Letter: US debt shell games

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To the editor:

Treasury Secretary Larry Kudlow said on March 18 that the U.S. can afford to borrow money to help the economy and Americans, as needed. Actually, that's not exactly what happens. In an earlier op-ed, I wrote that the nation does not need to repay it's so-called debt. In fact, it hardly ever even makes a down payment.

But, back to Kudlow. When the government decides to spend the $1 trillion or so under consideration to help the economy deal with the fallout from COVID-19, under current procedures, it may issue bonds to "pay for" that expenditure, as Kudlow suggests. Besides the point that it is entirely unnecessary for the government to sell bonds to pay for anything, if that's where the process ended, as much money would leave the economy through the bond sales as would enter the economy through the COVID-19 support.

What actually happens is that the "primary dealers," the banks that are obligated to buy the bonds from the Treasury, will almost certainly turn right around and sell them to Federal Reserve in an open market operation (you might recognize this as Quantitative Easing or QE as took place after the Great Financial Crisis in 2008 and following) or use them in "repo" operations that will amount to the same thing. Once the Fed owns the bonds, that's the end of it as the Fed returns to the Treasury any interest or maturity payment made by the Treasury to it as the bond holder (all Fed profits are returned to the Treasury). Poof. The "debt" all goes away, except, of course, the money provided by the Fed.

Modern Monetary Theory anyone?

Edward Lane,


The writer is an adjunct professor of Finance and Economics, University at Albany.



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