A Possible Rule for Government Money Creation

We’ve had some discussions within the MR team on the costs of minting a coin vs. the costs of borrowing. It turns out it’s more expensive for the U.S. government to mint a coin than it is for the the government to borrow money. It sounds crazy, but it’s true.

If the U.S. mints a coin, the coin will be deposited at the Fed. As the Treasury spends this money, the money will find it’s way back to the Fed through the banking system. The Fed pays interest on reserves at .25%

If the U.S. borrows money, the government pays the market interest rate for the specific bills, notes, or bonds it issues when borrowing. Here is the curve:

We can borrow money out to 1 year for cheaper than we can mint the money!

It’s possible this provides us with an easy way to determine if we should be minting/printing money or borrowing it. Here’s the proposed rule: The larger government should do whatever is the most expensive. The Treasury should print money if the Interest on Reserves is higher than the cost of borrowing. The Treasury should issue bonds if Interest on Reserves is lower than the cost of borrowing.

So today we should be printing money, minting coins. The market will tell us when it’s had enough by raising the cost of borrowing higher than the Interest on Reserves.

It’s a handy little rule, something we can use to determine when to mint and when to borrow. Today, we don’t have anything in place at all. Zero.

It’s become clear the division between fiscal and monetary policy isn’t as clear as it once was.

As has become more clear in the last few years, monetary and fiscal policy are closely intertwined. It’s hard to tell where fiscal policy stops and monetary policy starts. When the Fed swaps short-maturity government debt for long-maturity government debt, or purchases mortgage-backed securities with reserves, are those monetary policy actions or fiscal policy actions? You tell me.”

JKH pointed out we are speeding towards a combined monetary and fiscal policy institution in his classic Contingent Institutional Approach. Fiscal and monetary policy are two sides of the same coin (Ha! please forgive me!)

If the Treasury and Central Bank are linked at deep levels of accounting, it follows that monetary and fiscal policy should be linked and used as a combined policy tool.

Right now, we don’t have a combined policy. We just badger the government for spending too much and use the fed to try and clean up the mess after. Here is a rule which might help us just a little bit, and give us just a little more structure on what to do. It doesn’t tell us how large to set the overall budget deficit, like the Strong Economy Rule (formerly the TC Rule) does.


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118 Comments on "A Possible Rule for Government Money Creation"

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4 years 8 months ago

“If the Treasury and Central Bank are linked at deep levels of accounting, it follows that monetary and fiscal policy should be linked and used as a combined policy tool.”

That’s a very interesting comment that’s worth thinking about.

Perhaps the depth of the accounting linkage is telling us something.

Also – its very possible to conceive of a single institution with delineated monetary and fiscal functions – this is very roughly analogous to liquidity and capital management functions in big commercial banks – the delineations are complex – but hard to see them being more complex that what exists in separate institutions

4 years 8 months ago

I have a comment or two, but first, what’s the logic behind wanting the govt to do the most expensive thing, rather than the least expensive thing?