wait for another day.