Growth Bonds: A Proposed Solution without a Further Stimulus
Program Utilizing the Authority of the Federal Reserve Bank
United States Treasury.
By Frank Cihak
The purpose of this memorandum is to initiate a conversation
regarding funding the nation's infrastructure. It is
understood that modifications to any suggested approach will
be made. The methodology described herein is to consider a
funding mechanism that will not increase taxes nor add to
the national debt.
As of April 1, 2021, the United States Treasury's official
figure for the national debt of the federal government was
$28.1 trillion ($28,081,128,042,931.00). At the beginning of
the day, April 19, 2021, the national debt has increased to
$28,187,133,815,925,027.00. This translates to about
$85,307.00 per citizen or $224,748.00 per taxpayer.
The national debt dramatically increased because of the
economic problems of 2008, quantitative easing monetary
responses, and prosecuting wars in Afghanistan and Iraq.
Then, Covid-19 happened. The pandemic stimulus payments,
including the most recent $1.9 trillion stimulus program are
the reasons for the unprecedented surge in the debt totals.
For example, at the end of fiscal year 2000, the national
debt was $5,674 trillion. The various quantitative easing
and stimulus packages are not indicators of fiscal policies
that invested in economic growth; but rather emergency
actions taken to provide short term aid to qualified
business entities and citizens. This was spending assistance
rather than investment.
Such spending programs were necessary to provide a lifeline
to the country's population. Now, however, funding the
nation's infrastructure projects is the prescription for
tangible growth coupled with a surge in employment.
What is the National Debt?
The National Debt (“Debt”) is simply the net accumulation of
the federal government's annual budget deficits. It is the
total amount of money that the federal government owes to
its creditors. Generally, the cause for the upward momentum
in the “Debt” is because Congress continues to use deficit
spending to fund federal programs while also approving tax
cuts. The only method to reduce the “Debt” is to develop
structural solutions that will stimulate economic growth.
Coincident with these facts, the Federal Reserve Bank
(“Bank”) has a balance sheet of approximately $7.795
trillion in assets as of April 14, 2021. In order to cope
with current and prior economic problems, the Bank has
employed monetary policy that has effectively flatten the
yield curve to unprecedented low interest rates levels for
all maturities. Since coordinated monetary and fiscal policy
has been absent due to the polarized political climate, the
Bank's balance sheet is bloated by necessity.
The current balance sheet total assets would have been
unthinkable in past generations. However, a $10 trillion
balance sheet total is not outside the range of
possibilities given the prospect of the administration's $2
billion infrastructure proposal. In fact, if Federal Reserve
Bank Governors and their chairpersons of past generations
could be apprised of the Bank's current asset total, they
might have considered ritual seppuku. Congress, a divided
Congress must bear responsibility for the complete
abandonment of fiscal policy to address the myriad of
Nevertheless, the core requirements of the Bank is to
promote financial stability by regulating the money supply
and managing interest rates. The by-product of these actions
should be to minimize inflation and encourage a stronger
demand for goods and services; thereby, resulting in
economic growth and more jobs. Therefore, could the Bank
consider a new initiative in conjunction with the Treasury
(monetary policy working with fiscal policy) that would fund
the nation's infrastructure projects without increasing the
Debt burden nor increasing the money supply?
The Federal Reserve Bank Funds Infrastructure Growth Bonds.
Why not consider having the U.S. Treasury issue
“Infrastructure Growth Bonds that would be funded by the
Bank? A partial lists of necessary infrastructure projects,
such as bridges, damns, the power grid, ports, roadways and
public transportation, is supplemented by increasing
broadband capacity as well as additional security features
for a vulnerable internet (minimizing hackers orchestrated
by foreign governments).
All the states have identified infrastructure that are
absolutely required to be fixed in order to avoid further
deterioration. The federal, state, and local projects could
be coordinated by the Departments of Transportation, the
Department of the Interior, the Commerce Department, and the
Department of Labor by creating a joint task force with
underwriting approval by the Treasury and the Bank.
For each project, infrastructure bonds (with a maturity of
20-years, subject to renewal) would be issue having the
features of a project financing bond. Repayment of the
“Bonds” could occur by imposing a use tax. The concept is
that repayment comes from the parties that use or benefit
from the project. For example, the repair or construction of
a new bridge, may require the imposition of a toll.
Essentially, if you use it, you pay for it. It is recognized
that such a payments can be regressive.
The projects could be segmented into three tiers:
Those projects that are absolutely necessary now;
Those projects that are required but are not deemed
And finally, those projects that are on a “wish list”.
The determination of the merit and classification of
projects would be independent and nonpartisan, conducted by
an entity like the Army Corp of Engineers.
By definition, the Bank has the funds. Therefore, there is
no need for deficit spending nor increased taxes to fix
infrastructure, nor an increase in the money supply. The
infrastructure projects would provide economic growth that
would simultaneously aid business and fuel employment. These
functions (economic growth and employment) are existing
duties of the Bank. The jobs would be good paying jobs that
would increase the tax base. A portion of increased tax
revenues collected from business and individuals could
additionally be used to retire the “Bonds” as well as
reducing the national debt (with more tolls or other use
After the passage of time, there will be projects that fail
to meet the repayment criteria, (the obligation to repay the
“Bonds”). What is the answer? Potentially, there are several
possibilities: however, the following items are enumerated:
The given project “Bonds” are restructured (perhaps grouped
into like pools akin to mortgage-backed securities);
The given project could be leased or sold to a third party
using the proceeds to pay the “Bond” debt;
The projects in default (an aggregate amount of “Bonds”)
could be written off. The Treasury could essentially cancel
the Bonds, and in tandem, the Bank would reduce the money
supply by an equal amount. There could be a tick up in
interest rates resulting in a more normal yield curve. This
would mean monetary and fiscal policy has started to return
to historical normalcy.
The result would be the country's infrastructure projects
would be upgraded and completed. The companies doing the
work would be financially restored. Also, additional
employment (construction and manufacturing) would provide a
multiplier effect that would yield more consumer and retail
jobs resulting in an overall increase in the tax base.
What if new legislation was required to implement such a
proposed solution. Since every state would benefit,
bipartisan legislation should occur. A negative vote by a
legislator would require an explanation to voters about why
new jobs cannot occur; especially, without increasing the
debt or taxes. This would not be popular irrespective of
This alternative funding mechanism would allow the proposed
tax increase to be considered separately. The ultimate goal
is to restore fiscal integrity by generating annual budget
surpluses; thereby, beginning to get our economic house in
order. It is not simple. There is the need to maintain
Why not a test? The suggestion is to fund $250 - $300
billion worth of projects. This would be less than four
percent of the Bank's total balance sheet assets. The
reality is $2.0 trillion infrastructure projects will not
all start at once. A phased approach means that the proper
analysis and sequencing of infrastructure projects will be
accomplished. A phased approach means the Bank can have an
orderly sale or liquidation of treasury securities and
mortgage back securities in order to purchase the
infrastructure bonds. This alternative does not preclude the
sale of infrastructure bonds to qualified third party
Frank Cihak is a retired 79 year old who amassed over 50
years of work experience in financial institutions.