On May 9, 2013, The Republican House passed H.R. 807 the Full Faith and Credit Act. The Bill says in part:

(a) In General- In the event that the debt of the United States Government, as defined in section 3101 of title 31, United States Code, reaches the statutory limit, the Secretary of the Treasury shall, in addition to any other authority provided by law, issue obligations under chapter 31 of title 31, United States Code, to pay with legal tender, and solely for the purpose of paying, the principal and interest on obligations of the United States described in subsection (b) after the date of the enactment of this Act.
(b) Obligations Described- For purposes of this subsection, obligations described in this subsection are obligations which are–
(1) held by the public, or
(2) held by the Old-Age and Survivors Insurance Trust Fund and Disability Insurance Trust Fund.

So, in brief, the Bill provides for the Treasury, even when it is about to reach the debt ceiling, to issue additional debt to pay principal and interest on debt instruments issued to the public including foreign nations, and to pay principal and interest on Social Security (SS) “trust fund bonds” in the course of paying SS recipients.

Reactions to the Act immediately fell into two categories. Some hailed it as a move toward fiscal responsibility, while others saw it as another demonstration of Republican fiscal irresponsibility paving the way for US default on some obligations not prioritized by the bill, while making sure that bond market interests and “China” would get paid what they were owed, while the American people would be stiffed, unless Democrats gave the Republicans what they wanted in the upcoming debt ceiling crisis now projected for this October. Here are some typical reactions of the two types.

From John Avlon at the Daily Beast we have:

But even Speaker John Boehner realizes that the 50 or so radicals on the far right of his own party—the Bachmann, Broun, Gohmert and King crew—are the greatest impediment to responsible self-government right now.

That’s why the new responsible Republican proposal, which passed the House Thursday by a vote of 221-207, could be the best way to defuse the debt ceiling from its most destructive impact. . . .

So the Full Faith and Credit Act should be a no-brainer. But the Obama administration is opposing the measure, releasing a Statement of Administration from the Office of Management and Budget that stated H.R. 807 would “result in Congress refusing to pay obligations it has already agreed to … this bill would threaten the full faith and credit of the United States … this legislation is unwise, unworkable, and unacceptably risky.”

And here’s one from Travis Waldron at Think Progress:

But such a plan makes it clear that the U.S. will meet only some of its obligations, leaving many Americans, including troops, veterans, and the elderly, out in the cold. . . .

Worse yet, the Republican plan doesn’t allow the nation to avoid default. If the U.S. services its debt payments but still misses others, it is still defaulting on payments it is required to make. Since the bill only allows Treasury to make payments as it receives revenues, and the bulk of its payments are made at the beginning of the month even though revenues don’t come in until later, it would almost certainly be unable to meet at least some of its obligations.

When the GOP has considered similar plans before, Treasury officials have called it “unworkable.” Bipartisan analysts said it was “essentially impossible.” Failing to fulfill spending obligations would be “the first step to becoming a banana republic,” a Bush-era Treasury official said. Instead of inspiring confidence among investors, bondholders, and the American people, the legislation would zap it.

Far from preventing default, the Full Faith and Credit Act would essentially ensure it. That wouldn’t just put paying China ahead of senior citizens and members of the military — it would also hammer economic growth both in the United States and across the world. (HTHuffington Post)

Calling this a “responsible” bill as the Daily Beast did is outrageous, and, of course, Waldron is quite right to point out that the bill is fundamentally irresponsible because if it were to pass and nothing more was done it would still not avoid a default inflicted by Republicans who refuse to raise the debt ceiling for the sake of hostage-taking. Nevertheless, even though I agree with Waldron and the President that the bill is irresponsible, I also think that the Democratic Senate should jump on the opportunity provided by the Republicans and pass it forthwith without Amendment, and that the President should sign it immediately, as part of a larger plan to take the debt ceiling off the table in all future negotiations. Here’s the plan.

Budget projections show that if the Bill is passed, then the Treasury would have the authority it needs to meet the majority of its projected deficit obligations and would lack only about $170 Billion in Fiscal 2014 to meet them all. Let’s look at CBO’s budget projection.

Total Revenues for the Treasury in 2014 are projected at $3.0 Trillion. Total Outlays are expected to be $3.6 Trillion. That’s a deficit of roughly $.6 Trillion, or $600 Billion. CBO projects net interest on debt owned by the public of $243 Billion, and I’ve estimated OASDI interest at about $225 Billion. Summing the two we see that the Full Faith and Credit Act would allow debt financing of $468 Billion, leaving a gap of about $130 Billion which Treasury can’t cover with debt instruments.

So, what can Treasury and the President do to meet its remaining obligations? The answer is that it can use Platinum Coin Seigniorage (PCS), an approach the Administration rejected in January of 2013 before the latest compromise with the Republicans allowing debt financing while temporarily suspending the debt ceiling. In January, the dominant proposal making the rounds in the blogosphere was that the Administration use a few Trillion Dollar Coins to defuse the crisis. I didn’t favor that, but preferred and still prefer a “shock and awe” $60 Trillion PCS strategy that would end austerity politics forever, if the President had the desire and the will to do that.

The President doesn’t have the desire and the will, or he would already have filled the public purse in this way. Assuming he still feels that he doesn’t want to end austerity politics, with its terrible effects on poor people and the middle class; but does want to avoid debt ceiling crises in the future, provided the Full Faith and Credit Act is passed without amendment, he can then:

– First, beginning at the start of fiscal 2014, mint platinum coins having face values of $20 Billion per month until the Federal Government is no longer in danger of failing to meet all its obligations. This is about twice the average amount of projected shortfall of $10.8 Billion per month corresponding to the $130 Billion annual shortfall projected. That amount should be enough to cover variations from the average, and also errors in the projection caused by possible recessionary effects due to the sequester and the FICA tax increase in January.

– Second the Government can keep doing this until Congress fully restores the capability of the Treasury to issue debt instruments alongside deficit spending Congress has appropriated. How long this will go on, depends on the Republicans, of course. But even over a year’s time, the amount minted would come nowhere near the Trillion Dollar Coin values the Administration found unpalatable a few months ago. In fact, if the debt ceiling crisis is resolved by year’s end, the amount minted wouldn’t exceed $60 Billion, hardly great enough to roil the international or bond markets, or most people, given the amount of Quantitative Easing (QE) the Fed has already done. If the debt ceiling crisis lasts any longer than that and the financial world gets roiled by the practice, then a) it will certainly prefer the minting of those coins to the alternative of default; and b) they’ll know which party to come down hard on in blaming someone for the continuing crisis.

– Third, at some point in this process, the Republicans will be willing to increase the debt ceiling, but since PCS is being used to avoid shutting down the government or defaulting, their leverage to extract concessions will make the debt ceiling negotiations much easier than they are today. I recommend that the Administration give away nothing to get the debt ceiling raised. It should simply insist on a no-strings attached permanent elimination of the ceiling; while pointing out that the Full Faith and Credit Act, coupled with PCS provides enough flexibility for the Treasury to continue spending appropriations and meet all the nation’s obligations, even if the debt ceiling is never raised.

This may seem to be a very hard line. But in passing the Full Faith and Credit Act, the House has given the Democrats the opportunity to use debt instruments to cover most of the deficit anyway. And PCS gives the Administration the power to cover the rest. So, the Republicans would have a choice of getting rid of the debt ceiling permanently, or allowing the minting of $20 Billion platinum coins at the beginning of every month. If that’s their choice, then I think they’ll get rid of the debt limit, before the President decides to mint a $60 Trillion Dollar coin, don’t you?

Update: CBO just released revisions to its projections for 2013 – 2023. Total Revenues for the Treasury in 2014 are now projected at $3.042 Trillion. Total Outlays are expected to be $3.602 Trillion. That’s a deficit of roughly $.56 Trillion, or $560 Billion. CBO projects net interest on debt owned by the public of $237 Billion, and I’ve estimated OASDI interest at about $225 Billion. Summing the two we see that the Full Faith and Credit Act would allow debt financing of $462 Billion, leaving a gap of about $98 Billion which Treasury can’t cover with debt instruments.

The smaller gap means that it may not be necessary to use $20 Billion platinum coins every month; but only $15 Billion coins to handle variations from the new average shortfall of about $8.2 Billion per month. Of course, if deficits accumulate faster than expected, it would be easy to simply begin minting $20 Billion coins.

(Cross-posted from New Economic Perspectives.)

Well, that’s over. The President had a chance to go “over the cliff,” bargain hard with the Republicans, get more of what he said he wanted at the price of perhaps some more days of crisis with extreme pressure building on the Republican caucus, and he blinked. I don’t much care that he blinked on tax rates for the top 2% and on inheritance taxes, because tax rate increases for purposes of deficit reduction simply aren’t needed for getting deficit spending needed to create jobs, as the rest of this post will show. Here’s what I care about:

– First, he claimed to be after extending the partial payroll tax holiday; but he didn’t get that, a $125 Billion would-be stimulus failure that is likely to cost at least a million jobs;

– Second, he claimed to be trying to get the debt ceiling issue off the table for at least two years, and he didn’t even get anything to deal with it in the bill;

– Third, he claimed to want to resolve the sequestration issue, but only got that can kicked down the road for two months;

So, in sum, he’s already achieved some unneeded austerity with this “negotiation” and, in addition, he’s set things up beautifully for a truly extreme episode of extortion by the Republican House over the next couple of months, as Congress faces the upcoming sequester, debt ceiling, and Continuing Resolution (CR) conflicts. Why did he insist on making his year-end deal, rather than allowing things to kick over to the new Congress and negotiating a better one?

There are different theories about that. One, is that he wanted, at all costs, to avoid Wall Street panicking and then tanking, even if, only temporarily. A second is that he has good “progressive” motives, but he’s just a lousy negotiator, who just can’t avoid first establishing firm positions and then showing the other side that he will always cave in if they, in turn, stand firm. A third theory, and the one I favor, is that since 2009 he’s been conducting a careful campaign to get Americans to accept austerity through forced deficit reduction including heavy cuts to the social safety net programs that Americans love so well.

During this campaign, he’s ignored the evidence from Europe and elsewhere that austerity doesn’t work and hurts most of the people, most of the time. He’s also ignored all the polling data showing how Americans feel about Social Security, Medicare, and Medicaid. And he has moved slowly, deliberately, persistently, and in concert with allies outside the Administration like Peter G. Peterson, high-level Wall Street Executives, and MSM media personalities and journalists to create a consensus around the idea that “entitlement reform” is both inevitable and necessary for long-term fiscal sustainability. Finally, he has “negotiated” with Republicans during a series of “shock doctrine” crises to try to gradually implement austerity, while making sure that the Republicans, rather than his own party end up bearing the blame for the end result of austerity policies.

The results of the “cliff” negotiations have now set up a confluence of three events: the sequestration; the debt ceiling; and the CR; creating the occasion for the mother of all fiscal “shock doctrine” negotiations over the next three months. This confluence can be seen as an intentional emergence of the conflict between the Republicans and the “progressive” President Obama, or it can be seen as the result of a very long-term conservative campaign setting the stage for austerity, and a comprehensive attempt to weaken the social safety net.

I won’t try to make the case that the dangerous confluence we’re about to face is due to a deliberate staging by the President, even though I suspect that it is. Nor will I try to make the contrary case that the President has excellent motives, but stumbled into this mess due to incompetence at negotiating, and the Republican victories in the House in the past two elections, for which his supporters might say, he was blameless. What, I’ll do instead, is try to show that either way, the President has leverage to get what he wants.

If His Game Is Deliberate Austerity?

Then, of course, he’s maneuvered us into a situation where, he will claim, there either has to be a Government shutdown, frightening to most people, or concessions to Republican demands for cutting discretionary programs and entitlements. He will be in a very good position then, to regale all of us with horror stories about the consequences of shutting down the Government for weeks until the “crazy” Republicans capitulate; compared to the lesser evil of making “balanced” spending cuts among defense, discretionary, and entitlement programs, while he prepares to reluctantly give into the hostage takers to avoid disaster; while constantly letting us know that as the adult in the room he must arrive at a “compromise” settlement. So, if his game is deliberate austerity, then he will have plenty of leverage to get what he wants.

If His Game Is to Avoid Cuts That Will Hurt the Economy and the Safety Net?

Today, most people commenting on the fiscal cliff agreement are assuming that this is his game, and are saying that the President has given away his leverage for future deal-making. Their logic is that he’s already made deals on the tax rate cuts and on the inheritance tax rates, so that he has little left to offer the Republicans except painful cuts in programs most of the American like. This, however, isn’t true.

First, the President still has some leverage when it comes to defense cuts. Republicans don’t want those at all. So, if he’s willing to cut there; he can sincerely threaten cuts and then trade for their sparing popular programs from the ax.

But, second, the main thing being ignored by most of the strategists commenting on the morning after is the President’s ability to change the fiscal context of the coming negotiations from one of apparent scarcity “justifying” austerity to one where spending capacity is so plentiful, that Congress will be hard-pressed to impose austerity, because its justification in the form of apparent limitations on spending capacity will just seem silly. Now, that can translate into leverage in the negotiations!

How can it be done? Through the use of Platinum Coin Seigniorage (PCS).

PCS Variations

Here are some variations on PCS, an idea first proposed by beowulf. (Carlos Mucha).

First, mint a $1.6 Trillion coin and have Treasury use the profits from it to buy all the outstanding debt instruments held by the Fed. This would retire a substantial part of the national debt and immediately create $1.6 T in “headroom” relative to the debt ceiling. This alternative involves the least amount of change in current procedures. The coin, once deposited at the Fed, would remain in a Fed vault, and would not go into circulation.

The Government would then go right back to issuing debt in order to meet its debt obligations and spend previous Congressional appropriations. Of course, this proposal is a solution to the debt ceiling problem alone. It would prevent a default crisis caused by anti-government tea party Republicans. But, it wouldn’t do very much to defeat the austerity mind set in fiscal policy.

A second proposal is to mint a $6.7 T coin to pay back all debt held by the Fed, and all Intra-governmental debt, including that owed to Social Security, Medicare, and a host of other other agencies. That would create $6.7 T in headroom relative to the debt ceiling, that’s more than enough to carry us through the 2016 elections without breaching the ceiling. Again, this wouldn’t result in any “money” immediately going into circulation, but over time SS and Medicare payments to individuals and organizations would be adding to bank reserves without any reserves being withdrawn from the private sector due to debt issuance.

This alternative would render the debt ceiling problem a dead letter for some time to come, and it also might take some of the austerity pressure off. But it probably wouldn’t end the austerity drive, because the deficit hawks would still point to long-term problems in entitlements that would be projected as running up the public debt in future years.

A third proposal for applying PCS is to mint a coin with face value large enough to cover the $6.7 T intra-governmental and Fed debt repayment, plus all debt to the non-government sector coming to maturity during the next four years, and all Congressional Appropriations expected to require deficit spending through the 2016 elections. I’ll estimate, roughly, that a $20 T coin is enough for that, including about $6.2 T to more than close the expected gap between tax revenues and Government spending through the 2016 elections, and the rest for paying down the national debt. Issuing a coin that large, using the profits from seigniorage, and assuming that Congressional appropriations continue the pattern of the past 2 years or so, that would result in a remaining public debt outstanding of roughly a few trillion dollars in long term debt, which would please the bond markets except for the fact that the US wasn’t issuing any more debt instruments, which would probably make the bond vigilantes scream for those safe harbor debt instruments again.

A more important aspect of a coin this large is that it takes the deficit/debt issue very much off the table, since there would be no new debt issuance needed until after 2016, and because most of the seigniorage would be used to pay down debt the US would then have only about 15% of its current debt subject to the limit. In other words, it would take the austerity meme off the table completely over the next four years and even after that there would be a lot of room between the outstanding level of debt and the debt ceiling.

Much of the pressure now being applied to entitlement programs would also be gone. So, progressives could be much more expansive in supporting full employment programs, education, infrastructure, higher entitlement benefits, Medicare for All and other things the country needs.

If, also, Congress does the right kind of spending to bring full employment inside a year, then tax revenues will come back as they did during the Clinton Administration, and then there will be no need for all the profits from the platinum coin to be used completely for deficit spending between now and 2016. In fact, if the right jobs creating program is immediately enacted, as much as $3 T could be left, by the end of 2016. So, this is a much more progressive alternative than the first two. But in itself, it doesn’t provide a continuing ability for the Treasury to create reserves directly to support deficit spending. The nation could still slip back into the regressive money creation practices after 4 or 5 years, and the conservative, neoliberal bias of fiscal politics could be restored.

So far, I’ve discussed three alternative coin seigniorage proposals ranging in scale from a minimal proposal to handle the current crisis to one that would provide enough funds to both pay down debt, and support a gap between spending and taxes that might be sufficient to enable full employment. Now here’s a fourth, enough to handle even generous Congressional appropriations and deficit spending for at least 15 – 20 years, until 2032 and beyond.

Why not mint a $60 T coin?

I favor this fourth alternative above all, because it institutionalizes the idea that there is a distinction between appropriations, the Congressional mandate to spend particular amounts on particular goods and services, and the capability to spend the mandated accounts by having the funds (electronic credits) in the public purse (the TGA). In a fiat currency system, the capability always exists if the legislature provides for it under the Constitution, as it has under current platinum coin seigniorage legislation.

But the value of the $60 T coin, and the profits derived from it, is that it is a concrete reminder of the Government’s continuing ability to buy whatever it needs to meet public purposes, and its continuing ability to harness the authority of the Central Bank to create reserves to support the needs of fiscal policy. It demonstrates very clearly that the Government cannot run out of money, and that the claim that it can is not a valid reason for rejecting spending that is in accordance with public purpose.

So, please keep in mind the distinction between the capability to spend more than government collects in taxes, and the appropriations that mandate such spending. The capability is what’s in the public purse, and it is unlimited as long as the Government doesn’t constrain itself from creating credits in its own accounts. With PCS, its capability could be and should be publicly demonstrated by minting the $60 T coin, and getting the profits from depositing it at the Fed transferred to the Treasury General Account (TGA).

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

This fourth alternative is the one that best solves both the debt ceiling problem and the problem of taking austerity, justified by “we’re running out of money,” off the table. The debt ceiling would no longer be an issue if the Treasury immediately paid off $6.7 T in Fed and intra-governmental debt, and was poised, with the money in its account, to pay off the rest of the debt subject to the limit as it falls due. Nor would there be any justification for austerity policies if the Treasury had a public purse with $44 T of unearmarked funds in it to cover future deficit spending. So, this is the progressive alternative, the one that changes the political context of fiscal policy debates for the foreseeable future. It also gives progressive enough time to fight a major political battle that ought to and must occur; the battle to free the Fed from control by Wall Street and banking interests and to make it accountable to the people by placing it under the authority of the Treasury Department, and our nationally elected executive, the President.

What about inflation? Well using PCS isn’t intrinsically inflationary. For the reasons why, see my previous post. I outline how to justify it politically in the next and final section.

The Speech

If the President wanted to emulate the great Democratic Presidents of the past, end austerity and decide to rise above the debt ceiling controversy, safeguard the social safety net, and do something really, really important from the perspective of history by using $60 T coin seigniorage to short circuit the upcoming fights over the debt ceiling and the budget, then there would be a spectacular uproar in the Congress and the Press over what he had done. All kinds of overblown and downright crazy claims would be made because the President’s action would shock people, everyone would have a tough time getting their minds around it, and the media would report on what was going on in a very sensationalist way using stereotypes created by the neo-liberal perspective that journalists at places like the WaPo, NYT, WSJ, and CNN are superficially well-schooled in. Places like CNBC and Fox would be absolutely foaming at the mouth in response to something like this, and Geithner might very well resign over it, as might Ben Bernanke, since he’d be forced to have the Fed credit the coin.

There would also be an immediate move in Congress to repeal the 1996 law that enabled the President’s action. This would fail however, because even if it got through the Congress, the President would simply veto it. The opposition couldn’t possibly get the 2/3 vote necessary to override the veto. Even if by some miracle, repeal got through, however, it would be too late. The coin would have done its work and the $60 T would be in the Treasury General Account, a fait accompli, and a vivid demonstration that the government can create as much money as it wants, and can only run out of money by choice.

However, the President would then have to defend himself with a political campaign aimed at persuading the public that his move was a bold and liberating move and the first step in finally getting out of this protracted economic depression. And yes, he should use the D-word, whatever the Republicans, and the so-called “fact-checkers” say about it. And he should also begin the campaign by explaining the issuance and deposit of the first $60 T coin in a high profile TV address to the public, the following way.

My Fellow Americans:

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

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

3) Congress has also imposed a debt ceiling, so, if and when we reach it, we can’t borrow back our own money without Congressional approval, anyway, and lately Congress has been using the need to raise the debt ceiling as an excuse to extort cuts in safety net and discretionary programs that the majority of Americans support.

4) So, on my order, and in accordance with legislation passed by Congress in 1996, and with the US Code, the US Mint has issued $60 Trillion using a single 1 oz. platinum coin, and deposited it at the NY Fed. It’s legal tender, so the Fed credited the Mint’s Public Enterprise Fund (PEF) account with $60 Trillion in US Dollar credits using its unlimited authority from Congress to create them.

5) This is not inflationary because the Fed will put our coin into its vault, and keep it there permanently out of circulation, and the Treasury will use the $60 T in USD credits only to pay back the national debt and to spend what Congress has already approved, which is only a small fraction of these credits and far from the amount needed to cause inflation.

6) My action ends any possibility of a debt ceiling crisis in February or March, because we have no further need to borrow our own money back in the markets, and that’s why we don’t need the tea party or other Republicans, or even my fellow Democrats to agree to raise the debt ceiling any more.

7) Now the Treasury, has plenty of money, much more than we need, in fact, to pay for all appropriations Congress has already approved for 2013, and may approve in March, including all deficit spending and, again, we won’t have to borrow our own money back, either to repay debts or to implement future deficit spending.

8) So, we will pay all Government debts which will come due in 2013 and 2014. Treasury securities and all other debts included. We will also pay back all debts held by other agencies of Government and the Federal Reserve. When we do this we will lower the national debt by about $12 T, reducing the “debt burden” by about 75% by the end of 2014, and creating an actual Social Security trust fund with 2.7 T in cash reserves in it; and again, to do this we don’t have to borrow any of our own money back, and we will also reduce our interest costs on the outstanding national debt all through the remainder of 2013, 2014, and beyond until it is all paid off.

9) None of the $60 T in new credits created by our actions is “money” in the private sector economy until the Treasury spends it. For now it is just capability to spend awaiting the appropriations of Congress to mandate deficit spending, should it need to compensate for the reduction in demand, probably close to 10% of GDP right now, caused by your own desire to save (which we want to do our best to facilitate), and your desire to import goods from foreign nations.

10) We have created $60 Trillion in new credits even though we probably needed less than that to cover anticipated deficit spending and debt repayment until at least 2028. The reason for this, is that I wanted to have enough capability created in the Treasury account, so that the national debt could be completely paid off (except for a small amount in very long-term Treasury debt still not mature by 2028), and all projected Federal deficits covered over the next 15 years, even extraordinary deficit spending needed to be performed without further borrowing over this period.

11) Of course, we can always make new coins if our projections about future deficits turn out to be wrong; but I thought it would be best to ensure that all $16.4 T plus of the “debt burden” can be completely eliminated from our political concerns; and also to provide enough funds in our spending account at the Fed, so that it would be very clear to Congress and all newly elected Representatives and Senators, that even though they, as required by the Constitution, continue to control the purse strings, the national purse is very, very full, and that we would be able to cover from the Treasury General Account whatever deficit spending for the public purpose, including for full employment, Medicare for All, infrastructure, education, and other things, that Congress, in its wisdom, chooses to appropriate now, before the next election, and for some elections to come.

Good night, my fellow Americans! Rest well knowing that our beloved country won’t be defaulting on any of its debts when the debt ceiling is reached, and that I’ve prevented this without going over the legal debt ceiling, or borrowing any more, by providing money for spending mandated appropriations, in compliance with the laws authorizing Platinum Coin Seigniorage, while supporting the Constitution’s prohibition against our Government ever defaulting on its debts. I hope that, in the future, everyone in Congress will obey the 14th Amendment’s prohibition against questioning the validity of Federal Government debts, and think twice before they indulge themselves in loose talk about the possibility of the Federal Government defaulting on its obligations.

America will always pay its debts in US Dollars according to the terms of the contracts it has concluded, and in line with the pension payments and other obligations that it owes. Neither you, nor the rest of the world need ever doubt that again! Nor need you ever think that our Government is running out of money for the things we must do. We can never run short of money unless Congress refuses voluntarily, to use its unlimited constitutional authority to make more of it. But as long as it delegates to me the authority to create high value platinum coins to cover our needs, you can be sure that running out of US money will never happen!

(Cross-posted from New Economic Perspectives.)

I have a petition to President Obama up at: http://signon.org/sign/end-austerity-mint-the It’s about minting that $60 T coin and ending austerity. The wording of the petition is:

”A 1996 law gives the Executive Authority to mint coins w/arbitrarily large face values and deposit them at the Fed. The President should immediately mint a $60 Trillion coin, and use the proceeds to pay off the national debt completely, cover all likely deficit spending by Congress over the next 15 years, and take the issue of spending cuts in programs that benefit the 99% off the table! Google “$60 Trillion coin” for background!”

The purpose is:

“Ending the emphasis in Congress on deficit reduction rather than the merits of policy proposals to create full employment, Medicare for All, & rebuilding education, US infrastructure, & energy foundations.”

A $60 Trillion Proof Platinum Coin could close the spending/revenue gap entirely in any fiscal year, and technically end deficit spending, while still retaining the gap between tax revenues and spending that can produce full employment. In addition, profits from the coin could be used to pay off the “national debt,” and would also remove the need to issue any more public debt in coordination with deficit spending for at least 15 years.

However, a $60 T coin is not only a solution for ending public debt, it also has the potential to take off the legislative/fiscal table the whole austerity mind set that bedevils our current budgetary process and provides it with a constraining conservative cast focused on narrow monetary costs considerations, rather than a broader progressive framework that weighs the real costs and benefits of proposed fiscal activities of the Federal Government.

The $60 T coin can free the Government from narrow green eye shade concerns and force both Congress and the Executive to 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.

For example, currently we see before us proposals to drastically reduce the USPS in size after years of reduction in service and personnel and also proposals to cut already austere, by modern industrial nation standards, Social Security and Medicare programs, as well as massive spending cuts in other entitlement and discretionary programs. Why are we seeing these proposals? Would we be seeing these proposals if we were rapidly paying off the debt and we also had $ 44 Trillion in the Treasury General Account to be used for future deficit spending?

We’re seeing them now because of the effectiveness of a 35 year propaganda effort by deficit and debt hawks who have persuaded many Americans that the government is like a household which has enormous debt that will be burdensome to pay back. This view is false. But we can’t educate people about this in the near term. We can’t counter the deficit hawk propaganda with our own messages about the complex facts of government finance.

On the other hand, if we mint that $60 T coin, pay off the debt, and still have $44 T left in the TGA, then all the effects of the 35 year propaganda campaign will immediately go away. The debt will just no longer be an issue. Then the issues will be about what people need, and what improvements we can make by working together through our Federal Government.

That gets to be the fulcrum of the new politics, not debt. I think that’s where we want it to be. If you agree, you’ll follow the link above and sign my petition!

If you need more background to make a decision see here and here. But please consider this. I have only 5 signatures so far and I need 50 to get to the next stage of the petition process. So, if you really want to end austerity, then let’s get this over the first hurdle and let’s see how far we can take it into the public’s consciousness.

(Cross-posted from Correntewire.com.

Well, here we are again, House leaders have agreed on a compromise continuing spending resolution at the same level as before from October 2012 through January 2013. It’s likely now that the President(s?) will probably try to make the money available for deficit spending as of today, last through the time period of the continuing resolution so that one deal including both the budget and raising the debt limit can be made by March of 2013. According to the July 31, Daily Treasury Statement, there’s $499,424,000,000 left until the debt ceiling. That’s an average of $62,428,000,000 deficit spending per month for the next 8 months, ending March 31, 2013.

For the past 10 months, average deficit spending was at $114,802.3 Billion per month, and that amount was not enough stimulus for a full recovery. So, the likely 46% reduction in average deficit spending over the next 8 months is unlikely to be any more effective in pulling us out of the extended employment recession we are experiencing, than the deficits in the preceding 10 months were. On the contrary, deficit spending over the next 8 months is unlikely even to allow us to maintain the unemployment levels we have now. So, what ought to be done?

The most important thing that can be done is to change the fiscal context of politics from one of apparent scarcity “justifying” austerity to one where spending capacity is so plentiful, that Congress will be hard-pressed to impose austerity, because its justification in the form of apparent limitations on spending capacity will just seem silly. In the summer of 2011 I proposed a solution to the debt ceiling crisis calling for the minting of a $30 T platinum coin to overcome the problem and also improve the fiscal context for progressive legislation. Now, I want to update that post and apply it to the present political situation, where based on the above events, the next serious fiscal crisis is likely to happen in February and/or March of 2013. So, here’s the update.

The Law and Proof Platinum Coin Seigniorage

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

Proof Platinum Coin Seigniorage (PPCS) is now frequently and increasingly being mentioned on popular blogs as a possible solution to the debt ceiling crisis. It is one of the two solutions currently being suggested that requires no further legislation from Congress and also no challenge to either the debt ceiling law itself, or to the Congressional prohibition on the Fed extending credit to the Treasury.

However, PPCS is not only a solution to avoid a debt ceiling crisis. It also has the potential to take off the legislative/fiscal table the whole austerity mind set that bedevils our current budgetary process and provides it with a constraining conservative cast focused on narrow monetary costs considerations, rather than a broader progressive framework that weighs the real costs and benefits of proposed fiscal activities of the Federal Government.

PPCS can free the Government from narrow green eye shade concerns and force both Congress and the Executive to 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.

Government deficits and surpluses are important in themselves when the supply of Treasury funds is restricted to the amount that can be taxed or borrowed; but they are not intrinsically important when, through using PPCS, the supply of Federal funds is limited only by the President’s or the Treasury Secretary’s orders to the US Mint to use PPCS to fill the public purse without either taxing or borrowing

The PPCS alternative comes in more than one flavor. It’s actually a class of alternatives. Here are some different coin seigniorage proposals.

PPCS Alternatives

First, mint a $1.6 Trillion coin and have Treasury use the profits from it to buy all the outstanding debt instruments held by the Fed. This would retire a substantial part of the national debt and immediately create $1.6 T in “headroom” relative to the debt ceiling. This alternative involves the least amount of change in current procedures. The coin, once deposited at the Fed, would remain in a Fed vault, and would not go into circulation.

The Government would then go right back to issuing debt in order to meet its debt obligations and spend previous Congressional appropriations. With this alternative it is hard for critics to raise the inflation issue, since the new credits created by the coin are never spent into the economy, but are only used to buy back the debt held by the Fed because that debt counts against the debt ceiling. Of course, this proposal is a solution to the debt ceiling problem alone. It would prevent a default crisis caused by anti-government tea party Republicans. But, it wouldn’t do very much to defeat the austerity/deficit hawk mind set in politics.

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

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

A second proposal is to mint a $6.7 T coin to pay back all debt held by the Fed, and all Intra-governmental debt, including that owed to Social Security, Medicare, and a host of other other agencies. That would create $6.7 T in headroom relative to the debt ceiling, that’s more than enough to carry us through the 2014 elections without breaching the ceiling. Again, this wouldn’t result in any “money” immediately going into circulation, but over time SS and Medicare payments to individuals and organizations would be adding to bank reserves without any reserves being withdrawn from the private sector due to debt issuance. But this isn’t a change from the present situation so it would not add to inflation.

This alternative would render the debt ceiling problem a dead letter for some time to come, and it also might take some of the austerity pressure off. But it probably wouldn’t end the austerity drive, because the deficit hawks would still point to long-term problems in entitlements that would be projected as running up the public debt in future years.

Some might think this alternative would be inflationary, because they believe that net reserves added to the private sector are more inflationary than debt instruments added would be. However, there’s plenty of evidence that debt instruments provide much higher leverage than added reserves, and, in addition, they lead to greater interest payments than reserves do, even if the Fed decides it wants to pay interest on reserves, which it doesn’t always do.

A third proposal for applying coin seigniorage is to mint a coin with face value large enough to cover the $6.7 T intra-governmental and Fed debt repayment, plus all private debt coming to maturity, and all Congressional Appropriations expected to require deficit spending. I’ll estimate, roughly, that a $20 T coin is enough for that, including about $4.0 T to more than close the expected gap between tax revenues and Government spending through the 2014 elections, and the rest for paying down the national debt further. Issuing a coin that large, using the profits from seigniorage, and assuming that Congressional appropriations continue the pattern of the past 2 years or so, that would result in a remaining public debt outstanding of roughly a few trillion dollars in long term debt, which would please the bond markets except for the fact that the US wasn’t issuing any more debt instruments, which would probably make the bond vigilantes scream for those safe harbor debt instruments again.

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

How about the seigniorage profits of $4.0 T set aside for closing the gap between tax revenues and spending during the next two years? Will that be inflationary? Actually, I don’t know if Congress will appropriate a $4.0 T spending/tax revenue gap over the next two years or so, but if such a gap is needed to move towards full employment, and if it does, then the coin profits will cover it without new Federal borrowing. And as long as Congress does the right kind of spending and creates a large enough gap to add sufficiently to private sector assets to support full employment, their appropriations, backed by PPCS won’t be inflationary.

If, also, Congress does the right kind of spending to bring full employment inside a year, then tax revenues will come back as they did during the Clinton Administration, and then there will be no need for all the profits from the proof platinum coin to be used completely between now and 2014. In fact, if the right jobs creating program is immediately enacted, as much as $2T could be left before the President might want the US Mint to strike another proof platinum coin.

So far, I’ve discussed three alternative coin seigniorage proposals ranging in scale from a minimal proposal to handle the current crisis to one that would provide enough funds to both pay down debt, and support a gap between spending and taxes that might be sufficient to enable full employment. Now here’s a fourth, enough to handle even generous Congressional appropriations and deficit spending for at least 15 years, until 2025 and beyond.

Why not mint a $60 T coin and then another one in case the Fed gets obstreperous sometime down the road and presents the $60 T coin, that was deposited in the Mint PEF account, for redemption?

I favor this fourth alternative above all, because it institutionalizes the idea that there is a distinction between appropriations, the Congressional mandate to spend particular amounts on particular goods and services, and the capability to spend the mandated accounts by having the funds (electronic credits) in the public purse (the TGA). In a fiat currency system, the capability always exists if the legislature provides for it under the Constitution. But the value of the $60 T coin, and the profits derived from it, is that it is a concrete reminder of the Government’s continuing ability to buy whatever it needs to meet public purposes. It demonstrates very concretely that the Government cannot run out of money, and that the claim that it can is not a valid reason for rejecting spending that is in accordance with public purpose.

So, in reading what follows, please keep in mind the distinction between the capability to spend more than government collects in taxes, and the appropriations that mandate such spending. The capability is what’s in the public purse, and it is unlimited as long as the Government doesn’t constrain itself from creating credits in its own accounts. With coin seigniorage its capability could be and should be publicly demonstrated by minting the $60 T coin, and getting the profits from depositing it at the Fed transferred to the TGA.

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

This fourth alternative is the one that best solves both the debt ceiling problem and the problem of taking austerity, justified by “we’re running out of money,” off the table. The debt ceiling would no longer be an issue if the Treasury immediately paid off $6.7 T in Fed and intra-governmental debt, and was poised, with the money in its account, to pay off the rest of the debt subject to the limit as it falls due. Nor would there be any justification for austerity policies if the Treasury had a public purse with $44 T of unearmarked funds in it to cover future deficit spending.

At that point we’d be free to seriously debate: 1) full payroll tax cuts for both employers and employees until full employment is reached; 2) revenue sharing payments to the States of $1,000 per person to save and restore State government employment to pre-crisis levels; 3) creating a Federal Job Guarantee program which would guarantee a job offer at a living wage with full fringe benefits to anyone seeking full time work; 4) passing HR 676, John Conyers enhanced Medicare for All bill; 5) public education reforms to create a world class educational system open to all, from preschool to graduate school; 6) passing an infrastructure program re-creating the energy foundations of the United States and rapidly eliminating dependence on fossil fuels; 7) passing new legislation stopping human-created climate change; and passing a $3 Trillion infrastructure program for renewing the US’s infrastructure.

This brings us again to inflation. I’ve already pointed out that repaying the debt won’t be inflationary. So, the inflation issue then focuses on the $44 T in seigniorage profits in the TGA that would be used to cover gaps between Federal spending and tax revenues in the years following minting the $60 T coin. How much of that is spent ,and when, will depend on what Congress appropriates. To avoid demand-pull inflation, the kind caused by Government deficit spending, Congress must not spend more than is needed to create the aggregate demand necessary for full employment.

How much that is will depend on the savings and import desires of the American people. Right now, desired savings seems to be at the level of 6% of GDP, while import desires greater than export amounts seem to be at roughly 4% of GDP. So, roughly speaking that tells us that a full employment budget should involve a deficit of $1.6 T or 10% of GDP, give or take a few hundred billion depending on the fiscal multipliers associated with the specific government spending involved. As long as deficit spending is within those limits demand-pull inflation will not occur.

This doesn’t mean that cost-push inflation caused by supply problems, or monopolistic activities, or other supply bottlenecks won’t happen. But these won’t be caused by excessive government deficit spending, and can’t be cured by backing off such spending or by raising taxes. They have to be treated in other ways. The best discussion of the relationship between coin seigniorage and inflation has been provided by Scott Fullwiler.

The Speech

If the President decided to rise above the debt ceiling controversy, safeguard the social safety net, and do something really, really important from the perspective of history by using $60 T coin seigniorage to short circuit the upcoming fights over the debt ceiling and the budget, say in January, or better still during the lame duck, then there would be a spectacular uproar in the Congress and the Press over what he had done. All kinds of overblown and downright crazy claims would be made because the President’s action would shock people, everyone would have a tough time getting their minds around it, and the media would report on what was going on in a very sensationalist way using stereotypes created by the neo-liberal perspective that journalist at places like the WaPo, NYT, and CNN are superficially well-schooled in. Places like CNBC and Fox would be absolutely foaming at the mouth in response to something like this, and Timmy Geithner might very well resign over it, as might Ben Bernanke, since he’d be forced to have the Fed credit the coin.

There would also be an immediate move in Congress to repeal the 1996 law that enabled the President’s action. This would fail however, because even if it got through the Congress, the President would simply veto it. The opposition couldn’t possibly get the 2/3 vote necessary to override the veto. Even if by some miracle, repeal got through, however, it would be too late. The coin would have done its work and the $60 T would be in the TGA, a fait accompli, and a vivid demonstration that the government can create as much money as it wants, and can only run out of money by choice.

However, the President would then have to defend himself with a political campaign aimed at persuading the public that his move was a bold and liberating move and the first step in finally getting out of this protracted economic depression. And yes, he should use the D-word, whatever the Republicans and the so-called “fact-checkers” say about it in that campaign. And he should also begin the campaign by explaining to the public the issuance and deposit of the first $60 T coin in a high profile TV address, this way (the second coin just stays at the Mint for safekeeping. Its existence to be kept secret). Here’s the speech.

My Fellow Americans:

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

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

3) Congress has also imposed a debt ceiling, so, if and when we reach it, we can’t borrow back our own money without Congressional approval, anyway, and lately Congress has been using the need to raise the debt ceiling as an excuse to extort cuts in safety net and discretionary programs that the majority of Americans oppose.

4) So, on my order, and in accordance with legislation passed by Congress in 1996, and with the US Code, the US Mint has issued $60 Trillion using a single 1 oz. platinum coin, and deposited it at the NY Fed. It’s legal tender, so the Fed credited the Mint’s Public Enterprise Fund (PEF) account with $60 Trillion in USD credits using its unlimited authority from Congress to create US Dollars.

5) This is not inflationary because the Fed will put our coin into its vault, and keep it there permanently out of circulation, and the Treasury will use the $60 T in USD credits only to pay back debt and to spend what Congress has already approved, which is only a small fraction of these credits and far from the amount needed to cause inflation.

6) My action ends any possibility of a debt ceiling crisis in February or March, because we have no further need to borrow our own money back in the markets, and that’s why we don’t need the tea party or other Republicans, or even my fellow Democrats to agree to raise the debt ceiling any more.

7) Now the Treasury, has plenty of money, much more than we need, in fact, to pay for all appropriations Congress has already approved for 2013, and may approve in March, including all deficit spending and, again, we won’t have to borrow our own money back, either to repay debts or to implement future deficit spending.

8) So we will pay all Government debts which will come due in 2012 and 2013. Treasury securities and all other debts included. We will also pay back all debts held by other agencies of Government and the Federal Reserve. When we do this we will lower the national debt by about $12 T, reducing the “debt burden” by about 75% by the end of 2013, and creating an actual Social Security trust fund with 2.7 T in cash reserves in it; and again, to do this we don’t have to borrow our own money back, and we will also reduce our interest costs on the outstanding national debt all through the remainder of 2012, continuing through 2013, 2014, and beyond until it is all paid off.

9) None of the $60 T in new credits created by our actions is “money” in the private sector economy until the Treasury spends it. For now it is just capability to spend awaiting the appropriations of Congress to mandate deficit spending, should it need to compensate for the reduction in demand, probably close to 10% of GDP right now, caused by your own desire to save (which we want to do our best to facilitate), and your desire to import goods from foreign nations.

10) We have created $60 Trillion in new credits even though we probably needed less than that to cover anticipated deficit spending and debt repayment until 2027. The reason for this, is that I wanted to have enough capability created in the Treasury account, so that the national debt could be completely paid off (except for a small amount in very long-term Treasury debt still not mature by 2027), and all projected Federal deficits covered over the next 15 years, even extraordinary deficit spending needed to be performed without further borrowing over this period.

11) Of course, we can always make new coins if our projections about future deficits turn out to be wrong; but I thought it would be best to ensure that all $16 T plus of the “debt burden” can be completely eliminated from our political concerns; and also to provide enough funds in our spending account at the Fed, so that it would be very clear to Congress and all newly elected Representatives and Senators, that even though they, as required by the Constitution, continue to control the purse strings, the national purse is very, very full, and that we would be able to cover from the Treasury Account whatever deficit spending for the public purpose, including for full employment, Medicare for All, infrastructure, education, and other things, that Congress, in its wisdom, chooses to appropriate now, before the next election, and for some elections to come.

Good night, my fellow Americans! Rest well knowing that our beloved country won’t be defaulting on any of its debts when the debt ceiling is reached in February or March, and that I’ve prevented this without going over the legal debt ceiling or borrowing any more, by providing money for spending mandated appropriations, in compliance with the laws authorizing coin seigniorage, while supporting the Constitution’s prohibition against our Government ever defaulting on its debts. I hope that in the future everyone will obey the 14th Amendment’s prohibition against questioning the validity of Federal Government debts, and think twice before they indulge themselves in loose talk about the possibility of the Federal Government defaulting on its obligations.

America will always pay its debts in US Dollars according to the terms of the contracts it has concluded, and in line with the pension payments and other obligations that it owes. Neither you, nor the rest of the world need ever doubt that again! Nor need you ever think that our Government is running out of money for the things we must do. We can never run short of money unless Congress refuses voluntarily, to use its unlimited constitutional authority to make more of it. But as long as it delegates to me the authority to create high value bullion and proof platinum coins to cover our needs, you can be sure that running out of US money will never happen!

(Cross-posted from Correntewire.com.

There’s a distinction between Congressional appropriations, the mandate to spend particular amounts on particular goods and services, and the capability to spend those mandated amounts. The capability is the amount of electronic credits in the public purse, whether any of it has been appropriated for spending by the Congress or not. Congressional appropriations, not the size or contents of the purse, determines what will be spent and what will simply sit in the purse for use at a later time. So, there is a very important distinction between the USD level in the purse and whether any of it can be spent.

It may be the case that “the purse,” the Treasury General Account (TGA), contains far more credits than the funds needed to repay Federal debt and spend Congressional appropriations in any fiscal year. Or, the normal situation, until now, is that it won’t contain enough credits to cover debt repayment and Congressional appropriations, and will be credited throughout the year in amounts corresponding to tax payments, bond sales, sales of other assets and profits from coin seigniorage.

So, in this situation, the Treasury implements appropriations mainly through taxing and borrowing first, and then spending, since Congress prohibits the Fed from lending money to the Treasury. The need to fill the public purse continuously, and through borrowing in order to implement appropriated deficit spending has created a conservative bias in fiscal politics, since any spending proposals aren’t evaluated primarily on the basis of expected impacts, but on the basis of how they will be “funded.”

Will they be funded by issuing debt? Will they be funded by raising taxes? Will they be funded by “paying for them” with cuts in other spending programs? These fiscal issues become the main ones. The likely impacts of the programs, (or even the obvious need for them) take a back seat in debates. Instead, even though Congress has the constitutional authority to create unlimited amounts of money; it’s all about “We Can’t Afford This Because We’re Running Out of Money.”

In past months, we’ve seen Congressional debates over whether the debt ceiling ought to be extended to accommodate deficit spending previously agreed to; or whether existing programs should be cut to “pay for” the debt ceiling extension. Right now, there’s a disagreement over a Continuing Resolution to keep the government operating. Republicans will vote for such a resolution; but only if Democrats will vote for cuts in existing programs to “pay for” disaster relief to the victims of natural disasters.

The new Congressional “Super-Committee,” an outcome of the unnecessary agreement to extend the debt ceiling, is deliberating now on a plan to cut spending to achieve long-term deficit reduction, which is thought to be necessary because “we are running out of money” and therefore must slow the rise of the debt-to-GDP ratio. There will be big fights in the Committee and in Congress over proposed entitlement cuts, defense cuts, and cuts in other programs that are important to working people and the middle class; and with the political consensus that there is, in fact, a deficit problem, it’s likely that there will be substantial cuts in Federal programs, whether working people want them or not.

It’s likely that in 2012, this same pattern of legislative conflict over filling the purse and the price to be paid in needed Federal programs will continue. The Republicans certainly won’t give the President any program successes to run on in 2012. And Democrats will be increasingly unlikely to give in on further cuts in programs for their constituencies in an election year.

This ruinous dynamic will leave the US in an increasingly sad place as time goes on, and will lay waste to our country. We will not meet our real problems. We will not generate enough aggregate demand through deficit spending to create full employment. We will stay in recession or sink deeper into depression and growing inequality will bring the US closer and closer to the model of a banana republic. There will be no help for this from the political system until the ideology of economic austerity is beaten politically, and is weakened in both parties.

To avoid the fate of austerity-induced double- and even triple-dips, the most important thing that can be done is to remove the conservative bias in Federal fiscal policy. The opportunity for fights over the debt ceiling, the level of debt and the debt-to-GDP ratio must be removed from politics; along with the objection to needed spending, claiming that we are running out of money. If we can get rid of those two things, then progressive fiscal measures can be debated on their merits and pressure on the conservative House will build to pass them in the absence of the debt-related excuses the conservatives now rely on for spending cuts.

The good news is that we can get rid of both debt ceiling fights and the debt/deficit issues that paralyze Congress now, and that the President can make that happen without the concurrence of Congress or any other agency outside the Executive Branch, by filling the public purse to an extreme level, using the new money to pay off the national debt, and to spend Congressional appropriations, and then letting the rest of the extreme funding sit there in the TGA, providing a backdrop for conflicts over appropriations, and concrete proof that the Government has plenty of money to spend in worthwhile ways.

I’ve explained in detail how the President can do this in previous posts here, here, and here. The main point is that in legislation passed in 1996, the Mint was given the authority to create 1 oz. proof platinum coins with arbitrarily high face values having no relation to the cost of producing the coin or coins involved. The President can cause the Mint to create a coin of arbitrary face value, for example, $60 Trillion. The coin is legal tender and would be deposited in the Mint’s Public Enterprise Fund (PEF) account at the Fed. The Fed would have no option but to credit the deposit to the PEF since 1) the coin is legal tender, and 2) in disputes between the Fed and the Treasury over interpretations of the law; the opinion of the Treasury Secretary is controlling. The Treasury can then “sweep” the seigniorage profits (the difference between the cost of producing the coin and its face value) in the PEF into the TGA, filling the public purse with $60 Trillion.

The President can spend part of the money in the filled pubic purse to pay down, and eventually pay off, the national debt, and also to spend Congressional appropriation amounts exceeding tax revenues, so that no more debt issuance would be necessary. It’s likely that $60 T would cover the national debt and also all appropriations exceeding tax revenues between now and at least 2030, perhaps longer if the economy returns to full employment, which it could be made to do if a Federal Job Guarantee program were passed. The first round of debt payments could be made almost immediately, and by the end of the year would leave us with a national debt down to $7.1 T or so, down from the present 14.7 T.

So the initial paydown of the national debt over the next three months would remove debt and deficit considerations from the national debate over funding for jobs, infrastructure, education, innovation, further health care reform, new energy foundations, and any other proposed spending where appropriations would exceed tax revenues. Entitlement “reform” interpreted as cuts necessary for long-term deficit reduction would disappear as an issue, to be replaced by discussions about whether Medicare and SS benefits should be extended. In short, almost overnight, the conservative bias in national fiscal policy would be removed and the way would be clear to reconstruct America on thoroughgoing progressive economic lines.

We badly need the public purse filled with a $60 Trillion or greater face value proof platinum coin, in order to end our economic troubles.

This is not a necessity from the viewpoint of economics. If our people and their representatives understood the operations of our fiat monetary system, there would be no need to end austerity by getting rid of debt issuance and removing concerns about the national debt and deficits that threaten our solvency. Everyone would recognize that the debt and growing debt-to-GDP ratios do not affect the ability of the Federal Government to spend. So, make no mistake, I am not proposing the $60 T Proof Platinum Coin Seigniorage (PPCS) solution because it is the best measure we can take to get us out of economic troubles. There are lots of ways for Congress to reform our Federal fiscal structure to ensure that we are not hamstrung by rules that maintain the conservative fiscal policy bias. I am calling for it to be done through PPCS because the President has the authority to implement high value PPCS, and because an overfilled Federal purse will remove the conservative bias in fiscal policy and allow the United States to serve most of its people again, rather than only a miniscule elite.

Next, I’m very well aware that commenters will object to this post on grounds that it will cause inflation or hyper-inflation. Others and myself have considered the possibility of inflation very seriously. Here, here, here, here, and here, are some pieces on the inflation issue for people who want to use that dog-whistle in reply to this post.

If, after reading these posts you still want to advance the inflation objection, then please do so by making very explicit the causal transmission mechanisms that you think will cause inflation when the TGA money is just sitting there in the TGA reserve account, and is not being spent. And please also explain how the repayment of debt can be inflationary, because without such explanations of why you think inflation will occur, you are just making noise, and not providing serious objections.

Finally, returning to my main point, to understand how important it is to remove the conservative fiscal bias by issuing the $60 T coin;

– please try to imagine whether there would have been any debt ceiling negotiations earlier this year if there had been $52 T remaining in the TGA at the time after repayment of roughly 50% of the national debt.

– Also, try to imagine if the Republicans would dare to insist on “paying for” disaster relief aid by cutting other programs in passing a continuing resolution.

– Then try to imagine if they would dare to oppose a jobs bill to create full employment against the same TGA backdrop later this year, or in the election of year of 2012. In thinking this through they can no longer talk about fiscal solvency, fiscal responsibility, or fiscal sustainability. Those slogans would be gone.

Instead, they’d have to start stoking fears of inflation. But people won’t buy that with 9 – 10% unemployment and 17% under-employment, unless there really is demand-pull inflation caused by spending that exceeds tax revenues. Rest assured however, that’s not going to happen. There will be no such inflation.

There may be inflation caused by speculation in commodities. But if the Administration starts prosecuting and jailing people who try to control markets through speculation, then it can short-circuit that kind of inflation easily enough.

In short, it’s time for the President to act. He needs to create the $60 Trillion coin to change politics and get Congress working for the American people again. Will he do it, or will he go right on failing us by letting the losing political dialogue continue undisturbed?

(Cross-posted from Correntewire.com.

Now that a debt ceiling deal has ended the immediate crisis, the attention being given to the President’s options, in case there was no deal on the debt, will fade into the background, and most of the options offered to get past the debt ceiling won’t be discussed again, until the next time there’s a “debt ceiling crisis.” In highlighting, in previous posts, the President’s option of using Proof Platinum Coin Seigniorage (PPCS) to pay back part or all of the national debt, other bloggers and myself writing about PPCS, have raised broader questions of whether the President should use it to:

– 1) pay back the national debt entirely,

– 2) spend more than the United States collects in tax revenue whenever Congress appropriates such spending, and

– 3) replace the current method of creating the credits necessary to spend Congressional appropriations through issuing and selling debt instruments with PPCS as the basis for creating those credits.

The answers to these questions suggest that PPCS should not be forgotten until next time, because if it were implemented right now, it would be a political game changer for the economy and also for progressives almost immediately.

Using PPCS to Pay Back the National Debt

Minting proof platinum coins with arbitrarily high face values, depositing them at the Fed, receiving electronic credits equal to the face value of the coins from the Fed, and then having the Treasury sweep the profits into the Treasury General Account (TGA) can fill the Treasury’s purse to an arbitrary level selected by the President. The profits can then be used to redeem debt held by the Fed, debt held by the Trust funds (including Social Security) and Government agencies, and debt held by the non-Government Sector, including domestic investors and foreign Governments and investors.

The importance of using PPCS to pay back the debt isn’t economic. Modern Monetary Theory (MMT) tells us that Governments like the US with free floating, non-convertible fiat currencies, and no external debt, cannot be forced into insolvency by economic conditions or factors. So, the government spending capacity of those nations isn’t affected at all by the size of the national debt, or the debt-to-GDP ratio. Nor does the level of the deficit reduce spending capability; even though if it is too great, inflation may be the result. However, nations and governments are not purely economic and financial systems. They are also political systems. So, the issue of paying off the national debt has to be viewed from a political point of view, whether paying it off is necessary economically or not.

From a political point of view, deficits, the national debt, and very high debt-to-GDP ratios are a serious political and messaging problem for those who want to spend more than the Government can collect in tax revenues. People simply don’t understand the fiat currency system, and they view the Government as they would their own household. They know that their debt is bad for them, and they also think that public debt is very bad for their country and must eventually be paid back through taxes.

We could try to educate people in the MMT point of view that Government “debt is not debt,” and could also eventually get them to accept that Government debt in the aggregate can be continuously rolled over and never paid off, and that its absolute level and even the debt-to-GDP ratio are of no consequence. But success in this kind of educational project would not come for years and years. It’s a slow process, and we need to free up Government fiscal policy to handle our various problems by spending more than it taxes in the short run; not the long run.

So, how can we get people to support us in doing that? I think we need to remove the worries people have about public debts and deficits by removing them from the fiscal picture of the Government, i.e. by paying the debt off and by never running any technical deficits where Government spending exceeds Government revenue.

Until PPCS was legislated in 1996, the Executive didn’t have the ability to do that without gathering enough revenue from taxation to generate sufficiently high surpluses for as long as it took to pay back the national debt. And that course was unacceptable, because paying back all the debt subject to the limit using surpluses would have been equivalent to draining the economy of all liquidity and destroying all economic activity.

Now, however, the PPCS capability allows the US Government to fill the Federal purse with financial assets sufficient to re-pay the national debt without removing and destroying existing private savings. PPCS could be used to pay back debt held by the Fed and debt held by the trust funds and other Federal Agencies, a total of $6.2 Trillion, almost overnight. The remaining national debt of $8.1 Trillion, would be repaid as it matured, along with interest due on the securities. Since most of the outstanding debt will mature within 3 years, in that period of time the US would be nearly debt-free, and its debt-to-GDP ratio would be among the lowest in the world.

It’s important to emphasize that the capability to use PPCS, and to pay off the national debt, lies with the Executive Branch, alone. President Obama could see to it that the process is begun and that the repayment of the first $6.2 Trillion was completed this very week. By election time next year, close to $9 Trillion in debt would have been paid off, and the US debt-to-GDP ratio would be less than 40%. Mr. Obama could claim to be the President who placed the nation on the road to debt freedom, all without causing additional pain or the economy to deteriorate further. Here are some of the political implications of using PPCS this way, and minting a platinum coin with a large enough face value (say $30 to $60 Trillion) to pay off the national debt and do other things as well.

– Lots of political slogans supporting doing nothing about our problems, due to “financial constraints” instantly are swept away. Imagine, if you can, American politics without having to argue about, or cope with, slogans or sound bites like these.

– “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 PPCS)

– “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 PPCS, 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 PPCS, 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 PPCS, 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.” (PPCS 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 PPCS.)

– “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 be as big as we need it to be with PPCS.)

– “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 PPCS!)

– “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 PPCS; 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 PPCS, 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 PPCS, 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 PPCS it can’t become Greece or Ireland, only the next Japan. But with PPCS 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 PPCS, 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.)

With the debt paid off, sound bites like the above won’t be around anymore. When progressives bring up Medicare for All, or Federal Job Guarantees, or State revenue sharing to save jobs, a payroll tax holiday, or an infrastructure rehabilitation program, or education programs; or large scale programs to create a new energy foundation for our economy, conservatives will have to debate the merits of the proposals. They won’t be able to say that we can’t afford it because we’re running out of money. When progressives propose funding for food stamps, or extending unemployment to 156 weeks, or even propose that all limits on the number of weeks for collecting unemployment be removed, conservatives won’t be able to reply that we have a deficit problem, or that our national debt is too high, or that we have to be concerned about our poor grandchildren. They’d just have to admit that they don’t care about the unemployed, and that insofar as they do care, they only care about making more of them so that wages stay low.

– The neoliberal economic paradigm of response to policy proposals is constraining our politics in a very tight strait jacket, choking the life out of progressive initiatives. The first response to all proposals for change is to ask whether a proposal is fiscally responsible, where fiscal responsibility means, government spending that, whatever else it does, leads to a declining debt-to-GDP ratio over time. If CBO projections show that a program will increase deficits and add to the debt-to-GDP ratio, they are opposed, and, most often, rejected on grounds of “fiscal unsustainability.”

PPCS can change all that. It can change the paradigm governing political games in Washington. The deficit hawk ideas of fiscal sustainability and fiscal responsibility will no longer be relevant, once $60 Trillion in electronic credits are in the Treasury General Account (TGA). Then the important questions will be whether the proposed programs are likely to achieve public purposes or not, and whether if they are, our representatives will appropriate for “deficit” spending, if necessary, the already existing financial resources. A political game organized around messaging about the public purpose, is much preferable to one focused on whether we can meet a set of long-range targets in some deficit reduction austerity plan that, over time will destroy the real wealth, capabilities, and employability of most Americans.

– If PPCS is used, messaging around the public purpose can’t be opposed by austerity; but, instead, it will be opposed by claims and fears that PPCS will result in inflation. The argument of PPCS vs. inflation, however, is a much easier argument for progressives to win than the current argument of austerity vs. need. The reason is that in dealing with this last argument, progressives have granted and continue to grant the idea that deficit reduction is necessary for fiscal responsibility in the long run. This is a myth. But it is powerful. On the other hand, if PPCS gets rid of the need for austerity we can then consider whether PPCS will be inflationary.

Scott Fullwiler has recently done a comprehensive analysis of inflation possibilities with PPCS. It turns out that it is very unlikely to cause inflation because there appears to be no transmission mechanisms from the mere presence of PPCS profits in the TGA to inflationary outcomes. As always, Congressional appropriations followed by spending can produce inflation, if that spending exhausts the productive capacity of the economy. But that kind of inflation would result whether or not PPCS is used as the basis for spending.

Using PPCS to Spend More than the United States Collects in Taxes

Having revenue generated by PPCS, and using it to pay off debt, doesn’t guarantee that Congress will want to appropriate spending in excess of tax revenues, and have PPCS revenue close the tax/spend gap. Congress may want a budget in which spending doesn’t exceed tax revenues anyway, even with $60 Trillion sitting in the TGA. Or if it wants to appropriate spending in excess of tax revenues, it may still insist that the uncovered spending be preceded by selling new debt instruments in dollar-for-dollar correspondence to the new debt.

Or, perhaps the President may wish to close the tax/spend gap by issuing debt, rather than using PPCS revenue, because he wants to continue subsidizing investors in the bond markets. Projections based on CBO’s say that over the next 15 years interest costs on the national debt would approach $12 Trillion. Paying off the national debt will eventually reduce these interest payments to zero. Investors in the bond markets will be angry at this development, so the Treasury continuing to issue debt, to be paid off on an annual basis, to provide them at least a fraction of the projected income (about 10%) expected under the old debt-based regime, is a possible outcome of the political conflict that is likely to occur when the Government tries to use PPCS to pay off the national debt.

This would result in continuing the existence of the national debt, though not in growing it, since the $14.3 Trillion we have now would be paid off, and any new debt incurred could be paid off quickly using PPCS, especially if Treasury issues only securities with terms of a year or less. If this were done, a decision to keep issuing debt, and using PPCS only to pay it off wouldn’t materially effect the political background of budget debates. There would still be very low debt levels, with the debt being paid off every year and very low debt-to-GDP ratios. So, the very damaging austerity rhetoric and proposals we see today would still disappear and would no longer paralyze progressive politics.

Using PPCS to replace borrowing as the Basis for Creating the Credits Needed to Spend Congressional Appropriations

What if the President decided to use PPCS to create that TGA balance of $60 Trillion, and and also decided to replace all debt issuance as the basis for spending Congressional appropriations, and relied instead on taxes and PPCS revenue, alone? Then, there would be no more Federal debt, and there would be no further interest subsidies to the bond markets and foreign nations for placing their USD reserves in what is essentially a risk-free interest-bearing savings account at the Fed. The Government would “save” nearly $12 Trillion in projected interest costs over the next 15 years.

Considering that PPCS profits are considered “revenue” and not “debt,” the Federal budget would always be in balance, and so, the Government would never technically have a “deficit,” defined as the gap between spending and revenues. The gap between tax revenues and spending would continue to exist, however, and that gap is very important, because when Government spending exceeds tax revenue, the gap adds to non-government (including private) sector net financial assets, dollar for dollar. On the other hand, when tax revenues exceed spending, the gap subtracts from non-Government net financial assets. Of course, in the case of such a “surplus,” no PPCS credits would be subtracted from the TGA.

Possible Political Implications This Fall

I said earlier that having that $60 Trillion in the TGA, would change the background of political discourse and the paradigm governing political debate. With PPCS it could focus on public purpose and its relationship to policy proposals, rather than on issues of austerity and whether or not a particular proposal was “fiscally responsible” or “fiscally sustainable.” This change in focus will make a great difference in American politics, because it will expose the real motives of politicians very quickly, since they won’t be able to hide behind the austerity slogans and rationalizations.

It’s very important to see that this change in background and the terms of discourse doesn’t have to wait for any new election results. If President Obama were to implement PPCS in the right way, this week, the transformation of discourse could start immediately. The $60 Trillion in the TGA account would sit there, a huge elephant in a small room. An overnight payment of debt immediately reducing the Fed and Intragovernmental debt to zero, and paying off $6.2 Trillion of the debt counted against the limit, would hit Washington like the proverbial ton of bricks, making it clear that the extension of the debt limit just passed was meaningless compared to the impact of PPCS. Progressives in Congress could immediately apply pressure to void the recent agreement on hurtful spending cuts this year. How could the leadership in Congress oppose voiding it? By saying that the agreement is more important than the fact, evidenced by the $60 Trillion in the TGA, that there was never a need for any spending cuts at all?

Good luck with that! A refusal to restore the cuts would make the people doing the refusing a laughing stock! Even if they got away with that first step, what would happen when Thanksgiving rolls around and the “super Congress” is deciding on further cuts and then presents these for an up or down vote. Will a majority in either House vote for cuts on the grounds that deficit reduction demands it, with $52 – $54 Trillion still sitting in the bank and Trillions in debt scheduled to be repaid over the next year? How would they spin that? How would they paper it over?

How will they act if and when progressives move to restore food stamp cuts and extensions of unemployment insurance, and State Revenue sharing, and payroll tax holidays? How will they act when the public realizes there’s a huge amount of money in the TGA and no reason for Congress to go around cutting programs that benefit them? And when hundreds of thousands of outraged citizens, perhaps even millions, demonstrate across the country against the austerity kabuki and the tea party that was about to condemn working America to a decade of stagnation and suffering, when there was absolutely no reason for it; what will Congress do then?

I gotta say, I think they’d cave. The change in the material background resulting from the PPCS $60 Trillion application would be a very powerful catalyst, powerful enough to overcome habitual patterns of thought, and delivering a shock to the neoliberal system that would free up progressivism to be militant and moral again.

(Cross-posted from Correntewire.

By

Scott Fullwiler

(X-posted with permission of the author and New Economic Perspectives)

(Editor’s note:I think this is the definitive post on how proof platinum coin seigniorage relates to inflation.)

Solving the debt-ceiling issue via proof platinum coin seigniorage—an idea that began and was nurtured within the MMT ranks, mostly by Joe Firestone and Beowulf (see Joe’s post here and the numerous links therein)—has gone viral in the blogs and news sources as a viable option to end the debt ceiling crisis. The one thing that naysayers, and even some supporters, instinctively claim, however, is that coin seigniorage may or would be inflationary, even highly inflationary or hyperinflationary. But this is not true!

Let’s begin by noting the most basic point in the proposal (see link above for more details)—a platinum coin or coins would be minted and deposited in the US Mint’s Public Enterprise Fund (PEF) at the Fed, where it would be credited for its (their) full legal tender face value by the Fed. The Treasury would then “sweep” the profits (the difference between the cost to the Mint of producing the coin (s) and face value of the coin(s)) into the Treasury general Account (TGA) at the Federal Reserve. The face value of the coin(s) can be whatever the Mint chooses to stamp on it (them); there is no requirement that the coin(s) weight be related to the face value. So, the coin(s) could be $1 trillion or more, or less if preferred. This is all perfectly legal, as, again, several blogs and news articles have explained. It’s highly unlikely that one would have to worry about the coin(s) being stolen—they would be nothing more than a collector’s item as the extraordinarily high dollar value could never actually be cashed anywhere (who’s going to give you change for $1 trillion?).

So, why won’t coin seigniorage, using very large face value coins, be inflationary? Here are the reasons:

The coin(s) would never circulate among the public. It (they) would always remain on the asset side of the Fed’s balance sheet, and would always rest in a vault at the Fed. Since the platinum coin(s) never circulate(s), minting and depositing the coins at the Fed cannot possibly be inflationary.

Depositing the coin into the Treasury’s account at the Fed will provide the Treasury with an account balance nearly equal to the stamped value of the coin(s), but this is not inflationary, either, for the following reasons.

Coin Seigniorage and Government Spending

1.The Treasury can never legally spend any more than what has been appropriated by Congress. Congress still retains the “power of the purse,” actually the “power of the purse strings.” So, the coin(s) will never add to the government’s spending beyond what has been passed by both houses and signed by the President. There will be no inflation resulting from additional spending, due to coin seigniorage itself, since there won’t be any spending on goods and services not appropriated by Congress. So, as long as Congress doesn’t appropriate spending great enough to be inflationary, there’s no inflation problem, regardless of whether we use coin seigniorage to make the debt ceiling irrelevant.

Coin Seigniorage to Retire Debt Held by the Federal Reserve

2.The balances in the Treasury’s account could simply be used to retire the debt owed to the Fed. As of July 28, this is $1.635 trillion. So, the Mint stamps a coin or coins worth $1.635 trillion, the profits (the difference between the cost of minting and the face value of the coin) end up in the Treasury’s account, and the Treasury then pays down the debt held by the Fed, and then both the balance in the Treasury’s account and the Treasury securities owned by the Fed are debited. The coin replaces the securities on the Fed’s asset side of its balance sheet. The Treasury is now $1.635 trillion under the debt ceiling, but to spend again must receive revenue or issue more Treasury securities to the public (given that the Fed is not legally authorized to provide overdrafts to the Treasury—though some are now questioning this, it’s a separate issue and it’s not clear to me (at least yet) that it could work). Clearly, coin seigniorage has not been inflationary to this point, as there hasn’t even been one penny of new money put into circulation. This option is much like Ron Paul’s proposal—actually identical in terms of the effect on the debt ceiling and the Treasury—except that his proposal would destroy all of the Fed’s capital (and then some), which is a potential problem politically (not the least of which being that Paul himself has previously worried about the Fed being “bankrupt”), though not operationally, and which the Fed is therefore very unlikely to agree to.

Coin Seigniorage to Retire Debt Held by Agencies of the Federal Government

3.In addition to retiring debt held by the Fed, a coin or coins could be minted to retire the more than $4.5 trillion held by trust funds and government agencies. (I will here deal only with the debt held by the trust funds, as this is far and away the largest portion of the national debt held by agencies of the federal government.) Retiring this debt also demonstrates both how silly it is to count the trust funds against the debt ceiling and how the trust funds themselves are simply accounting gimmicks that do not actually “fund” anything in an operational sense. The trust funds are not altogether unlike if I were to promise today to pay for my daughter’s college expenses after she graduates from high school 14 years from now and having this promise show up in my credit reports as actual debt owed. (Some will say that the “promise” to the trust funds has the force of law while mine to my daughter doesn’t; however, the government—since it makes the laws—can choose to renege on this “promise” at any time, or water it down, as the President is currently attempting to do, just as I could tell my daughter next year that I’ll only pay, say, 85% of her college expenses, not 100%.) At any rate, since larger trust funds signal improved prospects for both Social Security and Medicare under current law, it is counterintuitive to count the improved “health” of these programs against the debt ceiling; that is, the larger the trust funds, the “healthier” the programs, the larger the debt counted against the debt ceiling. Go figure.

At any rate, the Treasury could simply mint another $4.5 trillion coin, or just one coin for a bit over $6.1 trillion to cover debt owed to both the Fed and the trust funds. Just as with paying off debt held by the Fed, the coin(s) would not circulate but instead would remain an asset on the Fed’s balance sheet while the Treasury’s account would be credited with the profits. To pay off the trust funds, the Treasury would simply create a special fund or balance separate from its “general” account from which it normally spends—sort of like it did beginning in fall 2008 with the supplemental financing account—that would be balances available for the trust funds to spend from. As such, these balances would replace the debt currently held by the trust funds and others as non-marketable bonds. These balances would not be spent for some time given that current payroll taxes are sufficient to cover spending by Social Security and Medicare for the time being. (Point 6 below explains what happens when the balances are eventually spent.)

The only difference between holding the trust funds as non-marketable securities and holding them as special balances in the Treasury’s account is that the latter would not earn interest. Some might therefore be against using the coin(s) to retire these debts as a result. However, because these debts are simply accounting gimmicks that do not really finance anything, any lost interest due to seigniorage could be more than replaced at any time the Congress wanted to by (a) simply appropriating more balances (which could be paid via coin seigniorage), (b) considering the special account at the Treasury to be a “savings” account that earns interest for the trust funds (which also could be paid via additional coin seigniorage), or (c) simply guaranteeing that the expenses would be covered by general revenues as it already does for parts of Medicare.
As with retiring debt owned by the Fed, retiring debt owned by the trust funds would similarly not be inflationary. The bonds as assets would simply be replaced with one or more coins that would never circulate. Nothing about the actual spending operations or outlays for the programs would change.

So, now we’re up to more than $6 trillion of debt retired via coin seigniorage, and not a chance of inflation yet.

Coin Seigniorage to Retire Debt Held by Private Investors

4.As with retiring debt owned by the Fed, the Treasury could mint coins, deposit the profits in its account at the Fed, and use balances thereby credited to its account to buy back bonds held by private investors. As I previously explained, this is the operational equivalent of quantitative easing (QE). This is not inflationary. The purchase of Treasury securities by the Treasury would retire the securities and leave banks holding reserve balances. But, as I explained in the previous post, “Banks can’t ‘do’ anything with all the extra reserve balances. Loans create deposits—reserve balances don’t finance lending or add any ‘fuel’ to the economy. Banks don’t lend reserve balances except in the federal funds market, and in that case the Fed always provides sufficient quantities to keep the federal funds rate at its target—that’s what it means to set an interest rate target. Widespread belief that reserve balances add ‘fuel’ to bank lending is flawed, as I explained here over two years ago.

One should also recognize that all the reserve balances created will necessarily earn the Fed’s target rate unless the Fed desired a 0% overnight rate (since that’s what it would get if it didn’t pay interest). Neoclassical economists almost uniformly believe (from Krugman to Sumner to the Fed’s own economists) that interest on reserve balances makes “base money” and Treasury bills equivalent, which then makes whatever quantity of reserve balances circulates non-inflationary. MMT’ers disagree that interest on reserve balances has this effect, but given most everyone who thinks coin seigniorage would be inflationary subscribes to the (incorrect) neoclassical understanding of the monetary system, this is a necessary point to make—anyone thinking coin seigniorage would be inflationary because it amounts to “printing money” must also disagree with (again, incorrect) standard economics descriptions of the monetary system found in any textbook to be internally consistent.

Furthermore, while non-bank sellers of the Treasury securities would now be holding deposits instead of securities, this is also not inflationary. Again, from my previous post:

“First, sellers of bonds were always able to sell their securities for deposits with or without the Treasury’s intervention given that there are around 20 dealers posting bids at all times. Anyone holding a Treasury Security and desiring to sell it in order to spend more out of current income can do so easily; holders of Treasury Securities are never constrained in spending by the fact that they hold the security instead of a deposit. Further, dealers finance purchases of securities from both the private sector and the Treasury by borrowing in the repo market—that is, via credit creation using securities as collateral. This means there is no ‘taking money from one person to give it to another’ zero sum game when bonds are issued (banks can similarly purchase securities by taking an overdraft in reserve accounts and clearing it at the end of the day in the federal funds market), as what in fact happens is that the existence of the security actually enables more credit creation and is known to regularly facilitate credit creation in money markets that are a multiple of face value. Removing the security from circulation eliminates the ability for it to be leveraged many times over in money markets.

“Second, the seller of the security now holding a deposit is earning less interest and can convert the deposit to an interest earning balance. Just as one holding a Treasury can easily sell, one holding a deposit can easily find interest earning alternatives. Some make the argument that the security can decline in value and so this is not the same as holding a deposit, but this unwittingly supports my point that holders of deposits aren’t necessarily doing so to spend. Deposits don’t spend themselves, after all.

“Third, these operations by the Treasury create no new net financial assets for the non-government sector (and can in fact reduce its net saving by reducing interest paid on the national debt as bonds are replaced by reserve balances earning 0.25%). Any increase in aggregate spending would thereby require the private sector to spend more out of existing income, or to dis-save, as opposed to doing additional spending out of additional income. The commonly held view that ‘more money’ necessarily creates spending confuses ‘more money’ with ‘more income.’ QE—whether ‘Fed style’ or ‘Treasury style’—creates the former via an asset swap; on the other hand, a true helicopter drop would create the latter as it raises the net financial assets of the private sector. Again, ‘money’ doesn’t spend itself. By definition, spending more out of existing income is a re-leveraging of private sector balance sheets. This is highly unlikely in the current balance-sheet recession, aside from the fact that QE again does nothing to facilitate more spending or credit creation beyond what is already possible without QE. The exception is that QE may reduce interest rates, particularly if the Fed or (in this case) the Treasury sets a fixed bid and offers to purchase all bonds offered for sale at that price—though this again may not lead to more credit creation in a balance-sheet recession and has the negative effect of reducing the net interest income of the private sector. (As an aside, a key difficulty neoclassical economists are having at the moment is they do not recognize the difference between a balance-sheet recession and their own flawed understanding of Keynes’s liquidity trap.)”

It is important to remember that using coin seigniorage to retire Treasury securities held by the private sector—because it is the operational equivalent of QE—can only be as inflationary as QE is, and we already know it has not been both in the US and in Japan earlier.

And if the public or policy makers end up unwilling to accept that this would not be inflationary, the Fed could take the additional step of either selling securities from its own balance sheet or issuing its own time deposits to banks, both of which would drain the reserve balances from circulation. The former would effectively be reversing the QE; the latter would also do this while effectively transfer debt from the Treasury’s books to the Fed’s. A combination of the two would be possible, too, if desired. These would not reduce the real inflationary effects of coin seigniorage, in fact, because there are none, but within the neoclassical understanding of the monetary system they would do so. So, again, anyone believing that coin seigniorage would be inflationary if the Treasury uses it to retire debt held by private investors is reasoning in a manner that is either inconsistent with actual monetary operations or inconsistent with the neoclassical textbook understanding of monetary operations.

And now, the entire national debt has been “paid off,” without any inflationary impact whatsoever.

But we don’t need to stop there.

Coin Seigniorage to Precede All Government Spending

5.Coin seigniorage could be used to add balances to the Treasury’s account before it spends. Would this be inflationary? Only in as much as the deficit that might be incurred would be inflationary. This is because, whether or not the Treasury spends via coin seigniorage, either the Treasury or the Fed must issue debt in order for the Fed to achieve its target rate, or the Fed must pay interest on reserve balances. In other words, without coin seigniorage, the Treasury issues securities for every dollar of deficit incurred; with coin seigniorage, the Treasury issues securities, the Fed issues time deposits, or the Fed pays interest on reserve balances for every dollar of deficit incurred. There is no difference, while the alternative, as above, is to allow the federal funds rate to fall to zero. Again, then, using coin seigniorage to go beyond retiring debt and in addition (or instead) use it to finance spending does not add to inflationary pressures besides those already in place as a result of the deficit the government would have incurred anyway.

Note what I did not say here—I did not say that coin seigniorage enables the federal government to increase spending or reduce taxes willy nilly and “just print” its way (or “mint its way,” as the case would be) to larger deficits. Any rise in inflation would be due to Congressional appropriations relative to revenues becoming inflationary rather than the effect of the “full purse” resulting from coin seigniorage. The inflation issue concerns whether “the purse strings” will  be monitored and managed by Congress, not whether the purse is full in the first place.

In other words, larger deficits absolutely can be inflationary, just as they can be now—indeed, there’s absolutely no difference, as above—but not because of coin seigniorage; and because of coin seigniorage, even future deficits do not need to count against the debt ceiling.

Coin Seigniorage and Entitlement Spending After Trust Funds Have Been Retired

Finally, regarding the special balances held on behalf of the trust funds in the Treasury’s account . . . what happens when those are spent? Won’t that be inflationary?

6.Again, there is no difference. With a trust fund, the relevant agency presents the Treasury with a non-marketable security and is given legal authority to spend beyond revenues earned by that program; balances are withdrawn from the Treasury’s account to pay beneficiaries.

With balances held in a special fund in the Treasury’s account, the relevant agency informs the Treasury that it desires to draw down its balances and is thereby given legal authority to spend beyond revenues earned by that program; balances are withdrawn from the Treasury’s account to pay beneficiaries.

In either case, whether or not inflation rises depends on the total deficit incurred by the program relative to the deficit incurred by the rest of the government’s spending versus its revenues—the deficit incurred by spending more on entitlements than revenues could conceivably be offset by a surplus for the rest of the government’s budget. Whether there has been coin seigniorage to move the balances held by trust funds in non-marketable securities into a special account within the Treasury’s account at the Fed has nothing to do with the inflationary impact of future spending on entitlements. (Note also, as in point 5, that any deficits incurred via seigniorage will still require the Treasury to issue bonds, the Fed to issue its own debt, or the Fed to pay interest on reserve balances in order to achieve a non-zero federal funds rate target.)

Coin Seigniorage and Lifting the Veil on Real-World Monetary Operations

As I wrote earlier, using coin seigniorage to finance spending lifts the veil on monetary operations to expose their true nature. As MMT’ers have always argued:

“It then would be clear to everyone that the Treasury’s spending is not operationally constrained by revenues or its ability to sell bonds. It would be obvious that the Treasury spends by crediting the reserve accounts of banks, who in turn credit the deposit accounts of the spending recipients. . . . As MMT’ers have explained for years (even decades), the operational purpose of the Treasury’s sale of a bond is merely to aid the Fed’s ability to achieve its overnight target by draining reserve balances created by a deficit.”

Similarly, coin seigniorage to pay off the trust funds and “fund” future entitlement spending demonstrates that the government’s ability to finance these expenditures is never at issue. Instead, it would be clear that the fundamental purpose of taxation is to constrain aggregate spending, not to finance government spending, another fundamental tenet of MMT.

Analytical Mistakes Made by Those Claiming Coin Seigniorage Would Be Inflationary

All in all, those claiming that proof-platinum coin seigniorage would be inflationary are in fact guilty of one or more of the following:

(a) misunderstanding the very basics of the proposal;

(b) misunderstanding how the monetary system actually works;

(c) misunderstanding the standard textbook explanation of the monetary system; and/or

(d) misunderstanding the options available to policy makers for dealing with concerns related to the standard textbook understanding of the monetary system.

Consequently, there is simply no reason for anyone who has carefully thought through the proposal and how it would actually work to argue that coin seigniorage would be inflationary (aside from the possible temporary reactions by those in markets that might similarly have a poor understanding of both of these—which itself assumes that policy makers in conflict with their own interests do a poor job of explaining the proposal and its effects).

Conclusion

We need to be on guard against inflation all the time; indeed, MMT’ers have always argued that inflation is the true constraint that the government should concern itself with, not traditional notions of “sound finance” or “bankruptcy.” Even so, we shouldn’t be paralyzed in adopting new financial arrangements for the federal government by people invoking the bogeyman hiding under the bed. That, only means that we will never cope with our financial problems and always remain in the present silly deadlocks, or worse (as in, sometimes the solutions to the deadlocks make one wonder if the deadlock was all that bad). What I’ve shown above is that there’s no reason to believe that using proof-platinum coin seigniorage will cause either significant demand-pull or cost-push inflation, regardless of the denomination, whether it be $ 1 trillion or $60 trillion, of the coin used to fill the federal purse. So, the coin seigniorage option for coping with the debt ceiling—whether now or in the future—is both a legal option, and also one that will not have any inflationary side effects.

The amount of coin seigniorage employed is highly significant for several issues, including the following: whether we will have any federal debt in the future as measured by the debt ceiling or the ratings agencies; whether wealthy individuals or foreign nations will continue to receive risk-free “welfare” payments in the form of interest from the federal government; whether we will perform reserve drains via debt issuance or paying interest on reserve balances; whether arguing over the national debt and deficits will have a place in our politics anymore; whether we will ever suffer the fate of Greece. However, one issue that it is not relevant, is whether coin seigniorage itself causes inflation. It just doesn’t.

(Special thanks to Joe Firestone for helpful comments and suggestions. For those interested, there is further discussion of the issues raised above here.)

(Cross-posted from New Economic Perspectives.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Cross-posted from Correntewire.com.

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

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

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

Let’s look at them in more detail.

1. The 14th Amendment option

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

The 14th Amendment to the Constitution says in part:

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

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

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

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

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

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

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

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

2. Selective Default

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

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

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

3. Proof Platinum Coin Seigniorage

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

4. Running an Overdraft at the Fed

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

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

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

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

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

Congress allowed both draw authorities to expire in 1981.

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

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

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

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

6. The “Exploding Option”

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

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

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

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

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

Comparison of the Options

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

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

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

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

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

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

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

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

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

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

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

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

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

(Cross-posted from Correntewire.com.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And later he says:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(Cross-posted from Correntewire.com.