Creating money

Secretary of the Treasury Timothy Geithner has told President Barack Obama that he has decided that yes, he will stay on through 2012. Mr Geithner, who commutes back and forth from his home in New York, had originally made noises about leaving for personal reasons; the time spent away from his family was bothering him. Mr Geithner is the last member of the President’s original economic team left on board, and Mr Obama asked him to stay.

I can’t say that I’m sure why: Mr Geithner, the guy overseeing the collection of all of our federal taxes but couldn’t even get his own right, doesn’t exactly have a sterling record for getting things right. From Bloomberg:

Geithner Downgrades His Own Credibility to Junk: Jonathan Weil


By Jonathan Weil – April 20, 2011 7:00 PM ET

Fox Business reporter Peter Barnes began his televised interview with Treasury Secretary Tim Geithner two days ago with this question: “Is there a risk that the United States could lose its AAA credit rating? Yes or no?”

Geithner’s response: “No risk of that.”

“No risk?” Barnes asked.

“No risk,” Geithner said.

It’s enough to make you wonder: How could Geithner know this to be true? The short answer is he couldn’t.

All you have to do is read the research report Standard & Poor’s published on April 18 about its sovereign-credit rating for the U.S., and you will see it estimated the risk of a downgrade quite succinctly. “We believe there is at least a one-in-three likelihood that we could lower our long-term rating on the U.S. within two years,” said S&P, which reduced its outlook on the government’s debt to “negative” from “stable.”

There you have it: Geithner says the chance of a downgrade is zero. S&P says the odds it will cut its rating might be greater than one out of three. So who are you going to believe? Geithner? Or the people at S&P who actually will be deciding what S&P will do about S&P’s own rating of U.S. sovereign debt?

It would be one thing to express the view that a downgrade would be unwarranted, or that the chance of it happening is remote. Either of these positions would be defensible. Geithner went beyond that and staked out an absolutist stance that reeks of raw arrogance: There is no risk a rating cut will occur. He left no room for a trace of a possibility, ever.

Note the date: that was last April. Then, Standard & Poor’s did just what they said they would do.

The Bllomberg original continues to note that wasn’t the only time Secretary Geithner made such an unequivocal statement: in February of 2010, he stated, in an interview with ABC News, when asked if the United States could lose its AAA rating, he responded, “Absolutely not. That will never happen to this country.”

Well, Mr Geithner didn’t say the following, but he was probably thinking along similar lines, given the Federal Reserve’s “quantitative easing” program. This was former Chairman of the Federal Reserve Board Alan Greenspan, on NBC’s Meet the Press yesterday:

The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.

Well, if it was that simple, why do we have a huge national debt? Heck, we don’t even need to turn on the printing presses, the way the Weimar Republic tried to get itself out of debt; in these days of electronic transfers and instant communication, why couldn’t the Federal Reserve just simply decide to add $2 trillion or $4 trillion to its cash accounts? After all, there’s nobody who can bring suit against the Fed for bank fraud for doing that? Then, when the Treasury has to make interest payments and redeem mature Treasury Bills, why there’s that extra $2 trillion or $4 trillion, created out of a few electrons, in the accounts with which to write that check. Who’s going to tell the US Treasury that their check bounced?

And as long as China has bought our bonds, denominated in US dollars, they’re stuck, right? All we have to do is hand them the check, and it goes into their accounts, giving them dollars to buy goods we export to them, right?

Heck, if it’s that easy, we can just declare that we have an additional $14 trillion in the Treasury, and buy back the entire national debt! And if our creditors accepted the checks, wouldn’t that actually count as the creation of money?

And there’s certainly no need for Republicans and Democrats to argue about taxes and spending. Since the government can just create money any time it wishes, by simply adding digits to the accounts, Uncle Sam can write out any checks, for any amount, to provide any service, to anyone who needs or wants it, and as long as they accept those checks and the bank credits the checks to their accounts, money has been created, right? Not only would there be no need to raise taxes, there would be no need for federal taxes at all.

Now, this didn’t work for the Weimar Republic, because those evil ol’ Allies insisted on their reparations payments in something other than Deutschmarks. But the United States dollar is the world’s reserve currency; everyone takes dollars, and all of our debts are denominated in dollars; we are not required to exchange them for anything else in order to pay our debts. Since our currency is Legal Tender for all debts, public and private, we could print up 14 million of these, and they’d be perfectly good! And, since the Phoenician has said we could, why I know that it’s true.

Now why President Obama wants to keep Mr Geithner on as Secretary of the Treasury is beyond me; after all, he wasn’t smart enough to come up with a simple and effective plan like this!

6 Comments

  1. Well, if it was that simple, why do we have a huge national debt?

    You’ve already been pointed at the answer; if you can’t be bothered learning, don’t assume your ignorance proves anything.

    The public deficit is equal to net changes in private savings + the current account deficit, as a matter of accounting identities.

    Since the government can just create money any time it wishes, by simply adding digits to the accounts, Uncle Sam can write out any checks, for any amount, to provide any service, to anyone who needs or wants it, and as long as they accept those checks and the bank credits the checks to their accounts, money has been created, right? Not only would there be no need to raise taxes, there would be no need for federal taxes at all.

    Yes indeedy, except for the teeny tiny minor problem that said government spending would be competing with private spending in allocation of teh nation’s wealth. This would reduce the nominal value of money to match that actual wealth – inflation.

    Except for the special circumstance where wealth creation is below capacity, in which case increasing spending leads to increased supply. You know, by reopening factories and employing people?

    [Edited to close open html tag; no changes to content made. -- DRP]

  2. Yes indeedy, except for the teeny tiny minor problem that said government spending would be competing with private spending in allocation of teh nation’s wealth. This would reduce the nominal value of money to match that actual wealth – inflation.

    Pho is correct, here. We can print what we want, its the whole fiat currency thing. Inflation and the acceptance of our currency by other countries and our own people after such an event would be the big problems.

  3. Inflation and the acceptance of our currency by other countries and our own people after such an event would be the big problems.

    Indeed – except:

    i, The US economy is operating below capacity at the moment.

    ii, Core inflation is bouncing around below the US historical average – up a bit from nearly hitting zero before (and deflation would be a lot worse)

    iii, Overseas investors are so eager to buy Treasury bills that some of the yields have turned negative – they’re effectively paying the government to take their money.

    Dana is claiming that you should not create more money because it would lead to an inflationary spiral – under the present circumstances, this is like claiming that you don’t wanna pile blankets on someone suffering from hypothermia for fear that they’ll get heat stroke.

    Dana isn’t operating from any rational economic model. Rather he’s engaging in moralistic “reasoning” based on a false analogy – that a government is like a business or family, and that the government’s responsibility for manipulating a fiat currency for the benefit of the national economy is like a company or household budget.

    It is not. Money is not wealth, and the government can create or destroy money as it sees fit in order to encourage actual wealth production within the economy. Ignoring foreign trade for the moment, in order for the private sector to build up financial resources – meaning to reduce debt for the US – the government has to run a deficit.

    Dana makes noises about “inflation” which have no relation to the actual situation because he doesn’t want to use his actual argument – that he thinks it is somehow “immoral” for a government to run a deficit – in a fiat currency which it issues and withdraws at will.

  4. “Dana makes noises about “inflation” which have no relation to the actual situation because he doesn’t want to use his actual argument – that he thinks it is somehow “immoral” for a government to run a deficit – in a fiat currency which it issues and withdraws at will.”

    Right, PiaToR, and Ben Bernanke understands this point as well, thank goodness! The key to recovery is to have the economy create wealth. For example, rebuilding infrastructure creates wealth. It requires a bottoms up strategy, that is, creating jobs which produce demand which make our world go ’round! Dana does not understand this!

    Dana’s problem, and that of his extreme Republican idols, is that he/they have no future vision. Instead of a vision, they possess an inflexible ideology which cannot, under any circumstances, be violated. This, in effect, is their absolutism. If these people are not elected out of power in 2012, keeping Obama in power regardless of his flaws, restoring the Dems to power with a majority in the House and over 60 in the Senate, it will be that much more difficult for us to pull out of our nosedive. The less disciplined Dems, (compared to the lock-step Repub absolutist plutocrats), have vision and represent the salvation of this nation, economically, in this man’s view!!!

  5. The less disciplined Dems, (compared to the lock-step Repub absolutist plutocrats), have vision

    Uh-huh. And what would that be?

  6. The Dems were the originators of the stimulus in 2009. It was successful but not nearly enough. The wingnuts have been for austerity only and against stimulus since Jan 2009 and before. Political reality has not enabled the Dems so far to push for more stimulus, and, they have been unwilling to fight the wingnuts, showing their weakness. So it has been too much talk and not enough action, a serious problem, I admit. Now is the time to fight! – It’s never too late!

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