A little disconnect: what President Obama, through Treasury and the Federal Reserve, really said last Saturday:

“We’re running out of money because the Republican House may not allow us to float any more debt; so I took the Platinum Coin off the table just to ensure that we would!

Next month, I’ll give you the gift of austerity, because, naturally, we’re now really gonna run out of money!”

Despite Saturday’s announcements by the Treasury and the Fed the Platinum Coin Seigniorage (PCS) legislation is still on the books. For the President not to use it to fill the public purse with enough funds to banish the fiscal conditions that underlie austerity politics — the national debt, and the ability to cover the deficit for a long time to come — is inexcusably corrupt, fiscally and economically irresponsible, and completely opposed to the public purpose that the President is supposed to serve.

So, I want to tell the President that for as long as PCS is on the books, and he and others are claiming that we need austerity because we are “running out of money,” he has the duty and the obligation to mint a game-changing High Value Platinum Coin, for example, a $60 T platinum coin. After this legal tender coin is credited by the Fed, the presence of $60 T in the Treasury General Account (TGA), and its immediate use to begin paying off the national debt, will make it very plain that there is no need for austerity; no need to cut SS, Medicare, and Medicaid; no need to cut Head Start, no need to cut anything that’s working.

Yesterday, the White House line was that temporary fixes to the debt ceiling problem like the platinum coin would not solve the budgetary and political problems faced by the Government. Our mainstream media people did their thing by failing to call out the President on that – probably because they, themselves, have never dared think about any other PC option apart from the Trillion Dollar Coin. It’s easy to see, however, that a $60 T coin wouldn’t be a “temporary fix,” spawning crises every few months, even if it wouldn’t last forever. The fact that a $1 Trillion Dollar Coin would not solve our debt ceiling problem for very long, isn’t an argument for taking High Value PCS (HVPCS) off the table at all.

So, I call on the President to mint that $60 T coin now! I call on him to abandon austerity and to create financial plenty in Federal fiscal policy by using game-changing HVPCS. Austerity and “grand bargains” are “the great betrayal!” We don’t need such “greed bargains.” We need a full public purse, and then we need to get Congress to open the purse for programs that fulfill public purpose.

I call on others to join me in beginning again to blog, comment, facebook, and tweet about PCS; but this time to forget about the TDC, which was always the wrong coin, and focus on #minttheHVPC instead.

Up the ante! Make this about ending austerity, and using the right platinum coin to create the political space needed for doing it! Forget about them taking PCS off the table! As long as it’s legal it’s still on the Table! Mint that HVPC! End Austerity!

(Cross-posted from Correntewire.com.)

Yesterday, Ezra Klein reported in the Washington Post that:

The Treasury Department will not mint a trillion-dollar platinum coin to get around the debt ceiling. If they did, the Federal Reserve would not accept it.

That’s the bottom line of the statement that Anthony Coley, a spokesman for the Treasury Department, gave me today.

“Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit,”

he said.

The inclusion of the Federal Reserve is significant. For the platinum coin idea to work, the Federal Reserve would have to treat it as a legal way for the Treasury Department to create currency. If they don’t believe it’s legal and would not credit the Treasury Department’s deposit, the platinum coin would be worthless.

This statement from Ezra Klein would have us believe that the Federal Reserve is an independent agent in this matter, and that it can refuse to credit the deposit of a newly minted high face value proof platinum coin, if the Treasury makes such a deposit. It also assumes that if the Treasury insisted on the deposit of the coin, that the Fed would be in a position to go Court to contest that; that it has a choice in the matter.

I don’t believe that either of these things are true. I also think they are just a rationalization, so the President, who most probably decided this can pretend that this decision isn’t on him; or at least can be partially blamed on the Fed. Let’s review some critical aspects of the relationship between the Fed and the Treasury.

Fed Independence?

First, here are a some quotes from the US Code and comments.

“…banks, when required by the Secretary of the Treasury, shall act as fiscal agents of the United States; and the revenues of the Government or any part thereof may be deposited in such banks, and disbursements may be made by checks drawn against such deposits.”12 USC 391

The coins are legal tender, and disbursements can’t be made unless a deposit is credited. So, both imply that all banks that receive such deposits must credit them, and that the Bank officers at the New York Fed cannot refuse to credit the face values of a deposit of coins by the US Mint in its Public Enterprise Fund (PEF) Account. As for the Board of Governors, including the Fed Chair, forbidding the New York Fed from crediting the deposit, there is this part of the USC:

“. . . wherever any power vested by this chapter in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.” 12 USC 246

The US code says that the Secretary has supervision and control, not the Fed Chair, or the bank officers at any of the banks, however exalted, within the Fed system. So, if anyone in the Fed system wants to go to Court about this; it’s hard to see that they could get standing even to file an injunction. In fact, if they attempted to get an injunction and to sue after a Treasury order prohibiting them from doing that, apparently the Treasury Secretary could fire the offending parties if “supervision and control” means what it usually means.

In short, the Platinum coin is still on the books. The legal rationalizations of the Treasury and the Fed are a smoke screen to obscure the President’s deciding not to use the authority he is granted by the Platinum Coin Seigniorage (PCS) legislation. And finally the coin certainly would work if the President decided to use it, provided he ordered the Secretary to mint and have a platinum coin deposited in the Mint’s PEF at the New York Fed; and provided the Secretary sent instructions to the New York Fed and the Board of Governors ordering that the coin be credited and no attempts be made to contest the Secretary’s action in a Court of Law.

The Wrong Kind of Coin

After a hiatus of 16 months the Trillion Dollar Coin (TDC) surfaced again in the mainstream blogging and MSM World at the beginning of December. The outbreak of posts and discussions was fairly intense as people began looking beyond the “fiscal cliff “crisis and started looking ahead to the debt ceiling fight to come. During the second half of December however, posts and commentary slowed as we got closer and closer to the “cliff,” and most commentary focused on that.

But at the beginning of the New Year, after the ‘cliff” was partially deflated, new posts from mainstream bloggers on the possibility of minting a Trillion Dollar Coin (TDC) to avoid the debt ceiling appeared, including a post from Paul Krugman. In addition, Jerrold Nadler (D-NY) became the first Congressman to advocate for the TDC to get around the debt ceiling, the TDC was suddenly ubiquitous on MSNBC, and began appearing on other networks as well.

The ground swell for the TDC continued through the first week of January and kept growing larger and larger facilitated by the #minthecoin twitter campaign. The hashtag #mintthecoin was originated By Stephanie Kelton of the Economics Department of the University of Missouri at Kansas City. Joe Wiesenthal, blogging at Business Insider, picked it up, used it to name a White House petition, and marketed a viral petition drive urging the President to mint a TDC and use it to pay down debt so the debt ceiling could be avoided.

The twitter campaign became a phenomenon and a trending topic, accompanied by more and more blog posts across the political spectrum, both pro and con, about using the TDC. Signatures on the petition grew fast, finally resulting in questions at White House news conferences about the TDC, asking whether the President was going to use it or had considered it.

Increasingly, after January 5th, the platinum coin was everywhere even getting covered by the Colbert show. Finally, on June 12, as the web frenzy continued to grow and after a very notable panel discussion of Platinum Coin Seigniorage on Chris Hayes’s Up show, including both Wiesenthal and Kelton, among others, this past Saturday morning at MSNBC, the Treasury and the Fed tried to put an end to speculation by announcing that the Administration would not mint the coin.

So, now the web echos with cries that the platinum coin is dead, some of the cries are joyful. Some of them are angry. Perhaps they’re right. Perhaps the coin is dead. But perhaps also it will come back again, in a new guise, when conditions are right. How can that be?

Well first, we need to recognize that the TDC, with its intense and frenzied web-based campaign was based on the wrong coin and the wrong cause. The cause or the problem it was addressed to was getting past the debt ceiling by creating some head room below it with the seigniorage proceeds. After that, the TDC bloggers envisioned that deficit spending would continue to require issuing debt instruments, and that there would be no further “disruption” in the normal way of doing things, and also that the President would cope with the coming sequester, and continuing resolution (CR) conflicts separately.

So, the TDC, even if used, would really change very little. It wouldn’t stop the Republicans from pursuing spending cuts in entitlements and important discretionary programs. It wouldn’t change the fundamental drive for austerity in both parties, fueled as it is by the view that “national debt” is both frighteningly large, and also unsustainable. So, at best, the TDC was a tactic to put off the day of reckoning with the Republicans, and perhaps to use the law authorizing it as the basis for a swap with the Republicans of the PCS legislation for the debt ceiling law, a very silly and odious idea proposed by a mainstream blogger, wanting to return the system to “normal” but not change it.

Considering this background, it is easy for the President to say that we won’t use PCS. Maybe not as easy he would have liked. But still the TDC was only a tactic. The President can abandon it and talk about other tactics, or his apologists can talk about his desire to avoid default by having a government shutdown that will break Republican resistance, as President Clinton was able to do. If they and he can do that for long enough, then the President can keep Democratic Congresspeople in line for as long as it takes for him to make his “grand bargain” for austerity with enough Republicans to join with the supine Democrats to pass it.

Even though I have blogged more frequently about PCS than anyone, I have never been for minting one TDC and returning to normal Treasury/Fed procedures for deficit spending. I have always proposed substantial and significant change in the financial system, change that would end with paying off the national debt, and with destroying the underlying political rationale for austerity based on the debt and the related idea of fiscal unsustainability.

During the whole current TDC campaign I have blogged constantly about High Value Platinum Coin Seigniorage (HVPCS) and its potential for changing the fiscal and political landscape and destroying the basis for austerity politics, while changing the game radically for progressive attempts to create greater economic and social justice. I referred to HVPCS as the big story the mainstream was missing, and also as game-changing PCS that would change the context of politics.

I believe that if the MSM bloggers hadn’t set up one of their usual “only talk to fellow villagers” echo chambers, but instead had embarked on an honest discussion of PCS options, they would have ended with a groundswell of support for HVPCS to fight austerity and that idea, since it is more strategic than tactical, would have been much harder for the President, Geithner, and Bernanke to dismiss, after a campaign that had identified it as the way out of austerity for the United States.

The President must, if he’s going to be successful in making the “grand bargain” continue to present himself as preferring not to make serious cuts to entitlement and other valued domestic programs, unless the Republicans “make him do it.” To the extent possible, the Democrats who will support him, also want to deny responsibility for the actions they will take. For the President and his Democrats to be seen as forced into the “grand bargain,” the President cannot be seen as acting to take an important way out of the austerity trap “off the table.” And that is what he would have had to do if the TDC campaign had been replaced with an HVPCS campaign sold as an answer to austerity.

The MSM and the blogosphere generally have missed the chance to generate such a campaign with the really heavy pressure it would have placed on the President and the Democratic Party. That is its failure; yet another disservice to the American people by the MSM Press.

The Right Kind of Coin

I’ve been blogging about the right kind of coin for a long time now, and very frequently since the latest wave of PCS began in December. That kind of coin is a platinum coin with a face value of $60 T. Why $60 T? Because that’s the face value needed to pay off the national debt, and to cover deficit spending for 15 – 25 years, enough time to educate people about the nature of fiat money and the desirability of changing the current financial system so that the Federal Reserve is reorganized as part of the Treasury Department, and the Treasury’s authority to create reserves as it spends, without either debt financing or seigniorage, is recognized as the way things ought to be done.

The idea that after Congress appropriates money for Federal deficit spending, that spending can only occur if and when the Treasury can raise the money, is a hangover from gold standard days and ridiculous for a fiat sovereign government like the United States. The authority to spend should be delegated by Congress to the Treasury at the point appropriations are approved.

Appropriations are a mandate on the Executive; that mandate, in a sane nation, would be accompanied by the delegation of the authority to fulfill the mandate. That is the system we should eventually have because it is the only one that makes any sense and that can keep both the Executive and Congress accountable for their actions.

But until Congress passes legislation creating that system, it ought to be recognized by all that the PCS legislation is on the books, and that for the President not to use it to fill the public purse with enough funds to banish the underlying fiscal conditions that underlie austerity politics, the national debt, and the ability to cover the deficit for a long time to come, is inexcusably corrupt, fiscally and economically irresponsible, and completely opposed to the public public purpose that the President is supposed to serve.

So, I want to tell the President that for as long as the PCS law is on the books, and austerity is impending, he has the duty and the obligation to reject it and to mint a game-changing PCS solution using a very high value platinum coin, that after it is credited by the Fed, will make it very plain that there is no need for austerity, but that there is a need for whatever deficit spending Congress needs to appropriate, and he needs to implement, to put America back on the road to the economic and social justice we ought to be pursuing as part of a Green New Deal.

I call on him to mint that $60 T coin now. And if he fails to do that; and instead, along with the Democrats, goes ahead with his plans to impose unnecessary austerity and sacrifice on most Americans other than the wealthy, in the face of his ability to create financial plenty, then I, and others who I am able to persuade about game-changing HVPCS, will do all we can to place the blame where it belongs for “the great betrayal,” and to see that Congresspeople who join in the “grand bargain” travesty of justice pay for it at the polls!

But before we get to that point, I call on others who want to see an end to austerity join me in beginning again to blog, comment, facebook, and tweet about PCS; but this time to forget about the TDC, which was always the wrong coin, and to focus on #minttheHVPC instead. That is up the ante! Make this about ending austerity, and using the right platinum coin to create the political space needed for doing it!

Forget about them taking PCS off the table! We’re putting it back on the Table! Make ‘Em Mint the HVPC! Make ‘Em Do It!

(Cross-posted from Correntewire.com.)

Ezra Klein

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(Cross-posted from New Economic Perspectives.)

Read the rest of this entry →

Well, not really. But if you view the Trillion Dollar Coin (TDC) meme, as I do, as a short-hand for the more general idea of using Platinum Coin Seigniorage (PCS), then yes, it can change the whole political game for progressives if President Obama dares to use it.

Literal TDC proposals would solve the debt-ceiling, but they won’t solve the larger problem of defeating the austerity politics that is so close to getting the cuts to social safety net and important discretionary government programs that austerians have long sought. PCS game-changer proposals are the ones calling for, or analyzing the impact of, PCS options aimed at paying off the national debt and covering anticipated federal deficit spending for some years.

PCS options of that kind change the game of fiscal politics by removing the issue of austerity from fiscal policy considerations. With this kind of PCS the national debt and the debt-to-GDP ratio go away as matters of concern. The focus of fiscal policy then becomes the impact of specific policies rather than some overall deficit or debt reducing target. The issue in fiscal policy then becomes public purpose. It becomes what specific impacts, including inflation, and full employment, are anticipated from passing specific legislation, and whether or not those impacts are in line with public purpose. But, when the national debt and the debt-to-GDP ration go away as matters of concern; then the issue of the deficit viewed as something that is draining a limited supply of financial resources goes away, also, because people will understand that using PCS to cover deficits ensures that the US Treasury can never run short of its own fiat currency.

I’m sorry to say that there are few posts of this kind, relatively speaking. I’ll list and link to some of those posts later. But first I want to point to what some in the MSM blogosphere are saying right now.

A popular position in the MSM blogosphere

In response to a tweet from the National Republican Congressional Committee (NRCC) yesterday, Jason Linkins at HuffPo repeats Joe Wiesenthal’s earlier contention that the platinum coin has nothing to do with additional spending, but only with solving the debt ceiling problem. And Linkins says:

The only role the platinum coin plays, in the scenario described by those who promote the idea, is an emergency measure that protects the United States taxpayer and the global economy from the catastrophic effects of a debt ceiling breach.

Linkins is just wrong about this, some, like myself have been advocating game-changing platinum coin seigniorage since July 2011 to get rid of austerity politics and enable the United States to handle its various problems without progressives having to constantly struggle against memes like “we can’t afford it,” “we’re running out of money,” “we’re going to leave huge financial debts to our grandchildren,” and other nonsense memes along these lines from austerians. Linkins accuses the NRCC of lying about this and says that the idea that some people are advocating using the coin to provide the means for spending is “a myth.”

Well, I don’t know whether the NRCC knows the PCS literature well enough to know about game-changing proposals, so they may have been lying about it out of ignorance. But, nevertheless, even though they may have misrepresented the position taken by many in the MSM “liberal” blogosphere, they haven’t told an untruth about people like myself who aren’t part of the MSM echo chamber, and who think more broadly about the possibility and potential of PCS applications. The real issue here isn’t whether the NRCC is lying. It’s why people like Wiesenthal, Linkins, Krugman, and Matthew O’Brien of the Atlantic aren’t focusing on game-changing PCS. In an earlier post, I pointed out that Wiesenthal was concerned about inflation; and surprise, surprise, it turns out that O’Brien is too. He says;

So why not just mint 16 of these $1 trillion coins and retire the entire national debt, smart guy? Or, even better, create a single $16 trillion coin — scratch that, make it $100 trillion!

Now that’s just crazy talk. Let me be clear: Nobody wants to use platinum coins to eliminate the debt. As http://krugman.blogs.nytimes.com/2011/08/15/mmt-again/ Paul Krugman points out, there’s a limit to how much seigniorage a government can extract before hyperinflation sets in, and that’s certainly far less than $1 trillion, let alone $16 trillion. . . . .

Can we cut this short? I need to run out and buy some canned food and gold bars to prep for the coming hyperinflation. A trillion dollar coin is only two orders of magnitude away from us matching Zimbabwe for monetary ignominy.

OK. So, it’s really about the fear of hyperinflation from a guy who tweets under the name @obsoletedogma, and the reference to Krugman indicates that O’Brien, like Krugman, still goes along with the Quantity Theory of Money (QTOM), which Keynes put to a well-deserved rest during the 1930s. Talk about obsolete dogma, IS-LM and loanable funds models aren’t exactly examples of up-to-date economic models.

Here’s a good blogosphere refutation for Matt to read to understand that the QTOM dog won’t hunt! And that he and the others need a specific analysis of why a $100 T coin would cause inflation including specifying causal transmission mechanisms for causing inflation when the seigniorage profits, including the debt repayment money would be paid out over a period of years, and the immediate money to be paid out, would go only to pay intragovernmental and Fed-held debt.

Before O’Brien, Wiesenthal, Linkins, and others start chanting: Zimbabwe! Weimar! I think they ought to do such an analysis and put off going out for some canned food and gold bars. I’ve done a fairly detailed analysis of PCS impact showing why it wouldn’t be inflationary, whatever the denomination of the coin(s) involved. So has Scott Fullwiler. With so much at stake in the debate over the TDC, I think they should at least read these Posts and tell us why they disagree, before they go off half-cocked about using PCS and getting hyperinflation or even inflation!

Wiesenthal, and Linkins, agree that the Platinum “. . . . coin debate coin could be the most important fiscal policy debate you’ll ever see in your life.” I agree but, if that’s truly the case, then let’s see them expand the debate to a serious consideration of game-changing PCS, and get off the shtick of talking only about the TDC as a solution to the debt ceiling problem.

Game-changing Platinum Coin Seigniorage Options and Posts

So, again, PCS game-changer proposals are those calling for, or analyzing, the impact of, PCS options aimed at paying off the national debt and covering anticipated federal deficit spending for some years. They probably start at no less than $30 Trillion, because you need $16. 4 T to set aside for paying off the national debt, and then another 14T, which may cover the next 10 years of needed deficit spending if we can get the economy recovered again and get a better balance of trade than we have now. A $60 T option would cover the debt and deficits for 15 – 25 years, and $100 T would probably work for 40 – 45 years.

The further you go out, the more nominal money value you have to have in the public purse to cover deficit spending. The reason for that is that an economy like the US, which imports more than it exports, needs Government deficit support of full employment of roughly the size of the trade deficit plus the size of the demand leakage to private sector savings per year. Assuming the private sector will want to save 6% of GDP per year and that our trade deficit is likely to continue at 4% per year, we can see that we’ll need a Government deficit of about 10% of GDP per year to sustain full employment. This follows from the well-known sectoral financial balances model of macroeconomics. It’s an accounting identity and always holds.

Once the savings and trade balances are determined, then the deficit will be the sum of those. The only question is whether the deficit spending will be done well, that is, in such a way that full employment is facilitated along with investments that guarantee a bright economic future, or whether the deficit spending will be ad hoc and strictly dictated by the automatic stabilizers like unemployment insurance payments, food stamps and the like. So, since GDP will be growing throughout this period, the deficit spending we’ll need per year also will be growing along with the size of the economy.

Some bloggers have advocated minting a $quadrillion coin, and that is another option for how to proceed with game-changing PCS. I’m not really opposed to that. But I’ve proposed the $60 T coin, because I think a game-changing PCS solution is a transitional stage preceding the reorganization of the Federal Reserve and its placement under the supervision of the Treasury Department. Since the $60 T coin will cover debt repayment and debt-free deficit spending for 15 – 25 years; it provides enough time to educate people politically about the desirability of such a change, while providing the Executive Branch with the power to fill the public purse while retaining Congressional control over the purse things themselves, as the Constitution requires.

Why do I call options like the ones above game-changing options in contrast to using the $1 T coin? The reason is that they, unlike the $1 T coin option, not only solve the debt ceiling; but also change the way the Treasury gets the credits into its spending account to deficit spend. The Treasury doesn’t create those credits directly with the platinum coin; but it does mandate the Fed to use its power to create them in response to depositing the very high value coin. Once the credits are swapped for the very high value coin involved, the national debt subject to the limit can be paid down and eventually off, without severely contracting the economy, and also deficit spending can then proceed using the credits already in the Treasury’s spending account. In short, the very high value PCS options fill the public purse with enough credits to take the debt off the table as an issue, and also to make the question of how we’re going to pay for the deficit spending we may need to adjust to the sectoral balances irrelevant, because the money will already be there to support that needed deficit spending.

With the debt ceiling, and the “how you gonna pay for it” issues gone from political debate; the foundation for austerity politics is also gone. We can forget about the Washington think tank industry talking about 50 year budget projections, fixing the debt, debating the debt, agonizing over the debt, calling for cuts to the safety net, saying we cannot afford Medicare for All, or programs for facilitating full employment, etc. This would be a new day for progressive and American politics. It would mean goodby to Bowles-Simpson, Maya McGuineas, Pete Peterson, Alice Rivlin, and all their cohorts.And it would mean hello to a new generation of progressives who could aggressively push a movement for social and economic justice for the 99%.

Moving to PCS game-changing posts, there are very few people blogging game-changing PCS until now. I began blogging it on July 21, 2011, during the first wave of mainstream posts on PCS, with a $30 T PCS post, including a speech the President could make announcing it and politically justifying it, and also a pretty detailed discussion of the inflation issue.

I concluded that inflation due to PCS per se wouldn’t be an issue, because the $6.4 T in intragovernmental and Fed-held debt wasn’t going to get into the economy. The repayment of other debt, gradually, and when it fell due, would have a similar impact on the economy as quantitative easing, already shown not to be inflationary. In addition, there was plenty of evidence to suggest that the reserves swapped for debt instruments when these are retired are less inflationary then the debt instruments, in any event. Finally, the use of PCS for deficit spending, in place of debt instrument sales, also would not be inflationary, because 1) the difference between these two is like QE; and also 2) the net financial assets produced by the deficit spending would be reserves rather than debt instruments, already shown to be less inflationary.

I followed that one on July 25, 2011, with an open letter to the President and Congress using the $30 T PCS proposal, and followed those posts with two more mentioning high value PCS on the 26th and 29th. At that point, on July 30, a popular blogger at DailyKos, Seneca Doane, wrote a blockbuster post on high value PCS that received 569 comments there, a large amount for DailyKos. It was a one-off thing for Seneca, but nevertheless did a lot to establish blogging about PCS at DailyKos, and also, Seneca was the first to mention the $quadrillion platinum coin in one his comments.

After Seneca’s post I kept blogging about high value PCS, routinely including it in my posts. Then on August 2nd, the day after the debt ceiling settlement Scott Fullwiler published his post on coinseigniorage and inflation. This was a comprehensive analysis of the types of payments that might be made using coin seigniorage funds. Scott, a top-level MMT economist showed that 5 different types of payments would not be inflationary, regardless of the face value of the coins that were minted.

After August 1, 2011, mainstream bloggers dropped PCS like a hot potato since the debt ceiling was no longer in the news. But I kept blogging about it because I knew the debt ceiling would be coming back, and also because I had become far more interested in game-changing PCS than in the Trillion Dollar Coin itself.

On August 3, 2011, I blogged “Proof Platinum Coin Seigiorage: A Political Game-Changer for Progressives,” along with the $30 T post, I consider this post to be one of my most important ones. For one thing it introduced the $60 T alternative for the first time. For another, it made very clear the idea that minting such a coin would change the political context and also the terms of political debate. I still think that post is the most compelling one I’ve done for high value PCS. On August 5th I followed with “Mint the Platinum Coin: End the Austerity War Against the People” which urged the President to implement high value PCS ($60 T) immediately. It outlined a scenario, in which the President minted a $60 T coin and then had to cope with the results of his action.

I continued blogging on the $60 T option bringing it up in the context of various issues throughout the rest of August and most of September 2011. Then on September 26, I posted “Filling the Public Purse and Getting the Public Spending We Need.” Another one, I consider very important. That post emphasized the distinction between filling the public purse and opening the purse strings. It made the point that while PCS gives power to the President to get the public purse filled; it doesn’t open the purse strings for deficit spending. It’s still up to Congress to do that, showing that PCS DOES NOT interfere with the constitutional power and duty of Congress to appropriate Government spending. Throughout the rest of 2011 and the first half of 2012, I blogged on PCS in the context of other issues. During the second half of 2012, I blogged about it in defending entitlements, on debt/deficit issues, and the debt ceiling and fiscal cliff issues. I also updated my $30 T post to a $60 T post and started a petition on $60 T PCS which has gotten very little support so far.

That pattern of blogging relating high value PCS to other issues like unemployment, the fiscal cliff, health care etc. continued until December of 2012, when the Second Wave of MSM posts about PCS broke on December 3. At that point I began a series of posts you can find at, among other places, New Economic Perspectives (NEP) and Correntewire. The posts at NEP will be found on my page there. The posts at Correntewire are related to one another through a handy link structure which forms “a book” over there. The book begins with a history post and then considers various aspects of PCS including reviews of posts in the current debate. One post in the series extends Scott Fullwiler’s analysis of PCS and inflation further. This post is part of the developing book on high value PCS.

Most recently, apart from from my own posts, other bloggers at DailyKos are starting to support High value PCS. These include: a post by priceman, one by bunnygirl60, and, a third by NBBooks.

Conclusion

So, that’s it! What the mainstream blogs are missing in their discussions of PCS is game-changing PCS, because their posts are overwhelmingly focused on the TDC. They dismiss game-changing PCS, when they recognize it at all by saying, of course PCS isn’t about that; it’s only about getting around the debt ceiling, and anything beyond the TDC intended to do much more would be inflationary, and a great and unwelcome disturbance in the normal way of doing things of developed nations. However, when the likelihood of inflation and hyperinflation is analyzed as in posts written by myself, and Scott Fullwiler, it becomes clear that claims about hyperinflation and inflation are very stereotypical and are based on either no analysis or very primitive notions about the QTOM.

The importance of the high value PCS the MSM bloggers won’t talk about, meanwhile, is that if tried it promises to end austerity and usher in a new era of progressive, even Green New Deal Politics, because the ideological basis of austerity politics which is the growing national debt would be gone. There are very few people blogging about this so far. But I’ve completed many blogs on $30 T and $60 T PCS which have discussed the major issues involved in high value PCS, and which have certainly provided a better basis for more extended discussion of it than the mainstream has so attempted. Whether they will ever go beyond the TDC, I don’t know; but hopefully this and other posts I’ve completed in past weeks will challenge the more curious among mainstream bloggers to begin to write about game-changing PCS and leave the small-ball TDC behind.

(Cross-posted from New Economic Perspectives.)

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The exception to the general pattern focusing on the Trillion Dollar Coin (TDC) as the solution to the debt ceiling problem I outlined and critiqued in my last post, is in Joe Wiesenthal ‘s posts here and here. Wiesenthal alone criticizes, rather than ignores, other options than the TDC, namely the $16 T and $100 T options, on grounds that they are no more effective at meeting the debt ceiling crisis than the TDC. He says that the issue is not a lack money but the debt ceiling law, and also that if a coin that large were minted and used to pay back the debt, then the result would be inflation or hyperinflation because of the flow of the large quantity of reserves into the economy, and the ensuing great expansion in the money supply.

I think that Joe Wiesenthal is both showing his bias towards solving the smaller, more immediate (debt ceiling), rather than the larger (austerity) problem, and also that he’s dead wrong about the impact of a $100 T coin on inflation. On his bias: I can only say, that I don’t agree that “we” are talking about a legal problem rather than a money problem.

If all “we” are concerned with is the debt ceiling, then Wiesenthal is right; we need only consider the TDC option, which the President can use either once, or until the House gets tired of his minting TDCs, and raises the debt ceiling. But I think that most Americans, if they understood Platinum Coin Seigniorage (PCS) and its possible meaning for fiscal politics would go beyond debt ceiling concerns to the issue of austerity. And they would also realize that the face value of the PCS option chosen by the Secretary of the Treasury is of enormous importance for removing any perceived need for austerity arising from the level of the national debt or the debt-to-GDP ratio.

Wiesenthal’s main additional stated objection to extremely high value PCS on the order of $50 – $100 Trillion is the inflationary impact he expects it to have. I’ve already analyzed the likely impact of a $60 T coin on inflation in a fair amount of detail in an earlier post, based on Scott Fullwiler’s comprehensive framework. My analysis shows that there would be no inflation due to the effect of $60 T PCS itself on the economy. I can summarize the argument this way.

The credits in the Treasury General Account (TGA) ultimately resulting from using $60 T PCS aren’t immediately spent. So, they don’t all enter the economy immediately, but over a very long period of time from 15 – 25 years in duration. So, to gauge the inflationary impact, you have to analyze when and how the credits would be entering the economy. At the end of the last fiscal year, $6.4 Trillion in debt subject to the limit was owed by the Treasury to other agencies and to the Fed itself. That debt could be redeemed in the same week after minting a $60 T coin. But the payments wouldn’t be inflationary because they would not enter the non-government economy. Nevertheless, these payments would cut back debt subject to the limit by close to 40%, because of the ridiculous quirk in the law that counts intra-governmental debt toward the debt ceiling.

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

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

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

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

So, that’s the true narrative about PCS and inflation. Not, ZOMG “Weimar, Zimbabwe.” That’s nonsense! Let’s hope that Joe Wiesenthal, and other MSM bloggers who have jumped into the PCS pool in the past few weeks read it and cease to spread “the silly idea” that PCS, in whatever denomination greater than say a few Trillion Dollars may be used, is inherently inflationary. It is nothing of the kind! Inflation, due to Government spending, is always and everywhere, in the rare instances that it occurs, a Congressional phenomenon!

(Cross-posted from New Economic Perspectives.)

Photo in the public domain.

Among the many posts on the Trillion Dollar Coin (TDC) and Platinum Coin Seigniorage (PCS) we’re seeing this week, is a category of posts favoring using PCS in a limited way to avoid the debt ceiling crisis, rather than using it in a much more robust way, that would change the procedures underlying Federal spending, so that fiscal policies advocating austerity no longer have a political foundation in a visible and rising national debt that austerity advocates can constantly talk about fixing through “shared sacrifice.”

The Trillion Dollar Coin, as in #TDC and #mintthecoin is a meme representing more than a Trillion Dollar Coin. It represents, instead, the general capability of the Treasury Department under 31USC5112(k) to mint platinum coins of whatever face value the Secretary cares to specify.

The coins involved could have $1,000, or $1 million, or $1 Billion, or $1 Trillion, or $60 Trillion, or $100 Trillion, or even $1 Quadrillion face values. So, an issue immediately raised is what platinum coin denomination(s) should be minted by the Treasury Department if it decides it wants to use PCS to help fill the Treasury General Account (TGA) with enough electronic credits to fulfill its objectives?

Of course, the answer to this question is inherent in the way I posed it. It depends on the objectives involved, and these objectives will not and should not be merely narrowly financial or technical. They will and should be political.

And the two main political objectives associated with PCS and the TDC up to this time have been a) remove the risk of a politically induced default on the debts of the US Government caused by a refusal of the Radical Republicans to raise the debt ceiling to accommodate deficit spending appropriations Congress has already made; and b) to end the political context of austerity which has constrained and limited government activity in the service of public purpose, since the “fiscally responsible” (really stupidly fiscally irresponsible) Democrats gained control of the Executive Branch of government in 2009.

In the latest outburst of posts, tweets, articles, and videos about the TDC, we’re beginning to see, a feeding frenzy in which the participants self-organize around the TDC meme AND the objective of avoiding the debt ceiling, but without providing any consideration at all to higher value PCS options that could both make the debt ceiling a dead letter and also remove the driving force for austerity politics. This focus on the bare TDC and its application to the debt ceiling is “small ball” policy analysis that ignores larger issues related to PCS. It needs to stop before it totally drives PCS into a defend the status quo solution, that may defuse the debt ceiling, but still leave us in the sorry state of austerity-driven politics

The focus on “small ball” policy analysis of PCS is emblematic of the superficiality of media outlets and what passes for “journalism” in the early 21st century. Too many content professionals are no more than marketers and propagandists, and don’t make even minimal attempts to get at the heart of the larger PCS news story.

If the small ballers get to control the PCS debate it will result in the waste of a remarkable opportunity to change the whole direction of American politics. Progressives need to wake up and try to grasp this opportunity, before the fiscal conservatives save their version of the financial system with its increasing tendency to impose austerity on the rest of us while the 1% get more and more wealthy.

Let’s review the pattern of those recent “small ball” PCS posts (each one summarized in the Appendix), and the significance of the position they take on PCS, then in my next post, I’ll deal with an exception to the “small-ball” pattern. And in the Post after that I’ll compare the small ball position with the one taken in the relatively few PCS “game-changer” posts.

The “Small Ball” Pattern

The primary characteristics of the small ball posting pattern are:

– They generally don’t consider any other options but the “TDC” option. They take the TDC meme literally and address their description, analysis, and advocacy to the TDC option, and its ability to end the debt ceiling crisis, and not to any of the other Platinum Coin Seigniorage variations, and what they may be able to do.

– They view the TDC option as somehow screwy, outrageous, ridiculous, looney, bizarre, or highly inappropriate, even though they acknowledge that it is legal, and probably would not be inflationary.

– They also believe that debt issuance prior to deficit spending, the way things are now done, is preferable to issuing platinum coins and then spending without debt issuance. So, some are concerned about the impact the TDC will have on the Federal Reserve’s control of monetary policy and its independence and most are advocating Josh Barro’s idea of swapping PCS capability for repeal of the debt ceiling legislation.

– They favor the TDC, however, despite its negative characteristics, for one very good reason: using it is preferable to defaulting, in violation of the Constitution, when the debt ceiling is reached, and, again, according to Josh Barro’s proposal, the capability to make TDCs can be traded for debt ceiling repeal, once it’s shown that it can be used to avoid the debt ceiling and prevent default.

Let’s evaluate this pattern. First, the idea that we have only one problem to deal with and that’s the debt ceiling problem is short-sighted and narrow, and reflects the bias of small-ball writers towards the economic and political status quo. What they all want is for the debt ceiling crises to be over, for it to go away, and for the political system to return to normal.

Well, that may be what these writers want; but “normal” in the current political system is austerity politics, a politics in which “the fiscally responsible” people in both parties are about to agree on severe cuts to discretionary spending and the social safety net, and also, perhaps to increasing tax revenue, which will extract further money from the economy. The cuts in deficit spending being planned, with or without any debt ceiling crisis, will severely reduce aggregate demand, and will do that for years to come; condemning American to a depressed and stagnant economy for several more years and perhaps beyond. That situation’s not much good for most of us, but it would be the result of the failure to end austerity resulting from viewing PCS as just an expedient for solving the debt ceiling crisis.

Second, I know it’s fashionable for the Very Serious People (VSP) who comprise the New York/Washington policy/financial axis to view PCS as silly, ludicrous, and all the other various epithets they’ve seen fit to bestow on it. But. In doing so, they reveal their ignorance of the history of fiat money issuance and coin seigiorage unaccompanied by debt issuance in the United States and elsewhere.

Lincoln’s Greenbacks funded the Civil War without ruinous inflation, and many nations funded their spending in World War I without debt issuance, and Nazi Germany, even if we hate the example, used it without issuing debt and without inflation in the pre-World War II period. Platinum Coin Seigniorage is not a priori silly. It is just not the way things have been done before, and if used in high denominations, it would require adjustments by the Federal Reserve. That does not make it silly, or looney, or ludicrous, or any such thing. It just makes it new and untried. That may be a problem for conservatives, and members of the MSM village, who, above all, want to be viewed as among the VSP; but it should not be one for progressives.

Third, the belief that deficit spending preceded by debt issuance is preferable to using PCS to close the gap between tax revenues and government spending is a belief I don’t share. The basis of it, apart from some of its advocates benefiting from current arrangements in some way, is the belief, that Treasury issued reserves in the process of spending without debt issuance are more inflationary; than reserves added only after debt issuance. This, in turn, requires assuming that debt instruments added to the economy as net financial assets are less inflationary than reserves added when unaccompanied by debt instrument sales. This assumption is false.

Debt financing is accompanied by interest payments into the economy of some $245 Billion at present. In addition, debt instruments can be sold anytime reserves are needed, and also, debt instruments can be leveraged multiple times when used as collateral in credit transactions. Reserves do receive Interest-On-Reserves (IOR) from the Fed these days. But the rate paid is lower than on Treasuries and also the payments are made by the Fed and are not a cost to the Treasury. Finally, since reserves injected into the economy through deficit spending cannot be leveraged as effectively as debt instruments, they are not as potentially inflationary in a financial system where private banks and the Fed, based on credit, routinely create money out of thin air, whether the Treasury deficit spends or not.

Believing that it’s preferable to have debt issuance precede deficit spending, rather than to use PCS prior to it, also is accompanied by concern about the impact of use of massive PCS would have on Federal Reserve control of monetary policy. PCS, in fact, is likely to result in the Federal Reserve’s having to adjust whatever it wants to do in response to deficit spending. Is this a problem, or a bad thing? Does that compromise the Fed’s independence? Doesn’t the Fed now formulate its monetary policy based on the assumption that the Treasury will issue debt?

Of course, it does. So, what the Fed does now is already impacted by what the Treasury does. It is already reacting to what the Treasury and Congress do, and we also know very well that it reacts to what Wall Street does. And the change that would be introduced by using PCS as the basis of all deficit spending would do no more than cause the Federal Reserve to make some different assumptions before it reacted to these various forces.

The idea that this is destroying the Fed’s vaunted independence, and that this makes it impossible to consider very high value PCS, is no more than a bias that prefers the status quo, and the way things are done now, where the predominant influence at the Fed is from the big banks and Wall Street. It is just conservatism talking again. Just a willingness to avoid changing how we do things to take austerity off the table, and make a better life for everyone out of fear of the new, the strange, and the unknown.

Fourth, even though the “small ball” writers are for using the TDC as a last resort, most of them endorsed Josh Barro’s idea of making a deal to swap the PCS capability in return for repeal of the debt ceiling law. This idea is a terrible one, and if progressives support it or even accept such a trade, then that would a perfect example of “loser liberalism.”

It’s essential to understand that if the Treasury uses PCS and continues to have the PCS capability, then the debt ceiling legislation is already a dead letter. It doesn’t matter if it exists, since the outstanding debt can be paid using PCS, and all future deficit spending can be covered by credits generated by the Fed in the course of using PCS.

Since that’s the case, a trade of the PCS capability for repeal of the debt ceiling legislation is a trade of something potentially very, very valuable as an enabler of progressive politics in return for nothing at all. It would be a bizarre trade. A silly trade. It would be a moronic trade. A trade made for no purpose at all.

Conclusion

Only a person who wants to keep the system of government deficit spending exactly as it is today can possibly advocate such a trade. But why would people want to keep it the same as it is now, since the political impact of such a system is so disastrous for progressive politics and for government efforts to achieve the public purpose? Why would people want to preserve a system that constantly sets the political table for austerity by constantly increasing something called “the national debt?”

What do austerity advocates now use to justify the policies they prefer? The answer is that they use the existence of the debt. And then they talk about fiscal responsibility, and the grandchildren, and the markets driving interest rates up, and the possibility of running out of money, and about cutting Social Security, Medicare, Medicaid, discretionary programs that people need, and then they go on to talk about this thing we need that we can’t pay for, and that thing we need that we can’t pay for, and all the financial limitations we have in doing things that we desperately need to do to make our country viable again.

We need to put an end to all that. And we can do that if the PCS capability is maintained; and if we can find a President who will use its power to its full extent. That’s why progressives need to wake up, and not only defend PCS against a Republican attack that has already begun; but also come forward with their own PCS proposals that will go beyond the TDC and offer PCS options that will put an end to the political basis of austerity!

Appendix: ”Small Ball” Views on the Trillion Dollar Coin

This survey summarizes what each of the pieces on the Trillion Dollar Coin appearing in the last few days I had the opportunity to review had to say. They served as the foundation for the above analysis. The dominant pattern is established by the Wiesenthal and Barro posts, and then is replicated by pretty much what looks like an MSM-based echo chamber. Not every post appearing in this time frame is replicated here. And some posts on the TDC were opposed to the idea and so, are not part of the ‘small-ball” category. Nevertheless, I think the posts and the video segment reviewed here are representative and that they served as a good basis for the pattern I identify in the Post.

Joe Wiesenthal: Minting the Trillion Dollar Coin won’t cause massive hyperinflation because: the money from a TDC wouldn’t go into the economy since it wouldn’t be used to pay back the debt; and even if some of it did go into the economy, the Fed could “sterilize” that by selling enough of the Treasuries it’s holding to get money out of the system.

The TDC won’t destroy the dollar because: the money won’t be just poured into the economy like “a helicopter drop” of money to people would be. It’s just a stop-gap to get by the debt ceiling and keep services going.

People who say we should mint a $16 Trillion coin or a $100 Trillion coin are missing the point. The point isn’t to pay off our debt. It’s to get by the debt ceiling. If we did try to pay off the debt with a minted coin we’d get inflation or hyperinflation because of the massive expansion of money.

Joe Wiesenthal2: Wiesenthal points out that Paul Krugman, Jerry Nadler (D-NY), and Josh Barro of Bloomberg News have endorsed it. Barro proposes an agreement in which the Republicans give up the debt ceiling and Obama gives up the PCS capability. Wiesenthal then says that it’s silly to think of funding the Treasury with a coin, but even sillier to think that defaulting is a good idea. So, let’s do the lesser silly (my paraphrase).

He also thinks that minting a TDC would not result in massive inflation because that results only from a massive injection of new money into the system, and a TDC could result only in spending conforming to Congressional appropriations. Also, we should not mint a $100 Trillion coin because: the current economic constraint is not about money, it’s about law and getting around the debt ceiling, and a $1 T coin gets around that just as well as a $100 T coin.

Josh Barro: The Treasury has the authority to mint large denomination platinum coins and deposit them at the Fed to finance payments of the Government’s bills in lieu of issuing debt. If the Republicans offer a list of demands to be met before they vote to increase the debt ceiling then the President should should simply say that he will mint platinum coins to pay the Government’s bills until the debt ceiling is raised. And he should also promise that as soon as the debt ceiling is raised he will have Treasury issue bonds to drain the economy of currency equal to the value of the platinum coins in order to dampen down inflationary expectations. Josh Barro then says:

And then he should offer to sign a bill revoking his authority to issue platinum coins — so long as that bill also abolishes the debt ceiling. The executive branch will give up its unwarranted power to print if the legislative branch will give up its unwarranted restriction on borrowing to cover already appropriated obligations.

He goes on to say that debt ceiling coercion is no way to run a country and neither is “. . . . monetizing deficits through direct presidential of the currency, in lieu of borrowing.” So, the ideal “concession” for Obama to offer is to trade this power for repeal of the debt ceiling legislation.

Matthew Yglesias: Platinum Coin finance would create new spending capacity, but no new spending authority. But because “it’s mighty silly” he supports Josh Barro’s call for legislation that would trade platinum coin financing authority for repealing the debt ceiling.

Joshua Holland, a progressive writer, likes the idea of using the TDC. He cites Josh Barro’s post and also Jerry Nadler’s support of the TDC idea, and then brings in Kevin Drum’s legal qualms about the platinum coin legislation which I’ve reviewed earlier. But then he concludes that he’d just use the coin and let the chips fall where they may. He grants that there may be law suits, but says he still thinks it’s a good idea because there’s “. . . nothing more ridiculous than a Congressional minority threatening the economy by trying to extract unpopular concessions in exchange for paying the bills that Congress itself already ran up. Let’s not pretend this is normal behavior we’re dealing with.”

And then he points out we should not pretend that the behavior of hostage taking using the debt ceiling is constitutional behavior and then cites the 14th Amendment Section 4, and the oath of office to strengthen his case.

William Wei at Business Insider produced a youtube explaining the mechanics of the TDC, inaccurately, in the interests of brevity I suppose, lets people know about the #mintthecoin movement, and then asks people to choose which is more silly, minting the TDC and paying your bills; or not minting it and going to default.

The #mintthecoinpetition asks the White House to direct the Mint to make a single platinum trillion dollar coin! It asks for this simple solution to avoid playing political football with the US and global economies.

Charles Riley of CNN also writes about the TDC. He says it’s not going to happen because it could lead to even people worrying about inflation and to critics of Federal reserve QE being apoplectic if the Treasury Department did a further “helicopter drop” of $1 Trillion. But later after outlining the solution, he refers to it as “elegant,” and points out that Jerry Nadler supports it as do many on twitter.

Alex Hern put together piece which combines the Wiesenthal and Barro posts and follows Barro down the road of advocating the swap I outlined earlier. He also repeats Wiesenthal’s statement that the TDC idea was first suggested by Cullen Roche on July 7, 2011. So clearly Hern did no research of his own on the coin and its origin.

Connor Simpson at the Atlantic Wire is another participant in the echo chamber generated by Joe Wiesenthal. Connor mentions the platinum coin, links to all the names I’ve mentioned above, repeats Wiesenthal’s viral error about the origins of the TDC movement, mentions the #mintthecoin petition, and then follows Barro down the line about what ought to be done, but also emphasizes using the coin as a negotiating tool to get the debt ceiling leverage off the back of the President in the negotiations over the budget. Then he asks why Obama didn’t think of this before? And answers: “Because no one’s first resort to a debt ceiling fight is to create what is essentially a loonie on horse steroids, duh.” He then concludes by presenting various humorous tweets on the subject by way of agreeing with the position that the move would not damage the economy much.

Bonnie Kavoussi of The Huffington Post provides a piece on the #mintthecoin petition. She calls attention to the debt ceiling and the possible dangerous consequences of default and then refers to the concerns of some that using the TDC may “could be a slippery slope to hyperinflation.” The piece also contains a video explaining the TDC, and reproduces a number tweets about the #mintthecoin petition drive. Everything is focused around the TDC and the debt ceiling problem.

Rachelle Younglai of Reuters This article just reports on the coin proposal, the #mintthecoin petition drive, and the context in the debt ceiling crisis. It doesn’t question the legality of platinum coin seigniorage, and doesn’t suggest that the proposal is “wacky” or “silly” or “ludicrous.” It mentions the likelihood of Congressional opposition from members trying to reduce deficits, and also mentions that using the coin would compromise the independence of the Fed.

Cullen Roche joined the small-ball party with a brief post at Pragmatic Capitalism. The debt ceiling is silly. The platinum coin solution is silly. The US government has no solvency constraint, and “Willingly defaulting on US debt by using the debt ceiling as a threat is pure madness. I can’t think of many things that would be more reckless than this.” The platinum coin is a legal workaround for the debt ceiling problem first discussed in a web comment by Carlos Mucha (beowulf). Mint the TDC. Deposit it at the Fed. Use the proceeds to pay down debt and it functions like raising the debt ceiling by $1T. It’s not inflationary because it’s not new spending. It’s an accounting gimmick and shouldn’t be used. But if the choice is between the coin and default, then “. . . then the decision is a no-brainer. It would be unpatriotic to default. Even more unpatriotic for leaders to allow default when they could mint the coin.” And then he endorses the Josh Barro solution of swapping the PCS capability for repeal of the debt ceiling.

Steve Randy Waldman also weighs in on the controversy. SRW thinks “The benefit of the plan (depending on your politics) is that it circumvents an institutional quirk, the debt ceiling. The cost of the plan is that it would inflame US politics, and there is a slim chance that it would make Paul Krugman’s “confidence fairies” suddenly become real. But note that both of these costs are matters of perception.” He thinks Treasury will reluctantly issue coins in the Million Dollar, rather than the Trillion Dollar range, to continue spending, and that the Fed will “sterilize” this spending selling assets to absorb an equal amount of money in the private sector. He thinks that’s all that would happen and that it would be a “big nothingburger.”

Chris Hayes segment with Jerrold Nadler (D-NY) and others on video.

http://www.msnbc.msn.com/id/3032507

Visit NBCNews.com for breaking news, world news, and news about the economy

This segment reflects the dominant pattern discussed in the text perfectly. The segment poses the issue as a trade-off between using the TDC and default due to the debt ceiling. Notice how Veronique De Rugy defends Republican debt ceiling tactics. Notice, also, that Chris Hayes appears not to have thought beyond the TDC idea as a solution to the debt ceiling.

Today, Paul Krugman weighed in with a very specific statement advising the Administration to be ready to mint the TDC immediately to take the debt ceiling issue off the table. He says: “Given the realities of our political situation, and in particular the mixture of ruthlessness and craziness that now characterizes House Republicans, it’s just ridiculous — far more ridiculous than the notion of the coin.”

(Cross-posted from New Economic Perspectives.)

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

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

Kevin Drum on legality

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

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

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

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

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

John Carney on Unconstitutionality

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

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

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

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

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

He then quotes the law authorizing PCS:

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

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

Carney goes on to talk about issues of standing recognizing that standing may be very difficult to get from the Courts and that therefore it may not be possible to challenge the law. But he still thinks that the above argument is a decisive one and that the coin seigniorage law is unconstitutional. You see the problems here, right?
Read the rest of this entry →

Another platinum coin surge in the Second Wave rippled through the mainstream media yesterday and this time hit the Congressional Progressive Caucus. Domenico Mantanaro of MSNBC kicked things off on one of the morning shows by mentioning the Trillion Dollar Coin (TDC) as a possible solution to the debt ceiling problem. Then, in the afternoon, on MSNBC’s the cycle, Krystal Ball, and Steve Kornacke, in discussing the coming debt ceiling conflict talked rather matter-of-factly, I thought, about minting some TDCs to get around the debt ceiling.

Then Paul Krugman blogged about platinum coins. In the context of answering a question about whether we can “print money,” to get around the debt ceiling, he answers no, and then says:

The peculiar exception is that clause allowing the Treasury to mint platinum coins in any denomination it chooses. Of course this was intended as a way to issue commemorative coins and stuff, not as a fiscal measure; but at least as I understand it, the letter of the law would allow Treasury to stamp out a platinum coin, say it’s worth a trillion dollars, and deposit it at the Fed — thereby avoiding the need to issue debt.

An admirably brief statement of the basic idea, but followed then by this puzzler:

In reality, to pursue the thought further, the coin really would be as much a Federal debt as the T-bills the Fed owns, since eventually Treasury would want to buy it back. So this is all a gimmick — but since the debt ceiling itself is crazy, allowing Congress to tell the president to spend money then tell him that he can’t raise the money he’s supposed to spend, there’s a pretty good case for using whatever gimmicks come to hand.

So, it’s gimmicks for gimmicks to get around the debt ceiling, and no notion on Paul Krugman’s part that Platinum Coin Seigniorage (PCS) might have a much broader use than simply countering a gimmick the Republicans are using to try to trash the social safety net and drown the Government in a bathtub.

Apart from that, however, this “. . . the coin really would be as much a Federal debt as the T-bills the Fed owns, since eventually Treasury would want to buy it back” is a bit strange. A very high value platinum coin deposited by the Mint in its account at the Fed would have its value credited to the Mint’s account in the form of electronic credits. The Fed would then keep the coin in a vault forever, as an asset on its balance sheet, and the seigniorage profits from the deposit of the coin would be swept into the Treasury General Account (TGA) where it would be used for repaying debt or other spending appropriated by Congress. So why would the Treasury ever want or need to buy that coin back from the Fed? And why would the coin be a Federal debt that the Treasury must repay?

It’s true that base money issued by the Federal Government is a Federal debt in the sense that the Government has an obligation to accept it in payment of taxes. But in this case, the Fed holds the coin and it has no taxes to pay. Also, the coin never goes into circulation, but sits in a Fed vault, so where does a debt that the Treasury must repay come into this picture and why?

Paul Krugman goes on to make a number of comments about the Fed printing money and the need for the Fed to pull that money back by selling its Treasury debt at some future time when the economy is growing rapidly to prevent inflation. But these comments aren’t directly relevant to using PCS, since using it is no more, and perhaps less, inflationary than using debt financing.

The appearance of PCS in Paul Krugman’s blog apparently had an immediate impact. Congressman Jerrold Nadler (D-NY), in an interview reported in Capital New York said: Read the rest of this entry →

Introduction

A round up of blog posts about Platinum Coin Seigniorage

MSM bloggers and cable hosts weren’t alone in creating the new wave of posts and video segments on Platinum Coin Seigniorage (PCS) at the beginning of December. The blogosphere also produced brief posts from a number of bloggers, as well as a few more substantial ones. I’ll review the brief ones in this post, and the more substantial ones in future posts, but won’t include my own recent posts on PCS during December.

Reviewing the Posts

First off the mark on December 3, was David Dayen at FireDogLake who mentioned the “trillion dollar coin” as something thee President could do to strengthen his hand in dealing with the Republicans. His mentioned was quickly followed by Atrios, later in the morning, who wrote a very short post saying:

I really don’t know why the administration doesn’t take the “mint the trillion dollar platinum coin” option seriously. It is, as far as I can tell, perfectly legal.

This triggered a post by Michael Sankowski at Monetary Realism announcing that the “Trillion Dollar Coin Goes Mainstream” which says that if Atrios knows about the coin that everyone on “the smart left” knows about it!

Mike Sankowski then blogged again on December 6, wondering out loud where Zerohedge’s rant on the Trillion Dollar Coin (TDC) was? In that one Mike refers to the mainstream blogs by Yglesias, Drum, and Carney all on the TDC and then makes fun of Zerohedge for not picking up on the subject.

Cullen Roche at Pragmatic Capitalism, then blogged on the TDC on December 7, in a piece called “Platinum Coin Easing,” which draws its title from some views of JKH’s I’ll be reviewing in a future post. Cullen railed against the debt ceiling conflict calling it “stupid,” and also says that while PCS may look “Zimbabwean” it does solve the debt ceiling problem. Cullen points to JKH’s post and says:

“The coin would replace some of the bonds that the Fed currently holds solving three issues:
1) A non-inflationary way for the US Government to spend.
2) It circumvents the debt ceiling by effectively reducing the debt balance by $1T.
3) It’s a completely legal workaround.”

Donald McClarey at The American Catholic blog also posted on December 7, on “Of Trillion Dollar Coins and Fiscal Lunacy.” calls it a lunatic nostrum, quotes the WaPo article by Plumer, and refers to the “wacked out left.” That’s right, he offers no reasoning at all. Just name-calling and this:

“The country is in debt sixteen trillion dollars. By the time Obama finally leaves office we will probably be at least 20 trillion in debt. Of course this does not take into account dozens of trillions of debt in entitlement obligations coming due over the next few decades. We are rapidly reaching the point where it is mathematically impossible to ever pay off this debt without currency depreciation and/or hyper inflation. This scheme is basically currency depreciation as the US currency swells by two trillion dollars in a year’s time. If attempted I think it would lead ultimately to hyperinflation. The left are not all loons. Something like this will eventually be done by people who realize it is economic poison, but who are willing to do it anyway to get out of dealing with an unpayable debt. The impact on our economy would be likely catastrophic.“

Of course, McClarey, was in too much of a hurry ranting against the coin to notice that the first nearly $6.5 trillion of debt paid off using PCS couldn’t cause currency depreciation because it would not enter the economy at all, since it would be used to pay interagency debt and Fed-held debt. Nor does any other seigniorage spending need to be happen except when debt instruments fall due, and Congress appropriates deficit spending. So, to back his hyperinflation currency depreciation rant, McClarey has to show that PCS-based spending would be more inflationary than normal spending after debt issuance, along with normal scheduled repayment of debt. Of course, he does not, and, I think, cannot show this.

Next, brief mention needs to be made of a post at “Twitchy – Tweet on the Platinum coin.” This post also happened on December 7. The tweets are entertaining but contribute little, if anything to the debate. On the other hand, they do make more sense than McClarey’s post on PCS.

On December 8, James Hamilton at Econobrowser offered a post objecting to using the coin “from an institutional perspective:”

Read the rest of this entry →

The most frequent objections to proposals that we use Platinum Coin Seigniorage (PCS) to create reserves for debt repayment and deficit spending, frequently come back to inflation. Perhaps people can’t get over the association they learned in high school Social Studies, or perhaps in American History, or Economics 101, that when Governments create money and then just spend it without any compensating deflationary action, inflation or hyperinflation happens. Maybe they can’t forget those cartoons about people in Weimar Republic days pushing wheelbarrows full of money to the market to buy some bread. So, I’ve been promising for about a week now, to blog about the likely expected relationship between the different PCS options and inflation using the framework laid out by Scott Fullwiler!

Types of Spending, Methods of Filling the Public Purse and Inflation/Deflation

That framework is reflected in the first column of the table where all but the top row names the categories in Scott’s framework. The table also expands the framework a bit, however. Scott’s post compares using PCS to using debt instruments to add reserves to the Treasury General Account (TGA), the Treasury’s spending account, to make the case that PCS, in, and of itself, won’t add to inflation. I want to expand the perspective a bit by adding a comparison of both these alternatives with the alternative of allowing Treasury to close any gap between the tax credits it receives and the spending appropriated by Congress by creating in its own reserves in the TGA, either directly, or by sending an instruction to the Fed to credit the TGA with the particular amount of reserves necessary to do the deficit spending. So, here’s the table.

Table – Likely Inflationary or Deflationary Impact of Debt Repayment and Government Deficit Spending By Type of Method Used To Credit the Treasury’s Spending Account

The conclusions in this table are based on only a few ideas:

1. There’s no way reserves paid by the Treasury to redeem old debt can be inflationary unless it is spent into the economy, because there’s no channel for causal impact at all.

2. So, debt repaid to other Government agencies and to the Federal Reserve Banks cannot be inflationary beyond inflation tendencies already built into the regularly scheduled spending into the economy of the agencies involved.

At the end of the 2012 fiscal year the total of Federal Reserve and Federal Agency held debt including Trust Funds was $6.4 Trillion (p. 51). So immediate redemption of that debt would reduce the debt subject to the limit by just under 40%.

3. Debt instruments in the private sector are a form of financial asset that is more inflationary than reserves in checking or savings accounts.

The classical Quantity Theory of Money (QTM) says that increasing the amount of money in circulation is inflationary. But, much empirical evidence shows that this is wrong, and that the expansionary factor in modern economies is increasing Net Financial Assets leading to increased demand beyond the productive capacity of the economy to absorb. NFAs can include income in the form money; but when money is exchanged for an asset of equal value as happens when a security is redeemed, then that’s not inflationary, and may even be deflationary because of the ending of interest payments and securities leveraging that follows if no compensating debt issuance happens.

Here’s Scott Fullwiler’s reasoning on why this is so:

As I previously explained, this is the operational equivalent of quantitative easing (QE). 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.

And on the subject of the deposits created by the debt redemptions he goes on to quote his previous post on QE3: linked just above:

“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. . . .

4. Demand-pull inflation cannot be caused by Government deficit spending, unless Congress appropriates and the Treasury spends, past the point of full employment. Whether inflation or hyperinflation happens generally has nothing to do with the method used to add electronic reserves to the TGA; but as one approaches full employment Federal interest payments and private leveraging of Federal securities resulting from debt instruments are more likely to initiate inflation than using either of the other two methods.

5. Using PCS to fill the TGA with reserves is very similar to the third method of giving the Treasury the authority to mandate the Fed to add reserves to the TGA upon instruction from the Treasury. In fact, functionally, depositing a high value platinum coin into the US Mint’s Public Enterprise Fund Account, and then “sweeping” the seigniorage into the TGA is virtually equivalent to instructing the Fed to add reserves to the TGA. The “big coins” are just a different form of message than a Treasury instruction would be. But the functional financial content of the different kinds of messages is virtually the same. They both mandate the Fed to create the amount reserves specified in the message.

At Bottom A Political Choice

Some readers may look at this argument and agree with everything I’ve said and still prefer to deficit spend only after issuing and selling debt, rather than using either PCS or direct Treasury instructions. They might argue that even if it is true that the other methods are less inflationary, the method of debt issuance 1) is not so inflationary as to create a problem and 2) creates a political climate among the public and in Congress, that restricts government deficit spending, and keeps it sufficiently in check, that we almost always have a good deal less than full employment, and therefore never risk serious demand-pull inflation. And that’s just the way they like it!

That, of course, is a political choice, and the people who make it, knowing that the Administration can use PCS to fill the public purse now, and also that Congress can authorize the third method of direct Treasury instruction if it wants to, are saying that they choose inflation control through using a method that fools most Americans into thinking that we are running out of nominal financial resources, even at the expense of having 28.5 million Americans who want full-time jobs not being able to get them, and even at the expense of having more than 50,000 fatalities per year due to lack of health insurance, and even at the expense of blighted futures for a generation of American young people, and the prospect of increasing poverty for many old people, and even at the expense of : and on and on.

Then I have an answer for them. And I’ll begin by quoting Bruce Springsteen and Randy Wray.

We take care of our own
We take care of our own
Wherever this flag’s flown
We take care of our own

That’s Springsteen; and here’s Wray:

. . . We don’t let old folks sleep on the street. We take care of our own. We don’t let children go hungry. We take care of our own. We don’t exclude the 47%. We take care of our own.

We’re all stakeholders in this great nation. We take care of our own. White, black, brown, yellow and red, we take care of our own. Young or old, healthy or sick, we take care of our own. . . .

We need a good government to help us take care of our own. We need good public services and infrastructure to keep our country strong so that we can take care of our own. Our government spends to keep our country strong so that we can take care of our own. . . .

Sovereign government cannot be forced into involuntary insolvency. It can always afford to make all payments as they come due. It can always afford to buy anything that is for sale for its own currency. It can always financially afford any spending that is in the public interest. It can always afford to take care of its own.

Anything that is technologically feasible is financially affordable for the sovereign issuer of the currency. It comes down to technology, resources, and political will. We’ve got the technology to take care of our own. We’ve got the resources to take care of our own. All that is missing is the political will.

And then I’d go on to say this.

Your method of filling the public purse through selling debt to accumulate credits in the TGA, may provide an extra hedge against inflation by fooling people into thinking we are running out of money and that unemployment and austerity are just the price we have to pay for insuring ourselves against inflation, but that method is anathema to me because it creates a political barrier to taking care of own, and undermines our political will to take care of our own and one another.

The 28.5 million who want full-time jobs at a living wage are our own, as much as you. And they have a right to a Federal Government that will use its full power to see to it that they have full time job offers at a living wage that they can be proud of. And that, in the final analysis is why PCS, and direct Treasury instruction of the Fed, are better methods of filling the public purse than your method of using debt instruments.

The method of direct Treasury instruction of the Fed, isn’t open to us without legislation. But PCS is available now to fill the public purse. We ought to fill it, the TGA, using PCS, with $60 T in electronic credits immediately, so no one can be fooled again by people saying that we can’t afford something for sale in our own currency.

We don’t need to have any public debt subject to the limit if we don’t want it. And we always can have enough money in the public purse to afford to take care of our own, if Congress will only represent most Americans and legislate the necessary programs, while appropriating the necessary funds to open the purse strings of that full purse the Treasury will have! At bottom, it’s a political choice; and, if we want to be real Americans, then we must choose to take care of our own!

(Cross-posted from New Economic Perspectives.)