Former Bank CEO and Treasury official: Issuing Treasurys isn’t government “borrowing”

Frank Newman is a banker who worked many years at  Citicorp, Wells Fargo, BankAmerica, and Bankers Trust, ending as CEO of BT. He also served as the Under Secretary of the Treasury for Domestic Finance for the U.S. Treasury Department in the Clinton Administration, where he led “the Department’s policy on the issues of domestic finance, fiscal policy, fiscal operations, government assets, government liabilities, and other related economic and fiscal matters”.  He has published two books using his deep understanding of domestic finance, monetary operations and the banking system. Below is an e-mail conversation he had with Stephanie Kelton, head of Economics at UMKC, related to Modern Monetary Theory’s depiction of federal finance and operations.

By Stephanie Kelton

A few weeks ago, I had a lengthy e-mail exchange with Frank N. Newman, former Deputy Secretary of the U.S. Treasury. Frank’s books (here and here) are so closely aligned with MMT thinking about deficits, debt, monetary operations, etc. that I wanted to get his thoughts on one of the most common criticisms of MMT. MMT recognizes that the currency itself is a simple public monopoly and that the issuer of the currency must spend (or lend) it into existence, before it can be used to pay taxes or buy bonds. The implication? Governments that issue sovereign money are not revenue constrained. Critics have argued that MMT has this all wrong because the system requires the government to have numbers on its balance sheet before it can spend — i.e. the government is not allowed to run an overdraft and is, therefore, constrained by cash on hand. Here’s what Frank Newman thinks of that critique:

I recall from my time at the Treasury Department that the assumption was always that there was money in the fed account to start with. Nobody seemed to know where it came from originally or when; perhaps it was established in biblical times. But as a matter of practice, if the treasury wanted to disburse $20bn a given day, it started with at least that much in its fed account. Then later would issue new treasuries and rebuild its account at the fed.  (I do not recall ever using an overdraft.)

In my view, this is still consistent with the MMT perspective that you mentioned, and in my own book the explanation starts the cycle with government spending, thus adding to the money supply, and then issuing treasuries for roughly equivalent amount, thus restoring the money supply and the Treasury’s Fed account to the levels they were prior to that round of spending. Every cycle is: spend first, then issue treasuries to replenish the fed account. The fact that Treasury started the period with some legacy funds in its Fed account is not really relevant to understanding the current flow of funds in any year.

[In practice, Treasury varies its issuance not only to match outlays, but also to deal with seasonal factors, and to avoid wide swings in new-issue sizes; so at one point of a year, treasury might actually issue some extra securities because the next month was expected to have low tax revenues, or might not fully replenish recent spending because the next month was expected to have high tax revenues. That seasonal process doesn’t really affect the overall flow of funds over a year.  The substance of the cycle is still: spend then replenish. Debating that would seem highly philosophical, and would miss the practical aspects of the flows.]

In any case, the treasury can always raise money by issuing securities. The bond vigilantes really have it backwards. There is always more demand for treasuries than can be allocated from a limited supply of new issues in each auction; the winners in the auctions get to place their funds in the safest most liquid form of instrument there is for US dollars; the losers are stuck keeping some of their funds in banks, with bank risk.

(I even try to avoid using the expression “borrow” when the treasury issues securities; the treasury is providing an opportunity for investors to move funds from risky banks to safe and liquid treasuries.)

If critics have focused on the technical matter about the spending and issuance cycle, then we are really in great shape: they are reaching to find any issue to debate!

Addendum: Many thanks to Frank for granting me permission to publicize these remarks.

Stephanie Kelton, Ph.D. is Associate Professor, Chair of the Department of Economics at the University of Missouri-Kansas City and a regular commentator on national radio and broadcast television. Follow her on twitter @StephanieKelton

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