The media and much of the blogosphere are framing the coming debt ceiling decision, somewhen in the March to early May period, as one in which the Republican-majority House of Representatives may refuse to extend the Federal debt ceiling, forcing both a Government shut-down, and also a possible US default in paying its debt obligations to its creditors. Republicans, especially “tea-partiers,” saying they will not vote to extend the ceiling, see this as an opportunity to force spending cuts and “entitlement reform” out of the Democrats and the Obama Administration.

There is an effective response the President ought to make to the threat of a refusal to raise the debt limit, which would allow him to avoid the “forced” spending cut scenario. In fact, he ought to preempt the impending threat, right now, way before there is a Congressional vote on the debt ceiling. The basis for the preemptive move I’m referring to is given in a post by Beowulf, called “Coin Seigniorage and the Irrelevance of the Debt Limit,” and, was also discussed in a post by myself called: “Will He Say He Has No Choice or Will He Use Seigniorage?”

You should read both of these posts, if you’re interested in getting into some of the details on coin seigniorage, or getting more deeply into the political context of the whole issue. But to summarize the main point on seigniorage, the Treasury, which the US Mint is part of, could order the mint to produce special very large face value Platinum coins (e.g. each coin might have a face value of 500 Billion USD or more), and to deposit those coins in the Mint’s account at the Fed. The Fed could not refuse the coins or fail to credit their face value because they are legal tender. Since the Federal Reserve Banks (though not the Board of Governors and the FOMC) are legally in the private private sector, acceptance by them of a deposit in the form of the jumbo coins, resulting in their markup of the Mint’s Account by the face value of the coins, from an accounting point of view, gets recorded as a sale of the coins to the private sector. The portion of the receipts from the “sale” representing the Mint’s seigniorage profit, after the costs of minting the coins are subtracted, may then be periodically swept into the Treasury General Account, and would go into the category of “miscellaneous receipts” to the Treasury, lifting the Treasury’s revenue total.

Enough jumbo coins could erase the annual deficit, and since part of government expenditures in any year involves paying off interest and principal on the national debt, enough of them would also erase the national debt over a decade or more. There would be no national debt to leave to our grandchildren, and also there would be a continuously declining debt-to-GDP ratio. Technically, there would also be no more deficit spending, even though in most years, Government spending would continue to exceed tax revenues.

So, coin seigniorage looks like a solution to the debt ceiling crisis and also to Congress’s requirement, which is the cause of our having a national debt, that the Treasury must issue new debt when it plans to deficit spend. To meet the coming debt ceiling crisis, I think the President ought to use it to preempt the Republican House by doing the following.

– Direct the mint to create a jumbo platinum coin with face value $500 Brillion.

– Direct the mint to deposit the coin in its account at the New York Federal Reserve.

– Direct the Treasury to “sweep” the mint’s account to collect profits from coinage (this would result in marking up Treasury’s account at the New York Fed by $500 Billion).

– Inform Congress and the public that the previous actions were taken to head off any possibility of default or Government shutdown due to the House’s possible refusal to raise the debt limit. The President should also mention that increasing the size of Treasury’s account balance at the Federal Reserve will not be inflationary because Government spending will remain exactly the same as it would have been if the coin had not been minted.

– Wait for reactions to this move. The ensuing uproar from many quarters including the business community, many economists, and the Federal Reserve, will focus on fears of inflation, and it’s likely that top economists, and some Federal Reserve officials such as Ben Bernanke will claim that spending without issuing debt to absorb the new money placed into the private economy is inflationary, because the quantity of money in the economy will increase. It’s likely that this view will create quite a stir in the media, and even that the value of the dollar will go down in international markets briefly, because the expectations of people will be affected by this argument.

– Respond to this reaction by pointing out that it was forced on the Administration, which could not stand idly by while the full faith and credit of the United States was threatened by irresponsible Congressional partisans whose purpose was to take the economy hostage to force an agreement on spending cuts that are against the wishes of the American people, as indicated by every public opinion poll appearing in recent weeks. The President should also point out, that even though he doesn’t believe that the minting of jumbo coins to pay for spending is inflationary, for reasons he previously stated, he is willing to work with Congresspeople who think there’s a possibility of inflation enduring beyond the initial psychological reaction to minting jumbo coins, and then he can suggest two proposals that Congress may want to consider to remove the need for the Executive Branch to issue jumbo coins to meet debt ceiling crises.

First, Congress could eliminate the debt ceiling so that the US has no more crises of this sort again. Congress can still cut/control spending through the appropriations process, even in the absence of a debt ceiling, and this is the appropriate way for Congress to do it so that individual Congresspeople must go on record for any cuts in Federal programs they want to make.

Second, Congress could eliminate the requirement that Federal deficit spending must be matched by issuance of new debt dollar-for-dollar. The President could emphasize here that if this was done, not only would there be no more debt ceiling crises, but the Federal Government could pay off most of the national debt, except for very long-term instruments, within ten years, because the only thing that is maintaining that debt is Congress’s requirement that new debt be issued in response to deficit spending.

He can also point out here that he doesn’t think that the rollover of Federal Government debt is any problem for the long run because of the way the US’s fiat currency system works. But for those who do think it is either a short or long-term problem, then this option will eliminate the problem because it will eliminate the national debt which we will not then have to hand on to our grandchildren. He can then add that he knows that many will react to this proposal by saying that it will be inflationary to try to eliminate the national debt this way. But he thinks that since the amount of Government spending won’t change if we implement this proposal; he doesn’t think so. But if it should turn out that inflation results from this effort to pay off the national debt; then the Treasury will simply begin to issue debt again to drain off the excess money supply.

– The President, after making these proposals, should add that the $500 Billion in revenue from coin seigniorage will probably take the Government through August or September without its having to issue new debt, and that if Congress can’t come to agreement on what to do about the debt ceiling before then, he will issue a new jumbo coin, this time one having $1.5 Trillion in face value, and that he will use the new coin for program spending and also to pay off $1 Trillion of the national debt. He can also say that he hopes he doesn’t have to do that, but like institutions in the private sector, the Government can’t operate well in an atmosphere of psychological uncertainty. Government workers have to know that their work and family lives will not be placed under stress by partisan conflict in Washington. In addition, private sector businesses and workers are greatly impacted by any freeze in Government spending caused by attempts at hostage-taking by Congress.

I think that Mr. Obama is a winner in the scenario I’ve outlined. He will be much more popular than he is now by virtue of rendering the debt ceiling threat impotent, and because he will be perceived as acting strongly and cleverly to get around the Republican House to avoid a shut-down of the Government and the possibility of default.

The Republicans will come back for a second bite at the shut-down apple when they take up the Omnibus spending bill. But here they will find that they won’t be able to use the ballooning deficit/national debt rationalization to justify their attempts to hold the Government hostage to get cuts in discretionary spending and the social safety net. President Obama will have, by then, demonstrated that by using seigniorage he can take the deficit and debt issues completely off the table, and that Congress can’t simply force Government to shut down by hostage-taking as long as coin seigniorage is there.

This lesson won’t be as clear in the case of the $500 Billion coin, even though some of that money will be used to pay off debt. But, once people see that the national debt doesn’t need to rise if seigniorage is used; it will be easy to explain that if it is used more, the national debt can actually be paid down or paid off. Of course, if the President ends up having to use the $1.5 Trillion coin, then there will be a very graphic demonstration that having a national debt is a matter of a policy choice which Congress is now making, not a matter of necessity.

After that, objections to Government spending based on the idea that it will increase the deficit and the debt will be “off the table.” And then we can move on to handle the many real problems of the American people without worrying about the purely political and psychological, but non-financial and no-economic, problems of the debt, and the deficit.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).