The Down Low on the Shut Down

The Total Public Debt Outstanding, aka ‘the national debt’ (approx $22 trillion) includes the total principal amount of marketable and non-marketable securities currently outstanding.

Marketable securities, aka ‘debt held by the public’ (approx $16 trillion) include Treasury bills, Treasury notes, Treasury bonds and Treasury Inflation-Protected Securities (TIPS), all of which are ‘commercial book-entry’ and can be bought and sold in the secondary market at prevailing prices.

Non-marketable securities, aka ‘intra-government holdings’ (approx $6 trillion) include savings bonds as well as special securities called Government Account Series (GAS) issued only to local governments, state governments and Federal trust funds (payable only to the persons or entities to whom they are registered such as Social Security).

The Total Public Debt Subject to Limit (the ‘debt ceiling’) is the maximum amount of money the federal government is allowed to ‘borrow’ (the amount of deficit spending allowed to be financed with net additions of $$$ into the banking system) under the authority granted by Congress.

In 1917, Congress, pursuant to the Second Liberty Bond Act, for the purpose of expediency, delegated authority to the Treasury Department to ‘borrow’ without needing to seek congressional authority—subject to a limit (ceiling) previously set by Congress.

“The debt ceiling law was a historical accident. At some point, it dawned on legislators that approval of the debt ceiling could be used as a bargaining chip. Debt ceiling deadlocks soon became much more dangerous.”—Ben Bernanke

The debt limit (debt ceiling) is the total amount of money that the federal government is authorized to deficit spend including Social Security checks, Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.

Congress imposes a debt ceiling on the ‘statutory debt’. The statutory debt is a little less than the total outstanding U.S. debt that is shown on the national debt ‘clock’ (it is the outstanding ‘debt’ after adjustments like unamortized discounts, old debt, guaranteed debt and debt held by the Federal Financing Bank).

The debt limit does not authorize new spending commitments—it simply allows the federal government to finance existing legal obligations that Congresses and presidents of both parties have already made in the past. Failing to increase the debt ceiling would be a ‘full’ government shut down (which has never happened in American history because it would cause the government to default on its legal obligations causing catastrophic economic consequences).

Rather than being a full shutdown, this shut down, like any other shutdown, is ‘partial’ because 75% of federal government funding has already been approved for the budget (fiscal) year that started in October 2018. Meaning that only 25% of government agencies no longer have the necessary funding to keep operating.

In a partial shutdown, federal agencies must discontinue all non-essential discretionary functions until new funding legislation is passed and signed into law. Essential services (i.e. related to public safety) continue to function, as do mandatory spending programs not subject to annual appropriations because those are already authorized either for multi-year periods or permanently (i.e. Social Security, Medicare and Medicaid payments).

A year ago, on February 9, 2018, as part of a two-year budget deal (that raised both defense and domestic spending), President Trump signed a bill suspending the debt ceiling until March 1, 2019 (and why the ‘Current Statutory Debt Limit’ on the enclosed graph says ‘$0’).

On March 2, 2019, the debt ceiling will be reinstated at whatever the debt level is at that time (likely around $22+ trillion).

Come March 2, same as in recent years, until the debt ceiling is raised again by Congress, the Treasury Department will delay any fiscal crisis by deploying so-called ‘extraordinary measures’ to continue paying the federal government’s bills after the debt ceiling has been reached using incoming cash flow (i.e. using federal tax revenues).

As for right now, this is the third time that the federal government has partially shut down since President Trump took office. The government partially shut down for three days in January 2018 after an impasse in the Senate over federal funding. The standoff ended when lawmakers passed a short-term spending bill. Less than three weeks later, the government partially shut down for a second time after Congress failed to pass a spending bill to keep the agencies running. That shutdown was the shortest one on record. It lasted less than six hours and ended when lawmakers passed a six-week spending bill. Congress passed a short-term funding bill in late September 2018 to give them time to finish their work.

Many federal government agencies and programs rely on annual funding appropriations made by Congress. Every year, Congress must pass and the President must sign budget legislation for the next fiscal year, consisting of 12 appropriations bills (discretionary funding), one for each Appropriations subcommittee.

When the last fiscal year ended on Sept. 30, 2018, Congress had passed just five out of 12 appropriations bills (setting discretionary spending levels). That short-term bill went through midnight December 7, but after former President Bush died – which led to a national day of mourning and a state funeral – President Trump and lawmakers agreed to extend the deadline through December 21.

Lawmakers had until midnight on December 21 to enact legislation to fund the programs covered by the remaining seven appropriations bills—the deadline specified in the most recent ‘continuing resolutions’ (which temporarily funds the federal government in the absence of full appropriations funding bills) that these programs had been running on.

Note that all this differs from a ‘sequestration’ which is reductions in caps constraining the total amount of funding for annually-appropriated programs.

On December 20, the Senate declined to even vote on a short-term spending package containing $5 billion of southern ‘border wall’ funding knowing it could not get the 60 votes needed (could not get some Democrat senators to support it). This type of legislation can be filibustered and requires 60 senators to end a filibuster—to overturn a procedural objection to a provision believed to be ‘extraneous’ (in this case, a border wall).

In a tweet sent on the morning of December 21, President Trump urged Senate Majority Leader Mitch McConnell to ‘go nuclear’ (abandon Senate rules and allow a simple majority of 51 Republican senator votes to end a filibuster), which was an idea that McConnell rejected. President Trump had seemed to be willing to sign a ‘clean’ spending bill (with no wall funding) but sharply changed course and let the government shut down at midnight.

President Trump allowed the short-term funding to lapse and the shut down to begin just as he insisted in that December 12th Oval Office meeting (with then-incoming House Speaker Pelosi & Senate Minority Leader Schumer) that he would be ‘proud’ to shut the federal government down if he didn’t get the $5B he demands for a border wall with Mexico.

Thanks for reading,

Pure MMT for the 100%

https://www.facebook.com/PureMMT/

P.S.

UPDATE (coincidentally just a few hours after this was posted) :

On January 25, 2019, President Trump announced a deal to reopen the federal gov’t for three weeks (until February 15th) ending a 35-day partial shutdown (now the longest in history) without securing any of the border wall money he had demanded.

P.S.S.

01/26/19:

“It’s not over. The GOP still controls the Senate. The Dems will make some serious concessions to border security before all is said and done. One thing the Left is conveniently ignoring is the Wall GoFundMe which collected 3 times the money that Sanders’ supporters contributed to his POTUS run in 2016.”—Mike Morris

Agreed Mike…Speaker Pelosi won that round impressively but like my dad used to say, ‘It’s a 12 round fight’.

Politics aside, for Pure MMTers, that GoFundMe which Mike Morris mentioned, is another perfect example of using creative pen strokes, not keystrokes, to unlock would-be unproductive savings dollars and looping them back into the functional economy—the modern monetary solution needed in an age of PayGo and rising wealth inequality fed by ‘more deficits’. 

Another thing that the entire MMT community ignored (or completely missed) is that there has been NO DEBT LIMIT for almost a year. This is yet another glimpse of the future, where the Modern Monetary ‘Formality’ of having a debt limit is disposed of and the Modern Monetary Theory enters the final stages to become the Modern Monetary Reality.

Politics Makes Strange Bedfellows

Politics makes strange bedfellows (like when ‘description’ MMT hooks up with ‘prescription’ MMT).

Warren Mosler on a Real Progressives broadcast a year before the 2018 US gubernatorial (midterm) elections:

“How are Treasury securities paid off (?)—the Fed just shifts the dollars from securities accounts at the Fed to reserve accounts.”

NOTE: Mr. Mosler says that THOSE dollars are ‘shifted’. However, when talking about paying federal taxes, when talking about dollars that go to the Daily Treasury Statement account at the Fed—the same account where all federal spending is drawn—he says otherwise. In the case of taxes, Mr. Mosler prefers to say that those particular dollars are ‘shredded’.

“Paying off the debt is just a matter of shifting dollars from somebody’s savings account to their checking account, the Fed does that every month for like $50B when the bonds come due, and there are no grandchildren or taxpayers in the room when that happens.”

NOTE: Mr. Mosler is conflating ‘rolling over’ those Treasury bonds (aka ‘revolving’ the debt), where no taxpayers are involved, with ‘paying off’ the bonds for good, where taxpayers ARE MOST CERTAINLY involved (where prolonged budget surpluses are involved). Similar to the circuitous route of federal tax dollars, that redistribution of bonds from one bond investor to another bond investor, also doesn’t fit the political ‘prescription’ MMT narrative.

“Of course it couldn’t be a problem, that’s complete nonsense, I’ve been hearing that for 45 years, it’s just a reserve DRAIN at the Fed and everybody inside the Fed knows this, they know it’s not a funding operation.”

NOTE: So Mr. Mosler, a seasoned Main Street banker, a successful Wall Street trader and now a national political player, seemingly does know the difference between a dollar ‘drain’ (paying federal taxes / lowering of deficits) vs. a dollar ‘destruction’ (paying off Treasury bonds / lowering the national debt)—as well as everybody inside the Fed knows. Which is why, when convincingly explaining the ‘description’ (the Pure MMT), he can also seductively whisper those sweet nothings of ‘prescription’ (the pillow talk MMT).

Thanks for reading,

Follow us at Pure MMT for the 100% https://www.facebook.com/PureMMT/

When ‘Chartalists’ (aka MMTers) confuse credits & debits with creation & destruction

The payment of federal taxes is not a ‘destruction’ of dollars.

The payment of taxes is a drain of $$$ to the Daily Treasury Statement (DTS)—the same exact account where all federal spending is drawn.

Only Congress can ‘destroy’ $$$—only Congress can reduce the Net Financial Assets (NFA) that Congress created.

Even if you burned a dollar bill to a crisp, you wouldn’t change the numbers on the ‘scoreboard’.

However, if you burned your mortgage (your ‘bond’ that you previously created), THAT’S A DESTRUCTION.

Think about a pumping heart. The blood is flowing out of that heart—to somewhere else—it’s not getting ‘destroyed’.

Rather than ‘keystrokes’ that fund surplus spending followed by the subsequent collection of federal taxes, what actually expands & contracts money supply circulation (the pumping heart of the economy) is the creation & destruction of bonds (aka leveraging v. deleveraging).

Rather than being ‘bulletproof’, political ‘prescription’ MMT is rendered with bullet holes—and they are all self-inflicted. Here’s some more holes:

MMTers (who are supposed to be good at being ‘chartalists’) are confusing credits & debits (‘postings’ that are consolidations of ledger charts) with creation & destruction (net ADDITIONS into the banking system v. the deleveraging of that leveraging).

When deficit spending, the Treasury is ‘fronting’ the ‘newly-created’ money via its Daily Treasury Statement account at its central banking agent, the Fed.

For example, if deficit spending $1B today, the equal and opposite ledger entry to reconcile (to balance) that +$1B that is credited from the DTS to the accounts of whomever provisioned the gov’t is a debit of -$1B to the DTS. Next, the federal gov’t collects $1B in Treasury bond sales, meaning that tomorrow $1B is coming back out from money supply circulation—which is the main reason to sell the bonds (to maintain price stability by neutralizing the potentially inflationary-bias of deficit spending). That ‘newly-created’ $1B, credited to the DTS, brings both the DTS and the money supply back to where it was—meaning that so far it’s all a ‘wash’. The final step, the ADDITION, is when the federal gov’t keyboards $1B in ‘newly-created’ Treasury bonds to those investors who just paid for them. Those assets are the Net Financial Assets that are added (that are ADDITIONS) into the banking system.

Same goes for when a household deficit spends (wants to pay on credit), the financial intermediary (the bank) is ‘fronting’ the ‘newly-created’ money in exchange for your ‘newly-created’ promise to pay back the money with interest (your ‘bond’). Your newly-created bonds create loans create deposits.

MMTers shouldn’t confuse ALL these ‘newly-created’ assets flowing back & forth above as being ADDITIONS of NFAs.

Furthermore, it’s only a ‘destruction’ if Congress decides to pay off those federal bonds for good; and the same goes for a household, it’s only a ‘destruction’ if they pay off their ‘bond’—the opposite of the creation.

Just like all debts (household debt) are liabilities but not all liabilities (Treasury bonds) are debt; all destruction (paying off Treasury bonds) are debits but not all debits (federal taxation / Treasury bond sale collection) are a destruction.

Pen Strokes Not Keystrokes

FY 2017:

 
Step #1) Federal gov’t keyboards $3.315T & spends $3.315T. 


Step #2) Federal gov’t collects back $3.315T (of EXISTING dollars from taxpayers).


Step #3) Federal gov’t keyboards $.666T & spends another $.666T.


Step #4) Federal gov’t collects back $.666T (of EXISTING dollars from Treasury bond investors).

 
Note: So far it’s all a ‘wash’…


Step #5) Federal gov’t keyboards $.666T of Treasury bonds into existence and keyboards those assets, denominated in $$$, to the bond investors (Note that is a CREATION which is ALSO an ADDITION of Net Financial Assets into the banking system).

 
Those tax & bond collections are not a ‘financing’ function, but are instead a redistribution of $$$ serving a ‘price-stability’ function. Furthermore, rather than being a ‘financial’ constraint, those Treasury bonds serve as a ‘political’ constraint—meaning that the federal gov’t can shut down if policymakers don’t agree on spending.


Those tax & bond collections are just dollar ‘drains’, ebbs & flows, from different parts of the banking system and NOT a dollar ‘destruction’ from the entire banking system. 

This is not rocket science, this is ACCT 101, BANKING 101 and CIVICS 101.

Same as the private sector when ‘deleveraging’, for the federal gov’t it’s not a destruction until the opposite of the creation (THE ADDITION), which means it’s a destruction only if those bonds are paid off for good (if the bonds are put in the ‘shredder’) and the last time that happened was in 1957.

Jim ‘MineThis1’ Boukis was right all along. 

#FakeMMT has it completely backwards.

The pure MMT insight is that, operationally, federal taxes and Treasury bond sales ARE NOT NEEDED to fund spending—not that they don’t at all because tax & bond collections are ‘destroyed’. Fake MMTers saying ‘taxes don’t fund spending’ because taxes are ‘destroyed’ are trying to usurp the ‘Power of the Purse’ of Congress, at best; or they’re confused about how the post-gold standard, modern monetary system really works, at worst.

Fake MMTers are their own worst enemy—If you can’t get the ‘description’ right, then how can you expect constituents to trust that you are getting your ‘prescription’ right (How can you expect policymakers to fund—read: approve—your ‘prescription’)?

There’s a difference between a ‘scoreboard’ (used for political ‘prescription’ MMT metaphors) and an excel spreadsheet (used by the consolidated balance sheets of the United States federal gov’t).

“The ‘keystroke to every need’ crowd are nothing more than populists offering free candy to children that in the end rots their teeth. Resorting to a ‘keystroke-first’ approach shows a lack of thought and creativity. There are ways to get at the underlying problems with pen strokes not keystrokes.”—Charles ‘Kondy’ Kondak

Thanks for reading,

Follow us at Pure MMT for the 100% https://www.facebook.com/PureMMT/

Follow MINETHIS1 and his Real Macro instructors at https://www.facebook.com/InvestingMMT/