The Cliffs of Sanity (Photo: aeu04117/flickr)

Alan Grayson’s e-mail on Moody’s warning that it might reduce the US’s AAA rating, suggested that Moody’s was either threatening a downgrade because it wants to get the Bush tax cuts for the rich extended, or, alternatively, that “Moody’s is living in what Aristophanes called “Cloud Cuckoo Land.”” He says this because Moody’s is upset about the possibility that the US may go over the so-called “fiscal cliff,” even though if it did, it would theoretically result in $560 Billion of deficit reduction annually, without further legislative changes, and it makes no sense on the surface for a ratings agency to think that the risk of US bond default is greater when the annual deficit is being reduced by $560 B per year, than by some lesser amount, which is likely to happen if Congress doesn’t take us over that “cliff.”

Grayson was right to call attention to this seeming contradiction and the possibility that Moody’s is just pressuring Congress to do more for rich people; but I think he should also have made the larger and more important point, that Moody’s warning, just like the one it delivered in January of 2010, is an empty threat without significant consequence, even if it were carried out. How do we know that? For a number of reasons.

First, as is widely known, all the ratings agencies including Moody’s gave the CDOs and CDSs that led to the collapse of AIG their highest AAA ratings. In addition, they downgraded Japan’s credit ratings a long time ago, with no measurable impact on its bond interest rates or costs, even though Japan’s debt-to-GDP ratio has continued to increase over time and is now in the neighborhood of 200%. More recently, in April of 2011, Standard & Poor’s downgraded the outlook on US debt from stable to negative. What happened thereafter? There was a flight to Treasuries on the International markets and interest rates have fallen more than 1% since S & P delivered its downgrade.

So, one may be forgiven for wondering why anyone should listen to the ratings ravings of Moody’s and the other agencies at all. In fact, one may begin to suspect that their ratings have little influence on the bond markets, and also, given the Japanese and US experiences, one might even suspect that the bond markets don’t influence to any appreciable degree or control the interest rates that Governments sovereign in their own currency must pay.

Second, since the United States is a nation with a fiat non-convertible currency system, with a floating exchange rate, and no debt denominated in any foreign currency, it is impossible for the United States to be forced into a default by any external party, simply because its ability to create the currency it owes its obligations in, is unlimited. Voluntary default could be caused by a Congress which acts stupidly, and in a manner contrary to the 14th Amendment of the Constitution, to constrain the Treasury from paying its obligations when they come due, coupled with a Treasury that accepts Congress’s constraint in conflict with the clear admonition of the Constitution that the debts of the United State shall not be questioned.
Read the rest of this entry →

Woodward (photo: Bektour / wikimedia)

Bob Woodward’s releasing a new book, so we are now seeing articles based on it. A few days back, The Washington Post published the ”Inside story of Obama’s struggle to keep Congress from controlling outcome of debt ceiling crisis.” This account is a pretty downbeat one of how our political leaders and President Obama handled the debt ceiling crisis of the summer of 2011. I want to comment on what for me was the most salient point: that during the crisis, the President had no “Plan B” to get around the debt ceiling beyond negotiating a deal with Congress.

According to Woodward, the President asked his Senior staff to come up with a Plan B, because the compromise Congressional leaders first proposed to him would have required a two-step increase in the debt limit, with the second step coming near the time of the 2012 election, opening the possibility that the House Republicans would be able to hold the country and the financial world hostage in the run-up to the election. The President rejected the deal, and sent Harry Reid and his Chief of Staff David Krone back to get another that would not require the hostage taking two-step. Meanwhile, Obama’s staff tried to put together a Plan B.

But when Harry Reid couldn’t get a deal from John Boehner, and the House Republicans passed a two-step plan on July 29th, the President again called for more options. Woodward reports none except for accepting the Republican deal, which Geithner favored, and vetoing the House Bill if Harry Reid “folded” and the Senate passed it, which the President favored. The President, concerned about the likely continuance of Republican blackmail and hostage taking, and believing that he was out of options, indicated that he would veto a two-step deal even if the Democrats folded. However:

”Obama never had to confront the veto question. A few days later, House Republicans dropped their insistence on the two-step plan. The final plan accepted a debt limit increase that would take the country through the 2012 presidential contest. It also postponed $2.4 trillion in spending cuts until early 2013.”

So, the President, and according Geithner, the world financial markets, survived that confrontation because the Republicans folded. But, if Woodward is right, if the Republicans had stood firm, Obama would have vetoed the bill, because no other options had been developed by the White House staff.

Yet there were at least four other options that were offered in the blogosphere and the news media at the time, three of them at CNN, that a well-informed White House might have been expected to know about. So, the obvious question is why is there no indication in Woodward’s account that the White House was aware of other options except a veto or surrender to the House Republicans to handle the crisis?

The four options were: Read the rest of this entry →

Today the MSM question of the morning for Congressional Progressive Caucus members is a variant of this:

“Which is worse, voting for a debt ceiling increase bill that doesn’t raise any revenue and that will lead to major cuts in discretionary programs, and in entitlements including Social Security, Medicare, and Medicaid, or voting to defeat a bill that does that and causing the United States to go into a default.”

So, there it is: a false choice again, being used to make progressives look bad if they say they will vote against anything but a clean debt ceiling deal.

In replying to these questions, some progressives are saying, both are worse, and it’s completely illegitimate to tie the debt ceiling vote to deficit reduction. Deficit reduction should be discussed separately when it’s time to pass a budget. Of course, the progressives are right about what ought to happen. But the problem is that they will have to decide whether to vote for a bill that will grievously hurt their constituents, or to vote against it.

What they most need to know at this point is that they have to reject outright the framing given in the question above. The choice is not between voting for default and voting for a terrible deficit reduction bill. The choice should have been put this way:

“Which is worse, voting for a debt ceiling increase bill that doesn’t raise any revenue and that will lead to major cuts in discretionary programs, and in entitlements including Social Security, Medicare, and Medicaid, or voting to defeat such a bill and placing the debt ceiling problem in the hands of President Obama to handle”

The answer to this properly framed question is that it is better to vote to defeat any such bill, and to leave the President to handle the problem. Make no mistake about it. The President can prevent the default himself. There are 6 options he can use, and he will have a constitutional duty to do whatever is in his power and authority to prevent default. Here are the 6 options:

– Challenging the debt ceiling based on the 14th Amendment Section 4
– Selective default
– Proof Platinum Coin Seigniorage (PPCS)
– Running an overdraft at the Fed
– The Fed burning its Treasury Bonds
– The “exploding option” plan

I’ve previously discussed them in some detail here and also analyzed and compared them.

I’ve also written many posts on PPCS, because I think it is the preferred alternative among the 6. I won’t repeat what I’ve already said, and urge you to read some of the posts at the link. Instead, all I want to do is to emphasize that a vote against a “compromise bill” that doesn’t compromise with progressives is NOT a vote for default.

It’s a vote for the President to use his powers to solve the problem without requiring harmful spending cuts in an economy that can afford absolutely no cuts without corresponding spending increases.

So, make the President do it! Make him solve the problem and avoid a default! That is the best thing that progressives in Congress can do now to save the economy and begin to kill the current austerity mania that will destroy the futures of our children and Grandchildren.

And for those of us outside of Congress, the best thing we can do is to ask our Representative and Senators to vote against anything except a clean debt ceiling deal, and to point out to them that they would not be voting for default; but only for placing the problem in the hands of the President who will have to handle it without making a big deal that hurts most Americans and that also, incidentally, forces them to walk the plank! Tell Bernie Sanders! Tell Sheldon Whitehouse! Tell Al Franken! Tell Dennis Kucinich! Tell Raul Grijalva! Tell Keith Ellison! Tell Barbara Lee! Tell Donna Edwards! Tell Louise Slaughter! Tell Marcy Kaptur! Tell them all!

Tell them to make no mistake! Tell them in no uncertain terms, that we will not forgive them in 2012 for giving away parts of the social safety net; when they easily could have avoided it by voting for the President to take care of the problem without making a deal. The President is dealing with the Republicans and going after our bread and butter! And Congressional progressives are aiding and abetting him by accepting false framings of the issue, and deluding themselves or trying to delude us into thinking they have no choice. Tell them that we do know they have a choice. Tell them to stop marching with the oligarchs, or we will find other Senators and Representative who will march with us!

Cross-posted from Correntewire.com.

(Thanks to DailyKos commenter 2laneIA for suggesting this post and the title)

It’s only a few days now until August 2nd. Perhaps a compromise on lifting the debt ceiling will be reached before then. Perhaps none will be reached. Perhaps the President will veto a compromise if it doesn’t extend the ceiling sufficiently to support deficit spending until after the 2012 elections. If a debt ceiling extension is voted down, or if the President vetos an unacceptably small extension, then what is to be done? I’ve now run into six primary options the President can select among to avoid default. The six are:

– Challenging the debt ceiling based on the 14th Amendment Section 4
– Selective default
– Proof Platinum Coin Seigniorage (PPCS)
– Running an overdraft at the Fed
– The Fed burning its Treasury Bonds
– The “exploding option” plan

Let’s look at them in more detail.

1. The 14th Amendment option

This option is the most well-known one right now, having been discussed on the web at least since last Fall.

The 14th Amendment to the Constitution says in part:

“Section 4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. . . . ”

People, including myself, have claimed that the debt ceiling is in conflict with the 14th Amendment and is therefore unconstitutional, and have called for the President to go ahead and issue more debt and wait for a legal challenge. That challenge may never come, because the House of Representatives alone will lack standing in the Supreme Court. In an article appearing today, at CNN, Jack Balkin offers an argument interweaving legal and political considerations, points out that the President would first have prioritize repayment of debt to conform to the Amendment, which might cause an inability to make Social Security payments fully and on time, creating great political pressure on Congress to pass a clean extension of the debt ceiling.

I’m not sure this analysis is entirely correct, since it may be possible for the Social Security Trustees to go to the Treasury with its Bonds, demanding payment for them so that Social Security payments can be made. Since the bonds are debt, and actually count against the debt ceiling, the President may not be able to hold up the payments. In any event, Professor Balkin continue his argument with:

Assume, however, that even a prolonged government shutdown does not move Congress to act. Eventually paying only interest and vested obligations will prove unsustainable — first because tax revenues will decrease as the economy sours, and second, because holders of government debt will conclude that a government that cannot act in a crisis is not trustworthy.

If the President reasonably believes that the public debt will be put in question for either reason, Section 4 comes into play once again. His predicament is caused by the combination of statutes that authorize and limit what he can do: He must pay appropriated monies, but he may not print new currency and he may not float new debt. If this combination of contradictory commands would cause him to violate Section 4, then he has a constitutional duty to treat at least one of the laws as unconstitutional as applied to the current circumstances.

This would be like a statute that ordered the president to hire 50 new employees provided that none of them is a woman. The second requirement violates the Constitution, so the president can hire the 50 employees and ignore the discriminatory provision.

Here the president would argue that existing appropriations plus the debt ceiling create an unconstitutional combination of commands. Therefore he chooses to obey the appropriations bill — which was passed later in time anyway — and ignores the debt ceiling. He orders the secretary of the Treasury to issue new debt sufficient to pay the government’s bills as they come due.

I’m not at all sure that the President will have to wait for a prolonged Government shutdown, to invoke the 14th Amendment: but whether he waits or invokes it on August 3rd, I think Balkin’s argument is too narrow in focusing only on the possibility that the President may invoke the 14th against the debt ceiling. Perhaps, for example, as my friend Beowulf suggests (in e-mail corrspondence), he could make “a flanking attack” on the Congressional limitation of $300,000,000 on Treasury printing US Notes? This limitation is older than either the debt ceiling legislation, or the current appropriations bill, and if he did challenge it successfully, then the Treasury would have its unrestricted power to create currency restored, a very powerful hedge against debt ceiling legislation, and an enabler for ceasing to issue debt at all.

2. Selective Default

The second option, is the Treasury declaring a selective default only on Federal Reserve-owned debt instruments in order to wipe these off the books, and create headroom relative to the debt ceiling. This is clearly an extra-legal procedure. The Federal Reserve Board of Governors is a Government agency; but those bonds are owned by the Fed Regional Banks, which in our system, are not Government agencies, but rather privately owned “Federal instrumentalities.” Here’s wikipedia:

“The Federal Reserve Banks have an intermediate legal status, with some features of private corporations and some features of public federal agencies. The United States has an interest in the Federal Reserve Banks as tax-exempt federally-created instrumentalities whose profits belong to the federal government, but this interest is not proprietary.[74] In Lewis v. United States,[75] the United States Court of Appeals for the Ninth Circuit stated that: “The Reserve Banks are not federal instrumentalities for purposes of the FTCA [the Federal Tort Claims Act], but are independent, privately owned and locally controlled corporations.” The opinion went on to say, however, that: “The Reserve Banks have properly been held to be federal instrumentalities for some purposes.” Another relevant decision is Scott v. Federal Reserve Bank of Kansas City,[74] in which the distinction is made between Federal Reserve Banks, which are federally-created instrumentalities, and the Board of Governors, which is a federal agency.”

Since the Bonds held by the Fed are held by the regional banks, this second option would involve a major hit to the assets of these banks and also an operating loss. It would involve not just questioning, but also denying a debt of the United States, and would therefore violate the 14th Amendment.

3. Proof Platinum Coin Seigniorage

Congress provided the authority, in legislation passed in October 1996, for the US Mint to create platinum bullion or proof platinum coins with arbitrary fiat face value having no relationship to the value of the platinum used in these coins. These coins are legal tender. So, when the Mint deposits them in its Public Enterprise Fund account at the Fed, the Fed must credit that account with the face value of these coins. This difference between the Mint’s costs in producing the coins and the credit provided by the Fed is the US Mint’s profit. The US code also provides for the Treasury to periodically “sweep” the Mint’s account at the Federal Reserve Bank for profits earned from these coins. Coin seigniorage is just the profits from these coins, which are then booked as miscellaneous receipts (revenue) to the Treasury and go into the Treasury General Account (TGA), narrowing the revenue gap between spending and tax revenues. Platinum coins with huge face values, $1, $1.6, $2, $3, $6.2, $15, and $30 Trillion coins have been mentioned, could close the revenue gap entirely, and, if used often enough, technically end deficit spending, while still retaining the gap between tax revenues and spending.

4. Running an Overdraft at the Fed

This option suddenly got some press this week as people begin to cast about for a solution. John Carney at CNBC says that overdrafts are more like “gifts” from the Fed than they are the kind of debt instruments the Fed is prohibited from buying from the Treasury, and that’s the gist of his argument. The problem with this argument, also quickly echoed by Felix Salmon is outlined by my friend Marshall Auerback in correspondence this way:

In the past, Treasury had access to both a cash and securities draw authority (hat tip, Cullen Roche of “Pragmatic Capitalism”). Intermittently between 1942 and 1981, Treasury was able to directly sell (and purchase) certain short-term obligations to (and from) the Federal Reserve in exchange for cash. Congress first granted this cash draw authority temporarily in 1942:

1. allowed it to lapse several times, and extended it 22 times until 1979, when it modified some of the terms and added controls.

2. In 1979, Congress also authorized a securities draw authority, which permitted Treasury to borrow securities from the Federal Reserve, sell them, and then repurchase the securities in the open market and return the securities to the Federal Reserve within a specified period.

3. The securities draw authority was never used. After Congress authorized Treasury to earn interest on its Treasury Tax & Loan (TT&L) account balances in 1977,

Congress allowed both draw authorities to expire in 1981.

That Congress allowed them to lapse would imply that it’s no longer operative . . .

In short, in 1981, Congress ended the Treasury’s drawing authority by allowing it to expire.

5. The Fed “Burning” its Treasury Bonds to Get Them off the Books

Ron Paul suggested this one. If the Fed agreed to the proposal, it would create at lead $1.6 Trillion in headroom between debt subject to the limit, and the debt limit. The proposal hasn’t been met with notable enthusiasm. In fact, I don’t think the Chairman has even dignified it with a reply. However, the objection to it is similar to the objection to Treasury declaring a default on its Fed-owned debt. The result would be a big whole in the Assets of the Fed Banks owning the debt instruments. They’re unlikely to support this proposal.

6. The “Exploding Option”

Jack Balkin presents the “exploding option” idea this way:

The government can also raise money through sales: For example, it could sell the Federal Reserve an option to purchase government property for $2 trillion. The Fed would then credit the proceeds to the government’s checking account. Once Congress lifts the debt ceiling, the president could buy back the option for a dollar, or the option could simply expire in 90 days. And there are probably other ways that the Fed could achieve a similar result, by analogy to its actions during the 2008 financial crisis, when it made huge loans and purchases to bail out the financial sector.

As near as I can make out, the idea here is for the Fed to pay for an option on the property, that it would not then exercise by some date certain. When the option expires, the Government, having an increase in the debt ceiling by then, would pay back the Fed, give it a small profit, and keep the property.

Presumably, this could be done indefinitely, if Congress has still failed to raise the debt ceiling by the end of the option period, or the option period could be made long enough that it is very improbable that the debt ceiling would not be raised. The “exploding option” idea is undoubtedly ingenious; but:

– I wonder whether the option isn’t functionally a debt instrument, and also whether
– the option isn’t being “monetized” by the Fed in complete analogy to the monetization of debt instruments that is expressly prohibited by Congress?

Comparison of the Options

From my point of view, selective default and the fed burning its bonds are both far out options. I just don’t think the accounting rules governing the Fed would allow it to approve procedures that resulted in huge losses for the Fed regional banks. The Fed would never agree to such alternatives.

The overdraft and “exploding option” alternatives are likely to be much more acceptable to the Fed than options that destroy the financial assets of regional banks. However, both of these options are a bit legally questionable. As I said above, the overdraft procedure appears to have been ended by Congress in 1981, when it had every opportunity to renew the Fed’s drawing authority.

Felix Salmon is taken with the Fed allowing overdrafts. He thinks this solution is a realy elegant one because it would allow Treasury to keep on spending until it could arrive at a new debt ceiling. He also thinks that the Fed would have to honor Treasury checks by allowing an overdraft because if it didn’t do so, that would “trigger a massive recession” and violate the Fed’s full employment mandate.

I find this unconvincing because the Fed has been violating its full employment mandate since passage of the Humphrey-Hawkins during the 1970s. It has always taken its price stabilization mandate much more seriously than its full employment mandate. So, I think that the Fed may not honor Government overdrafts, because Government special drawing authority was ended in 1981.

The “exploding option” alternative is certainly inventive. However, if I understand it correctly, it’s a transparent artifice for allowing monetization of the functional equivalent of federal debt instruments. So, I think it’s legality is questionable, and that the President should be careful before he resorts to it.

In fact, the first four options being compared all propose procedures of questionable legality. All might turn out to be politically feasible, because the House Republicans may not be able to get standing to challenge the President. Nevertheless, if many representatives feel that the President’s solution to the debt ceiling problem is of questionable legality, and they also find themselves unable to get standing in Court, they may well feel justified in pursuing impeachment. They won’t get far, because the Senate will never sustain them; but nevertheless another impeachment circus is likely to be very costly for an Administration that wants somehow to improve the jobless rate before the elections of 2012.

This brings us to the Constitutional option. This is a legally fascinating option especially since the President might challenge the debt ceiling or other legislation such as the limits on Treasury printing money, or the legislation withdrawing the Treasury’s overdraft authority; It’s also a politically attractive option, because it makes the President look strong, relative to the House Republicans. It’s also interesting because if he issues a constitutional challenge and goes on issuing debt, it’s very doubtful that the House Republicans will have a practical legal route to contest what he’s done. On the other hand, as with some of the other options, their very inability to get redress from the law may goad them into attempting to impeach the President, and I suspect that the Administration would want to avoid that outcome, with all its distractions.

Coin seigniorage isn’t some crazy or radical idea, even though some who want to be considered Very Serious People (VSP) have had that kind of reaction to the idea. Instead, it is a legal instrument that the President may, depending on how things work out, have to use in a bit more than two weeks to comply with his oath of office. It may be the only way for him to avoid breaching one of the laws which he is supposed to enforce. As such, it has to be taken seriously, and treated with more than just a few dismissive conclusions, accompanied by a lack of explanation.

Many writers on the current debt ceiling crisis have been taking the view that the 14th Amendment constitutional challenge route is the best thing for the President to do if there is no agreement on the debt ceiling. But, a constitutional challenge requires violating the debt ceiling, or some other legislation, claiming that the chosen law is unconstitutional, and relying heavily on the House’s inability to have standing to take the President to Court in order to sustain the President’s action. The President may get away with this, but it is radical in the sense that it claims the Executive’s right to make a unilateral judgment of constitutionality in opposition to clearly written legislation, without getting a by your leave from the Supreme Court. Surely we can all see how dangerously radical this kind of practice is for the rule of law in the United States?

In other posts, I’ve made the case that the debt ceiling isn’t in violation of the 14th Amendment as long as PPCS is an option for the President. Also in an e-mail communication, beowulf, the blogger who wrote the seminal blog on coin seigniorage, offered the following opinion on why a 14th amendment-based challenge will not work, given the existence of PPCS.

. . . No federal judge — Supreme Court justices included — will take the extraordinary step of enjoining an Act of Congress if the President who asks them to had an opportunity to sidestep the constitutional issue lawfully but neglected to do so. . . . .

. . . The moral of the story is if the Court thinks there is no alternative to breaching the debt ceiling, it probably would find it unconstitutional (or rather, it would decline to hear the case on Standing grounds, leaving the President’s decision to ignore the debt ceiling in place). On the other hand, if the Court thinks the President had a lawful alternative– like coin seigniorage– but neglected to use it, they’re not going to bail him out.

This argument is compelling to me given the history of the Court. The Court defers to the legislature if it possibly can, and prefers the President to avoid constitutional challenges if he has a means of doing so. In this case, he does, and the means is proof platinum coin seigniorage.

(Cross-posted from Correntewire.com.

Many people have been, deservedly, very quick to jump on John Boehner for the lies he told in answering the President’s Address; but they have been a lot less anxious to lay out the lies or at least falsehoods told or implied by the President, himself. I don’t intend to excuse the Speaker’s lies or the Speaker, by showing that the President doesn’t have clean hands. I don’t intend to say that lying is alright because everybody does it. All I want to do is show that the President was feeding us fantasy too, because I believe, strongly, that we won’t solve our national problems if we don’t firmly reject fantasy, whoever may be its author. So, let’s look at some quotations from the President’s speech, and see where the fantasy is.

“For the last decade, we’ve spent more money than we take in. In the year 2000, the government had a budget surplus. But instead of using it to pay off our debt, the money was spent on trillions of dollars in new tax cuts, while two wars and an expensive prescription drug program were simply added to our nation’s credit card.”

No. Mr. President, during the years the Government had a budget surplus, the Government simply borrowed less than it did in other years, and also less than it paid back when its debt instruments came due. So, the Government did use its surpluses to “pay back” part of the debt during the years of surplus, and no money was saved for future years when it was then spent on new tax cuts, new wars, and the drug prescription program.

As for the “our nation’s credit card” business, the Government’s “credit card” situation is very different from our own. First, the limit on the Government’s ability to issue debt is not based on the Government’s ability to borrow, or on the Government’s ability to generate financial assets, which, aside from Congressional constraints, is constitutionally unlimited. Nor is the limit imposed by any creditor, as it is with us.

Instead, the limit on what the Government can borrow is determined by the Government itself. Specifically, it is determined by Congress which imposes the debt ceiling, now causing a fiscal crisis. Without that ceiling, that self-imposed constraint, the limit on what the Government can borrow in US Dollars is indeterminate, if it exists at all.

Second, you and I can’t keep adding debt to our credit cards, not only because we have a limit, but long before we reach such limits, we may well want to stop adding debt, because our ability to maintain and pay off our debt burden, may be running out. That ability is limited because we can’t produce financial resources at will.

The Government is different however. It is not like a household or even the largest corporation. It is not the user of our national currency. It is the creator of it. All of our dollars come from the authority of the Government to spend, and, in the act of spending to create dollars.

If the Government has debt, it can always pay that debt simply by marking up the accounts of its creditors. Also, unlike your household or mine, it doesn’t matter how much is on the Government’s credit card, it can always repay its debts whenever they come due, unless Congress does something stupid to stop it from doing so.

In fact, its own constraints aside for a moment, the Government has precisely the same ability to repay its debts, however high those debts are, and however high its debt-to-GDP ratio is, so long as those debts are owed in the currency (USD) it has the authority to create. It doesn’t matter whether the Government owes $14.3 Trillion, or $30 Trillion, or only $50,000. Its ability to pay, self-constraints aside, is exactly the same. It doesn’t matter if its debt-to-GDP ratio is 10% or 100% or 300%, it’s ability to meet its debt obligations is exactly the same, if it only decides to shed its self-constraints.

So, when President Obama says or implies that we can’t keep putting debt on our national credit card what is he really talking about? He’s not talking about the Government’s intrinsic ability to pay or not. What he’s talking about is that Congress has 1) placed a debt ceiling on the Executive Branch’s ability to borrow, and 2) passed a mandate requiring the Government to issue debt when it deficit spends. These are Congress’s constraints on the Treasury and they are causing our current so-called fiscal crisis, assuming the President’s continued unwillingness to raise revenue for deficit spending other than by issuing more debt.

The austerity mavens, including the President are telling us that we, the people, have spent too much and run up debts that are too large on our national credit card when Congress has a) required us to use our credit card and, as a result, maintain and increase our national debt, and then b) given us a ceiling of debt which they raise from time-to-time, which has nothing to do with our Government’s ability to pay. How unjust is it to create this Catch-22, claim there is an objective problem with a national debt that only exists due to their own restraints, and then say to us, after they’ve just finished extending the Bush Tax Cuts for the rich and providing an estate tax giveaway, that this phony fiscal crisis requires that everyone (except the rich, of course) accept “shared sacrifice”?

It is not true that we can’t keep placing debt on our national credit card, so long as Congress removes its arbitrary and unnecessary debt ceiling. If it does that we can keep placing debt on that credit card if we want to without threatening our solvency as a nation.

It is also not true that we must keep issuing debt instruments and keep increasing the national debt when we want to deficit spend, because of some intrinsic feature of the economic system. As I’ve written in many recent posts, we can generate all the revenue we need by using proof platinum coin seigniorage, including the revenue we need to pay the national debt entirely, as US debt instruments fall due.

In connection with his reconstruction of how the nation came to this pass Mr. Obama said that as a result of the tax cuts, wars, and the prescription drug plan:

“. . . . the deficit was on track to top $1 trillion the year I took office.”

But this anticipated deficit was not due simply to these factors. Most of the anticipated $1 Trillion deficit was due to the loss of tax revenues accompanying the Crash of 2008. If not for the recession, the tax cuts, wars, and prescription drug costs would not have produced a deficit of this size.

“To make matters worse, the recession meant that there was less money coming in, and it required us to spend even more -– on tax cuts for middle-class families to spur the economy; on unemployment insurance; on aid to states so we could prevent more teachers and firefighters and police officers from being laid off. These emergency steps also added to the deficit.”

They did, but what is misleading in this account is that the President fails to tell us is that his grossly inadequate stimulus left too many people unemployed, and provided so little assistance to the States, that while it stabilized the unemployment rate, it did so at a very high level ensuring that Federal tax revenues would remain low and that the deficit would still be very high; but without the benefit of having enabled full employment.

“Now, every family knows that a little credit card debt is manageable. But if we stay on the current path, our growing debt could cost us jobs and do serious damage to the economy. More of our tax dollars will go toward paying off the interest on our loans. Businesses will be less likely to open up shop and hire workers in a country that can’t balance its books. Interest rates could climb for everyone who borrows money -– the homeowner with a mortgage, the student with a college loan, the corner store that wants to expand. And we won’t have enough money to make job-creating investments in things like education and infrastructure, or pay for vital programs like Medicare and Medicaid.”

And later he says:

“For the first time in history, our country’s AAA credit rating would be downgraded, leaving investors around the world to wonder whether the United States is still a good bet. Interest rates would skyrocket on credit cards, on mortgages and on car loans, which amounts to a huge tax hike on the American people. We would risk sparking a deep economic crisis -– this one caused almost entirely by Washington.”

The falsehood here is assuming that the bond market actually controls the interest rates that Governments like the United States must pay. Sure, they can determine interest rates if the Government and the Fed sit idly by, and lets them do so. However, the Federal Reserve and the Treasury, can target bond interest rates and set these for the bond markets by manipulating overnight bank reserves. Specifically, one way to do this, is that the Treasury can cease issuing long-term bonds, and sell only three-month bonds. Three-month bond interest rates are generally controlled by overnight rates for bank reserves, and overnight rates can be driven down to near zero by flooding the banks with excess reserves. That’s basically how the Japanese keep their bond interest near zero, even with a debt to GDP ratio of nearly 200%, and that’s how we can do the same.

Alternatively, the Fed ihas driven down interest rates through its policy of Quantitative easing (QE). QE currently involves providing banks with cash reserves in return for non-cash bank assets including Treasury Bonds. QE results in an increase in cash reserves, which drives down overnight interest rates for borrowing such reserves. Low rates in the reserve market again, drives down bond market interest rates on three month Treasuries, and exerts downward pressure on bond market interest rates across the board.

Yet another move we can make to remove the effects of the bond markets and the ratings agencies upon public finances, is for the Treasury to stop issuing debt for every dollar it deficit spends. It can do this by using coin seigniorage to generate additional revenue, and by borrowing only for a portion of its deficit spending. If Treasury did this, interest rates in the bond market would be driven down because of the shortage of treasury bonds in the marketplace.

Of course, if Congress allowed the Executive to deficit spend without issuing debt, or the Executive decided to deficit spend only after raising revenue through coin seigniorage, then the Executive Branch could choose to issue no more debt, and then bond market interest rates wouldn’t be an issue at all. So none of the effects described by the President just above would happen, all the problems he points to are due to more debt causing higher interest rates through the bond markets. If increasing debt can’t cause that, because of interventions outlined above, then the bond market/interest rate scare is “off the table.”

In short, the bond markets aren’t in control of US public finances. They are not in a position to influence what our taxing or spending policies ought to be, or whether we will default on our obligations.

“This balanced approach asks everyone to give a little without requiring anyone to sacrifice too much. It would reduce the deficit by around $4 trillion and put us on a path to pay down our debt. And the cuts wouldn’t happen so abruptly that they’d be a drag on our economy, or prevent us from helping small businesses and middle-class families get back on their feet right now.”

Calling his plan “balanced” is just propaganda. First, it assumes that there is a deficit/debt problem; but this assumption is based on the idea that the US Government can become insolvent or is otherwise constrained in its spending by economic necessity. It also assumes that we’ve borrowed too much, and that this requires us to slow down deficit spending over time. However, these assumptions are just false. As the currency issuer, the US can’t ever run out of money, and the only real world constraint it has on its spending is demand-pull inflation, which we needn’t worry about until we’ve reached full employment.

Second, $4 Trillion over 10 years in spending cuts and/or increased taxes, averages out to $400 billion per year less money either going into the private economy from the Government sector, or being taken back by the Government. If the spending is high fiscal multiplier spending, as much of it appears to be, then we may be looking at as much as $1 Trillion per year in reduced GDP. Anyway you slice it friends, that will cost jobs, careers, family hardship, and lower economic growth, and it is unlikely to reduce deficits very much or at all, simply because the effects of the economy’s automatic stabilizers will ensure that more government spending and less taxes will result from these cuts.

Third, this $400 Billion per year of “shared sacrifice” which is supposed to ensure that no one suffers too much is, to use a popular phrase of yesteryear, “lipstick on a pig.” We know that the impact of the spending cuts contemplated will fall disproportionately on the poor and the middle class. They will be “sacrificing” income, jobs, and services that are very important to them, but any “sacrifices” made by the wealthy and large corporations will be largely symbolic and will not cut to the bone.

Fourth, the President says that the cuts wouldn’t happen so abruptly that they’d hurt the economy. But this assumes that current Government deficits are large enough to compensate for savings desires and imports, and that the economy has already received enough of a boost that it will fully recover by the time the full impact of austerity is felt. If they are not large enough, and the economy doe not recover; then what? Do we then follow this inflexible austerity plan and go ahead withdrawing net financial assets from the private sector at the rate of $400 Billion per year, in the expectation that this will lower the debt-to-GDP ratio?

“So the debate right now isn’t about whether we need to make tough choices. Democrats and Republicans agree on the amount of deficit reduction we need.”

Democrats and Republicans do not agree on the amount of deficit reduction we need. Nor do they agree on how deficit reduction should be achieved. There are even many Democrats, though, perhaps not in Congress, who believe that there is no debt or deficit problem at all, and that the President’s whole exercise in austerity is motivated by a false economic ideology, and by a desire to show “the independents” that he is a responsible “bipartisan” grown-up who deserves their support in 2012. Here he is using the left-right frame, viewing the independents as people in the middle who are relatively homogeneous and ideologically disillusioned with the right and the left.

So, he thinks he can pick up these folks “en bloc” by showing that he has made both progressives and conservatives angry at him. In this, I think he is ignoring the possibility that there are independents from all parts of the left-right spectrum, who have become independent because the two parties represent their interests very badly, preferring to see to it that the wealthy and the corporations are represented at the expense of their constituents. In any event, President Obama’s attempt to appeal to independents may fail, because they really have no interest in his independence relative to the bases of the legacy parties; but care much more about his actions in supporting the big banks, a corrupt financial system, continued globalization of the economy, and failure to produce jobs, and viable health care reform for everyone.

“That’s not right. It’s not fair. We all want a government that lives within its means, but there are still things we need to pay for as a country -– things like new roads and bridges; weather satellites and food inspection; services to veterans and medical research.”

We do have to live within our means; but a phrase like this is meaningless, when it comes to the Government’s ability to generate new net financial assets in the private sector. That capacity is unlimited. And while we do have to worry about demand-pull inflation under certain conditions. The US never has worry about running out of money as do, for example, the members of the Eurozone or other nations that aren’t sovereign in their own fiat currency system. What “our means” really refers to is our real resources and our capacity to produce further real resources in a sustainable way. It does not refer to financial sustainability, or to fiscal sustainability in the meaning of that term spread by Peter G. Person, and Barack “Hoover” Obama.

“Understand –- raising the debt ceiling does not allow Congress to spend more money. It simply gives our country the ability to pay the bills that Congress has already racked up. In the past, raising the debt ceiling was routine. Since the 1950s, Congress has always passed it, and every President has signed it. President Reagan did it 18 times. George W. Bush did it seven times. And we have to do it by next Tuesday, August 2nd, or else we won’t be able to pay all of our bills.”

This is one of the biggest falsehoods told by the President. Let’s say there is no agreement, then, is it true that we won’t be able to pay our bills? Only if the President fails in his own constitutional duty and doesn’t take the measures he is able to take to make it possible for Treasury to spend appropriations. Yves Smith, in a recent interview with Paul Jay of the Real News Network, points to three alternatives the President can use: 1) the constitutional challenge; 2) selective default; and 3) Proof Platinum Coin Seigniorage (PPCS).

Yves characterized PPCS as the most “radical” of the three alternatives. Depending on the coin seigniorage option selected, that may be true; but I think that from the legal point of view, at least, PPCS is the least radical of the alternatives. I think that’s true because it’s the only one of the three that is completely within the law as currently written and interpreted.

The first option, the constitutional challenge, requires violating the debt ceiling, and then claiming that the law is unconstitutional and relying on the House’s inability to have standing to take the President to Court in order to sustain the President’s action. The President may get away with this, but it is radical in the sense that it claims the Executive’s right to make a unilateral judgment of constitutionality in opposition to clearly written legislation, without getting a by your leave from the Supreme Court. Surely we can all see how dangerously radical this kind of practice is for the rule of law in the United States?

The second option, is the Treasury declaring a selective default only on Federal Reserve-owned debt instruments in order to wipe these off the books, and create headroom relative to the debt ceiling. This is clearly an extra-legal procedure. The Federal Reserve Board of Governors is a Government agency; but those bonds are owned by the Fed Regional Banks, which in our system, are not Government agencies, but rather privately owned “Federal instrumentalities.” Here’s wikipedia:

“The Federal Reserve Banks have an intermediate legal status, with some features of private corporations and some features of public federal agencies. The United States has an interest in the Federal Reserve Banks as tax-exempt federally-created instrumentalities whose profits belong to the federal government, but this interest is not proprietary.[74] In Lewis v. United States,[75] the United States Court of Appeals for the Ninth Circuit stated that: “The Reserve Banks are not federal instrumentalities for purposes of the FTCA [the Federal Tort Claims Act], but are independent, privately owned and locally controlled corporations.” The opinion went on to say, however, that: “The Reserve Banks have properly been held to be federal instrumentalities for some purposes.” Another relevant decision is Scott v. Federal Reserve Bank of Kansas City,[74] in which the distinction is made between Federal Reserve Banks, which are federally-created instrumentalities, and the Board of Governors, which is a federal agency.”

Since the Bonds held by the Fed are held by the regional banks, this second option would involve a major hit to the assets of these banks and also an operating loss. It would involve not just questioning, but also denying a debt of the United States, and would therefore violate the 14th Amendment to the Constitution. From a legal point of view I think the Treasury unilaterally deciding to inflict a substantial loss on privately owned banks, whether Federal Instrumentalities or not. and also violating the 14th Amendment, is a very radical option.

Getting to the third option of Coin seigniorage, the authority to do this was legislated by Congress in 1996. If the President uses PPCS, he 1) won’t exceed the debt ceiling; 2) won’t be challenging the constitutionality of the debt ceiling; 3) will be able to spend all Congressional Appropriations; and 4) will be able to uphold his constitutional obligation to see that all US debts are paid. In other words, there are no legal downsides to this course of action, even if it may involve a very different way of raising revenue than issuing debt instruments.

On the positive side, if the Administration were to use PPCS, it wouldn’t have to make a deal with the Republicans about the debt ceiling at all. It wouldn’t have to create hurtful cuts in the safety net or in discretionary programs, because it would not need a deal at all. I’ve argued elsewhere, that in case there is no agreement on extending the debt ceiling, that it becomes the President’s constitutionality duty to use one of a number of PPCS options to avoid default, since only they are unambiguously legal. In that case, some form of PPCS, would no longer be a choice, but a mandate, which the President would have to fulfill.

So, it’s not true that we won’t be able to pay our bills on August 3rd, if the debt ceiling isn’t extended, unless the President fails in his constitutional duty. The Congress may be acting stupidly in not extending the ceiling; but in doing so, it would not be forcing the US into default. It would, instead be placing a constitutional burden on the President. It is he who would force the US into default if he fails to shoulder this burden and do his duty.

(Cross-posted from Correntewire.com.

"Writing to reach you" by Wim Mulder on flickr

Dear Dems and Mr. President:

I’ve been a lifelong Democrat. But now, I don’t know anymore. I’m still registered alright; but when I look at your behavior, I think I’m a freely floating voter resource now, and I’d probably respond to a poll as one in that amorphous blob of independents that stands for “the two parties suck; but we don’t agree on much else.” I’m sorry about that. I really had high hopes after the 2008 election, that a new period of Democratic resurgence had come, and that the Reagan era had ended.

Instead, of course, I’m seeing an Administration that is out-reaganing Reagan, and a Democratic Party in Congress that just goes along, and goes along, and goes along, no matter what the President and the leaders give away to Republicans just to get a deal, any deal! That’s all very disgusting! Especially, when you self-described protectors of working and middle class Americans are fixing to cut Social Security, Medicare, and Medicaid benefits for the sake of a Hooverite fairy story, told by the President, which tells you that the Government will run out of money if we, “the richest nation on earth,” or so they keep telling us, in hypocritical bursts of national boosterism, try to maintain and extend a social safety net that is the least generous and most inadequate among the group of modern industrialized nations.

What’s wrong with you? Why do you Dems in Congress believe in the fairy story that the US Government, the sole issuer of its own currency, can ever run out of money? Why should the Government ever have to borrow back its own money? Why should it ever have debt in its own currency. The whole arrangement is ridiculous. It defies common sense, and it makes you slaves to the Hooverites, because you agree with them that we can’t afford “entitlements,” because the bond markets will cut off our credit; so that we must cut back on the safety net to save the Republic. Read the rest of this entry →

Congress provided the authority, in legislation passed in 1996, for the US Mint to create platinum bullion or proof platinum coins with arbitrary fiat face value having no relationship to the value of the platinum used in these coins. These coins are legal tender. So, when the Mint deposits them in its Public Enterprise Fund account at the Fed, the Fed must credit that account with the face value of these coins. This difference between the Mint’s costs in producing the coins and the credit provided by the Fed is the US Mint’s profit. The US code also provides for the Treasury to periodically “sweep” the Mint’s account at the Federal Reserve Bank for profits earned from these coins. Coin seigniorage is just the profits from these coins, which are then booked as miscellaneous receipts (revenue) to the Treasury and go into the Treasury General Account (TGA), narrowing the revenue gap between spending and tax revenues. Platinum coins with huge face values, $1, $2, and $3 Trillion coins have been mentioned, could close the revenue gap entirely, and, if used often enough, technically end deficit spending, while still retaining the gap between tax revenues and spending.

Coin seigniorage is now being mentioned increasingly on popular blogs as a possible solution to the debt ceiling crisis. It is the only solution currently being suggested that requires no agreement in Congress and also no challenge to the debt ceiling law itself. If Congress fails to increase the debt ceiling by August 2nd, it may even become the constitutional duty of the President to use coin seigniorage to avoid default.

But the proof platinum coin seigniorage alternative comes in more than one flavor. It’s actually a class of alternatives. Here are some different con seigniorage proposals.

First, mint a $1.6 Trillion coin and have Treasury use the profits from it to buy all the outstanding debt instruments held by the Fed. This would retire a substantial part of the national debt and immediately create $1.6 T in “headroom” relative to the debt ceiling. This alternative involves the least amount of change in current procedures. The coin, once deposited at the Fed, would remain in a Fed vault, and would not go into circulation. The Government would then go right back to issuing debt in order to meet its debt obligations and spend previous Congressional appropriations. With this alternative it is hard for critics to raise the inflation issue, since the new credits created by the coin are never spent into the economy, but are only used to reduce buy back the debt held by the Fed because that debt counts against the debt ceiling.

One objection made to coin seigniorage proposals is that the high face values of the coins would drive up the market price of platinum. However, the Mint is already scheduled to produce 15,000 platinum coins having relatively small arbitrary face value. There would be no conceivable need for more than enough material for 100 very high face value proof platinum coins. So there really is no supply issue.

Having said that, every time the Mint creates a high value coin for deposit at the Fed, it would have to create a duplicate coin, so that it had the means to swap with the Fed if it ever decided to redeem the coin for currency of equal value. This is not a likely event; but it is possible. So, it would be necessary to create duplicate coins and place them in a vault at the Mint.

A second proposal is to mint a $6.2 T coin to pay back all debt held by the Fed, and all Intra-governmental debt, including that owed to Social Security, Medicare, and a host of other other agencies. That would create $6.2 T in headroom, more than enough to carry us through the 2014 elections. Again, this wouldn’t result in any “money” immediately going into circulation, but over time SS and Medicare payments would be adding to bank reserves without any reserves being withdrawn from the system due to debt issuance. Some might think this would be inflationary, because they believe that net reserves added to the private sector are more inflationary than debt instruments added would have been. However, there’s evidence that debt instruments provide much higher leverage than added reserves, and, in addition, they lead to greater interest payments than reserves do, even if the Fed decides it wants to pay interest on reserves, which it doesn’t always do.

A third proposal for applying coin seigniorage is to mint a coin with face value large enough to cover the $6.2 T intra-governmental and Fed debt repayment, plus all private debt coming to maturity, and all Congressional Appropriations expected to require deficit spending. I’ll estimate, roughly, that a $15 T coin is enough for that, including about $4.5 T to close the expected gap between tax revenues and Government spending through the 2014 elections, and the rest for paying down the national debt further. Issuing a coin that large, using the profits from seigniorage, and assuming that Congressional appropriations continue the pattern of the past year or so, that would result in a remaining public debt outstanding of roughly $4.6 T, which would please the bond markets except for the fact that the Us wasn’t issuing any more debt instruments.

Again would this coin seigniorage proposal be inflationary? Well, the intra-governmental and Fed debt repayments won’t be, for reasons already stated. Also, there’s no reason to believe that the repayment of further debt will be, unless one believes, again, that reserves swapped for bonds, and not swapped again for more bonds, is inflationary. But, other than the interest payments which certainly add to private sector assets somewhat, payback of debt instruments is just an asset swap, followed by destruction of securities. There’s no addition of net financial assets to the private sector.

How about the profits of $4.5 T set aside for closing the gap between tax revenues and spending? Will that be inflationary? Actually, I don’t know if Congress will appropriate a $4.5 T spending/tax revenue gap over three years, but if such a gap is needed, and if it does, then the coin will cover it without new Federal borrowing. And as long as Congress doesn’t do the right kind of spending and creates a large enough gap to add sufficiently to private sector assets to support full employment, their appropriations, backed by coin seigniorage won’t be inflationary.

If, on the other hand, they do the right kind of spending to bring full employment inside a year, then tax revenues will come back as they did during the Clinton Administration, and then there’ll be no need for the profits from the proof platinum coin to be used completely between now and 2014. In fact, if the right jobs creating program is immediately enacted, as much as $3T could be left before the President might want the Mint to strike another proof platinum coin.

So far, I’ve discussed three alternative coin seigniorage proposals ranging in scale from a minimal proposal to handle the current crisis to one that would provide enough funds to both pay down debt, and support a gap between spending and taxes that might be sufficient to enable full employment. Now here’s a fourth, enough to handle Congressional appropriations for a decade.

Why not mint a $30 T coin and then another one in case the Fed gets obstreperous sometime down the road and presents the 30T coin, that was deposited in the Mint PEF account, for redemption?

I favor this fourth alternative above all, because it institutionalizes the idea that there is a distinction between appropriations, the mandate to spend particular amounts on particular goods and services, and the capability to spend the mandated accounts. In a fiat currency system, the capability always exists if the legislature provides for it under the Constitution. But the value of the 30T coin, and the profits derived from it, is that it is a concrete reminder of the Government’s continuing ability to buy whatever it needs to meet public purposes. It demonstrates very concretely that the Government cannot run out of money and that the claim that it can is not a valid reason for rejecting spending that is in accordance with the Public purpose.

So, in reading what follows, please keep in mind the distinction between the capability to spend more than government collects in taxes, and the appropriations that mandate such spending. The capability is what’s in the public purse, and it is unlimited as long as the Government doesn’t constrain itself from creating currency. With coin seigniorage its capability could be and should be publicly demonstrated by minting the $30 T coin, and getting the profits from depositing it at the Fed.

On the other hand, Congressional appropriations, not the size or contents of the purse, but whether the purse strings are open or not, determines what will be spent and what will simply sit in the purse for use at a later time. So there is a very important distinction between the purse and the purse strings. The President can legally use coin seigniorage to fill the purse, but only Congress can open the purse strings through its appropriations.

If the President decided to rise above the debt ceiling controversy, safeguard the social safety net, and do something really, really important from the perspective of history by using $30 T coin seigniorage, then he could explain the deposit of the first $30T coin to the public in a high profile TV address, this way (the second coin just stays at the Mint for safekeeping. Its existence to be kept secret):

My Fellow Americans:

1) Until now we’ve been borrowing the money the Government created back from the private sector, in order to cover our deficit spending, so the national debt has been steadily growing.

2) That’s silly! According to the Constitution, this Government, of the people, by the people, and for the people, is the ultimate source of all US money. So why should we ever borrow US money back and pay interest on it, since we can create it any time by the authority of the Constitution and Congress?

3) Congress has also imposed a debt ceiling, which, as you know, we’ve now reached, so we can’t borrow back our own money, anyway.

4) So, on my order, and in accordance with legislation passed by Congress in 1996, and with the US Code, the US Mint has issued $30 Trillion in a single platinum coin, and deposited it at the NY Fed. It’s legal tender, so the Fed credited the PEF with about $30 Trillion in USD credits using its unlimited authority from Congress to create US Dollars.

5) This is not inflationary because the Fed will put our coin into its vault, and keep it there permanently out of circulation, and we will use the $30 T in USD credits only to pay back debt and to spend what Congress has already approved, which is only a fraction of these credits and far from the amount needed to cause inflation.

6) My action ends the debt ceiling crisis, because we have no further need to borrow our own money back in the markets, so we don’t need the tea party or other Republicans, or even my fellow Democrats to agree to raise the debt ceiling.

7) Now the Treasury, has plenty of money, much more than we need, in fact, to pay for all appropriations Congress has already approved for 2011, and, again, we won’t have to borrow our own money back.

8) So we will pay all Government debts which will come due in 2011. Treasury securities and all other debts included. We will also pay back all debts held by other agencies of Government and the Federal Reserve. When we do this we will lower the national debt by about $7.5 T, reducing the “debt burden” by about half this year, and creating an actual Social Security trust fund with 2.6 T in cash reserves in it; and again, to do this we don’t have to borrow our own money back, and we will also reduce our interest costs on the outstanding national debt.

9) None of the $30 T in new credits created by our actions is “money” in the economy until the Treasury spends it. For now it is just capability to spend awaiting the appropriations of Congress to mandate deficit spending, should it need to compensate for the reduction in demand, probably close to 10% of GDP right now, caused by your own desire to save (which we want to do our best to facilitate), and your desire to import goods from foreign nations.

10) We have created $30 Trillion in new credits even though we needed only a fraction of that to cover anticipated deficit spending and debt repayment until 2021. The reason for this, is that I wanted to have enough capability created in the Treasury account, so that the national debt could be completely paid off (except for a small amount in very long-term Treasury debt still not mature by 2021), and all projected Federal deficits covered over the next 10 years.

11) Of course we can always make new coins if our projections turn out to be wrong; but I thought it would be best to ensure that all $14.3 T of the “debt burden” can be completely eliminated from our political concerns; and also to provide enough funds in our spending account at the Fed so that it would be very clear to Congress and all newly elected Representatives and Senators, that even though they, according to the Constitution, continue to control the purse strings, the national purse is very, very full, and that we will be able to afford whatever deficit spending for the public purpose, including for full employment and Medicare for All, that Congress, in its wisdom, chooses to appropriate now and before the election of 2012.

Good night, my fellow Americans and Sweet dreams! Rest well knowing that our beloved country won’t be defaulting on any of its debts, and that I’ve prevented this without going over the legal debt ceiling, by providing money for spending mandated appropriations, in compliance with the laws authorizing coin seigniorage, while supporting the Constitution’s prohibition against our Government ever defaulting on its debts. I hope that in the future everyone will obey the 14th Amendment’s prohibition against questioning the validity of Federal Government debts, and think twice before they indulge themselves in such loose talk. America will always pay its debts in US Dollars according to the terms of the contracts it has concluded, and in line with the pension payments and other obligations that it owes. Neither you nor the rest of the world need ever doubt that again!

(Cross-posted from Correntewire.com.

"Law Books" by seychelles88 on flickr

(Author’s Note; Many thanks to lambert strether, beowulf, and Yves Smith for their reviews of this post)

Well, the debt limit crisis is upon us. Treasury Secretary Geithner says the US Government will not be able to meet all its obligations on August 3, unless the debt ceiling is increased by Congress. The Secretary says he is out of moves to extend this date. I don’t think that’s true. I think he can use proof platinum coin seigniorage to supply all the money needed to spend Congressional Appropriations. I do not know if the Administration knows about this idea yet. It may, and it may simply have been unwilling to mention it for its own reasons. But just in case it doesn’t know, and also for the sake of the rest of us, I’m making another attempt to state the case for using coin seigniorage, so that as many people as possible know that the President has an alternative to the “shock doctrine,” make a deal approach to cutting essential spending and services including the social safety net, in return for getting $2.6 Trillion more in debt issuance authority.

The idea of using coin seigniorage to remove the need for issuing debt, and so to always stay under the debt ceiling is due to a commenter (and occasional blogger) on economics and politics blogs whose screen name is beowulf. He first presented the idea in comments and then posted the seminal blog on coin seigniorage.

Throughout the next six months, a number of other posts appeared at various sites (See here for links) with increasing frequency as the debt limit problem received more attention.

In the last few days, as coin seigniorage itself climbed up the hierarchy of public awareness, Felix Salmon and Matt Yglesias, both well-respected, mainstream, and professional bloggers, have mentioned the proposal while taking issue with it for reasons I’ll analyze below. Before, I do that however, here’s what’s involved in proof platinum coin seigniorage: Read the rest of this entry →

I’ve written a lot about jumbo coin seigniorage as a way of getting around the debt ceiling problem over the past 7 months, and others here, here, here, here, here, and here, apart from beowulf and I have been joining the fight. Lately, the situation has crystallized much more sharply for me as the day of reckoning for default on the Government’s obligations approaches; and so, I wanted to present my thinking as briefly as possible in the form of a series of points.

– Congress has appropriated Federal spending for FY 2011 which the Executive is mandated to spend.

– These appropriations exceed the tax revenue the Government is collecting. This was expected at the time the appropriations were passed. So Congress appropriated deficit spending.

– Congress has mandated that whenever the Government plans to deficit spend, it must first issue and sell debt instruments in an amount a least equal to the planned deficit spending. In this connection, the Treasury is prohibited from having an overdraft in its Treasury General Account (TGA) at the Federal Reserve Bank.

– Congress has mandated a debt limit such that the Administration must stop issuing debt when that limit is reached. (The limit was reached in early May). Given the Congressional requirement that deficit spending must be accompanied by debt issuance, the debt limit, in the absence of other countervailing factors puts a stop to deficit spending, until the limit is increased. There is a very important countervailing factor. But it is not recognized or used. So, for the moment, at least, the debt limit has stopped any further deficit spending

– The 14th Amendment, section 4, requires that the validity of the “debts” (broadly construed) of the United States never be questioned, and since the President has sworn an oath to uphold the Constitution, he is obligated to do all he can to see to it that these “debts” are paid.

– Congress has provided the authority, in legislation passed during the 1990s, for the US Mint to create platinum proof coins with arbitrary fiat face value having no relationship to the value of the platinum used in these coins. The US code also provides for the Treasury periodically sweeping the Mint’s account at the Federal Reserve Bank for profits earned from coin seigniorage generally. These profits are then booked as miscellaneous receipts (revenue) to the Treasury and go into the TGA, closing the revenue gap between spending and tax revenues. Platinum coins with huge face values e.g. $2 Trillion, would close the revenue gap entirely, and technically end deficit spending, while still retaining the gap between tax revenues and spending. If used routinely to close the revenue gap, such jumbo coin seigniorage would reduce the national debt to zero, and remove it as an issue in US politics. In addition, the existence of jumbo coin seigniorage as an option, removes the tension between the mandated debt ceiling and the 14th Amendment. It is the countervailing factor I mentioned earlier, because it provides a way to spend Congressional appropriations without issuing further debt.

– The President has sworn to uphold both the Constitution, which prohibits a default, and also the laws of the United States including the mandates just mentioned.

– These mandates, along with the platinum coin seigniorage authority, make using seigniorage the one viable option to: continue spending appropriations without violating the debt limit; fulfill all the other mandates, both legal and constitutional; and still be able to spend the money Congress has appropriated.

– So, if no action by Congress raising the debt limit is forthcoming, it will be the President’s solemn DUTY AND OBLIGATION to use platinum coin seigniorage to make the money necessary to avoid default, since his failure to use the only way of continuing to spend appropriations, which he is mandated to do would be a violation of his oath of office.

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

Today, the MSM noticed that there’s an issue of constitutionality related to the debt ceiling. Ryan Grim and Samuel Haass report that some Democratic Senators, including Chris Coons and Patty Murray, have begun to discuss. And they’ve contacted the White House raising the question of what the President’s constitutional obligation would be if Congress refuses to raise the debt ceiling before the Government again must issue debt. Keith Olbermann then picked up the issue in an interview with Grim on Countdown, and Lawrence O’Donnell raised it in part of his discussion with the world’s most genial, and persistent deficit hawk, Alice Rivlin on his show. Who knows who will pick it up tomorrow?

A dairy at DailyKos today by Jed Lewison also picked up the issue and opines:

I’m not a lawyer, but given that the plain language of the Fourteenth Amendment is that public debts must be honored, it would seem that if there were conflict between making good on those debts and staying within the debt ceiling, the Constitution would require the government to make good on its debts, trumping the debt ceiling. Given that the financing of a program like Social Security is structured as a public debt, it seems that at a minimum, the debt ceiling doesn’t apply to much of the federal budget.

Again, I’m not a Constitutional law expert here, but the key point is that there is an open question about what legal obligations the Obama administration would face if Congress fails to raise the debt limit. Not only has Congress passed legislation that would come into conflict, but the Constitution itself appears to conflict with that legislation as well. Because these are unsettled issues, the White House has a significant degree of latitude in choosing a path forward if Congress fails to raise the debt limit. It certainly shouldn’t limit its options by automatically assuming that the debt limit itself is the controlling legal mandate.

In past months I’ve written about the debt limit and considered various responses to the developing Congressional deadlock and the widely predicted “default” crisis, as well as the constitutionality question. In my view, the debt limit is not unconstitutional in the present context of legislation and constitutional mandates!

The Senators, MSM commentators and Jed Lewison are all right to suggest that the constitutional obligation to pay all US obligations must not be ignored by officeholders. But their suggestion that the debt limit forces the President to choose between complying with the debt limit, and ceasing to issue more debt, or complying with his constitutional mandate to uphold the constitution, and issuing further debt to pay US obligations, is not the case. It’s a false choice. It assumes that the only way for the Government to generate the money it needs to allow it to spend Congressional appropriations, is to borrow more of its own currency back by issuing more debt instruments and selling them.

There is another perfectly legal way, legislated by Congress, for the President to create the revenue he needs to pay US obligations, however, and to make the debt limit irrelevant. And because there is, there isn’t any kind of constitutional crisis here. There is only an obligation for the President to use the means that Congress, in its wisdom, has already provided to pay our debts.

What is that way? It is called Jumbo Coin Seigniorage. Congress has granted to the Executive the authority to employ jumbo coin seigniorage to replenish the Treasury General Account (TGA) at the Fed and pay all of the obligations of the United States without issuing more debt or even, technically, doing any more “deficit spending.”

As beowulf puts it:

The Secretary has rather broad authority to mint coins, Congress was apparently feeling generous when it authorized platinum coins in 31 USC 5112(k) (“with such specifications, designs, varieties, quantities, denominations, and inscriptions and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe…”). If deficit spending was paid for (eliminated actually) with miscellaneous receipts, revenue generated by selling the Fed jumbo denomination coins, and since the Federal Fund Rate can now be pegged with Interest on Reserve payments in lieu of selling Treasuries to drain excess reserves, Tsy could fund govt operations indefinitely without ever raising the statutory debt limit.

Beowulf might also have pointed out that national debt can eventually be reduced to near zero with the constant use of coin seigniorage. Details of how coin seigniorage would work with citations to legal issues involved are in beowulf’s post; and an outline of steps in a procedure is in my recent posts here and here. A more modest proposal than mine on how to use jumbo coin seigniorage to avert the debt ceiling crisis by using newly minted platunum coins to retire $2 Trillion of debt now held by the Federal Reserve was recently offered by wigwam.

So, since the Executive has a way of paying all obligations without deficit spending by using coin seigniorage and its Constitutional duty is to uphold both the Constitution and the laws of the United States, it follows that the Executive must use coin seigniorage to replenish the TGA as necessary to implement all the spending appropriations passed by Congress and all the previous obligations of the United States.

What else is there to say? The President has no choice in this matter. Congress has appropriated money for particular purposes. It has also passed a debt ceiling, and passed a law providing the Administration authority to engage in jumbo coin seigniorage to get revenue necessary to spend appropriations in the presence of the debt limit. The President is also bound to uphold the Constitutional mandate in the 14th Amendment that no one may question the validity of the debts of the United States, which certainly also implies, in the context of the debt ceiling, that it is the obligation of the President to remove any basis for such questioning by using the authority granted to him to raise all revenue necessary to spend Congressional appropriations. So, what is he waiting for? He should end the faux “debt ceiling crisis” by ordering the Secretary of the Treasury to immediately use jumbo coin seigniorage, while ignoring the inevitable teeth gnashing by those holding the nation hostage, to provide the TGA with a balance large enough to cover all appropriations already passed by Congress!

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