Why the US Couldn’t Just Print Money to Pay the Interest on US Bonds

August 8, 2011

The mechanism for money creation in the United States is controlled the Federal Reserve Bank. When it wants to increase the money supply it buys securities (generally treasury bills) from banks. The Fed has the power to just credit the bank with cash. It didn’t have to print the money, but it’s the same thing. The banks now having cash can lend it out. This also generally lowers interest rates. So, more people will want to borrow money.

This form of money creation was unhelpful in the debt crisis. The Fed could create all the money it wanted, but unless some of it reached the Federal government in the form of tax receipts or some other mechanism, it couldn’t solve the immediate problem.

Now let’s put out a hypothetical question. Can the Department of the Treasury print a bunch of $100 bills and send them to bond holders in payment of interest?

The simple answer is no.

The Treasury prints the money at the behest of the Federal Reserve. So, the Treasury can’t print money without the Fed asking it to do so. Even if they do, there is no direct mechanism for the Fed to credit these funds to the Treasury for payment of our Nation’s obligations. The Federal Reserve is only authorized to send currency to Federal Reserve and private banks.

So, even though we can “print” all the money we want, there isn’t a way to use that printing press for making interest payments. But Fed policy is indirectly helping the US make its interest payments by keeping interest rates low.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s