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As part of a wonderful discussion thread on the legal basis for using Platinum Coin Seigniorage (PCS), following a post by beowulf (Carlos Mucha), the first to propose the Trillion Dollar Coin (TDC). Michael Sankowski, one of the founders of the Monetary Realism approach to economics offered a very long reply directed at High Value Platinum Coin Seignorage (HVPCS), and the TDC itself. Mike’s reply is a good example of the many misgivings people have about using PCS with face values in the trillions. Since Mike is a supporter, rather than opponent of PCS and believes that PCS is legal, I thought it would be worthwhile to deconstruct his long comment and show that his downsides are pretty speculative and don’t provide good grounds for supporting incrementalism is using PCS.
Mike begins:
There are huge downsides to printing a high value coin. Like it or not, our current setup requires the buy in of a large number of participants.
I don’t think it does. Using PCS requires only a decision by the President and his willingness to command the Treasury Secretary to do his bidding. In turn, the Secretary must command the Director of the Mint, and also the Chair of the Fed, to play their roles in creating the coin and seeing to it that the Fed credits the face value of the coin to the Public Enterprise Fund (PEF) account at the New York Fed. The fact that the President can command the Secretary is well-known. What’s not so well-known is:
12 USC § 246 – Powers of Secretary of the Treasury as affected by chapter
Nothing in this chapter contained shall be construed as taking away any powers heretofore vested by law in the Secretary of the Treasury which relate to the supervision, management, and control of the Treasury Department and bureaus under such department, and wherever any power vested by this Act in the Board of Governors of the Federal Reserve System or the Federal Reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.
So, one of the powers vested in the Secretary of the Treasury before creation of the Federal Reserve was certainly to spend its legal tender into the economy. But to do that under an arrangement where the Fed is its bank, requires that the Fed deposit and credit its legal tender into its spending account, the TGA. So, I think it follows that under 12 USC 246 the Secretary has the authority to order the Federal Reserve to credit that coin so Federal spending can proceed.
The coin is new. The coin is weird. Even if the effect of the coin is the same – or similar – to quantitative easing, it’s still new and weird for nearly everyone in the United States.
Well, it’s a new use of coinage, sure. That will make it “weird” for some people; not so weird for others. Using the coin forces the Fed to add reserves to the PEF which in turn gives the Treasury the ability to fill the pubic purse with most of the face value a platinum coin. I don’t find that “weird.” I think it’s the way things ought to be done. What purpose is served by using the term “weird” to describe PCS? Is it to discredit the idea because it’s new; or is Mike trying to show that even though he’s a supporter of PCS, he’s still a Very Serious Person (VSP).
Actually minting a very high value platinum coin could easily disrupt markets, it could easily freak out the larger investment community. This proposal is totally out of left field – heck the mainstream is only now thinking about the coin. We’ve had a few years over here at MR and in the MMT community to think through the pros/cons, and I bet we still haven’t covered many of those pros and cons.
First, I think a good many of the pros and cons were vetted in a single thread at Warren Mosler’s site soon after the first blog post by beowulf appeared focused mainly on the coin. And there’s been an awful lot of discussion of it since then, including a lot of mainstream discussion in the Summer of 2011 and for the past two months.
Second, labeling the coin as “out of left field” is is strange because beowulf is certainly not “left,” but a long-time Republican. His idea is new, that’s all, and it’s about Treasury creating fiat money. Looking at the history of the United States, Treasury has created fiat money from time-to-time under strong Executives. So, why is the PCS proposal to do that again “out of left field”?
And third, what exactly does “freaking out the investment markets” mean. I understand that there will be lot of excitement and maybe some hysteria if the President mints a $60 T coin. But if he uses it only to pay down Government and Fed-held debt immediately and to cover deficit spending, then why would people be overly concerned for too long; especially if the Federal Reserve takes care to assure people, that as Treasury Securities get more scarce, it will be compensating by paying Interest On Reserves (IOR), to provide a continuing vehicle for risk-free investment.
Market confidence isn’t something that is easily shaken, but when it is shaken, the results are disaster. The actual flows in the market only shut down for about a month or so in 2008 before they started to recover, but the job losses were horrific. The impact could have been much worse had the fed not reacted like it did.
“Market confidence” is a slogan that the financial community uses to scare the rest of us. Mostly, it’s just the “confidence fairy.” It was lost in 2008; but there was a concrete reason for its collapse in the collapse of Lehman Brothers and the exposure that created for the rest of the FIRE sector. That is, back in 2008, following on the housing crash, and Lehman’s failure, there was reality behind the reaction to hold on tight and panic.
But, if the President mints a $60 T coin and uses it to pay down nearly 40% of the debt subject to the limit; rendering debt ceiling conflicts immediately a thing of the past; then why should that shake market confidence for more than a few days, if at all? I don’t see the factors that would reinforce any initial irrational psychological reaction to that event. Also, I think that if the financial system is that fragile that we have to postpone implementing direct issuance of money by the Treasury, when we need to have that done to defuse austerity; then that is just another reason for taking the big banks into resolution and rebuilding the whole system from the ground up.
The world is not ergodic, as Paul Davidson points out. There are random features of the world which cannot be foreseen, cannot be accurately forecast, cannot even be put into a probability distribution. Keynes called this uncertainty, as opposed to risk, and Keynes was right.
Stepping out into the world with something which is in every sense revolutionary for our existing monetary system isn’t something to take lightly. Not only that, there are no boundaries or programs in place to constrain the power to directly issue money. As it stands, we’re just making it up without any constraints at all.
Taleb calls these “Black Swans,” and they certainly do exist. But we can’t deal with Black Swans by pursuing all innovations incrementally, or in safe-fail modes. We have to weigh the likely costs of waiting to fully implement an innovation with the explicit costs we’re experiencing without taking advantage of it.
Right now we’ve got 15-16% of the work force wanting full time jobs and unable to get them. We’ve got millions of home owners underwater. We’ve got 55,000 fatalities due to lack of health insurance, since the ACA hasn’t really gone into effect yet, and even after that, we’re likely to still have 35,000 annual fatalities unless we pass Medicare for All. We have a crumbling infrastructure which needs $3 T in new investment and on and on and on. I won’t counsel an incremental introduction of PCS over a period of a decade when the minting of a $60 T coin could free up the whole political system to begin to solve these problems in a matter of months; because of the possibility of a Black Swan that escaped my analysis.
And as far as constraints are concerned, the ones that are important here aren’t constraints on how much can be put into the public purse. They’re constraints on the purse strings. Those constraints are fully in place even with huge PCS face values. Congress still controls appropriations of deficit spending so that no seigniorage can be spent unless Congress appropriates that. The only other spending of seigniorage that would be allowed is repayment of scheduled debt.
Putting together a program where this change is introduced to the market in small increments seems wise to me. I do like the “target” plan you’ve suggested. It’s measurable. We know how much it will be in advance of the program being implemented.
I’ve already critiqued the “target” plan of beowulf’s Mike refers to, in this piece, which is a lengthy evaluation of incrementalism in using PCS. The bottom line is, that incrementalism won’t work, because it will end in likely repeal of the PCS authority.
Many people who trade bonds are severely freaked out by the inflation prospects of QE. Yes, they are dead wrong. They are terribly wrong. But this doesn’t mean we should flip them the bird and shove $60T down their throats, just because we can. It’s possible, but is it wise – even if some parts of our financial overlords are directly responsible for criminal activity?
No one’s suggesting that $60 T should be shoved down their throats. The $60 T proposal is to end debt issuance accompanying deficit spending and use seigniorage instead, and to repay the $16.4 T debt as it falls due, except for the intragovernmental and Fed debt which would be paid immediately. The other $43.6 T would be spent in accordance with Congressional deficit appropriations over 15 – 25 years. Is this a “wise” proposal? Well, I think it’s a lot wiser than one that leaves austerity politics in place for a decade or more, and costs our fellow citizens so much in foregone government financial investment in the public purpose.
Like Bill Black, I am pissed the banksters never got charged with any crimes. They knew. They freakin’ knew. They did bad things. But not everyone did bad things, and I’d argue even most of the finance industry did not do bad things. But this does not excuse the criminals, and there were many criminals.
If you’re so pissed at the banksters then why aren’t you out there doing something about them. There’s an institutional structure out there that nourished the banksters and the fraudsters. At the center of it is the big banks and the Federal Reserve which refuses to regulate them. The Fed needs to be subordinated to the Treasury if this system is going to placed under control. And the first step toward doing that is minting very big coins as part of a process of subordinating monetary policy to fiscal policy.
So we’re here, with a slightly better understanding of how the world of money works. It’s not a perfect understanding, because you see disagreements even among people with a deep level of understanding of the monetary system on our side. But it is better than the current status quo.
So What do we do? First, do no harm.
Pushing the country into another recession because we flip out the repo market by taking away every last safe asset they are using is probably not a good or wise path. Even if this was a good way to strip the bankers of their power – and I don’t agree with it being a good method – it would probably be worse for most people in the United States. There would be many job losses.
Beowulf’s plan to use a series of coins to pay the interest owed at the end of the year is a pretty good one.
The $60 T coin, in itself, does no harm. In fact, it does a lot of good by allowing the political issue of austerity to finally be taken off the table, and allowing the political system to get back to legislating to meet the real issues face. I also don’t think that “flipping out the repo market” will be a problem because IOR means the continued existence of a risk-free, interest-earning place for USD reserves.
That place is at the Fed in reserve accounts. What’s so bad about that, if IOR interest is comparable to bond interest? Why should there be any job losses as a result of this move; and if there are, then the $60 T in the kitty will allow the Federal Government to quickly respond with MMT policies that would have the economy roaring in 3-6 months, in contrast to the economic stagnation we have now.
Finally, the plan to pay interest on the debt using seigniorage isn’t good enough; because it leaves the national debt still in place, even increasing it. So, it leaves austerity politics in place, and fails to create the political background needed for economic legislation that will finally end the Great Recession. That is, it’s a big fail; as are so many attempts at incrementalism.
(Cross-posted from New Economic Perspectives.)
10 Comments
Thanks. Rec’d.
Technically and legally you are correct. However, for a president to spring such a major fait accompli as the issuance of a $60% coin on Congress is commonly considered “high handed” at best and irresponsible or even unconstitutional at worst.
Also, nearly all of liberal voices in the media consider it economically and financially dangerous. That includes Krugman, Weisenthal, Klein, Chris Hayes, etc. They would have supported temporary use of the HVCS, but only until the debt limit got raised, and many of them thought that such coins should immediately be “bought back” with borrowed money, once the debt-limit got raised.
Trying to sell them on issuing a $60T coin would be an unnecessarily long and steep hill to climb.
Well, that’s my point, isn’t it? That it is necessary to do it because the TDC won’t do the job.
As far as “high-handed” is concerned. This is one case in which a move by the President followed by a transformational speech would have defused the liberal opposition you speak of.
Also, many liberals would be overjoyed to see the President standing on his hind legs for a change and just battering the Republicans in a way that they could not counter. They would also appreciate a move against the banking system. And they would rise to defend him against the inevitable move to impeach by the House. The Ds in the Senate would also come together.
And, still further, as time went on, substantial portions of the debt were paid off without inflation, support for him would grow among the people substantially and liberal leadership would give him full-throated support in the end recognizing that he had transformed politics and opened the way to progressive economic legislation that could ameliorate the crippling trend toward inequality that we suffer from.
Wigwam, I really think that doing this is a no-brainer the more one thinks about it. I also think that liberals and progressives spend a lot of time grousing and complaining about how bad things are and about how helpless they are to change things and about how they’re always getting sold out. But when they do have a chance to push for a real solution to a problem; they won’t do it. Always looking at an imagined downside, always over-thinking the problems, and trying to devise wonky solutions that appear to address a problem but really do not.
Look at the present filibuster issue. Everyone’s unhappy because Harry Reid didn’t compromise on the talking filibuster, but instead negotiated a deal with McConnell that changed very little. However, I think the liberals in the Senate set this up. They should have known that Harry was going to compromise; he always does. So, the liberals should have started at the real solution to the filibuster; namely getting rid of it entirely, gotten however many votes together to support that and then threatened to paralyze the Senate unless they got that. Of course there would have been the matching move on the right to retain the filibuster; but Reid would have been a lot less free to come up with a POS compromise in that situation, than he was the way the “reasonable” liberals played the game.
Overall, I think liberals need to stop being so reasonable, or perhaps, to embrace a higher rationality which is to take off the table any legislation that actually doesn’t solve a problem. They should have ended up defeating the POS filibuster reform. They should have ended up defeating the ACA. They should have voted again the Finreg and CCR bills, and against the various compromises Obama accepted setting up the chain of fiscal crises we now see. The other side is using shock doctrine to make progress with its outrageous program to create a plutocracy. If liberals are going to stop it wthen we have to play shock doctrine too.
I’m not saying that the $60T approach wouldn’t work. What I’m talking about is resistance and concerns on the part of those that need to be sold. When it comes to actions, Obama (for example) stays very close to dominant view of the consensus inside the beltway — it’s difficult to believe that the same person made that inauguration speech and those cabinet appointments within the same month.
Per Mike Sandowski:
I think that the folks who voice such effect-on-the-market fears have by now lost their credibility, like the boy who cried “wolf.” But there is a similar and related fear that I’ve not yet seen addressed.
However, the U.S. (allegedly) gets a lot of advantages from the U.S. dollar being the world’s “reserve currency.” A well-publicized call the U.S. Treasury to mint a $60T coin would likely become a propaganda asset to those seeking to unseat the U.S. from this advantageous position — they include Joe Stiglitz and several Asian governments.
Digressing a bit, elsewhere you wrote:
IIUC, under existing law, all high-value coins (i.e., “coins with face values in the millions, billions, or trillions”) must be of platinum. Right?
If so, this seems to be a confusing choice of acronyms.
I know all about Obama. But that’s not the point of the diary. Its point is to defend a proposal about what he ought to do. I never say he’ll do it; or even that there’s much of a chance that he’ll do it. I’m just saying that people are unpredictable to a degree and so we need to have the alternatives out there, to evaluate them, and to meet criticisms of them, just in case.
I also your understand your point about resistance. What I’m saying is that if he acts first and then seeks consensus; he’ll have enough of one to stay in office and to sustain a change in the political climate. But if he seeks consensus first, then he’ll never get it and he’s much more likely to get enough resistance that the whole game will be lost.
Well, I don’t see how the other nations can agree on the makeup of a market basket of currencies to replace the dollar as “the reserve currency” in a short time, and this would be the only acceptable replacement for using USD that I can see. But even if they came up with a market basket agreement; why do you think this would be a problem for us. It wouldn’t change the fact that we’re sovereign in our own currency; and in the scenario we’re picturing here the US would be gradually repaying all its “debts.” So, on what basis would other nations conclude that the dollar is weakening. I understand, there’d be the $60 T, but we both know that most of that wouldn’t be going into the economy, except gradually over 15 – 25 years. The first $6.5 T wouldn’t go into the economy at all. So, what forces in the International market would pull down the value of the dollar?
That’s right! And the confusion is also right. What’s happened is that I used HVPCS in contrast with the TDC; then Philip Diehl proposed that HVCS be used as the general term for Platinum Coin Seigniorage so people wouldn’t be fixated on the TDC, and the term started getting used in Beo’s thread. At this point, I thought I’d just stick with my use of HVPCS and wait and see what happens with Philip’s use of the term.
We need a term for government-issued money that the government can spend. Randy Wray includes money issued by central banks under the term “Sovereign Money,” so that term doesn’t work. Coins are exactly the money that currently fills this description in the U.S., but once upon a time, so did greenbacks.
And, btw, I don’t like acronyms. ;-)
No one, likes acronyms including myself; but it gets really tiresome to use a phrase again and again in a piece, and that’s why people use acronyms. The lesser of two evils.