Monday, February 8, 2010

A Tale of Two Accounting Numbers

The Federal "debt" demagoguery, to me, is at it's highest levels ever. Perhaps because it is an election year with both major political parties simultaneously trying to position themselves as the more fiscally "responsible" leading up to this November's mid-term elections. Even the Nashville "Teaparty" event that took place over the weekend featured former V.P. candidate Sarah Palin providing a keynote address and Q&A that of course contained the now required statements that we're drowning in "debt" and borrowing from the Chinese, and on, and on.

Mike has often explained here on his blog and in the comments that Treasury Security issuance would best be thought of as an interest rate maintenance operation, and that now that the Fed has the ability to pay interest on reserve balances, Treasury issuance is now only required due to a self-imposed Government prohibition on running a negative balance in the Treasury's account at the Fed. Warren Molser recently addressed this in a comment on his blog:

" if tsy spends without selling tsy secs when it uses up its balances at the fed the additional spending will be booked as an overdraft at the fed, which is not allowed. so the no overdraft rules and the debt ceiling rules combine to force the tsy to issue secs first and then spend. operationally this is entirely unnecessary and at the macro level these self imposed constraints serve no purpose apart from being potentially disruptive and counter to public purpose."

So all of the debt demagoguery is just the ignorant rantings of politicians or economists that should know better. They are for some reason incapable of understanding simple accounting. Perhaps some pictures will help:

A positive number here

Would be the same as a negative number here:

Yes, it's that simple.


MortgageAngel said...

What does "Federal Debt Held By Public" represent? Treasuries purchased i.e 'owned' by the Fed?

Does the this 7,840,401 amount have something to do with the 'total operating balance'?

Sorry if these aren't good questions. I'm lost.


kris said...

So if the treasury has to issue bonds before it can spend, how does it differ now to a state or an EU member?

Mike Sandifer said...

Obama and the Democrats have to do something to spur aggregate demand. I'd have no problem with treasury temporarily getting authority to expand the money supply through fiscal channels, since the Fed isn't willing to do enough(Why isn't Bernake approaching our situation as he did and does Japan's?)

How feasible would it be for Obama to just have Treasury take other means to spur some inflation?

googleheim said...

Mike and Mike

Obama is doing a good job spurring inflation

Whatever he did to p-off the insurance companies worked to increase my health insurance by 20% without any apparent reason

They are going to give him inflation already, inflate him and get him out of office now that he's content to disturb the hive and not get things done

Matt Franko said...

This will be a piece of cake for you.

"Does the this 7,840,401 amount have something to do with the 'total operating balance'? "

It's like the govt has a HELOC and a separate checking account.

The Fed Debt Held by the Public is their HELOC statement balance. and the Total Operating Balance is their checking account balance. So the way they currenlty operate is sort of like they tap the heloc first and then transfer the funds over to the checking account to spend it. What is being proposed is that since the govt is the monopoly issuer of money, they dont need the formality of a heloc, they can just run an overdraft in the checking account and keep track of the negative balance in the checking account for accounting purposes, both ways represent the same financial reality. Without all the political baggage that comes from the "debt" demagogues.

What does "Federal Debt Held By Public" represent? Treasuries purchased i.e 'owned' by the Fed?"

When they say public here, they actually do mean the non-govt. this ($7.8T) is the amount of treasury bonds held by the non-govt sector ie us citzens, companies, foreign govts, etc..i look at this as the true govt "debt". the approx 5T difference between the two numbers is the "social security trust fund" (SS has been in a forever surplus meaning forever thay have been taking in way more than they are putting back out in SS/Medicare). that is money the govt "owes" itself. I look at it like this: banks used to have "christmas clubs", where you could put money aside so you had funds at the end of the year. so say you signed up for one and you agreed to put in $100/month. then one month you didnt put the $100 in, if you were the Treasury, you would now "owe" yourself $100, and you would formally make yourself write youself an IOU.

Abbott & Costello:
Abott: Can I borrow $20.
Costello: All I have is a $10.
Abbott: OK I'll take it and then you can owe me $10!

The overreaching theme is that the govt is monopoly issuer of money, so we can change the accounting if we want to. Its not an exact anology but hope it helps. Any other questions just post.

Matt Franko said...

@kris I dont understand completly your question. re-phrase?

Mike Norman said...


I believe I can answer your question. The difference is subtle but nonetheless important.

The sale of bonds by California, let's say, does not reduce the level of reserves in the banking system as the buyer of those California obligations will have his/her account debited and California's account will be credited by the same amount. System reserves have not changed.

On the other hand, when the Treasury sells bonds reserves in the banking system are reduced, forcing the Fed to add reserves so as to keep their target interest rate where they want it.

In the big picture, the Fed provides the reserves that are used to buy the Treausuries so there is never any problem for the gov't to sell them.

bubbleRefuge said...

So if the treasury has to issue bonds before it can spend, how does it differ now to a state or an EU member?

Good question. The EU monetary system is based upon the Maastricht treaty which places restrictions on the fiscal authority of each of the individual states. I believe they can only run 3% GDP deficits. This limits their fiscal authority. In other words, their have yielded their sovereign fiscal authority to a outside body. Thus, if France wanted to create a new bullet train line and they were at their fiscal limits of 3% they would have to increase taxes in order to spend that money.

A one point a proposal was circulated for a similar arrangement for North America called the Amero. Needless to say: very bad idea.

MortgageAngel said...

This is very helpful. At least I think I'm getting clearer on it.

HELOC and checking account example understood. :)(Although I don't condone that practice on a micro level!)

I didn't realize, or at least it seems to me now, that much of the misunderstanding could possibly be attributed to, for lack of a better word right now, jargon.

"Federal Debt Held By Public" represents private savings? Or is best described as private AND foreign savings?

Re:'the approx 5T difference between the two numbers is the "social security trust fund"'

I'm still trying to grasp this part! How is it that the SS Trust fund and treasuries are related exactly? SS trust fund represents money we pay into the system, right?

bubbleRefuge said...

Not an expert on exact operational aspects of Social Security, but from a MMT point of view Social Security accounting its another disgrace/relic of the gold standard fixed currency era. Payroll taxes are regressive and should be eliminated and Social Security transfers should be paid by direct debits from general operating treasury account. And people who have worked all of their lives to provide us with the country we have should have a dignified retirement.

Matt Franko said...

this is what I believe, could be wrong in details;

If SS/Medicare takes in 800B in Fica taxes in a year, but only pays out 500B in ss/medicare; Then the Treasury puts 300B of T-Bonds into the "trust fund" and spends the 300B excess right out of the operating account for general federal purposes (defense, etc). This is probably another vestige accounitng procedure from before 1971 when we left the gold standard (just like the "debt ceiling"). The Govt tracks this amount in the DTS Table III-C "Intragovernmental Holdings" (its about 4.5T)

Interesting: at the start of the year it was at 4.35T and now it is at 4.5T so I think this represents that they have "overtaxed" us in SS by about 150B so far this year! What happened to "pay-go"? If these buttheads that advocate for paygo are serious, I might take them up on it if they agree to refund the 4.5T that we have "over-payed-goed" till this point! 15k per capita...Resp

Mike Norman said...


Hear hear!

MortgageAngel said...

lol Good one, Matt!

Robbrian said...


There's a crying need for experts like you, Warren, Joe, Randall, Stephanie and Progressives like Thom Hartman, to hook up and produce a layman's language statement about the implications of the U.S. being monetarily sovereign and not dependent on revenue to spend.

Most American don't understand that their tax dollars don't fund anything. The .0001% understand and have punked us since 8/71. It's past time for the Fed gov to use its MS powers to serve public purpose and in doing so slay the "Vampire Squid Royalists."

Americans must be made aware of the fact that all the President needs to spend is an appropriation.

I sure hope you folks can inform, so that us folks can avoid the impending descent into feudalism.


Robert Bostick