Why Won't The Fed Tell Congress the Truth About Our Debt?


Warren Mosler is one of the founder fathers of Modern Monetary Theory, a heterodox school of economic thinking the breaks from both classical and standard Keynesian economics. This is the third of a three part series by Mosler looking at the Fed from an MMT perspective. Part I is here. Part II is here.

The Federal Reserve knows full well that solvency is not an issue for the government of the United States, short term or long term.

It knows as operational fact there is no such thing as the U.S. government ‘running out of money' or 'being dependent on China' for funding. Or 'leaving the tab to our grand children.'

The Fed knows debt management is nothing more than shifting dollar balances between reserve accounts at the fed to securities accounts at the Fed, and that paying off the debt is nothing more than shifting dollar balances from securities accounts at the Fed to reserve accounts at the Fed, with no grand children involved.

And the Fed knows that they, and not markets, necessarily set interest rates by voting on them, as the fed is the monopoly supplier of clearing balances (reserves) for the banking system and therefore what's called 'price setter' in economics 101.

In other words, the Fed knows the U.S. can't be the next Greece, as politicians from all sides continuously warn and fear monger. They know that Greece and the other eurozone member nations are in the position of US states, currency users, not the federal government, the issuer of its currency. And they know that the ECB is the currency issuer for the euro, and, like the U.S. government, its expenditures are not revenue constrained.

And yet the Fed remains silent when Congress allows this misinformation to determine public policy.

And, worse, FOMC members have tended to encourage the use of this misinformation, with their talk about the merits of long term deficit reduction and all that goes with it.

So my criticism of the Fed is the failure to educate Congress and the nation in general.

And it's my humble opinion that a word from the Fed on how it all actually works would most likely result in immediate policy from Congress to restore output and employment to desired levels without excess inflation, which also happens to be the Fed's mandate.

The Fed knows or should know that it may have it backwards on monetary policy, that the dollar swap lines are functionally unsecured, and that the Fed has been withholding information from Congress with regard to monetary operations that would likely enable an immediate economic recovery.

Yes, these are harsh criticisms, and yes, they are only from the MMT camp.

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