Monetary Realism

Understanding The Modern Monetary System…

Just Eliminate The Debt Ceiling….

The US government has no spending constraint.  There is no such thing as the USA not being able to make a debt payment.  But for some reason we have enacted a silly law that binds Congress by the “debt ceiling”.  The debt ceiling is a misguided law for several reasons:

  • The debt ceiling is only reached when past spending results in current debt bumping up against the debt ceiling.  This is like deciding to build a 100 foot high structure directly beneath 50 foot high telephone wires and then complaining that we can’t tear down the telephone wires once we reach the 50 foot level.  It makes no sense.
  • The Public Debt Acts were all put in place under a fixed currency regime in the 30’s and 40’s.  In 1971 our monetary system became a floating exchange rate system with no convertibility.  The laws, however, remain outdated and are now defunct.
  • Congress needs to be constrained in its spending.  But is debt the right target?  No.  The USA, as an autonomous currency issuer can never “run out of money” or fail to make a debt payment.  There is simply no such thing as an autonomous currency issuer being constrained in its ability to spend.  So it makes no sense to create a debt ceiling to impede debt issuance and risk self imposed default due to political ignorance.
  • The true constraint for an autonomous currency issuer is always inflation.  Congress should enact a process by which we measure the effect of spending on overall living standards and adjust policy accordingly.  We should not have a debt ceiling.  If anything, we should have an inflation ceiling.

The best way to get around the perpetual debt ceiling concerns?  Just eliminate it.  The law makes no sense anyhow and does not apply to our monetary system.  There’s absolutely no need for us to keep having recurring “debt ceiling crises” just because policy makers have failed to update the legal system to match our evolving monetary system.



Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering asset management, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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32 Responses

  1. Vincent Cate says

    “The true constraint for an autonomous currency issuer is always inflation. Congress should enact a process by which we measure the effect of spending on overall living standards and adjust policy accordingly. We should not have a debt ceiling. If anything, we should have an inflation ceiling.”

    There is very good evidence that there are “long and variable delays” between when new currency is issued and when prices go up. If there are such delays then deciding how much money you can print now by just looking at the inflation rate now gives you a “fool in the shower problem”.

    Do you not believe in the long delays? You think prices go up instantly or never? Do you think prices are the same now as back in 1971 when all limits to money creation ended and oil was $3.60/barrel? Do you understand the “fool in the shower problem”?

  2. beowulf says

    Tom Hickey started an interesting thread about John Carney’s article, “Obama Can Raise the Debt Ceiling on His Own”.

    • Obsvr-1 says

      it’s too bad that the branches of government defined by the Constitution continue to use the Constitution to subvert the Constitution.

      I favor elected officials who abide by their oath to protect and preserve the Constitution and repudiate those who circumvent and pervert said document.

  3. Obsvr-1 says

    Initially I was against the QE2 (wholesale buying of USTrsy’s by the FED). As I became more educated in the FED/UST operations (MMT) and the overall Federal Reserve Banking system (MMR) I have come to realize that the FED’s QE operations are a blessing in disguise (FED obfuscation). Having the FED purchase US Trsy’s effectively eliminates the interest on the debt and the debt altogether since these Bonds will be cancelled (rolled over) upon maturation. This may be a test run, or slow process of change, that the FED is driving to get to a point of debt-free money.

    I like the TDC better than the consul since the TDC is a non-interest bearing instrument whereas a consul still requires interest payments by the US Gov’t.
    Since there is universal agreement within the MMT/MMR group that the Gov’t spends money into existence and does not need to borrow to spend, then what is the rationale to pay interest on money that is being spent into existence without the need to borrow. Therefore the elimination of issuing US Trsy’s is perfectly rational and the FED (QE) is effectively exercising a tactic of “No US Trys issuance” but obfuscating the process through the use of the new “open and transparent” FED and FED-speak.

    The common argument is that the US Trsy’s are the only tool for exercising monetary policy on the scale of the US GDP. However, we have seen that over the last 4 years FOMC isn’t the only tool the FED uses. If you go back before the Financial crisis and review the FOMC operations and the FED balance sheet then you would see a much different picture of using US Try’s as a monetary policy tool than what we are witnessing today.

    The “Debt Ceiling” is pure political theater, since congress sets the ceiling and congress raises the ceiling (at the 11th hour to save the day !!) after a bunch of political backscratching and spending negotiations (concessions) to continue the “picking of winners and losers” regime. Judge Napolitano correctly identified the problem between the Demo/Repub in that we do not have 2 parties, we have 2 wings of the same party of “Big government spenders”. The Democrats support big government programs, war (MIC) and social programs (Welfare for social safety net) while the Republicans support big government programs, war (MIC) and business (job creator) programs (Welfare for corporations).

    Education for the masses is the key to making significant changes to the existing establishment …

  4. beowulf says

    Here’s the problem with eliminating the debt ceiling, it has too many veto points. Unless the House, Senate and President are all on board, it doesn’t happen. And if they all understood enough about economics to be on board, ironically, there’d be no need to eliminate the debt ceiling since you’d have no problem getting the votes to raise the debt limit as needed.

    The two ways I’ve suggested (platinum coins and consols) have the advantage of being already legal today. No need for Congress to vote and it doesn’t even require the President to get his hands dirty with an executive order, Tim Geithner has all the authority he needs as Secretary (of course, no Tsy Sec would do anything so hardcore without running it by the boss). Between the two, I don’t think you can beat the jumbo coin for one singular reason, while consols stop the debt clock, coins run the debt clock backwards.

    You’re never going to get the average citizen (who’d rather live their life than study economics) to understand “spreadsheet money”, its too damn abstract. But everyone understands the govt has the power to mint its own money, they already have tangible proof of this in their pocket or on their dresser.

    Since everyone hates the Fed, might as well go with the flow. When we borrow money at the Federal Reserve, we pay interest on the debt. But when we coin money at the US Mint, there is no interest because there is no debt. We paid $200 billion in net interest last year, which meant Congress overtaxed us $200 billion last year to pay Wall Street and China their vig. Now that’s a point everyone gets (and gets them angry). :o)

    • Obsvr-1 says

      The TDC is effectively the same a “Restoring Seigniorage:” — reference white paper

      Paper describes Restoring Seigniorage: (Debt-free money) and recommendations for fiscal, monetary and private banking operations under a debt-free system.

    • Dan M. says

      Wasn’t Reagan’s SoT (Regan) basically his boss? I’m thinking of the youtube video where Reagan is told to hurry it up, and responds obediently.

      • beowulf says

        I don’t think the President ever fully bounced back mentally from his shooting in his first year in office. So even before his Alzheimers presented, he was foggy on things. Reagan’s first term Chief of Staff James Baker and Tsy Sec Don Regan swapped jobs in the second term (and Reagan acquiesced!. After which point, Tsy got much better run and the WH much worse. Iran-Contra would not have happened in the first term.

        Baker may have been the single most competent government official of the past 50 years. He only went into politics because he was widowed young and his tennis buddy George Bush was trying to get him out of his funk by working on a political campaign. Baker astonished everyone by turning out to be a political genius. From somehow conjuring the GOP nomination for Gerald Ford in 1976 (over Ronald Reagan of all people) to conjuring the Florida electoral votes for George W. Bush in 2000 to just a few years ago when he gave Obama excellent advice on the banking crisis, Baker’s been the guy you listen to when the game’s on the line. Naturally Obama didn’t listen. As Krugman put it:
        “And we have the spectacle of James Baker — James Baker! — attacking the Obama administration from the left, calling for temporary nationalization of zombie banks as part of the recapitalization process.”

  5. Kelly says

    Cullen, my initial reaction is that I like the inflation ceiling proposal. And then of course I start thinking about how it would be implemented. It would definitely take a little thought on how to do it. First thought is that if you hit a certain rate of inflation, spending is shutdown immediately. That seems too extreme. It seems like such a policy would need to look a the rate of change of inflation and curb spending on a percentage basis. But does it curb automatically? If so how? Every govt’ salary is now begins to curtail down to say 80% of what they were making?

    Anyway. Just thinking out loud without thinking too much :-)

    • Cullen Roche says

      Honestly, I haven’t even thought about an inflation ceiling at all. It was just something I wrote off the top of my head since it’s the true constraint. I’d prefer that the debt ceiling just be eliminated since it’s not accomplishing anything. And if we need to replace it with an inflation ceiling then we would need to build production and full employment into that so that we don’t get our priorities backwards. Inflation would be tertiary in those priorities mentioned….but the way we have the system set-up today we seem to always sacrifice growth for keeping inflation contained.

      • wh10 says

        Sankowski says 15% inflation for 30% nominal growth would be hard to turn down! 😉

        • Michael Sankowski says

          That’s right!

          Can you imagine 15% real growth? How great would that be?

        • Obsvr-1 says

          I can imagine gold falling out of the arse of my pet cat, that would be great
          too 😉

          Seriously, more growth would be awesome, growing out of the hole is the only way back to prosperity.

        • Tom Hickey says

          May make sense economically, but it’s not politically sustainable since there are winners and losers in inflation and many of the losers have political clout.

        • wh10 says

          are the losers more likely to be the wealthy or everyone else? if you’re invested in bonds/equities, wouldn’t you be able to reap that gain?

        • Tom Hickey says

          Creditors and the elderly are both adversely affected by inflation and they are powerful interest groups. Debtors benefit. Although assets may appreciate in nominally, they might not do as well in real terms.

        • Michael Sankowski says

          This is all true. Not politically feasible in terms of proposing it. I keep putting it out there to keep our focus on real growth.

          Nominal growth doesn’t matter, it’s better and more real goods which matter. Inflation doesn’t matter.

          All of these are tools we should use to get more real growth. We can bicker and argue about which path to high real growth is best, and that’s to be expected. I just find it annoying as hell the consensus is stable prices somehow more important than real growth. Y

          eah, yeah, yeah – “stable prices facilitate long term sustainable growth” The econometrics show inflation volatility can be as important or more important than absolute inflation levels. And I’d say lachmann showed relative prices can remain in line at most reasonable inflation rates.

          We need to remember something else – low inflation is no more natural than high inflation, because money is a construct of humans, and humans can choose anything they want. And low inflation chooses winnners and losers just as surely as high inflation.

          Tom, you point out high inflation angers some powerful groups. Do you think there is any possibility to turn the titanic and form a consensus for higher inflation levels? I’ve seen people like DeLong argue for higher inflation (think 4-5%) in response to zero bound problems.

        • Tom Hickey says

          The political reality seems to be that employment and price stability create a policy bandwidth that politicians know they have stay within the bounds of. I doubt that there is much that will change this.

        • Cullen Roche says

          China seems to have it figured out in that regard. 13% nominal growth every year….

  6. Tom Hickey says

    Since 1979, the House of Representatives passed a rule to automatically raise the debt ceiling when passing a budget, without the need for a separate vote on the debt ceiling, except when the House votes to waive or repeal this rule. The exception to the rule was invoked in 1995, which resulted in two government shutdowns.[43] Wikipedia-Debt Ceiling

    Thank Speaker Gingrich.

    • Cullen Roche says

      I like this when MMT and MMR remember that we agree on 80% of everything!

  7. Greg says

    After all….. “there needs to be strict spending guidelines” (This is what I would hear from the deficit phobes at work)

  8. Greg says

    Agreed, but this has less chance of passing than a JG.

    • Cullen Roche says

      Maybe it would be wise not to build one’s theory around this policy then, right? :-)

      • Greg says

        (Rim shot)

        Well done sir!

      • Dan M. says

        The smiley doesn’t ease the pain of the sharp retort. Touche!

        • Michael Sankowski says

          haha! yes, I doubt this would pass.

          We’re probably going to propose as many different ways we can to improve the system while abiding by the hard coded Godley economic framework.

  9. Dunce Cap Aficionado says

    Per your tweet, it should be replaced immediately and directly with an inflation ceiling.

    • beowulf says

      So if there’s an inflation ceiling, what’s your policy lever(s) to keep it down?

      Unless you know what actions to take to bring inflation down and how to set up a formula-based system so those actions are done automatically, its just an aspirational goal, like being the first female astronaut on Mars or something.

      • Dunce Cap Aficionado says

        Well unlike some people, I’m NOT against females being astronauts or them going to Mars! (You’ve just Gingriched).

        All kidding aside I just wanted to bring up the idea. Because (as we all know) solvency isn’t the constraint and inflation is.

        Hell, as I like to say, I wear the hat for a reason. I’m not gonna be the person to come up with a way to do it, but I know that the direction to focus the conversation is better not being only ‘what we concentrate on is wrong’ but also ‘this is what we should concentrate on…’

  10. Michael Sankowski says

    Exactly. This is a dumb set of laws. We should eliminate the debt ceiling entirely.

    We should also not force the U.S. to borrow to deficit spend. It’s just silly in todays world.

    • Dan M. says