Frequently Asked Questions

The interest we pay on the national debt is a fairly complex issue which generates a great deal of confusion, and this is not the place for a comprehensive treatment of the subject. This said, it is important to recognize that the interest we pay on the nationaldebt is entirely a policy choice and is not at all necessary to obtain revenue in order to fund the government. This is because the government does not need bond holders’ money as the government has the power to issue money itself. Why pay interest on our bonds or issue them at all then? There are a number of reasons which may or may not on balance justify the practice. The most obvious and uncontroversial reason is that by paying interest on treasury bonds, the government provides savers with savings instruments that allow them to earn interest with negligible risk of default. The public interest argument for providing such instruments is clearest in the context of their use by pension funds. For wealthy money managers of course it is less clear that it is in the public interest to provide such an instrument. 

One thing is clear however, which is that the issuance of interest-bearing government securities need not be linked to deficit spending as it currently is. The federal government can and should deficit spend without issuing corresponding treasuries. Then, if we consider it on balance in thepublic interest to provide interest bearing government securities we can allow investors to purchase them in whatever quantity we see fit without being constrained by aligning the issuance 
of these securities with our deficit spending.

In recent decades, shadow banking has become central to our financial system. There are countless ins and outs to how it works, but the following is meant to provide a verybasic account in order to give people a sense of how we view it and its significance for our project. Shadow banking is typically defined as credit intermediation outside the traditional banking sector. It is generally thought to have arisen both in order to avoid regulations associated with the traditional banking sector and to provide investors with substitute secure savings instruments in the context of a shortage of US treasury bonds. 

For the purposes of our project there are two main points with regard to shadow banking. First, shadow banking, like traditional banking, entails the “private allocation of our public’s monetized full faith and credit”, or in other words, private money creation which relies on public support to prop up and maintain the value of the money created. Second, the existence of the shadow banking sector means that any imposition of regulations on the traditional banking sector threatens to drive financial activity into the shadow banking sector, potentially rendering these regulations counterproductive or at least ineffectual. We believe it is nonetheless viable to impose credit controls on the traditional banking sector in order to limit bank allocation of public funds to public interest uses, because there are ways of curtailing shadow banking activity as well, such as with a financial transactions tax (among others which we will elaborate in an upcoming paper).

Contrary to popular belief, money creation is not a rare occurrence that is hyperinflationary whenever it takes place. As we say elsewhere, money creation is as common as dirt, and is performed everyday by the government as well as by banks and other financial institutions. Irresponsible money creation however can be part of a dynamic that creates hyperinflation. Actual cases of hyperinflation are generally, if not always, the result of deeper political and economic crises.

No. The past several decades since the collapse of the gold standard in 1971 shows definitively that money need not be backed by gold in order to retain its ability to function as a medium of exchange, store of value, unit of account and means of settlement. The idea that money must be backed by gold is a relic of the gold standard era. It is key in order to take advantage of the opportunities presented by the post-gold standard era that we get beyond this kind of thinking.

Actually it is irresponsible for a government that creates its own currency not to spend more than it collects in taxes. By spending more than it collects in taxes the government provides the economy with a money supply that is created through public spending rather than private lending. This reduces the economy’s reliance on private borrowing and allows the government to better attend to public priorities.