Any alternatives to debt for expanding the money supply?

There are valid reasons for wanting to expand the supply of a given currency, such as population growth, or perhaps real increases in productivity.

My understanding is that for the US at the least the only mechanism we have to cause that increase is through the Fed creating more national debt.

Does anyone know of any other mechanisms in use today or that seem like a better idea than debt?

If not, should we just get comfortable with the idea of a perpetually large national debt, at least up to a certain size?

 

There are many methods available to the Fed for increasing the money supply without increasing the national debt.
The money supply can be increased if the Fed lowers its member banks reserve requirement or stops paying interest on excess reserve deposits. It can also buy up private debt on the open market. It can push the overnight lending interest rate down. It can reduce the discount for securities offered at its discount window. These actions can significantly increase the money supply without increasing the national debt.

If you mean by national debt only the Federal Government debt the Fed does increase the money supply by buying up Federal debt but in general monetary authorities are not very fond of increasing the money supply this way since it leads to a perception among the public and politicians that tax cuts which create a gross underfunding of the government are good public policy. The big problem with depending on the Fed to finance the government instead of taxes is that as taxes are cut and revenues decline the Fed pumps ever increasing amounts of money into the economy in its purchases of government debt and inflationary bubbles begin to form in various sectors of the economy.

Currently tax revenues are about 16% of GDP while expenditures are around 21%. The average from 1950-2000 is about 19% revenues and 20% expenditures. Expenditures are projected to decline to about 19% of GDP by 2016 and revenues to decline to about 15%. There is no political party willing to cut Federal expenditures to meet tax revenues and there is not enough political will to raise taxes so perpetually increasing debt is unavoidable.

 

The Fed is not the only means of increasing the money supply. Banks do it every day. An example is when you deposit $100 in a bank (keep in mind this is a basic explanation). Banks are obligated to keep a 'reserve' on hand and it's typically 10% of deposits in order to have enough funds to give back to those wishing to withdraw their money at any given time. Bank runs ruin that and are the reason why the 10% is BS because their only option is to lock the doors until the bank run ends.

Anyway, your $100 deposit left $90 available to loan out. So they do that. The key here is they do it at interest, meaning whoever borrowed that $90 now owes something more than $90 back to the bank. Where does that interest come from? At the end of the trail it comes from additional debt in the currency because banks create the capital to fund the loan, not the interest to be paid on top of it. In order to pay back with interest, debt must be accrued by the country's money system. Otherwise, debts simply cannot be repaid in full.

But back to that $90 loan. When someone got that loan they had to do something with the money. Imagine that they deposit it in the bank to buy things with later. That $90 deposit has a 10% reserve and $80 can be re-loaned at interest. That's the cycle and that's how banks create money. They continue to loan out money that they do not even have. Remember, it started as only $100 but in the end it becomes $1000 worth of loans plus interest. And that has been happening for many, many years. Beyond government spending, this also increases our debt and our government has zero control of it. As a matter of fact, Quantitative Easing (QE) is actually giving banks lots of liquidity with which to loan money. So in essence it's just growing our money supply if the banks actually loan out all that "credit" they get through QE.

In a debt-based fiat money system as we have, debt will incur indefinitely or until the system collapses. It can't be any other way and all the talk we hear about paying off the debt is just talk from people who don't really understand how a debt based money system works. Without debt there is no money. Fortunately, it's not that way in our lives because we do not have the ability to create money and we must live within a fixed budget. Our government has that sovereign right to create money so they can do so as necessary to fund the needs of the country. It seems politicians use those big numbers as scare tactics against each other as they find it convenient, then deflect issues about it as it becomes inconvenient. The real fix is for the government to create money NOT at a debt, which is our constitutional right already. They just gave that away in 1913 when they allowed the Fed to be privatized, which led to right here where we're talking about all this debt.

Abraham Lincoln and the greenback...that's the system that could get us out of this mess so long as they don't base it on a precious metal.

 

The thing is that economies cannot grow unless the supply of money does. In the past the supply of money was based on a scarce commodity. The economy was regulated by the supply of gold and silver, which created a boom and bust economy as gold and silver strikes flooded the market and drove speculation in the markets causing over-investment that led to a surplus of goods which led to falling prices and wages and an economic bust as too many goods chased ever less money. Banks lending more then they have in deposits has been going on since the 14th century. The entire economic structure of the planet has been built and operates on this system. The only problem with it is that bankers sometimes take inordinate risks that lead to a collapse of the entire banking system. This has also been going on since the 14th century.

Central banks came into being in the later 19th and early 20th century in order to bring some stability to the economy, blunting these plagues by regulating the supply of money created by both commodities and the banks. The goal of central banking is to match growth in the supply of money to economic growth in order to maintain relative price stability. There are big existential problems for central banks attempting to meet this goal, government mandates for unachievable goals, fiscal profligacy, free trade agreements, money arbitragers.


Nevertheless between them all they have financed the growth of the world economy in a way that would be impossible without them. A return to the gold standard is impossible. Private holdings in India are 40% of the entire planets gold by many estimates. This is more than all the central banks and far more than the commodity markets. If the US returned to the gold standard the people of India and China and the Gulf could buy up the US and the EU lock stock and barrel because they have all the gold.

 

The money supply is all debt (public & private).
The vast majority(~93%) of the money supply is private bank credit.

This does not increase the money supply.
Banks are not reserve constrained.

When the Fed buys Federal debt directly it adds to the Treasury's reserve account but, as it is not part of the money supply, does NOT increase it.

 

The Fed is not allowed to buy Federal debt directly but must buy it on the open market like everyone else.

No question about that.

Banks carry reserves so they can meet demands for payment that may arise from their activities. A bank that has insufficient reserves can quickly become insolvent in times if immediate demands exceed its reserves. Many banks have become members of the Federal Reserve System in order to enjoy its benefits, one of which is the ability to trade excess reserves with other member banks and earn interest on them. Another is the ability to acquire cash quickly from the Federal Reserve Bank itself if the bank suddenly finds itself in a position where its own reserves are inadequate.

If the Federal Government never ran a deficit and always balanced the budget banks would still need to carry reserves for the simple reason that depositors might occasionally want some of their money back and the bank better have some cash on hand to give to them if it is to stay in business. The history of banking all over the world is littered with stories of banks, and entire banking systems suddenly collapsing because of banks that failed to carry sufficient reserves to meet the demands of depositors.

Wrong. Public Sector + Private Sector + Foreign Sector = GDP, which is definitely not zero.

 

If there were it would be going on in my garage right now!!

Debt is an easy thing to control...just live within our means. If we have an emergency and need to spend some debt money, this is fine but then cut back for the next period in order to pay off that debt. Debt is not a bad thing. The abuse of debt is a bad thing. Businesses use a line of credit which is a great thing but it is a bad thing if those businesses don't pay down their lines of credit.

Debt is also a behavioral issue. I'm guessing no matter how much people earn they still create debt. And our typical behavior is to create as much debt as we can service. We get a raise or a windfall and the first thing we do is buy more! Since people have this behavior, people who depend on their government will demand the government continue to provide no matter if the government must use debt. Probably 100 million Americans are barely paying any taxes to support the federal government yet these same 100 million demand government continue to provide more and more...and why not since these 100 million aren't going to pay the bills...

 

Actually if you include people who are children and elderly pensioners and corporations it is closer to 200million who do not pay any federal income tax. This does not mean these "people" pay no taxes. On fact many of them pay more in taxes as a portion of their income than those who pay income taxes and many of these non-tax payers are simply wanting the benefits they have already paid for. You have characterized the pensioners who demand their Social Security benefits that they have paid into their entire lives as non-tax paying freeloaders. They have paid so much into SS and Medicare that not only did they pay for the underfunded benefits of past retirees but created a $2Trillion surplus in the SS and Medicare trusts.

Is it really their fault that a republican dominated government decided in the early 2000s that tax cuts and deficits were more important than gaining a fiscal position that would allow it to begin repaying its borrowing from these funds when it was well known over 30 years ago that SS would move from surplus to deficit around 2010. The right wing mantra through the 2000s was that deficits do not matter.

Debt is indeed a behavioural issue, an issue of right wing denial. The right denies that the debt and deficits it created in the 2000s with its tax cuts and deficits while the economy was booming have anything to do with the massive debt and deficits now. This is preposterous. If the republicans had spent their years in total control of the Federal government reducing the debt instead of cutting taxes the government would have been in a far better position to deal with the economic calamity of 2008 and its need to begin repaying its borrowing from SS.

As early as 2005 the CBO projected a budget deficits over $1Trillion by 2010. Their projection did not include the economic meltdown of 2008 which reduced tax revenues by over $800Billion and the increased government spending to deal with to well over $2Trillion from 2009 to 2011, much of which was put in place before Obama became president.

Federal deficits have come down every year since then, the latest projection is that the 2013 deficit will be around $600Billion due to increased revenues from economic growth and reduced spending from the sequester. For the past 60 years or so federal spending has averaged about 20% of GDP and Federal revenues about 19%. The Bush tax cuts reduced Federal revenues to about 16% of GDP while spending increased to about 21% by 2011, is currently about 20% and is projected to decline to less than 19% by 2016 and then rise for a decade because of demands from SS to be repaid.

There is no possible way for the Federal deficit to be eliminated by spending cuts alone. The projected increases in the Federal budget are from things that Congress cannot, or will not control. Neither the right or the left will mess with SS or Medicare and these, along with interest on the national debt, are the drivers of increased spending for the next decade. The rest of the budget can be cut to zero, including Defence and it will not be enough to accommodate these demands and balance the budget within the next half century given the current revenue scheme.

In other words, taxes will go up sooner or later regardless of any politics. Under the current scheme all Federal revenues will be used to pay back government borrowing from Social Security, Medicare, and interest on the public debt by 2025. All other functions of the government will need to be funded by borrowing.

The really crazy part is that the longer tax increases are put off the greater the tax increase will need to be. If the income limit on SS contributions was eliminated SS would be self funding into the indefinite future. If the Medicare contribution was raised to 6% and income limits removed Medicare would also become self funding into the indefinite future. If capital gains were taxed as ordinary income the budget deficit would be eliminated by 2020 if increases in government spending were held to the rate of inflation.

There are certainly a lot of people who view debt as something they can take on as long as they can pay it but that is not a perspective that leads to long term prosperity. Any prudent person would take the opportunity that increasing prosperity provides to pay down their debt and save what they can for the inevitable times when things turned bad. The 2000s provided that opportunity for the Federal government but the republicans in charge decided to ignore prudence.

Once a democrat was elected president they suddenly became the party of fiscal responsibility and the result was a government so constrained by debt blabber from the right that it was unable to respond adequately to the economic calamity.

The current low growth in the economy can be laid directly on the doorstep of the right. They have no interest but power and have sacrificed an entire economy in trying to gain it back.

 

I don't discuss politics so I have nothing to say about your political rants. Debt is created when someone spends more than they have and continues this process as long as they can get away with it. This is a complete lack of fiscal responsibility. In government it is 100% politics. There are zero plans by Obama or anyone in the federal government about paying down the US debt. In this context...debt is a bad thing...

 

Increasing the circulation of money in our Institution of money based markets must expand the money supply.

 

We can start by placing a tariff on communist China's imports the way they place a tariff on our imports into their country. But why is it every time a politician brings this up he immediately get's shot down? Is it because ex-patriot multinational companies pay huge amounts of money through lobbyists to protect their profits by paying 15% or less in federal taxes? They are also reaping huge profits by playing both sides. This all started when China joined the WTO back in 1994 when Bill Clinton signed NAFTA. Seems that huge China market Clinton promised didn't work out so well thanks to a dictator government which is preventing the free trade they agreed to. Now Hillary Clinton says she is against NAFTA. Really?

 

I believe correcting for any inefficiency in our market for labor may be sufficient.

 

Your understanding is incorrect. While it is true that the Fed historically has purchased US Govt debt as the vehicle for injecting new (base) money into the money supply, we certainly do not need to increase the debt for this purpose. Even after 4 years of quantitative easing, the Fed still holds just a little over 10% of the US Govt debt. The rest is held by private entities, governments, or US Govt pension funds.

There is already enough debt for the Fed to conduct its operations for decades into the future.

 

Yes, I know.
I was replying to a comment regarding if it did.

But where would the reserves come from?

No.
You are confused.
This is the Sectoral Balances Identity.
It is derived from the fundamental principle of accounting that for every financial asset there is an equal and offsetting financial liability.

 

Why do you think deficits are bad?

In a nation with massive trade deficits, the public sector can net save only if the government runs a budget deficit bigger than the trade deficit.
This is true by accounting identity.

Public Sector + Private Sector + Foreign Sector = 0

The state of the Federal budget should NEVER be the aim of policy.
The real economy should always be the focus for policy making.

 

It isn't that deficits in themselves are bad, but that public policy choices may be bad if they don't provide for the common defense and general welfare of our republic.

 

Can you explain that a little. How does "Public Sector + Private Sector + Foreign Sector = 0"?

 

It is based upon the fundamental principle of accounting that for every financial asset there is an equal and offsetting financial liability.
The sum of all financial assets must equal the sum of financial liabilities.

The economy is often divided into three sectors, the Public Sector, the Private Sector & the Foreign Sector.
Taken alone, the financial assets plus liabilities of any sector MUST equal zero.

In order for any sector to accumulate net financial wealth, it must be in the form of financial claims on another sector.
One sector’s deficit equals another’s surplus.
If we sum the deficits run by one or more sectors, this must equal the surpluses run by the other sector(s)

Public Sector + Private Sector + Foreign Sector = 0

 

I believe a positive multiplier effect should be a requirement for any public policy to be said to be, an investment in the general welfare.

 

What is the proof of that principle?

See above. Why must that be the case?

Don't see it. When the Govt runs a deficit, it borrows money, it issues debt. The lender pays out one asset (cash) gets another (loan payable). Where is the surplus?

Doesn't make sense, but maybe you will be able to explain it.

 

For example:

I issue an $100 IOU to you in payment of goods received.
My IOU is my liability & your asset.

My Balance Sheet:

Assets +$100 goods
Liabilities +$100 IOU owed to you​

Your Balance Sheet:

Assets +$100 my IOU
Assets -$100 goods​

Notice that our balance sheets are mirror images of eachother.
My deficit is your surplus.
Your savings are my debts.
The sum of my liabilities (-$100 IOU) & your asset ($100 IOU) is zero


Now, assume we are the only two members of the economy.
The only way for you to save (surplus) is to accumulate claims against me, that is, for me to run a deficit and vice versa.

My Sector(-100) + Your Sector(100) = 0​

It is known as the Sectoral Balances Approach

This equation is called the Sectoral Balance Identity. It is true by accounting definition.

Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0

 

Really? you think that all bank reserves come from government debt?

Bank reserves come from the portion of a banks capital and deposits which they keep on hand so they have enough cash to deal with day to day activities, cover bad loans and the occasional emergency that may require a sudden large disbursement of cash.

You have conflated a basic bookkeeping principle of accounting into the entirely different world of macroeconomic accounting. They are entirely unrelated since they use completely different principles and methods. The only thing they have in common is the use of the word accounting. Accounting and economics use many of the same terms but with distinctly different meanings that describe wholly different things.

Zero balance bookkeeping is just one method of accounting among many. Economists do not generally use zero balance bookkeeping because it has proven to not accurately reflect the state of the larger economy, which requires more complex considerations than simple zero balance bookkeeping can accomplish.

 

How would "increasing the size of the pie" be reflected through accounting principles?

 

I am wrong.
I will elaborate at a later date.

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I'm not sure what you mean.

 

How does an economy expand or contract, through accounting principles?