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Treasury default requires reprogramming



July 26, 2011 – Comments (0)

David, Chris and I had an excellent debate on checklist's blog: In particular, Chris and I had quite a lot of back on forth on the point of the mechanics of government spending. Specifically of the point that I am making that Government spending is the source of *net* financial assets within the private sector because it is the only entity that can create an asset without generating a corresponding liability (taxation does the opposite, it removes assets from the private sector). The mechanics are that the US Treasury credits private sector bank accounts directly, which is does by adjusting numbers in a spreadsheet. The idea that the Treasury needs to wait on 'bond revenues or tax revenues' is a fiction in our current system (this is true under a Gold standard, it is completely false in a fiat currency standard).

This piece by Warren Mosler helps to highlight that fact:


Treasury default requires reprogramming
Posted by WARREN MOSLER on July 26th, 2011

In case anyone thinks spending is operationally revenue constrained. Unless they reprogram the computers, the Treasury will routinely make all payments on a timely basis. And those payments create ‘real dollars’ in private bank accounts that can be spent regardless of tax revenues, and without borrowing from the likes of China.

And tonight’s speeches seemed to me confirmation of a power move by the Speaker of the House. He announced that on Wed the house will pass a modified bill that the Senate will also pass and send to the President’s desk for signature. If he succeeds, he will emerge as the leader who, from now on, will be the one to organize and have bills introduced and passed by both Houses. And on the odd chance that the economy improves, he’s positioned himself to be the Republican candidate for President.

“Steve McMillin, a former deputy director of the White House Office of Management and Budget under Bush, said Treasury has options but most of them are “pretty ugly.”

If Treasury were to decide to delay payments, it would need to re-program government computers that generate automatic payments as they fall due — a massive and difficult undertaking. Treasury makes about 3 million payments each day.”


In our current monetary system, the Government SPENDS FIRST. It is the source of all dollars in existence. It is only *after* the government spends Dollars into existence that they can be swapped for Treasury bonds. In our current system bonds are not 'debt'. Debt is an IOU that gives a party the ability to spend when it otherwise couldn't via borrowing. It is obvious that this is not even an even remotely accuarate depicition of how our current monetary system works

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