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Framing Platinum Coin Seigniorage: Part Six, More Political/Economic Objections

8:31 am in Uncategorized by letsgetitdone

This series provides a framing document for Platinum Coin Seigniorage (PCS). In the five previous parts of the series, I pointed out that there are three classes of opponents of High Value Platinum Coin Seigniorage (HVPCS, $30 T and above). The first and largest group opposes all Platinum Coin Seigniorage (PCS) of whatever type. The second, opposes HVPCS, but favors using the Trillion Dollar Coin (TDC) for the limited purpose of avoiding the debt ceiling. The third, opposes HVPCS, and doesn’t really favor using the TDC either, except, perhaps, as a last resort to avoid the debt ceiling. It favors an incremental approach to PCS beginning perhaps in the millions or billions in face value, and over a long period of time, after giving people years to adjust to Treasury using platinum coins with unusual, and unprecedented, face values, eventually building up to a TDC.

Parts two, three, four, five and this post (Part Six), considers further objections to HVPCS brought forward by people in one or more of these categories, and my replies to them. As you’re seeing, if you’re following the series, the opponents of HVPCS are throwing everything but the proverbial kitchen sink at it. In this concluding post, I’ll consider some further political/economic objections to PCS and HVPCS.

Destroys confidence in the dollar, here and abroad because it reveals the reality that our fiat money isn’t “backed” by anything

This one really makes me see red because it reflects 1) the arrogance of the complainer who thinks he or she is fit to know the reality of the fiat money and our present financial system, while the average citizen is not; 2) the attitude of the complainer that it is OK to maintain the platonic “noble lie” that the operation of our fiat money system is different from the way it really works; 3) the very questionable judgment that if everyone knew that US fiat money was just that, then that would destroy confidence in the dollar, even though it’s well-known that all the world’s currencies, including our own are fiat currencies; and 4) the attitudes of the globalizing elites that average citizens shouldn’t know what they’re about. In a word, the anti-democratic character of this objection to HVPCS really creeps me out.

But recognizing that this objection is profoundly anti-democratic also makes it very clear that HVPCS is very much about the larger process of turning back from the evolution toward global plutocracy we see all around us. And it is also about turning back towards both political and social democracy and a decent life for all.

Destroys budgetary discipline

This is another rich one. The idea here is that as long we think we are short of public money, then we will be more disciplined in our spending, and will make sure that the government deficit spending we do approve is only that spending that is necessary for public purpose. On the other hand, if we use HVPCS, then it will be clear that we can have as much money as we choose to have, and so we will lose our fiscal discipline and responsibility, and just spend willy-nilly on foolish things.

Too bad the world and our public spending habits aren’t as simple as this picture suggests. But, they’re just not.

We now have more than 35 years of experience with austerity politics in the sense that powerful groups in the political system have warned about our deficit and debt problems all that time, and have emphasized the importance of evaluating fiscal policy based on its impact on reducing deficits and balancing budgets, rather than the larger economic and social benefits and costs of those policies.

The record during this time shows that the US has increasingly suffered from a profound fiscal irresponsibility in the sense that we have failed to spend what was necessary to achieve larger public purposes like full employment, decreasing inequality, widely distributed gains in standard of living that keep up with productivity, developing a first class educational system, developing alternatives to fossil energy to serve as the new basis of our economy, developing programs to meet the challenges of environmental sustainability and climate change, increasing family integration, and providing first class universal health care to all Americans as a right. So, for more than 35 years now, our politicians have poor mouthed about not being able to afford expanding our domestic social safety net and discretionary programs, while proceeding to spend lavishly on defense industries, and insisting that we can afford that, all while our country more and more develops the social and economic characteristics of a third world nation.

In short, the last 35 years show that placing artificial constraints on the amount of public deficit spending we will do hasn’t worked to produce responsible fiscal policy that fulfills public purpose. I think that’s because when politicians and people focus on indicators like the debt and deficit to guide fiscal policy, instead of focusing on the real impacts of fiscal policy, that opens the way for well-funded elites to obscure issues about those real impacts and focus instead on narrow financial details that the elites understand, because they employ armies of analysts to understand them, while the public has no hope of understanding them, and so is in a very bad position to defend its interests.

So, when we look at the history of politics since Jimmy Carter decided we ought to try to balance the budget, and Alice Rivlin assumed a dominant position in DC thinking about fiscal policy, we can see that practicing artificial scarcity in fiat money creation hasn’t resulted in our becoming more fiscally responsible, but precisely the opposite. We have to acknowledge that we’ve been focusing on the wrong things, and we have to stop using them as a way of evaluating fiscal policy and government spending.

The national debt and reducing deficit spending should have no part in our evaluation of our fiscal responsibility. All that ought to matter is evaluating the real effects of Government spending on the economy, politics, society, culture, our resources, and the environment. That’s the sort of evaluation that should define budgetary discipline.

Budgetary discipline in that sense is unrelated to HVPCS. It has nothing to do with whether we have, or do not have $60 T in the TGA. It has to do instead, with whether we can mobilize ourselves to make Congress and the Executive accountable to our views about public purpose. Right now they are not.

Instead, they are using their austerity narrative as an excuse to weaken rather than strengthen the safety net. They are using it to refuse to legislate Medicare for All, even though polls have shown for many years that 2/3 of the population wants Medicare for All. They are using it to refuse to enable full employment, including a Job Guarantee for everyone who wants to work full time. They are using it to refuse to make available the funding we need to create a first class educational system. They are using it to refuse to fund sorely needed infrastructure repair and modernization. I can go on and on. But the main point is that the present system of funding Federal deficit spending isn’t working to fulfill our public purposes.

It’s time to change that system and to have the change reflect the truth that there can be no shortage of money in our system, only shortages of resources, labor, skills, know how, and well-being. The budgetary discipline we ought to pursue is the discipline of ending the real shortages we have, by using the money we can generate in whatever quantity we need to implement government programs that will help us end these other, real, shortages.

Causes the Government bureaucracy to expand and crowd out private sector activities

HVPCS is itself unrelated to the size of government compared to the size of the private sector. We can have HVPCS, use it to pay off the national debt, use it to cover deficits for many years to come, and still choose to have a lower percentage of economic activity performed by government rather than the private sector. Even if we run large deficits, covered by HVPCS, those deficits can be devoted to shoring up private sector growth rather than government growth. Whether we do this or not is our choice, and either shrinking the Government, or growing the Government is compatible with HVPCS.

Having said the above, that doesn’t mean that we should decrease the relative size of the government compared to the private economy. In recent years, we have shrunk the government bureaucracy substantially as a percentage of employment. That shrinkage has not led to good times or private sector growth. It has led to the opposite.

The privatization of a lot of government work since the 1970s hasn’t led to a reduction in the costs of funding the activities that used to be performed by civil servants. Instead, it’s clearly increased those costs. Contracting out was supposed to be cheaper, because the government would avoid expensive fringe benefits, including retirement costs, and supposedly would reduce the cost of services through competition. However, this theory has proven to be incorrect. Civil servants are cheaper than contractors, and they perform as well or better than contract workers, perhaps, because they have little incentive to drag out and prolong work to ensure that they will be employed in the future.

In addition, there is no correlation over time in the United States between prosperity, economic growth, and a smaller Federal government. If anything the correlation is negative. There were better times, lower unemployment, and faster growth from the end of WWII through 1980 when the Government’s percentage of the economy was higher than it has been during the period from 1981 to the present. So, maybe we could benefit from some more “crowding out” of the private sector by Government than we now have; but whether we would benefit from this or not, the issue of relative size of the government isn’t directly related to whether HVPCS is used or not.

Conclusions

Here are my conclusions based on this six part examination of HVPCS, including all the current objections I could find to the Executive Branch using it to fill the public purse.

  • Using HVPCS would demonstrate to the public that: the Federal Government’s budget isn’t like their budget; the Federal Government can never run out of money if it doesn’t choose to; there is no need to cut either revenue or spending because we must reduce the deficit; we can use revenues from HVPCS to pay off the national debt as it falls due, and there isn’t any need to pursue the current agenda of austerity and “shared sacrifice.” There is just no need for austerity and we ought to quit wasting time and causing harm by either discussing it or implementing it. Take it off the table!
  • So, HVPCS-based elimination of debt can end the whole austerity mind set that provides our current budgetary process with its constraining conservative cast, focused on narrow monetary cost considerations, rather than on a broader progressive framework that weighs the real costs and benefits of proposed fiscal activities of the Federal Government. Congress and the Executive would then evaluate the substance of legislative proposals based on their likely direct impacts and side effects on the lives of Americans, rather than their impact on Federal deficits and surpluses. Then the issues will be about what people need, and what improvements we can make by working together through the Federal Government. That would be the fulcrum of a new, game-changing politics, not debt, deficits, and debt-to-GDP ratios.
  • HVPCS strikes at the domination of the global financial and political system by Wall Street and the big banks. They will do everything they can to remove the power to use it from the President and the Treasury. That is why HVPCS must be used by the President ASAP! He has the main chance to bring change now. He should take it!
  • Progressives need to fight for retaining the Executive’s capability to use PCS, because that is the quickest road to ending austerity politics and preparing the way for Modern Money Theory-based policies to deliver sustainable economic prosperity, full employment, low inflation, and fiscal policy devoted to the public purpose.
  • High Value Platinum Coin Seigniorage using coins having $30 Trillion or greater value is most probably a legal alternative for the Treasury to use to fill the public purse. I say most probably, because no one can tell what will happen in response to a Court challenge. However, the likelihood is that the court will not grant standing to any challenger. Even it does, the odds are with the Executive Branch due to the clear language of the coin seigniorage legislation, the relationships between the Fed and the Treasury specified in the Federal Reserve Act, and the unitary executive doctrine.
  • There are a host of other economic, political, institutional, and political/economic objections to using HVPCS, they range from dismissing it as “weird,” “crazy,” etc. scary to most people, characterizing it as “printing money” and “inflationary,” projecting a political firestorm and projecting political paralysis in Congress if PCS is used at all, worrying about letting the Republicans off the hook for their irresponsible behavior in causing repeated fiscal crises, worrying about appearing to act like a “banana republic,” worrying about the possibility that HVPCS will elicit “black swans” with terrible unanticipated consequences, warning that using HVPCS will violate “a social norm,” projecting a collapse of investor confidence in the US and its currency and loss of reserve currency status, projecting rising interest rates from the bond traders, warning that HVPCS shouldn’t be used because of the maxim “first do no harm,” warning that minting a platinum coin is the first cousin of defaulting on the debt, because the act will convince financial markets that we can’t manage our affairs, warning that using HVPCS will compromise the independence of the Federal Reserve, and the related objection that it would destroy the institutional structure of the financial system. warning that it would destroy confidence in the dollar because it will reveal the reality that our money is “unbacked” fiat, warning that it would destroy budgetary discipline, and that it would cause “crowding out” of the private sector by the government bureaucracy.

    Looking at this list of objections and the replies I’ve offered in this series, I suggest that every one them, with the possible exception of the inflation objection is insignificant compared to the likely benefits of using HVPCS in place of debt issuance to pay off old debt and perform deficit spending without issuing any new debt instruments.

    Even the relatively light austerity being practiced thus far is costing the United States $3.4 Trillion per year in GDP and is leaving more than 30 million dis-employed. If the coming round of austerity from the Congress and the President materializes in the next few months, and we experience another recession, we may end up losing another $1 Trillion off GDP, along with another few million dis-employed.

    So, lifting the burden of austerity politics on the 99%, and ending debt ceiling crises, sequesters, and ideological budgetary conflicts, and their attendant effects on economic activity and unemployment, far outweighs the likely negative consequences of any or all of the rest of the objections against HVPCS, apart from demand-pull inflation, which, I’ve argued, is a very unlikely outcome of HVPCS.

    In this series, I’ve tried to show that there isn’t a good reason in the world not to use HVPCS. Of course, one can’t prove a negative, so I really haven’t shown that. But I hope I’ve shown that it’s costing far too much to continue down the road of debt issuance, in the context of the many objections I’ve reviewed.

    The important cost of doing what we have been doing, is not really the interest on the debt itself; that’s only fiat currency which the Government can always make. it’s the political consequences of the national debt, which are bipartisan action to practice austerity and “shared sacrifice,” that really count. We need to get rid of this before it destroys everything we hold dear. The way to do that is to use HVPCS to get of rid of debt and cover government deficits for many years. HVPCS is a way out of the trap we’ve built for ourselves. We need to get on with it, now!

(Author’s Note: h/t to Jack Foster for proposing a framing document for HVPCS. This is the sixth and concluding part of that document. I’ll make available the whole document shortly.)

(Cross-posted from New Economic Perspectives.)

Framing Platinum Coin Seigniorage: Part Five, Institutional Objections

7:50 am in Uncategorized by letsgetitdone

This series provides a framing document for Platinum Coin Seigniorage (PCS). In the four previous parts of the series, I pointed out that there are three classes of opponents of High Value Platinum Coin Seigniorage (HVPCS, $30 T and above). The first and largest group opposes all Platinum Coin Seigniorage (PCS) of whatever type. The second, opposes HVPCS, but favors using the Trillion Dollar Coin (TDC) for the limited purpose of avoiding the debt ceiling. The third, opposes HVPCS, and doesn’t really favor using the TDC either, except, perhaps, as a last resort to avoid the debt ceiling. It favors an incremental approach to PCS beginning perhaps in the millions or billions in face value, and over a long period of time, after giving people years to adjust to Treasury using platinum coins with unusual, and unprecedented, face values, eventually building up to a TDC.

Parts two, three, and four, and this post (Part Five), and the remaining post in this series considers further objections to HVPCS brought forward by people in one or more of these categories, and my replies to them. As you’re seeing, if you’re following the series, the opponents of HVPCS are throwing everything but the proverbial kitchen sink at it. In this post, I’ll consider some objections to PCS and HVPCS based on their predicted institutional impact.

The platinum coin is “the first cousin of defaulting on our debt”

This objection is from Ezra Klein; he says:

. . . It is a breakdown in the American system of governance, a symbol that we have become a banana republic. And perhaps we have. But the platinum coin is not the first cousin of cleanly raising the debt ceiling. It is the first cousin of defaulting on our debts. As with true default, it proves to the financial markets that we can no longer be trusted to manage our economic affairs predictably and rationally. It’s evidence that American politics has transitioned from dysfunctional to broken and that all manner of once-ludicrous outcomes have muscled their way into the realm of possibility. As with default, it will mean our borrowing costs rise and financial markets gradually lose trust in our system, though perhaps not with the disruptive panic that default would bring.

The “banana republic” stuff is just name-calling. What does using HVPCS, which is authorized by legislation passed in 1996, have to do with being a banana republic? Sure, we’ve never used HVPCS before to pay down debt and cover deficit spending, but why is it not a superior way to do these things than issuing debt instruments, which require us to deal with bond markets and to provide risk-free interest payments mostly to wealthy elites and foreign nations? It seems to me that it is that method of financing that is much more consistent with the methods used by the Latin American banana republics in the 20th century than HVPCS would be.

And why is the platinum coin the first cousin of defaulting on the debt? Ezra Klein says that it proves to the financial markets that we can’t be trusted to manage our economic affairs in a rational and predictable way. But why would it prove that?

It would prove that we’ve changed our way of paying off debt instruments and deficit spending alright; but that doesn’t mean that our new way of doing things wouldn’t be predictable and rational, and that financial markets wouldn’t know exactly what we were going to do. They’d know, for example, that the US wouldn’t be rolling any more debt by issuing new debt instruments, even though they may not like that as well as they like what we’re doing right now. They’d also know that with austerity off the table; we’d be likely to deficit spend a lot more to create full employment here, which they might guess would also be good for their flagging export-based economies.

As for our borrowing costs rising; just how does Ezra Klein suppose that would happen since 1) we’d use HVPCS to end sales of debt instruments altogether; and 2) our interest rates on still outstanding debt are mostly fixed, except for the relatively small volume of bonds that are inflation-protected?

This last notion of Ezra Klein’s makes two things clear. First, he’s fixated on using Trillion Dollar Coins or less; and has never thought through the implications of using a $60 T coin, having freaked out over the small-ball TDC proposal. And second, he hasn’t yet figured out that our bond interest rates can only go up if the Federal Reserve raises the Federal Funds Rate which it, and it alone, controls. He still thinks that the bond vigilantes and their “confidence” in US bonds determines our interest rates.

Compromises the independence of the Federal Reserve

That’s true. But, the vaunted independence of the Fed has not served us well over the years. What it has amounted to is that the Fed has not been accountable to the public. Its independence has meant independence from the Treasury and, largely, from Congress. But it has not meant independence from the big banks and Wall Street, which the Fed fails to regulate to any visible extent to protect the economy and the public, and whose interests the Fed has served ahead of the interests of the public at large. I am all for the President ordering the Secretary of the Treasury to use HVPCS, because I think the constraints imposed by that upon the Fed, and also the filling of the public purse to such an extent that it will be clear to people that the US can never run out of the currency it alone has the authority to issue, will make the Congress, the Fed, and the Executive Branch all much more accountable to the wishes of the American people.

Destroying the institutional structure of the financial system

I don’t know about its destroying the institutional structure of the system; but I will point to a few critical impacts I think HVPCS is likely to have. First, as Warren Mosler has pointed out in his characteristically pithy way,

“And all the coin does is shift interest expense from the Treasury to the Fed. . . “

This is Warren’s assessment of the financial system impact. But, second, an HVPCS coin would have a critical impact politically, because as I have pointed out time and again, it would end austerity politics for good, because it would end the debate over the national debt.

Third, it would make Treasury financing operations much more transparent than they are now. “The secrets of the temple” would be much more out in the open. That’s important, because right now the Federal Reserve and the banks escape accountability, since the American people don’t understand their role.

Fourth, the Federal Reserve Banks would have to pay IOR to maintain their target Federal Funds Rate. From the viewpoint of the public, that kind of operation would look like the bank savings accounts that people are familiar with. The Fed holds reserves and pays depositors an interest rate. Right now, when the Treasury pays interest on securities, that looks like debt to the public, not like the savings accounts that security accounts are like functionally. So, IOR replacing securities in response to HVPCS would greatly improve the political optics of government financing deficit spending.

And fifth, John Lounsbury makes this important point:

The reason Mosler’s one-liner is so significant is that, once discovered that it is no longer necessary for private banking to create the credit to pay for government appropriations when they exceed tax revenues, the banks have lost their umbilical cord to the federal government. The government will have demonstrated that private banking is not necessary to fund government operations.

A primal fear of private banking: The government might discover that public finance and private finance can be divorced. An entitlement can be ended: the need for government to pay interest to private institutions to finance operations would be no more.

That might well be beginning of the end for today’s institutional structure of the financial system. And I have to confess that after the many banking fiascos of the past 30 years, I can’t view that as a bad thing for either this country, or the rest of the world.

But that’s just me; maybe Ezra Klein has a different opinion?

(Author’s Note: h/t to Jack Foster for proposing a framing document for HVPCS. This is it; but divided into 6 parts for blogging convenience. The rest of the series will continue with objections made to HVPCS and my answers to them.)

(Cross-posted from New Economic Perspectives.)

Framing Platinum Coin Seigniorage: Part Four, Political/Economic Objections

7:46 am in Uncategorized by letsgetitdone

This series provides a framing document for Platinum Coin Seigniorage (PCS). In the three previous parts of the series, I pointed out that there are three classes of opponents of High Value Platinum Coin Seigniorage (HVPCS, $30 T and above). The first and largest group opposes all Platinum Coin Seigniorage (PCS) of whatever type. The second, opposes HVPCS, but favors using the Trillion Dollar Coin (TDC) for the limited purpose of avoiding the debt ceiling. The third, opposes HVPCS, and doesn’t really favor using the TDC either, except, perhaps, as a last resort to avoid the debt ceiling. It favors an incremental approach to PCS beginning perhaps in the millions or billions in face value, and over a long period of time, after giving people years to adjust to Treasury using platinum coins with unusual, and unprecedented, face values, eventually building up to a TDC.

Parts two, and three, this post (Part Four), and the two remaining posts in this series consider still more objections brought forward by people in one or more of these categories, and my replies to them. As you’re seeing, if you’re following the series, the opponents of HVPCS are throwing everything but the proverbial kitchen sink at it. In this post, I’ll consider some political/economic objections to PCS.

An HVPCS coin is a less acceptable option than a TDC or HVCS coin

Less acceptable to who? Certainly, HVPCS would be less acceptable to the FIRE sector than other PCS options. But the truth is that all PCS options would be unacceptable to them. They will scream hysterically if any PCS option is used; and then will raise huge amounts of money, and work as hard as they can to repeal PCS legislation. So, what’s the difference whether an HVPCS, TDC, or HVCS approach to PCS is used? Why do we care about how they will react?

The important question is how most people will react; not how special interests will. And people will react much more favorably to PCS, if enough money is minted to fill the public purse, change the game, and solve their perceived debt/deficit problem, than will react if only enough is minted to avoid the debt ceiling, or to fund specific programs with relatively small amounts of seigniorage. That’s why HVPCS is actually a much more acceptable option than either of the other two.

An HVPCS coin would bring on “Black Swans”

The argument here is that any new significant thing that we do, will have unintended consequences; and that some of them will be “black swans.” Nassim Nicholas Taleb says (pp. xvii – xviii) that a “Black Swan” is an event with three attributes:

It is an outlier . . .” in the sense that it is “outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. . . it carries an extreme impact . . . human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.”

Keeping this definition in mind, perhaps beowulf’s formulation of the PCS option might be considered a black swan; though Ellen Brown had envisioned the possibility of a TDC in her 2007 book, before beowulf advocated it, but without framing it in the context of existing legislation. That might make PCS more a “white swan,” an unexpected event we might have been able to anticipate. However, even if PCS itself is a black, white or “gray swan,” it’s much harder to contend, even with the most open-minded thinking about it, that it’s potential consequences are likely to include events “. . . outside the realm of regular expectations.”

Looking at the various objections we’re surveying here, they include a wide range of unintended consequences, and we are anticipating them, discussing them, evaluating the likelihood of the various possibilities. Black Swans can always arise, and we need to prepare for them as best we can. But that preparation can’t include avoiding new innovations that promise to help us solve serious problems that are visiting very heave social and economic costs on much of out population. But, instead, it ought to include measures we can take to adjust and correct for risks that are known and even unknown.

I think that deficit spending using HVPCS, comes with various fail-safes we can use if things begin to develop chaotically. One of them, perhaps the most fundamental, is that we can simply stop using the seigniorage in the TGA, and start issuing securities again. Even if we did that, by then we’d be a better position relative to the perceived threat from the debt, we’ve been hearing about everyday. Another, is that the Federal Reserve can pay Interest on Reserves (IOR), as it is doing now.

Yet another, is that we can monitor the effects of seigniorage spending carefully, to track the changes occurring in the financial institutional structure caused by seigniorage in itself. Finally, we can use taxation to cool off any overheating of the economy due to seigniorage spending.

In short, with the various alternatives for adjustment we have available, if necessary, and very careful monitoring of effects, I think that fear of the inevitable unintended consequences of using seigniorage should not deter us from using it to attempt to solve the political problem of the national debt and end austerity. To suggest otherwise, is to mistake the “black swan” for a conservative bogeyman. But then again, perhaps that’s what Nassim Nicholas Taleb intended all along.

Inflation

Won’t creating all this money by using PCS to repay debt and perform deficit spending without issuing any new debt be inflationary? In a word, no!

The credits in the Treasury General Account (TGA) ultimately resulting from using $60 T PCS aren’t immediately spent. So, they don’t all enter the economy immediately, but over a very long period of time from 15 – 25 years in duration. To gauge the inflationary impact, you have to analyze when and how the credits would be entering the economy.

Roughly $6.5 Trillion in debt subject to the limit was owed by the Treasury to other agencies or to the Fed itself. That debt could be redeemed in the same week after minting a $60 T coin. But the payments wouldn’t be inflationary because they would not enter the non-government economy. Nevertheless, these payments would cut back debt subject to the limit by close to 40%, because of the ridiculous quirk in the law that counts intra-governmental debt toward the debt ceiling.

Next, the 10 T or so of debt held by private corporations, individuals, and foreign governments would only be paid as it falls due. Much of it would be paid over the first three years. But, the additional reserves placed in the system by paying the debt, and not issuing new debt instruments would be less inflationary than rolling over bonds would be.

Also, their presence in the banking system, would clearly flood it with reserves and drive overnight interest rates down to zero, rather than raising them. For the Fed to hit any non-zero rate targets it would have to support them by paying IOR, to drain the excess reserves. So, there’s no inflationary impact from repaying debt instruments as they fall due by adding reserves to the banking system.

That leaves deficit spending. In the case of a $60 T coin, and a national debt of $16.4 Trillion, we’ll assume that $43.6 Trillion would be left in the TGA for future deficit spending. However, the fact that the credits are in the TGA doesn’t mean that the Treasury could spend them. In fact, it can only spend them if Congress appropriates deficit spending. So, the bottom line is that the $43.6 T doesn’t go into the economy until it’s appropriated. Then some portion of it can be inflationary if Congress deficit spends past the point of full employment; but if it doesn’t, then there won’t be demand-pull inflation. And, if it does, then the inflation will be due to unwise Congressional appropriations and not to using PCS.

In short, there’s no way that PCS in itself can have an inflationary impact, no matter how high the value of the platinum coin is. That’s because repayment of already held debt is less inflationary than continuous rollover, and gradual increase, of debt. Repayment of debt to government agencies including the Fed doesn’t enter the economy, and using PCS-generated funds to cover deficits is not in itself inflationary, unless deficit spending is so large that it continues past the point of full employment.

”First Do No Harm”

“First, Do No Harm,” is a great maxim; but when excessive caution and delay have the very high costs we see in our economy; then we have to weigh those already experienced and continuing costs of not minting a $60 T or other HVPC, and also the risk that the capability to use HVPCS may be repealed, against the potential cost and very low likelihood of inflation resulting from using it to fill the public purse, and then only to pay down the national debt and cover Congressional deficit appropriations. As I’ve already argued, there’s no causal transmission mechanism directly from PCS-based spending to demand-pull inflation. And demand-pull inflation is by far the consequence of HVPCS that people fear most.

It would shake investor confidence in the US

Some skeptics warn that using a $60 T coin would shake investor confidence in the United States lead to the dollar’s replacement as the reserve currency, and might and cause the de-evaluation of the dollar in international exchanges. I’m very skeptical about this possible scenario. First, the $60 T coin proceeds would first be used to pay off intragovernmental and Fed debt. This can have little effect on the non-government economy because nothing goes into it as a result of this pay off. Also, the outstanding public debt would suddenly be down by 40%, guaranteeing that would be no more debt ceiling crises in the US for some time. I can’t see how this would do anything but increase confidence.

Second, when the seigniorage is used for deficit spending, the immediate effect of that would be to supply no more securities to the market and to create the expectation that supply would be limited in the future. That can only increase demand for the securities still outstanding, increasing their desirability.

Third, during the first year after HVPCS is used another $1.7 T in short-term debt would be paid off, at least. That too, would increase demand for the remaining securities in the market place. As for the swap of $1.7 T in reserves for the securities, I’ve already argued earlier, that the reserves may be less inflationary than securities, which means that the swap might well be mildly deflationary. But whether it is, or is just a swap with little inflationary impact; it’s hard to see why this would effect the value of USD in international trade.

On the reserve currency business, I don’t think there will be any impact on that status as a result of using the coin, because, again, there will be no inflation resulting from it. But let’s say people panicked and replaced USD as the reserve currency. Then 1) our exports would increase and unemployment here would decline; and 2) our military interventionism in foreign policy would take a hit; because fighting wars overseas would be much more expensive due to the decreased value of USDs. Seems to me both of those things are good for us.

If we mint the $60 T then we will “freak out” bond traders since we’re “flipping them the bird.”

Well, all I have to say about this one, is that it’s probably true. After all, anyone would “freak out” if the primary source of supply for their business was threatened. But what I don’t understand about this complaint is why the President and the rest of us ought to worry about it. After all, the bond traders don’t worry about us, or the 31 million people who are now dis-employed, do they?

So, if the bond traders are mad at the US, then can they do about it? They can’t drive up the interest rates on bonds already sold, and they can’t force the United States to sell any more debt instruments if the Treasury doesn’t want to. Maybe they can get the Fed to pay a higher IOR rate. But that will have minimal effects on our politics.

In my next post, I’ll discuss objections to HVPCS based on institutional impacts

(Author’s Note: h/t to Jack Foster for proposing a framing document for HVPCS. This is it; but divided into 6 parts for blogging convenience. The rest of the series will continue with objections made to HVPCS and my answers to them.)

(Cross-posted from New Economic Perspectives.)

Framing Platinum Coin Seigniorage: Part Three, Political Objections

10:57 am in Uncategorized by letsgetitdone

As I pointed out in Part Two of this series, there are three classes of opponents of High Value Platinum Coin Seigniorage (HVPCS, $30 T and above). The first and largest group opposes all Platinum Coin Seigniorage (PCS) of whatever type. The second, opposes HVPCS, but favors using the Trillion Dollar Coin (TDC) for the limited purpose of avoiding the debt ceiling. The third, opposes HVPCS, and doesn’t really favor using the TDC either, except, perhaps, as a last resort. It favors an incremental approach to PCS beginning perhaps in the millions or billions in face value, and over a long period of time eventually building up to a TDC.

Part two, this post (Part Three), and the three remaining posts in this series consider the many objections brought forward by people in one or more of these categories, and my replies to them. As you’re seeing, if you’re following the series, the opponents of HVPCS have already thrown everything but the proverbial kitchen sink at it. In this post, I’ll consider some political objections to PCS.

The Executive will never do it because it’s too crazy, weird, bizarre, or outré for words and is beneath the dignity of the United States. Also, it’s too big to be practical.

Mostly, this kind of characterization is just name-calling and labeling and is really beneath contempt. A big problem exists. That problem is austerity politics and it is blocking the emergence of progressive economic policy during a time when the presence of nearly 31 million dis-employed people, unprecedented inequality, a stagnating economy, and many other serious challenges requiring an activist Federal government to enable solutions. This is what is too crazy, weird, bizarre, or outré for words and is beneath the dignity of the United States. This is what is profoundly impractical; not minting an HVPC of whatever face value to fill the public purse so we can pay off the debt and cover deficit spending for years to come.

HVPCS can provide the fiscal background that will open the way to constructive economic policies. HVPCS is a novel solution in the sense that it has never been used before. But that doesn’t make it crazy, weird, bizarre, or outré. It just makes it “new.”

Fearful, or conservative people will frequently characterize new initiatives in uncomplimentary ways; but their real objection is that the new proposal is outside of their comfort zone; and they believe in as little change as possible because they think that change is most often bad and rarely, if ever, a good thing. From their point of view, this is the best of all possible worlds, however evil it may be for the majority of people.

There’s no point to creating a Strategic Petroleum Reserve-like buffer stock of something the govt has the ability to create at will, especially if it’s just going to scare the hell out of people

This is an objection offered by those who prefer an incremental approach to PCS, rather than HVPCS with its consequence that enough seigniorage would be generated to pay off the national debt and cover deficit spending for many years to come. They emphasize the importance of making people comfortable with the idea of PCS before we use it to really change the situation of fiscal politics and move it away from austerity.

Making people comfortable and moving toward consensus is a laudable goal. But PCS will immediately be perceived as a threat to powerful vested interests (as I’ll explain below). These interests won’t allow the Treasury Department to have the power to create electronic credits in the Treasury’s spending account for very long. They will vigorously pursue repeal of the 1996 law to constrain Treasury once again to taxing or borrowing in order to fill the public purse. That’s why we do need a buffer stock of funds in the Treasury General Account (TGA) whether or not it scares people.

In addition, just what does “scaring people” people mean? Scaring bond traders? Scaring Wall Street? Scaring the big banks? Scaring the media who have gotten in bed with these interests? Scaring the people who have devoted their lives to propagandizing for austerity? Or does it mean scaring “average” Americans?

I don’t think it means scaring most people, because I think they will be comforted to know that the Treasury has enough funds to pay off the public debt as it comes due; and to cover deficit spending appropriated by Congress for many years to come. They will also be comforted to know that there’s no need to cut major popular safety net or discretionary programs, or to raise taxes on them.

Let’s get real! Using HVPCS may scare elites here in the United States and in other nations around the world. But it won’t scare the American people once they understand how it will impact their own lives.

It’s the same as “printing money”!

“Printing money” is an epithet from gold standard days used to characterize paper money that wasn’t convertible to, and thus “backed by” gold. When the US and other nations ended the gold standard in 1971, all money became fiat money, unbacked by convertibility into any commodity. So, today, when people refer to “printing money” they usually mean the Government issuing currency or bank reserves while deficit spending, without also issuing debt instruments of equal face value to withdraw an equal amount of money from the economy. When debt is sold along with new money created in deficit spending, this is often viewed as “debt-backed” money, and is also thought to be less inflationary than deficit spending unaccompanied by new government debt.

The objection to using PCS then, is precisely that it would provide the credits needed to add new money into the economy without issuing debt, and the basis of the objection is that this is more inflationary than adding the same money into the economy after subtracting an equal amount from it by selling debt. In turn, the idea that PCS-based deficit spending and debt pay off would be more inflationary than debt-based spending is based on the Quantity Theory of Money (QTM). The problem is that the QTM is false, and that both logical analysis of the theory and the empirical evidence available to us refute it.

I’ll discuss this a little more below under the inflation objection. But the main point here is that there’s no reason to believe that PCS-based deficit spending or debt repayment would be more inflationary than deficit spending or debt repayment accompanied by debt issuance. So, there’s nothing to the “printing money” objection. The US isn’t either Zimbabwe, or Weimar. It doesn’t have crippling external debts in currencies it does not create; or wholesale destruction or appropriation of its productive capacities to contend with. So, PCS won’t lead to our becoming like either of those historical basket cases.

The political blowback will be fierce, and minting the coin will strengthen the extremist faction in the Republican Party and lead to paralysis in the Congress.

Minting a platinum coin with any appreciable face value over $1 Billion Dollars will create a political firestorm. It doesn’t matter if the face value is $100 Billion or $100 Trillion, the act of using PCS, including HVPCS, will be met with outrage, propaganda, labeling, name-calling, and predictions about the decline and fall of the United States. The extremist faction of the Republican Party will have a field day and will be fully supported in their outrage by Wall Street, the big banks, and the financial and political MSM.

However, it won’t lead to political paralysis in Congress, provided HVPCS is used rather than “moderate” PCS options. If $60 T gets credited to the TGA, and the President pays down $6.5 T in intragovernmental debt, during the first week after minting the coin, then the Congress will be faced with a game-changing fiscal backdrop to deal with. The President can advocate for action on a variety of measures that will meet national problems with no questions about the fiscal capacity to accomplish these things. If the Republicans simply refuse to pass them, or to work through compromises without having the excuse that we must balance the budget, reduce the deficit, or repay debt because we are running out of money; then they will suffer severe losses in 2014, and the President will get what he wants in 2015.

It really is as simple as that. Without being able to “poor mouth” the country, the Republicans will have no rationalization for their obstructive fiscal politics, and the President will have no excuse for cutting programs people need and want. If the extremist Republicans continue on with their normal economic nonsense, then they will be dead men/women walking as we approach the next election. The 80 CEOs and their “fix the debt” stuff, as well as Peter G. Peterson will also be gone, as political factors. And both parties will have to get about the business of solving our nation’s problems, or suffer the consequences in 2014.

The platinum coin will only delay a reckoning we need to have

The “reckoning” here is over the Republicans’ “reckless threat to force the United States into default.” Using either the TDC or HVPCS, lets the Republicans off the hook on this issue and makes the new hot issue the President’s irresponsible action in minting a platinum coin. I think whether this happens or not depends on the face value of the platinum coins involved. If the platinum coin is a $60 T or some other HVPCS alternative, then I think the political system will quickly begin frying bigger fish than either of those issues.

The issue of whether to let Republicans off the hook is small potatoes compared to the issue of whether HVPCS should be used in place of debt issuance to pay off old debt and perform deficit spending without issuing any new debt instruments. Both this issue and the issue of whether we should end austerity politics when there’s no longer any need to worry about solvency or debt when deficit spending, are far bigger issues than whether the Republicans were “reckless” or the President “irresponsible.” In addition, the issue of the President’s “irresponsibility” will be gone in a week once he pays off that first $6.5 T in debt subject to the limit.

We can’t mint a platinum coin because this would violate a social norm!

Social and cultural norms are properties of social systems, and there are many levels of social systems ranging from families and small friendship groupings to international social systems. You can certainly say that there’s a norm against using HVPCS as a plausible solution to the national debt, and claim that this is not how our society pays its bills. And, it’s certainly true that we haven’t done it in the past; and that people working for, or identifying with, the FIRE sector are opposed to using PCS as a solution to the debt problem and take refuge in ridiculing us and trying to activate a social norm and frame that they think is dominant.

But these things don’t show that there really is a social norm preventing this in the United States when viewed as a large-scale political/economic system. Or that President Obama has to move incrementally to change “the social norm” because he would have a problem with implementing High Value PCS with a bold lightening strike minting a $60 T coin, since the country as a whole would rise up in opposition to such a move due to the strength of the social norm that we shouldn’t use HVPCS. There’s no evidence at all to suggest that this would be the case, and every reason to believe that most people don’t care how the national debt is paid off; so long as it’s paid off, and is not there to burden themselves, and “their grandchildren.”

After all, most people are completely unaware of how deficit spending and debt instruments work, and completely unaware that “debt is not debt” as we MMTers like to say. What they do know is that the United States has more than $16.4 T in debt instruments out there. That scares them, because they’ve been made to believe that it’s their debt, and I think they really don’t care if this “debt” is paid off by taxing more than we spend, or through using platinum coins to get the Federal Reserve to create money out of thin air for Treasury to use in a way that has no obvious short-term effects on them.

In part four, I’ll discuss more political as well as some economic objections.

(Author’s Note: h/t to Jack Foster for proposing a framing document for HVPCS. This is it; but divided into 6 parts for blogging convenience. The rest of the series will continue with objections made to HVPCS and my answers to them.)

(Cross-posted from New Economic Perspectives.)

Framing Platinum Coin Seigniorage: Part Two, Legal Objections

4:30 pm in Uncategorized by letsgetitdone

There are three classes of opponents of High Value Platinum Coin Seigniorage (HVPCS, $30 T and above). The first and largest group opposes all PCS of whatever type. The second, opposes HVPCS, but favors using the Trillion Dollar Coin (TDC) for the limited purpose of avoiding the debt ceiling. The third, opposes HVPCS, and doesn’t really favor using the TDC either, except, perhaps, as a last resort.

It favors an incremental approach to PCS beginning perhaps in the millions or billions in face value, and over a long period of time eventually building up to a TDC. The remaining posts in this series consider the many objections brought forward by people in one or more of these categories, and my replies to them. As you will see, the opponents of HVPCS have already thrown everything but the proverbial kitchen sink at it. In this post, I’ll consider some legal objections.

PCS violates the intent of the 1996 legislation, and is an unconstitutional exercise of executive authority, or is an unconstitutional delegation of legislative authority to the executive.

The Courts generally don’t try to interpret laws based on theories about Congressional intent, in the face of the plain language of a law. The language of section (k) of the 1996 legislation is particularly plain in providing for platinum coin seigniorage and leaving face values and other coin attributes up to the Secretary. It is not just that section (k) is plain its meaning; but also that other sections of the law constrain what the secretary can do in various ways. The plain implication of the section (k) textual context is that Congress intended to delegate broad powers of platinum coin seigniorage to the Secretary. There is no contrary evidence to the plain meaning of the text of section (k) in the law.

Some have contended that the purpose of the statute was to legislate about commemorative coins, rather than coins intended as a a source of revenue for the Treasury. Philip Diehl, Director of the US Mint at the time of the legislation drafted the language of the law. He flatly denies that the intent of the law was to authorize more commemorative coins, and says it was to provide new coins that would produce profits for the US Mint. Such coins are unambiguously legal tender. There’s no further evidence that Congress intended anything else in passing the law he drafted.

The Justices aren’t collective psychologists who are expert at divining the intent of the Congress. They are expert, however, at interpreting what the text of a law says, and so that is what they stick to almost all the time. A challenge to PCS based on intent isn’t something any Court is likely to take up, in the face of the language of the 1996 legislation, and Congress’s plain ability to repeal one or more of countless laws that allow unintended consequences.

What if a $60 trillion dollar coin is used to avoid the debt ceiling, and this saves the United States from defaulting on its debts, and the world financial system from collapsing? Is it then likely that the Supreme Court will entertain any challenges to the plain language of the law based on an interpretation of intent, unsupported in the text of the law, which would then place the Treasury in the position of having to return that trillion dollars in Fed credits, and again look default in the face? Can you see John Roberts ever voting for this?

John Carney, a CNBC blogger, has suggested that the 1996 legislation is unconstitutional because it specified an impermissible delegation of the Congressional authority to coin money to the Executive Branch. He argues that there’s no “intelligible principle” behind the language in section (k) limiting the Secretary’s powers.

However, Congress delegated to the Treasury the power to mint platinum bullion and proof coins having a variety of properties to be specified by the Secretary; but it did not delegate to the Secretary that power with respect to coins made out of other materials; or even with respect to platinum coins that are neither bullion or proof coins. So, Congress did limit the authority of the Treasury to mint platinum coins according to intelligible principles. Just not the intelligible principle that the coins involved had to be limited to a specific face value. Or, to put it another way, in the area of platinum coins what Congress has done is to delegate its authority according to “the intelligible principle” that the Secretary is to mint such coins with face values he/she deems necessary and proper.

PCS really doesn’t avoid breaching the debt ceiling

It’s also been suggested that PCS doesn’t solve the debt ceiling problem, because in substance, if not in form, using the platinum coin is just a way of Treasury getting a loan from the Fed until the debt ceiling can be raised and it can go back to issuing debt. This argument assumes, however, that Treasury would have an obligation, at some point, to redeem the coin from the Fed with revenue raised from taxes or debt issuance. However, none of the proponents of using PCS, until very recently, when this idea crept into the writing of Paul Krugman, ever proposed restoring the status quo by buying the coin back from the Fed.

Instead, our main idea has always been that any platinum coins deposited at the Fed would remain in its vault as a Fed asset in perpetuity, and that the Fed would credit the US Mint’s account with the face values of the coins. In our view the Fed would have the legal duty to provide such credits in response to a deposit of a platinum coin or coins because the coins are legal tender, and the NY Fed, as the fiduciary banking agent of the Treasury Department, cannot refuse to accept and credit a legal tender coin. The Treasury would incur no obligation to the Fed in using PCS, any more than any one of us would incur any obligation to our bank in giving them a coin with $100 in total face value, and expecting the bank to credit our account with that $100.

The Fed can’t be forced by Treasury to accept and credit an HVPC it mints

Oh, yes it can. Treasury may choose not to force the Fed to do this, as it just did, but one of the powers vested in the Secretary of the Treasury before creation of the Federal Reserve system was certainly to spend its legal tender into the economy. To do that under an arrangement where the Fed is its fiduciary bank/agent, 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. If the Fed Chair still refuses, then the President can remove the Fed Chair for cause (12 USC 242). See this more detailed argument for further development. In Part Three, I’ll consider political objections to using HVPCS.

(Author’s Note: h/t to Jack Foster for proposing a framing document for HVPCS. This is it; but divided into 6 parts for blogging convenience. The rest of the series will continue with objections made to HVPCS and my answers to them.)

(Cross-posted from New Economic Perspectives.)

Can the Federal Reserve Really Refuse To Accept and To Credit A Platinum Coin Deposited By the US Mint?

10:42 am in Uncategorized by letsgetitdone

The issue of whether the Fed can really refuse to accept and credit a deposit of a platinum coin with its face value, is being raised frequently on blog posts about Platinum Coin Seigniorage (PCS) and the Trillion Dollar Coin (TDC). In the past, I’ve argued that the Fed cannot; and the final decision on taking the TDC off the table was actually made by the President, and not by Chairman Bernanke.

Ellen Brown, the well-known author of The Web of Debt, and also of this recent post on fiat money, direct financing of federal spending, and using platinum coin seigniorage made this comment in a discussion thread at Monetary Realism:

Per the Fed’s website (or maybe it was the Treasury’s), a gas station can reject a $100 bill before the gas has been pumped. You only have to accept legal tender after the service has been rendered or good delivered. The Van Nuys Flyaway won’t take dollar bills. Apparently then the Fed can reject a tender before it has rendered the banking services involved. It’s a privately-owned bank, after all!

Here’s my reply to this comment.

The coin being presented to the Fed isn’t tendered as payment for services, or for a product. It’s a coin being tendered as a deposit into the Treasury General Account (TGA). Also, note these three considerations.

First, the Treasury Department is mandated to deposit its money into Fed accounts if it wants to enter the banking system. So unlike the gas station; the Treasury can’t find another bank; and it needs a bank to spend and implement Congressional appropriations. A Fed regiional bank, such as the New York Fed, in turning down a coin, would be refusing to perform a duty it contracted for to serve as the depository of the funds of the Treasury Department and the US Mint. I don’t think it can do that and remain a regional Fed bank.

Second, even though the regional Feds are privately owned banks; they cannot behave in ways that contravene the policy of the Board of Governors, a Federal Agency, and they are very tightly regulated by that Board. So, the regional NY Fed, the bank that has the Treasury General Account (TGA) will not be making any such decisions on its own authority. Additionally, in agreeing to house the TGA, the New York Fed has contracted to serve as the sole banking agent of the Treasury Department with respect to its spending account.

Somehow I don’t think the sole banking agent of the United States Treasury Department has the legal right to turn down a deposit of legal tender, and refuse to credit its face value in the Treasury’s own checking account. Imagine what the liability of that “private” bank would be to the US Government, if as a result of any such action, the US would be forced into defaulting on some of its payments and decided to sue the NY Fed for consequential damages. Not a pretty picture, and not a risk that the NY Fed would want to take w/o an explicit and specific instruction from the Board of Governors.

And third, consider the Board of Governors and the Chairperson of the Fed. What would they do? Well, they’ll tell the Secretary that they don’t want to do it. But if they say no; and the Treasury Secretary orders them to accept and credit the coin; then what? Then this:

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 system 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. If the Fed Chair still refuses, then the President can remove the Fed Chair for cause (12 USC 242)

And as beowulf has pointed out, the Fed really doesn’t want to go to Court over this because they risk a Supreme Court finding of unconstitutionality due to the Unitary Executive theory, which, in this case, may well have the support of some of the most conservative justices. My own view here, is that the Fed would not even make it to the Court because they’d be denied standing under 12 USC 246, if the Treasury Secretary also ordered them not to contest his order legally.

If you read through the discussion thread where Ellen Brown left her comment, you’ll see that both Philip Diehl, former Director of the US Mint under President Clinton, and Carlos Mucha (beowulf, or beo), the lawyer who first proposed the use of PCS and the TDC, and the author of the blog post, believe that no Secretary would treat the Fed this way. But what if the Secretary were ordered by the President to do it? And what if the President were somebody like FDR or LBJ? Then I think it could happen; and depending on how tough things get in the next few years who knows what Obama will do?

After all he’s the guy with the drones. And the guy who throws people under the bus when he thinks he has to. So, why wouldn’t he throw Bernanke under the bus too, if he thought he needed to? Just sayin’!

(Cross-posted from New Economic Perspectives.)

Beowulf and Diehl Embrace Trillion Dollar Coin Incrementalism!

11:34 am in Uncategorized by letsgetitdone

A wonderful discussion thread has been going on at Monetary Realism (MR) after a very good new post by beowulf (Carlos Mucha), who first brought forward the proposal for the Executive Branch to use the authority provided in the 1996 Platinum Coin Seigniorage (PCS) legislation to fill the public purse, on whether the Fed had a legal basis for turning down PCS in the form of the Trillion Dollar Coin (TDC). I’ll leave the legal discussion for another blog post, since I agree with beo on these, and also need to review some legal arguments against the TDC by some George Washington University Professors. Here I want to write about some of the MR discussion relating to High Value Platinum Coin Seigniorage (HVPCS) vs. incremental PCS options.

Why the $60 T Coin Is Needed

Beowulf addresses himself to my call for High Value Platinum Coin Seigniorage (HVPCS) using a $60 T coin in this way:

Once you blow past the size of the public debt is there a reason to go right to $60T? You need to ease into something that’s such a break from current practices. Even a trillion dollar coin is too big to be practical (of course, like Mike said, once you think it, you can’t un-think). IIRC it was Philip who suggested minting $25B coins would be a good place to start.

“Philip” is Philip N. Diehl, former Director of the US Mint in the Clinton Administration and Co-author with Mike Castle, (Rep. DE) of the PCS legislation. In comments of the post, Philip joined beo in advocating for an incremental process of PCS introduction.

An important reason for using a $60 T coin, isn’t because we need all that money right away. In fact, we can spend very little of it because the spending hasn’t been appropriated by Congress, and most of the outstanding debt subject to the limit, will have to be paid as it falls due rather than immediately.

Still we need the $60 T coin to be minted because:

– a) the coin legislation may be repealed at any time by people who don’t want seigniorage to be an alternative to taxing or borrowing; but once the $60 T coin is minted, the cow would be out of the barn, and the proceeds would last 15-25 years, by which time we’d have a chance to get political acceptance for reorganizing the Fed under Treasury and ending its existence as a politically unaccountable agency dominated by private banks and Wall Street;

– b) the seigniorage from a $60 T coin would serve as a potent symbol of the truth that the Federal Government can never involuntarily run out of money. This is one of the central ideas of MMT that the public needs to accept routinely to understand that the Government’s budget isn’t like their household budget;

– c) the mere presence of the $60 T in the public purse makes clear that the claim of those favoring austerity that we can’t afford to enable full employment; or to pass Medicare for All, or to rebuild our infrastructure or do 101 other things that need doing are false, and to oppose them the austerians would then have to argue on the merits of the policy proposals and not almost solely on grounds that we just can’t afford it because of all the debt we’re going to leave to our grandchildren; and

d) the presence of the $60 T in the public purse would be a positive enabler of progressive legislation creating benefits that people want now but austerians say we can’t pass because “we can’t afford it.”.

Easing Into PCS and Being Practical

Beo also says we have to ease into something that is such a break with current practices. But, I ask, why?

Are current practices so beneficial to us that we want to preserve them as much as possible? Haven’t they been a critical part of a public financing system that’s been failing us for a long time now in enabling us to do what must be done to create full employment and various other elements of public purpose that would create a better life for Americans? Haven’t they failed us in a very critical way by creating such complexity in public financing that the public can’t see that Federal “debt is not debt,” and instead are easily fooled into believing that we can “run out of money,” and can’t afford to pass progressive economic legislation?

Beo knows what the answers to these questions are. And he must also know that our current procedures for financing deficit spending are poison to progressives, to the need to fulfill public purpose and to the American people. The only people who really like them are people who directly benefit from the system of issuing debt instruments. These procedures are not something we should want to conserve for another moment; because they do not benefit the 99%.

Beo. also says that the TDC is ‘too big to be practical . . . ” But what’s “impractical” about it? Assuming it’s legal, which he and Philip both believe, it strikes me that in its $60 T version it’s both efficient and effective in ridding us of austerity politics. Beo goes on to talk about the fear of inflation:

Considering that the fear of inflation is the biggest political hurdle to “printing money” (and needs to be addressed when it comes up), a shock and awe $60 megaton coin strategy will lose more political support than it gains. Besides, there’s no point to creating a Strategic Petroleum Reserve-like buffer stock of something the govt has the ability to create at will, especially if its just going to scare the hell out of people (and that it certainly would).

I can’t see how beo can possibly know that, due to inflation fears, a $60 T coin strategy will lose more political support than it gains. Maybe, he’ll oblige me by doing a political analysis showing the transmission mechanisms involved. Here’s mine.

The $60 T in seigniorage would allow the President to pay off all the debt instruments held by the regional Federal Reserve banks and by Federal Agencies. Since the reserves used to redeem these instruments would not be spent into the economy, they can’t possibly cause inflation without a causal transmission mechanism. That’s a pay off of nearly 40% of the debt subject to the limit. If the Treasury pays that off in the week following minting and depositing of the coin, the most likely reaction on the part of the public will be very strong approval of this action.

When the Treasury then pays off $1.7 T in Treasury Bills over the next year, and the Administration points out that debt subject to the limit has been reduced by 50% overall, people will be even happier. When, next, people see that no more debt subject to the limit is issued over the first year to cover deficit spending, I think they will be happier still.

When, finally, they see that there is no inflationary impact from paying off half of the national debt, they will be ecstatic and conclude that Obama is a genius for coming up with this great new platinum coin trick that has stopped both spending cuts and further tax increases, and yet still allows the debt that their grandchildren might have inherited, to be paid off as it falls due, with NO NEW DEBT ISSUANCE needed!

The proof of the pudding is always in the eating. We, including beo, and maybe Philip too, know now that paying off that first $8.2 T in debt will not cause demand-pull inflation during the first year after minting the coin. The public will know that too when they experience it.

During that first year, inflation fears will gradually recede from the first day the money is used to pay off debt. By the end of the year those fears will be largely gone among most people, except for those for whom that fear is part of a “religious belief,” leaving inflation hysteria to “the gold bugs,” and Austrian school economists.

I would have done the $60 T coin in May of 2011; or most recently the day after the election. And, then I would have given a speech like the one in this post followed by a mobilization of Organizing For America (OFA) behind the initiative.

The Senate, then, never would pass a House bill to repeal PCS, because everything would have become so visible that sticking with the coin would be a litmus test for any Democratic candidate want to run with Party support. Then, if Obama got a high percentage of the debt paid by November 2014, I doubt there’d be any trouble in the mid-terms in either keeping control of the Senate or winning back the House. After all, what’s not to like: 1) debt rapidly disappearing; 2) the end of any need for austerity and no entitlement cuts; 3) no battles with Congress over debt ceilings or fiscal cliffs or austerity budgets; 4) Congress still controls the purse strings; and 5) attention turned to real issues about how to create good times here in America.

So, the brouhaha over the $60 T coin would pass. The Rs wouldn’t be able to repeal the coin capability until they got hold of both Houses of Congress, and if Obama played his cards right, actually doing things for people rather than the banks, and Wall Street, I don’t think we’d see Republican control of both Houses again for some time; in spite of wholesale gerrymandering. Their earliest opportunity to get the Senate again might not be until 2018, when there will probably be many more D Senate seats than R Senate seats at risk. As for the House, if the Democrats win in 2014, and don’t screw up (a big assumption I know), then they’ll win in 2016, and again the Republicans will have to wait until 2018, provided their party doesn’t split apart before then.

On beo’s buffer stock of reserves in the public purse point, of course there would be no point in creating one if the Treasury always had the power to create Trillions to pay off that national debt; or to deficit spend Congressional Appropriations; but the authority to do that is dependent on a Congress that has little understanding of fiat currency, and that may repeal that authority at any time. So, the “buffer stock” of reserves in the public purse is needed for that reason and the other three reasons I gave earlier.

The Incremental Approach

Philip Diehl, and beo joined together in an exchange advocating an incremental approach to introducing PCS which would feature a step-by-step approach to gradually increasing the amount of PCS annually. Beo suggested starting out with a $25 B coin, and said this:

On first day of fiscal year, Tsy deposits coinage equal to net interest paid the previous year. I like plays that end in the first act. . .

If you’re looking for a more incremental strategy, perhaps the way to ride the TDC wave while also defusing opposition is to propose a “responsible alternative.” Say, Tsy and the Fed should cooperate on a pilot program using $25 billion coins to see what effects positive or negative the use of debt-free money would have on our financial system, which is swimming in debt. If it’s negative, that should quiet critics who are pushing for a trillion dollar coin. If it’s positive, then it will be worthwhile to slowly expand the program, to gauge its impact in larger amounts. The only time we should ever mint a trillion dollar coin is sometime after the evidence is clear to everyone the $500 billion coin, the $100 billion coin and the $25 billion coin worked just fine (a red herring of course, the Mint can strike 40 $25 billion coins almost as easily as a single $1 trillion).

I guess it’d be worth stressing that it’s not a transfer of power from Tsy to the Fed since it is the Fed who orders coins from the Mint. You could call the article, “Beating trillion dollar coins into plowshares: Can a political weapon be converted into a useful monetary policy tool?”

I think beo meant to say a transfer of power from the Fed to the Treasury, just above.

Philip Diehl added this to the case for the incremental approach:

Beo, I like the step by step approach but I’d go faster and with a specific target in mind–like increments of at least $50 billion a year to reach the goal of covering the annual carrying cost of the debt. I figure that with the debt continuing to rise and interest rates also rising, it would take, say, ten years before HVCS is covering the full annual interest on the debt. Let’s say that’s $500 billion a year. At that point, we’d be minting a half trillion dollar coin every year to continue covering the annual interest on the debt, is that correct?

A slow ramp up like this would not only alleviate fears over the inflationary effect of HVCS (assuming we’re right that there won’t be any), it would also make plain its significance as a way of relieving the zero sum game of budgetary politics. A constituency will form inside and outside Congress to continue or even accelerate the pace HVCS is ramped up in order to ease the squeeze on the rest of the budget as entitlement and other spending increases.

Also, wouldn’t we expect interest rates to fall from what they would otherwise have been if Treasury was no longer longer competing in credit markets? And wouldn’t we expect tax revenue to rise if there were fewer tax free bonds in the marketplace? If I’m correct on this, it seems like HVCS would develop a powerful public constituency for the lower interest rates it would bring.

What’s wrong with this picture? It seems to good to be true. Where’s the downside, the tradeoffs?

The HVCS acronym means High Value Coin Seigniorage, and is intended to refer to all coins with face values in the millions, billions, or trillions. Here’s another contribution from beo, supporting the incremental approach in the context of a comparison with HVPCS (which refers to platinum coins with face values of $30 Trillion or more), using this scenario:

. . . Philip was once Chief of Staff to Tsy Sec. Lloyd Bentsen, imagine if Philip presented him as policy options:

1. a trillion dollar coin (against the Fed’s wishes)
2. a $60 trillion coin (against the Fed’s wishes)
3. a joint Tsy-Fed pilot program beginning with a $25 billion coin ( or whatever face value the Secretary was comfortable with, maybe it starts with a $1 billion coin).

Does anyone really think Lloyd Bentsen (or any Tsy Secretary) would take a “screw the flight simulator, lets see us try this in a real plane” attitude?”

So, that’s the case for the incremental approach, which I’ve tried to present fairly, and in its strongest possible light. So, now we can get to answering Philip’s question about the downside.

The Downside of the Incremental Approach

First, if an upside of the $60 T option is that its implementation through a “lightening strike,” to quote Philip, eliminates the chance for its opponents to mobilize against it until after it’s a fait accompli, and also removes the efficacy of any move towards repeal, before repeal no longer matters; then the opposite is true of the incremental option. Beo and Philip envision years, perhaps a decade, of ramping up until coin seigniorage is making an appreciable impact on the conditions underlying the drive towards austerity.

During that time, surely a very well-funded and powerful opposition to deficit spending and debt instrument payoff will form and do everything it can to repeal the platinum coin. And they will be able to mobilize and work against the coin before it has had a chance to solve any problems, or do any good; before, in other words, the coin can get enough love from the broader public, to ensure that the capability won’t be repealed.

Philip points out, correctly I think, that during the PCS rampup, the coin, if left in place as a capability, would develop a powerful constituency of its own, both in an out of Congress. This is true. But at $25 or $50 B per year in PCS value, can enough people grow to love its impact to counter-balance an all-out propaganda and political campaign by Wall Street, the Fed, and right-wing austerians like the Koch brothers? I seriously doubt it.

They will see the threat from the coin, probably have already seen it, judging from the reaction to it at AEI. And they will try to get rid of it soon; at the very first opportunity. I’m sorry to say that I think an incremental strategy is not just impractical, but even feckless, given that they are now, or shortly will, come after the coin with everything they have, in much the same way that the health insurance has come after any serious health care reform. So, incrementalism in applying coin seigniorage, will only lead to its repeal before its own constituency is powerful enough to protect it.

And what do beo and Philip hope to accomplish by this incrementalism? They hope a) their proposal will be viewed as “reasonable,” compared to HVPCS options like the $60 T or even the TDC; b) to calm inflation fears by minting coins with values low enough that they cannot possibly trigger inflation, and then increase face values gradually until over a period of years the fear of inflation is calmed and people are ready to consider really serious uses of PCS; and 3) to show people more and more positive impacts of the coin, so that they build a more and more powerful constituency as time goes on.

So, when it comes down to it, they want incrementalism to mollify people against the coin enough that they will be allowed “a seat at the table” and taken seriously by their opponents. They also want it because they care a lot about calming inflation fears, and they also care about having a general consensus about using it, before they “go big” with the coin.

The problem with this approach is that people who want the FIRE sector defended from the coin, and its lessons about fiat money, will never give them a seat at the table, have no incentive to do anything but discredit and ridicule them, and won’t be convinced about the low likelihood of inflation from PCS because they have a vested interest in continuing to claim and/or believe that the coin is inflationary. Even those among them who come to believe it isn’t inflationary will still oppose it on grounds that it is, because they won’t consider the advantages and disadvantages of the coin in good faith.

But in addition to these problems, there is the still more serious problem that an incremental approach taking a decade to implement has very serious likely costs. Apart from the possibility of losing the capability for PCS, there are also unemployed, partly employed, uninsured sick people, ill-educated young people, and people whose careers and social mobility are heavily impacted by the refusal to use the full power and potential of HVPCS when it is available for use.

Beo and Philip are, in effect, suggesting that the underlying condition supporting austerity politics remain out there for perhaps a decade or more, when the President has the power to eliminate it now, because they want to calm fears, get a seat at the table, and have consensus before they go ahead with PCS in a big way. Is this really a serious proposal when we look at the full political context we face? Is it actually “practical,” or does it just avoid facing the most important problem we need PCS to solve for more than a decade?

“First, Do No Harm,” is a great maxim; but when excessive caution and waiting have the very high costs just mentioned; then we have to weigh those already experienced and continuing costs of not minting a $60 T coin, against the potential cost and very low likelihood of inflation resulting from it filling the public purse, and getting used only to pay down debt and cover Congressional deficit appropriations. I’ve done the inflation analysis, and I’ve been unable to find any causal transmission mechanism directly from PCS to demand-pull inflation. I invite beo, Philip or anyone else to critique my analysis and show me where I’ve made a mistake.

Of course, demand-pull inflation can result if Congress appropriates too much deficit spending; but that would happen whether seigniorage, or Treasury Securities or both, are used alongside deficit spending. So, before we so easily propose and decide to follow an incremental PCS strategy, perhaps its proponents ought to make clear the causal mechanisms they see that are at least minimally likely to cause inflation, beyond the inflation from deficit spending accompanied by debt issuance? Until that’s done, I don’t think the incremental PCS proposal can be considered a serious one.

Second, let’s look at beo’s three options in the Lloyd Bentsen type of scenario. I think the President does 1) or 2) if he wants to start a long political struggle that he may very well lose, or if he wants to engage in kabuki. But if he wants to destroy the foundation of austerity politics, then he will select 3) or maybe a $100 T coin (because it’s more powerful as a meme), because those alternatives will actually do the job.

So, what coin seigniorage option should be pursued depends on what the goals of the President are, and his/her perception of the problem. Beo, Philip, and other incrementalists seem to think that the problem is how to get everyone used to fiat money, so it can be introduced on a large scale, fairly non-controversially, and with a good deal of consensus support. They think we can afford to wait for that result for a decade, and that it will be worth waiting for.

I, on the other hand, think the problem is how to destroy the political power of the austerians, now, so we can build a more equal and prosperous economy and society. The incremental approach could well leave us with austerity, a stagnant economy, and growing inequality, for a decade or more.

I don’t think we have that much time left, before our society sees its democracy extinguished by a soft, but, nevertheless, totalitarian plutocracy. That is much too high a price to pay for the benefits of the patient, careful, and experimental introduction of platinum coin seigniorage that beowulf, Philip Diehl, and others who like the incremental approach have in mind. Incrementalism is always favored by the Very Serious People (VSP), as the “practical” alternative; but all too often it is “impractical” in the highest sense of the term, because it simply will not work!

(Cross-posted from New Economic Perspectives.)

Ezra Klein Chooses Fear Mongering the Big Coin, I Choose Ending Austerity!

4:40 pm in Uncategorized by letsgetitdone

Ezra Klein

(H/T to Lambert Strether for the title!)

Here’s a commentary on Ezra Klein’s recent diatribe against Platinum Coin Seigniorage (PCS).

But there’s nothing benign about the platinum coin. It is a breakdown in the American system of governance, a symbol that we have become a banana republic. And perhaps we have. But the platinum coin is not the first cousin of cleanly raising the debt ceiling. It is the first cousin of defaulting on our debts. As with true default, it proves to the financial markets that we can no longer be trusted to manage our economic affairs predictably and rationally. It’s evidence that American politics has transitioned from dysfunctional to broken and that all manner of once-ludicrous outcomes have muscled their way into the realm of possibility. As with default, it will mean our borrowing costs rise and financial markets gradually lose trust in our system, though perhaps not with the disruptive panic that default would bring.

Name calling, labeling, and fear mongering aside, does Ezra understand the first thing about PCS? Does he know that if a $60 T coin were minted, and the Treasury General Account (TGA) filled with $60 T in electronic credits, the US would be able to just say goodbye to the international markets? If we were paying off the national debt as it fell due, we would not only not be defaulting, but would be paying all our creditors on time and in full, and without benefit of further debt instrument issuance. Nor would we care whether the markets trusted us or not; since we would not be borrowing money from them for the foreseeable future. So, how could our borrowing costs rise?

And, as far as predictability is concerned, what would then be predictable is that we would be paying all our obligations to everyone whether Wall Streeters, denizens of the global markets, pensioners, Medicare, and Medicaid recipients, and everyone else we have obligations too without anyone getting the short end of the stick. Now, I’d like to see that kind of predictability from this Government, without any drama, histrionics, deficit terrorism, or whining about how our moral character is too weak to endure the Washington Post’s favorite meme, “shared sacrifice.”

The argument against minting the platinum coin is simply this: It makes it harder to solve the actual problem facing our country. That problem is not the debt ceiling, per se, though it manifests itself most dangerously through the debt ceiling. It’s a Republican Party that has grown extreme enough to persuade itself that stratagems like threatening default are reasonable. It’s that our two-party political system breaks down when one of the two parties comes unmoored. Minting the coin doesn’t so much solve that problem as surrender to it.

Well, Ezra, that’s your notion of the worst problem we face. My notion of a problem is that our national debt is hopelessly misconstrued by people, and that its existence is being used by radical “free market” extremists who want to sharply cut the social safety net, and who also want to block the passage of other Government programs that would benefit most Americans. So, I want to get rid of “the national debt” as a political issue. The best way to do that is to get rid of that national debt. That can be done by using PCS, and in a way that will not drive the economy into depression, or working people into even deeper poverty.

The platinum coin is an attempt to delay a reckoning that we unfortunately need to have. It takes a debate that will properly focus on the GOP’s reckless threat to force the United States into default and refocuses it on a seemingly absurd power grab by the executive branch. It is of no solace that many of the intuitive arguments against the platinum coin can be calmly rebutted. It’s the wrong debate to be having.

Only your version of the platinum coin. You clearly have in mind the Trillion Dollar Coin (TDC) PCS option. I agree that it would only delay a reckoning, and that a debate over its legality is not the debate to have. But a $60 T coin, would eliminate the debt ceiling as a factor, make the debate about getting rid of austerity irrelevant, and also make it impossible to use any of following to oppose progressive legislation:

– “The Government is running out of money.” (Not with a $60 T coin in the bank.)

– “The Government can only raise money to spend by taxing and borrowing” (Not with PCS)

– “We can’t keep adding debt to our national credit card.” (We won’t be using any of the money on the credit card.)

– “We need to cut Government spending and make do with no more money.” (Only if more spending would definitely cause inflation.)

– “if the Government borrows more money, then the bond markets will raise our interest rates.” (The Government won’t be borrowing anymore.)

– “If we continue to issue more debt, our main creditors: the Chinese, the Japanese, and our oil suppliers, may cease to buy our debt, making it impossible for us to raise money through borrowing which, in turn, would force us into radical austerity, or perhaps even into insolvency, which would then be followed by radical austerity and repudiation of our national obligations.” (Again, the Government won’t be borrowing anymore, so who cares if they no longer want to buy our debt)

– “Our grandchildren must have the burden of repaying our national debt.” (There won’t be any debt or any burden.)

– “Now, the final step – a critical step – in winning the future is to make sure we aren’t buried under a mountain of debt.” (Again, no debt; either mountain or molehill.)

– “Our government spends more than it takes in. That is not sustainable. Every day, families sacrifice to live within their means. They deserve a government that does the same.” (But it is sustainable. If we use PCS, then we can have gaps between taxes and spending every year.)

– “We need to cut entitlements like Social Security and Medicare, because we are running out of money and they are not fiscally sustainable.” (But they are with PCS, because we won’t be running out of money!)

– “If we make the hard choices now to rein in our deficits, we can make the investments we need to win the future.” (Given PCS, what we do now about deficits has nothing to do with our capability to make the investments we will need)

– “We need to reduce our deficits to be fiscally sustainable.” (Deficits have nothing to do with fiscal sustainability in the sense of continued capability to spend, which will be very plain to people if $60 Trillion is sitting in the TGA.)

– “We face a crushing burden of debt. The debt will soon eclipse our entire economy, and grow to catastrophic levels in the years ahead.“ (Can’t say that if most of the debt is about to be paid off.)

– “Our debt is out of control. What was a fiscal challenge is now a fiscal crisis. We cannot deny it; instead we must, as Americans, confront it responsibly.” (PCS can confront it responsibly, but the bipartisan horror just enacted can’t.)

– “We believe the days of business as usual must come to an end. We hold to a couple of simple convictions: Endless borrowing is not a strategy; spending cuts have to come first.” (Right! So let’s stop borrowing and use PCS.)

– “Everyone knows that the U.S. budget is being devoured by entitlements. Everyone also knows that of the Big Three – Medicare, Medicaid and Social Security – Social Security is the most solvable. . . . “ (The budget can be as big as we need it to be with PCS.)

– “The Social Security Trust fund is a fiction, a mere bookkeeping device.. . . There is no free lunch. There is nothing in the lockbox.” (There will be if we pay back the trust fund through PPCS.)

– “There is a deficit/debt reduction problem for the Federal Government that is not self-imposed.” (What’s the problem? We can’t run out of money with PCS!)

– “The Federal Government is like a household and that since households sacrifice to live within their means, Government ought to do that too.” (What nonsense! As PPCS shows very well; the Government is not like a household. Households can’t create unlimited funds through PCS; but the Federal Government can.)

– “The only way to tackle our deficit is to cut excessive spending wherever we find it.” (It’s always good to cut spending that’s not in the public interest. But if spending is having good results, and we’re using PCS, then there’s no reason to cut it, whether taxes cover the spending or not.)

– “We should also find a bipartisan solution to strengthen Social Security for future generations.” (With PCS, we can easily strengthen SS by extending benefits, and we don’t need to do it through a bipartisan Rube Goldberg contraption.

– “The United States is in danger of becoming the next Greece or Ireland.” (Even without PCS it can’t become Greece or Ireland, only the next Japan. But with PCS it can become the United States again.)

– “Fiscal Responsibility means stabilizing and then reducing the debt-to-GDP ratio and achieving a Federal Government surplus” (With PCS, the debt-to-GDP ratio will be stabilized and reduced, but no “surplus,” in the sense of more tax revenue than spending, will ever be necessary for revenue purposes.)

Ezra goes on to say that using the Platinum Coin will trigger a debate within the Republican Party, that will strengthen its worst factions, because its extremists will be able to argue against:

. . . a wild, unprecedented, inflationary power grab by an overreaching president. Making matters more difficult, it will become impossible for more cautious Republicans to break ranks. It’s one thing to argue, as many are already doing, that inducing default risks destroying the Republican Party for a generation. It’s another to abet such a blatantly unconstitutional, dangerous move from the executive branch.

Well, it’s not blatantly unconstitutional at all Harvard Law Professor Laurence Tribe thinks it’s legal. Yale Law Professor Jack Balkin thinks it’s legal. The lawyer who came up with the idea, beowulf (Carlos Mucha), thinks it’s legal. Philip Diehl, former Director of the US Mint thinks it’s legal. And, I, a Ph.D. political scientist with some background in Constitutional Law, also think it’s legal.

Even Ezra says it’s legal earlier in this very column. So, who are the Republicans to label it “blatantly unconstitutional”? What evidence would they have that it’s “blatantly illegal? If the President uses it he will have legal opinions supporting its legality. In addition, the plain language of the law says it’s legal. Arguments that it’s not are more complex and detailed than the plain language of the law. So, how will this play in the court of public opinion?

Ezra goes on to suggest that using the coin won’t end the conflict; but will cause the Republicans to work even harder and in a united fashion to get what they want. Well, isn’t that too bad, they’re just going to work harder at being even more nasty, so the rest of us shouldn’t do anything that will get them really ticked off. What kind of advice is that, the advice of a columnist who works for a newspaper with a deficit hawk editorial director, and a financial deal with the world’s most prominent deficit hawk: Peter G. Peterson?

Can’t you just picture it? Ezra gets called into a meeting with Fred Hiatt who asks him whether he can’t do anything to dampen this platinum coin wave that everyone is riding, and Ezra replying says: well, maybe I can write something that will make people very, very afraid of the tea partiers fomenting a new American Revolution.

Of course, Ezra may be right about a big coin making Republicans even more determined to destroy the US economy than they are now. Things could happen that way; but if a very high face value coin, like a $60 T coin, is minted; then the mere presence of the $60 T in the Treasury General Account (TGA), and its use to pay down debt, will change the political context, and make Republican propaganda look much more fanciful, than it does in an imagination that assumes the political context and the future won’t be changed by minting a big enough coin and using it to fill the public purse.

So, Ezra, notice what happens to the memes Iisted above. They’re just not going to work anymore, if a $60 T coin gets used. If the Republicans remain stiff-necked, what justification would they then have for austerity? Now, they have the debt, and no apparent means of paying it off except lowering spending and raising taxes. But what would they have after that coined filled the public purse? The answer is ZIP!

It is likelier that the platinum coin would drive the Republican Party towards a much more dangerous and enduring standoff. If Republicans never permitted another debt increase, would we just keep minting platinum coins? Would the Federal Reserve abet the strategy and work to hold down inflation, effectively putting itself in the middle of a titanic political fight? Would the market eventually begin to panic because American governance has entered into unknown territory?

If the Administration minted a $60 T coin, then it would probably never have to mint one again, since the first one would lead people to understand that the world won’t come to an end if Treasury can print money to fill the public purse to spend Congressional appropriations. Would the Fed help hold down inflation? Of course, it’s their mandate. It’s not about politics. They’d have to act that way. If they didn’t; there’d be immediate talk of folding them into Treasury! Finally, minting and using a $60 T coin to pay for debt and deficit spending won’t be inflationary.

There are two ways to truly resolve the debt-ceiling standoff. One is that the Republican Party needs to break, proving to itself and to the country that the adults remain in charge. The other is that America is pushed into default and voters — and the world — reckon with what we’ve become, and what needs to be done about it. Sadly, there’s no easy way out. It’s heads America wins, tails America loses.

Well, rule out the platinum coin, and sure, these may be one’s only two choices. But Ezra hasn’t shown that using a really BIG coin would elicit real problems, other than getting the Republicans and the right wing really, really, mad (maybe they won’t have lunch with him anymore), and there are compelling arguments suggesting the contrary. So, I think that Ezra’s gone off the deep end in this column, especially when you consider the cost of default to people, and also the cost of the austerity alternative. Both default-induced austerity; and major party-induced austerity by compromise are both utterly unacceptable.

We must find a third way! Ezra can’t just assume that there is no way out of his Hobson’s choice. He and we need to consider game-changing PCS before condemning the nation to default.

(Cross-posted from New Economic Perspectives.)

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Trillion Dollar Coin: Posts on Legality and Constitutionality

9:58 am in Uncategorized by letsgetitdone

Enthusiasm for using Platinum Coin Seigniorage (PCS) to produce a Trillion Dollar Coin, or coins totaling a few trillion dollars continues to increase. The twitterverse went mad two nights ago around #mintthecoin, a hashtag originated by MMT’s Stephanie Kelton, which by yesterday morning had become the 5th most highly trending topic on twitter.

Meanwhile, the blogosphere continued to produce more points of view on the Platinum Coin. The points of view divide into those that are very negative; either claiming that 1) using Platinum Coins would be illegal or unconstitutional, or 2) using them would be just ridiculous and financially irresponsible, and so should be avoided; and others that favor using PCS 3) either in a limited way to avoid the debt ceiling crisis, or 4) in a much more robust way, that would change the procedures underlying Federal spending, so that fiscal policies advocating austerity no longer have a political foundation in a visible and rising national debt that austerity advocates can constantly talk about fixing through “shared sacrifice.” In this post I’ll review new posts on legality and constitutionality.

Kevin Drum on legality

Kevin Drum of Mother Jones filed his second recent post claiming that the trillion dollar coin is illegal and will be subject to challenge in Court on grounds of intent. He repeats exactly the same reasoning he used in his first post. I’ve already critiqued that reasoning saying that the Courts generally don’t try to interpret laws based on theories about Congressional intent. The Justices aren’t collective psychologists who are expert at divining the intent of the Congress. They are expert, however, at interpreting what the text of a law says, and so that is what they stick to almost all the time. A challenge to PCS based on intent isn’t something any Court is likely to take up. Drum then adds:

There is, apparently, a widespread belief that courts will uphold a literal, hypertechnical reading of legislative language regardless of its obvious intent, but I’m quite certain this isn’t true. Courts are expected to rule based on the most sensible interpretation of a law, not its most tortured possible construction. I don’t think there’s even a remote chance that any court in the country would uphold a Treasury reading of this law that used it as a pretense for minting a $1 trillion coin.

I am, obviously, not a lawyer. So if someone with actual legal training in the appropriate area of the law says I’m wrong, then I guess I’m wrong.

Well,, the language of 31USC5112(k) doesn’t look very tortured or “hypertechnical” either to myself or many others who have looked at this including lawyers Jack Balkin and Carlos Mucha (beowulf); but seems very plain and unambiguous. Drum is entitled to his opinion, but as he keeps saying, he’s no lawyer, and his judgment about what the Courts will do based on the problem of intent isn’t very plausible.

What if a trillion dollar coin is used to avoid the debt ceiling, and this saves the United States from defaulting on its debts, and the world financial system from collapsing? Is it then likely that the Supreme Court will entertain any challenges to the plain language of the law based on an interpretation of intent, which would then place the Treasury in the position of having to return that trillion dollars in Fed credits, and again look default in the face? Can you see John Roberts ever voting for this? Please Kevin, give us a break!

John Carney on Unconstitutionality

John Carney believes that Platinum Coin Seigniorage (PCS) and the Trillion Dollar Coin are unconstitutional. The core of his argument is:

There are limits to how far Congress can stretch its powers under the necessary and proper clause. Of particular interest to us here is the non-delegation doctrine, which holds that the Constitution’s requirement that laws be passed by both houses of Congress and signed into law by the government constrains the ability of Congress to delegate its lawmaking authority to other bodies. . . .

The Supreme Court . . . . went out of its way to affirm the basic principle of non-delegation . . .

Article I, Section 1, of the Constitution vests “[a]ll legislative Powers herein granted… in a Congress of the United States.” This text permits no delegation of those powers, and so we repeatedly have said that when Congress confers decision making authority upon agencies Congress must “lay down by legislative act an intelligible principle to which the person or body authorized to [act] is directed to conform.”

So the question that is relevant for us here is whether or not the law that authorizes the creation of platinum coins by the U.S. Treasury lays down an “intelligible principle” to which the Treasury is directed to conform.

He then quotes the law authorizing PCS:

“The Secretary may mint and issue bullion and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.”

You see the problem here, right? There’s no intelligible principle whatsoever. The law gives the Secretary complete discretion over everything having to do with the minting of platinum coins. This is very likely an unconstitutional delegation of the legislative power to coin money and regulate the value thereof.

Carney goes on to talk about issues of standing recognizing that standing may be very difficult to get from the Courts and that therefore it may not be possible to challenge the law. But he still thinks that the above argument is a decisive one and that the coin seigniorage law is unconstitutional. You see the problems here, right?
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Origin and Early History of Platinum Coin Seigniorage In the Blogosphere

12:15 pm in Uncategorized by letsgetitdone

This post records the history of platinum coin seigniorage in the blogosphere through the debt ceiling agreement on August 2, 2011. Its purpose is to correct errors in the record about the history of this idea appearing on mainstream blog posts by Joe Wiesenthal, John Carney, and Brad Plumer, during the past week. The idea of using coin seigniorage, the profits made from minting proof platinum coins, depositing them at the Fed, and receiving electronic credits in return, 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 (Carlos Mucha). Beowulf”s first comment on Platinum Coin Seigniorage (PCS) was on Brad Delong’s site on July 6, 2010 (h/t Cullen Roche, 01/05/13). But, the first comment of his I noticed on PCS was at New Deal 2.0. Unfortunately, when The Roosevelt Institute redid its New Deal 2.0 site, it wiped out the record of beo’s comment. However, I quoted his ND 2.0 proposal in a post on November 12, 2010 discussing a possible Government shutdown due to the debt ceiling. I cross-posted this at Correntewire too where beowulf commented further on the platinum coin option.

Beowulf continued his work on the coin seigniorage proposal as the weeks went by in various comments made at blog posts such as this one at FDL, and this one, also at FDL. Then on 12/15/2010 there was an exchange between beo and I about platinum coin seigniorage.

Following that beo wrote me, and we corresponded by e-mail from 12/15/10, roughly until the Christmas break, exchanging views about PPCS, with me urging beo to blog it, and telling him that I would blog in support of him soon after he did. On January 3, 2011, he posted the seminal blog on coin seigniorage. I followed two days later, raising the question of whether President Obama would use it to forestall an attempt to use the debt ceiling to extract cuts in the social safety net or not.

These posts were noticed by Warren Mosler, one of the originators of the Modern Monetary Theory (MMT) approach to economics, who sponsored what turned out to be a wide-ranging and very high quality discussion of the coin seigniorage option at his site. Beowulf contributed extensively and very creatively to this discussion, which remains one of the most important resources on the coin seigniorage option.

Throughout the next six months, I pushed platinum coin seigniorage in blog posts at Correntewire, FDL, and DailyKos from time-to-time and in comments at various sites. Then, in late June and July a spate of posts on platinum coin seigniorage appeared, beginning, I think, with wigwam’s at FDL and DailyKos.

He’s followed up since with a number of other posts including this one with a variation on how coin seigniorage might be applied by buying $2 Trillion in debt from the Fed to create “head room” relative to the debt limit.

Other important posts appeared in the first two weeks of July 2011 by Mahilena, DC Blogger, ubetchaiam, Cullen Roche, and Scott Fullwiler.

Accompanying the last two are extensive discussions of coin seigniorage and constitutionality of the debt ceiling with contributions from beowulf. Scott’s post also received extensive discussion with beowulf contributing at Cullen’s site. Trader’s Crucible, presented a post on the unconstitutionality of the debt ceiling. Its comment thread however, focused very much on platinum coin seigniorage with beowulf and myself making contributions.

In addition, I added a couple of my own posts, one on constitutionality of the debt ceiling and coin seigniorage (06/29/2011), and another on the President’s obligation, if no agreement on the debt ceiling is forthcoming (07/11/11).

At this point, the platinum coin seigniorage debate began to hit the mainstream blogosphere. Felix Salmon at Reuters provided the opening blog post (07/14/11) and he was followed a day later by Matty Yglesias at Think Progress. I replied to Salmon and Yglesias in this post, presenting a fairly comprehensive view of platinum coin seigniorage up to that time, with critiques of their posts (07/17/11).

My post appeared in an abbreviated form at Naked Capitalism, and was also cross-posted at MyFDL, New Economic Perspectives and Global Economic Intersection. It appeared amidst an explosion of blogosphere posts on the subject, including posts on the subject by many mainstream bloggers and others including: Tom Hickey: “Coin Seignorage Breaks into Mainstream,” (07/18/11) Scott Sumner: “Is coin seignorage Obama’s magic bullet?” (07/19/11) Joshua Holland: “There’s a Solution to the Debt Fight That Could Avert Catastrophe — Why Is Everyone Ignoring It?” (07/20/11) Darrell Delamaide: ”Smoke and mirrors with the federal deficit,” (07/20/11) Mark Kleiman: “Phony problem, phony solution,” (07/20/11) wigwam: “Mark Kleiman calls Coin Seigniorage a phony solution; to a phony problem,” (07/23/11) upyernoz: “Platinum Pieces Were Always My Favorite,” and Yves Smith: “We Discuss the manufactured UD Debt Crisis at the Real News Network.” (07/25/11)

These posts were an immediate wave, so to speak, of responses to the Salmon and Yglesias posts. But there was more to come in July. I posted again, presenting a variety of platinum coin seigniorage face value options, along with differing political and inflation implications of the options (07/20/11).

Then I followed with an open letter to Congress and the President on getting around the debt ceiling (07/25/11), and a post on the President’s apparent views on the debt ceiling. (07/26/11)

Meanwhile, Jack Balkin, a Constitutional Law Professor at Yale, had blogged about coin seigniorage telling a good story in an important post (07/18/11).

And Balkin next did a post at CNN, where he reviewed a number of options for getting around the debt ceiling (07/28/11). And, in doing so, brought the platinum coin seigniorage idea into the mainstream discussion.

Balkin’s efforts seemed to fuel another wave of the July 2011 platinum coin seigniorage explosion. These include:

”Capt. Fogg: Billion Dollar Coins and Exploding Options — oh my!” (07/28/11)

Logan Penza: “(Platinum) Pennies From Heaven (UPDATED);” (07/28/11)

Jonathan Chait: “The Coin That Will Save The World;” (07/28/11)

Matthew Yglesias: “The Platinum Coin Option;” (07/28/11)

Brad DeLong: ”The President’s Obligation to Take Care That the Laws Be Faithfully Executed Requires Him to Start Minting Large Denomination Platinum Coins” (07/28/11)

upyernoz: “platinum, baby, platinum” (07/28/11)

Master of Interesting Links: “The meme that will not die!”; (07/28/11)

Tyler Cowen: “Crank up the mint for the platinum coin!” (07/28/11)

Edward Harrison: “The #trilliondollarcoin meme”; (07/28/11)

Matthew Yglesia: Neutralizing Platinum Coin Finance; (07/29/11)

The Economist: “The trillion dollar coin solution;” (07/29/11)

Eric Hayden: “A $1 Trillion Coin Seems Like a Nice Idea” (07/29/11)

Paul Krugman: “Lawyers, Coins, and Money” (07/29/11)

Annie Lowery: “The $5 Trillion Coin” (07/29/11)

Johnsonville: “Debt Watch/Coin Trick: the Trillion Dollar Coin” (07/29/11)

Seneca Doane: “Cut the Gordian Knot with the Platinum Sword;” (07/30/11) This Post was a particularly important because it recognized the key political implications of PCS, and also was enormously popular at DailyKos and elicited 569 comments there.

Laurence Lewis: “The Debt Ceiling Dance and the Trillion Dollar Coin.” (07/31/11)

David Weigel: “The Platinum Coin Hysteria of 2011;” (07/31/11)

So, that was the second wave of responses by mainstream bloggers, and others, to the Platinum Coin Seigniorage idea. In addition, I added two posts on 07/31/11:

What If a Debt Limit Extension Is Voted Down?” (07/31/11) and

Progessives In Congress: Vote for The President To Do It!” (07/31/11)

Also, the last notable post on Platinum Coin Seigniorage (08/01/11) before the debt ceiling settlement of 08/02/11 was Scott Fullwiler’s Coin Seigniorage and Inflation. It’s still the most comprehensive and rigorous discussion available of the relationship between the two.

But then, and lastly, there was Beowulf responds to Dave Weigel of Slate.” (07/31/11) I think this reply is worth quoting, because, in a way, Weigel’s reaction is pretty typical of most mainstream posts, reacting to the idea in what only can be described as a superficial way, part brush-off; part poking fun, almost as if mainstream bloggers were afraid of discussing the idea without an obligatory heaping slice of skepticism accompanying their mention of it. Obviously beo’s reply doesn’t apply to everyone, so I don’t want to over-generalize it. But if you read all the posts, I think you’ll see that Weigel’s reaction is pretty common, so beo’s reply is pretty broadly applicable.

There’s nothing fanciful about it. The strange thing is that the USG is constrained by debt ceiling but a part of the USG (The Fed describes itself as “an independent government agency”) is unconstrained by a debt ceiling. Even more anomalously, Fed-held Treasuries are counted against the USG debt ceiling.

This isn’t about selling drilling rights on the moon but a practice almost as old as the Republic. The US Mint has used coin seigniorage continuously since the Coinage Act of 1792 (in a legal sense, a single $1 trillion platinum coin is the same as trillion $1 coins but with far less expense and effort). It violates no laws nor federal regulations nor prior obligations for the USG to transfer debts from the constrained whole to an unconstrained part (that is violates all logic is the fault of Congress).

The idea actually originated in a note I sent the Department of the Treasury on a collateral issue (as it happened, I had “buried the lede”). I posted about this on Firedoglake (and Correntewire) only after discussing the issue at Warren Mosler’s blog (Incidentally, I’m hardly a lefty. I voted for Romney in the 2008 GOP primaries, will probably do so again next year).

Writer Joe Firestone suggested to me that the platinum coin seigniorage issue was something worth posting a blog about and bugged me until I did (after which, Joe took the leading oar on developing the idea). I’d point out that Warren Mosler also picked up on the economic ramifications very early. But I trust that every reader here with an interest in economics has already read his book The Seven Deadly Innocent Frauds (you can download for free from his site if you haven’t), so that should come as no surprise.

http://moslereconomics.com/2011/01/20/joe-firestone-post-on-sidestepping-the-debt-ceiling-issue-with-coin-seigniorage/

Of course, there is historical precedence for using coinage to pay the national debt, the Legal Tender Act of 1862 authorized the issuance of fiat currency, US Notes or “Greenbacks” (the predecessor of today’s Federal Reserve Notes) required that Tsy pay debt service only with US Mint-issued coins. Of course Nixon freeing us from the gold standard changed everything, but if our politicians understood that, we wouldn’t have a debt ceiling now would we?

And finally, I should note, that once the debt ceiling compromise was agreed to on 08/02/11, the sudden explosion of posts on platinum coin seigniorage quickly faded away, as I predicted it would then. I’ve blogged a lot about it, since, trying to develop the political context further and to make people aware of the policy variations available in the platinum coin seigniorage toolbox. But bloggers doing posts on it were few until just this past week.

Now people are starting to see that there may be a fiscal cliff settlement and immediately afterward a new debt ceiling crisis for us to cope with. So, suddenly the mainstream has taken up where it left off with platinum coin seigniorage in early August 2011. It’s again in a frenzy about it, and it’s again making errors in its analysis of it and in the information it’s spreading about the history of the platinum coin seigniorage idea.

In future posts of mine, I’ll look at the new wave of blog posts and discuss the issues they raise. But for now I want to correct one immediate thing. Joe Wiesenthal, Brad Plumer, and John Carney have been saying that the platinum coin seigniorage idea originates with Cullen Roche’s blog post of 07/07/11 cited earlier with a commenter on that post. Plumer even says:

*Update: Cullen Roche appears to have been one of the first people to discuss the platinum coin idea in 2011 ― it came from one of his readers. See also here.

If Plumer had read the first of his references with the accompanying comment thread, he would have found a host of links to earlier work on PCS. And if he had read the 07/17/11 post of mine he references (also linked to in the review above), he would have found that the first statement of the PCS idea by beowulf, Cullen Roche’s commenter, was on November 4, 2010, more than 8 months before Cullen’s own post. As it turns out even this date is too late, since Cullen, himself, (h/t to Cullen Roche, 01/05/13) discovered an even earlier occurrence at Brad Delong’s blog in another comment of beowulf’s, a full 12 months earlier than Cullen’s first post on PCS.

Also the first full blog post on PCS, as you can see from both Plumer’s reference and the account above is on January 3, 2011. And after that, there are numerous blog posts on the subject before Cullen’s post on 07/07/11. So, I think that Wiesenthal, Plumer, and Carney, all got it wrong. Probably because they relied on each other, rather than on reading their own links, or on using “the google.”

(Cross-posted from New Economic Perspectives.)

Photo in the public domain.