Paging Dr. Firestone (Or, The Other Meaning of "Repo")

There has been trouble brewing lately in a little-understood corner of the financial markets, known as the repurchase agreements (or "repo") market.  Since mid-September of this year, when overnight borrowing rates spiked due to a shortage of liquidity (i.e. cash money), the FERAL Reserve has been injecting more new cash into the repo market (a sort of stealth QE) in the hopes of shoring it up.  Though this is really supposed to be a temporary measure.

And the shortage of cash in the repo market was most likely due to too many T-securities (i.e. US Treasury bills, notes, and bonds) on the market at one time, which in turn is a result of this year's high federal "deficit" spending.  (The previously record-high deficits a decade ago during the Great Recession coincided with QE which prevented any liquidity shortage then.)  If not resolved, this could indeed spell trouble far beyond just the repo market as well.

(Note that the repo market, which provides a type of short-term lending, is directly linked to money market funds, and is also directly or indirectly linked to the "plumbing" of the entire financial system as well.)

But literally the only reason this would even be an issue at all is due to the arcane and archaic rules that require federal "deficits" (i.e. spending not matched by tax revenues) to be matched by "borrowing" in the form of T-securities.  And literally all Congress needs to do is repeal those outdated rules and decouple spending, taxes, and "borrowing".  Wait, what?

Earlier this year and last year, we at the TSAP have exposed the Big Lie of Economics, a lie so massive and specious that even WE partially fell for prior to 2018.  The Big Lie consists of the following statement and its corollaries:

• Federal taxes pay for federal spending, and any shortfall in revenues (i.e. "deficit spending") must be made up by the federal government borrowing money to cover the deficit.
• It must be this way, because otherwise the federal government will run short of dollars, which are finite.
• The federal government is literally bankrupt and can no longer afford to keep paying for Social Security, Medicare, and Medicaid, let alone anything more ambitious and progressive.
• Things like Universal Basic Income (UBI), tuition-free public college for all, state-of-the-art infrastructure, a Green New Deal, and single-payer Medicare For All sound like good ideas on paper, but we literally can't get the numbers to add up.  Sorry.  Oh well.
• If the national debt as a percentage of GDP rises above some arbitrarily high level, the federal government will have no choice but to default.
• Thus, we will have no choice but to accept an austerity "menu of pain" at this point, with both large tax hikes and/or deep spending cuts. (Austerity for the bottom 99%, that is.)

Do you still believe these statements? Well, guess what?  Each and every one of those specious statements is absolutely FALSE.  Period.  Not even a kernel of truth in there, except for the completely contrived self-fulfilling prophecy that believing such lies leads to, starting with the very first statement on that list, and it goes downhill from there. Federal taxes DO NOT pay for federal spending, because our federal government is Monetarily Sovereign and creates all the dollars they need to spend into existence on an ad hoc basis.  Tax dollars merely disappear into infinity, and the so-called "National Debt" is literally nothing more than a National Savings Account consisting of deposits in Treasury securities.  Yes, really.   And the only reason why we must currently match spending with taxes and/or "borrowing" is due to the arcane and archaic rules left over from when we actually had the gold standard.

As for inflation, there is essentially zero correlation between deficit spending and inflation, and history bears that out.  And even if there were inflation that resulted, that could be easily cured by raising interest rates as needed.  And due to the velocity of money, federal taxation of any kind, at even a relatively low rate, can to an extent automatically "claw back" any excesses in the money supply that may result, which can prevent inflation before it occurs.

So having established that, we must now note that sustaining the Big Lie, a lie that really only benefits the oligarchs and their sycophantic lackeys of both corporate duopoly parties in government, is now physically and metaphysically untenable.  Especially given the many converging real and contrived crises now facing our nation and world.  Make no mistake, we absolutely must end this Big Lie YESTERDAY or else face extremely painful austerity, recession, depression, or worse in the very near future.

Thus, we should all write letters to our Congresscritters based on the following sample letter written by the ever-insightful Dr. Joseph M. Firestone and disseminated by the ever-insightful Rodger Malcolm Mitchell:

Dear __________________

At one time or another you and nearly every one of your fellow Representatives (or Senators) have expressed great concern, even alarm, at the size of the national debt and the often increasing debt-to-GDP ratio.

Many of you have pointed out that if the national debt were broken down into how much each American owed that would add more than $50,000 to our individual debts, even though the national debt is not an obligation of each American citizen, but of our government.

You and your political allies have also pointed out that in view of the size of the national debt it is important for the Government to either reduce spending, raise taxes or both.

You have said doing this is necessary to be “fiscally responsible”, and, at least, to reduce the annual deficit, and the debt-to-GDP ratio.

You have voted for and supported legislation in order to be “fiscally responsible” in this way, and in doing so you have cut many programs of long standing that were delivering great benefits to people, harming them and their families.

Some of you have expressed regret and sorrow about this, while insisting on the need for sacrifice in order to be fiscally responsible.

I, your constituent, have heard this fiscal responsibility story from you for many years now, including your sentiments about how much you hate “the national debt,” what an evil it is, and how much we have to lighten its burden on our grandchildren.

In view of all this from you, it surprised me greatly to learn recently, that the very existence of the national debt is Congress’s fault, including your own and your colleagues. I say this for a very simple reason.

That reason is that you and your colleagues can, in an afternoon, make it standard legislative practice to include the following clause, or an alternative formulation meaning the same thing, in every appropriations bill or continuing resolution for Federal Spending. The clause is:

Now here comes the key part:

“Upon passage of this appropriations bill, the Federal Reserve is directed to fill the Treasury’s spending account at the New York Federal Reserve with the addition to its Reserve Balance necessary to spend the appropriation.

“In addition, the Federal Reserve is directed to fill the Treasury spending account with the additions to the Treasury Reserve balances necessary to repay all outstanding debt instruments including principal and interest as they fall due for the fiscal year of this appropriation.”

In short, the Federal Reserve would pay off T-securities, making the so-called “debt” disappear.

The Fed simply would create U.S. dollars from thin air, just as it always has been authorized to do, and just as it does when it buys federal bonds with its Quantitative Easing (QE) programs.

The first sentence provides the reserves necessary for the Treasury to spend its mandate from Congress without issuing new debt.

And the second provides the reserves necessary for the Treasury to pay down the existing outstanding Treasury debt instruments as they fall due within the time period of the appropriation or continuing resolution bill.

If this or similar language were included in every such bill it would mean that (1) deficit spending by Congress would no longer involve issuing new debt instruments, so the debt would no longer grow and (2) that all outstanding debt instruments would be paid off as they fall due as long as Congress continues to include the new language in all its appropriations bills and continuing resolutions.

So, it seems to me that the sole reason why the national debt exists at all in 2017 is that when President Nixon took the United States off the gold standard in 1971, the Congress did not adjust to the new reality of fiat monetary sovereignty by funding Federal spending using language like the above.

I believe that Congress made a grievous mistake in not changing its funding language immediately after the change to a fiat currency in 1971, and mandating the Federal Reserve to fill Treasury’s spending account with the reserves needed to spend its appropriations.

That mistake has led to the whole situation of debt terrorism we see around us now, and to all the damaging propaganda and horrible legislative outcomes we have suffered at the hands of Republicans and Democrats alike.

You have all been very wrong about the need to sacrifice. There was no need to sacrifice!

You have been all wrong about all of that for 40 years now, and you should all wear sackcloth and ashes and hang your heads for the damage you have done to America.

Since the Administration of President Carter we have been treated to these meaningless harangues about a faux financial problem that is purely one of politics and messaging and not one of public financing at all.

And this faux problem, solely of Congress’s own making has led to much suffering among most of the American people, including decades of less than full employment, the denial of universal health care coverage, deteriorating public spaces and infrastructure, refusal to deal with a life-threatening climate change problem, increasing economic inequality, a declining educational system, decreasing life expectancy, and a host of other problems too numerous to mention.

Well, I have had enough of all this, and especially of the pretense that the Federal Government doesn’t have enough money to buy any goods or services for sale using US currency.

I know that using the words above or words very like them, you and a majority of your colleagues in Congress can appropriate funds for anything you want to spend on.

So, never let me hear from you ever again that we can’t afford this good program or that good program or any other program that will benefit a majority of the people of the United States.

I now know that is a lie. And I insist that you never tell that lie again in public, and that from now on you advocate for and insist on legislative language similar to the above, being included in all appropriation bills and continuing resolutions passed by Congress.

I demand, that as my representative, you vote against any bill that lacks that language.

And I tell you now that if you fail to comply with this demand of mine, I will do all I can to defeat you in the next election and will work for and vote to elect any opponent of yours who is willing to promise that she or he will include such language in all appropriations bills or continuing resolutions.

In closing, I hope I have made myself abundantly clear. I insist that the lies and propaganda advancing faux fiscal responsibility stop immediately.

I insist that the issue of the national debt be taken off the table by including the language suggested above or a similar formulation, followed by gradual pay-off of all outstanding Treasury debt instruments. And I insist that you represent me in this way going forward and for as long as you serve.

I want Job 1 for you to be seeing to it to the best of your ability that this language is in all appropriation bills or continuing resolutions coming out of Congress. I will want other things from you too.

But, as I say, this is Job 1, and if you want my vote in the future you will see to it that it is well done, so that the various lies and fables surrounding Federal spending are at last ended, and so our nation may move forward to true fiscal responsibility, which is Government spending for public purpose.

Sincerely Yours, Your Constituent,

Granted, this letter is probably TL;DR and should perhaps be more concise, but the part in blue is really the heart and soul of the letter.  As Rodger Mitchell further explains:

The above letter is way too long to send as is. Further, I disagree with two of the points it makes: 

1. I disagree that all “debt” (i.e. T-securities) should be allowed to expire...and not [be] replaced. T-securities serve useful purposes. They help the Fed control interest rates and they provide a safe place to hold large amounts of money.
2. I disagree that “. . . Treasury Reserve balances (are)necessary to repay all outstanding debt.” Maturing Treasuries are repaid by transferring existing dollars from the T-security accounts back to the checking accounts of the T-security holders.  [Only the interest needs to be created anew.]

That said, the fundamental idea of having the Fed buy enough T-securities to reduce the outstanding “debt” would change the dialog, and ease the drive to cut social benefit spending.

And there you have it.  A bit more nuanced, but the same basic idea.  It would probably also be useful to add that there is a federal statute on the books that codifies the aforementioned arcane and archaic rules left over from when we actually had the gold standard.  That statute is codifed as 2 USC Ch. 20, most notably Section 902. Once one gets through the legalese mumbo-jumbo, one can plainly see that this requirement for "sequestration" upon "falling short" of federal budgetary dollars to pay bills is an outmoded contrivance that no longer serves any useful purpose at all.  Amending or repealing this obsolete section, or even the entire Chapter 20, is not just a good idea, but a matter of grave necessity to save our country at this point.  The same goes for 31 USC section 3101, which is the statute that imposes that other outmoded contrivance, the so-called "debt ceiling" as well.  Repealing both of these obsolete laws will permanently make it so the text in blue in the aforementioned letter will no longer need to be every spending bill as a formality to work around such laws each time going forward after the first one--especially if that text in blue were to be inserted in whatever remains of the repealed/amended 2 USC Ch. 20.

And instead of so-called "debt ceiling", which almost no other nation in the world has, we could simply have a spending limit that would be deemed automatically raised each time a new budget, continuing resolution, or appropriations bill is passed and signed into law, NOT by a separate vote. And that limit will only apply to spending on any new obligations taken on going forward, not on outstanding obligations.  The only functional reason for this at all would be as a "safety valve" or "circuit breaker" that would stop feeding the beast of inflation in the (unlikely) event of truly excessive inflation.

Or, to quote Rodger Malcolm Mitchell:

The best way is to eliminate the federal budget deficit and debt: Ending government borrowing. The government has the unlimited ability to create and spend money without borrowing. The process will be: 

1) Congress will create an account called "Money." 

2) Congress will determine how much money this account contains. The process will be similar to the way Congress now determines the debt ceiling. 

3) Federal agencies will write checks against this account according to budgets decided by Congress. If any federal agency needed additional funds, Congress would decide whether or not to allow this spending, in the same way that Congress votes for additional spending by the military et al. 

This would eliminate concerns about "our grandchildren paying for the federal debt." There would be no federal debt.

In the meantime, if Congress refuses to act, the executive branch does still have one powerful "ace in the hole":  the trillion-dollar coin.  While a pure "Treasury Warrant" idea is of very questionable legality and would likely be struck down by SCOTUS, under current law the Department of the Treasury has the explicit legal authority to mint platinum coins in literally any denomination.  Thus, they can easily mint one or two (or twenty!) trillion-dollar coins, or even a $100 trillion coin, as an effective workaround for the time being and use the resulting seigniorage to pay any bills and preclude default even if Congress plays "chicken" with the debt ceiling as a cudgel to force a default if they don't get their way.

TL;DR version:  Put simply, the entire problem is artificial, both politically and psychologically.  And even that can be solved via Overt Congressional Financing (OCF).  As for the argument that economic growth must outpace bond yields, that is also just another version of the Big Lie debunked above, as OCF would essentially render it meaningless.

Again, to quote Dr. Firestone:

The national debt exists today because when the nation went off the gold standard in 1971 and adopted its fiat currency system, Congress did not explicitly repeal its mandate (very appropriate when our currency was convertible to gold on demand, at least in theory) requiring that the Government back all its deficit spending with already existing borrowed dollars whose convertibility was covered by our holdings of Gold. This Congressional mandate to borrow funds by issuing debt instruments when the Government deficit spends caused the national debt to persist until 1996. Congress, then, unintentionally, removed the mandate, leaving in its place the perceived compulsion of an old die-hard financial practice supported by the false ideology of neoliberalism, and a real, but unrecognized, option to abandon the practice by using platinum coin seigniorage. 

Had Congress repealed the practice when President Nixon took the country off the Gold Standard, and had we ceased to issue debt at that time, then the Government would have re-paid all of our 1971 debts as they came due, and both our national debt and our debt-to-GDP ratio would be at 0% today.

And while the value of T-securities at any given time will mostly never fall all the way to zero, once they are decoupled from federal "deficit" spending, they will never again be any more than what the market wants, and likely a LOT lower than today, thus no surprise shortages of liquidity in the repo market or any other market that trades such securities.

It's long past time to end the Big Lie already, period.  The very best time to do so was in 1971 when we functionally got off the gold standard and/or 1975-1976 when all remaining nominal ties between gold and the dollar were formally severed for good.  The second best time is NOW.  And with the recent artificially contrived troubles in the repo market, it is more timely than ever now.