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

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

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

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

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

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

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

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

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

If His Game Is Deliberate Austerity?

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

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

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

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

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

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

PCS Variations

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

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

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

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

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

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

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

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

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

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

Why not mint a $60 T coin?

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

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

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

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

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

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

The Speech

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

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

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

My Fellow Americans:

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

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

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

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

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

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

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

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

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

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

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

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

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

(Cross-posted from New Economic Perspectives.)

Here’s the next group of Ryan’s follies from his answer to the President’s 2011 SOTU.

On bureaucracy and innovation:

”Depending on bureaucracy to foster innovation, competitiveness, and wise consumer choices has never worked – and it won’t work now.”

That may be. But depending on the big banks and big US corporations to either get lending going again, or to bring innovation and jobs to the United States also won’t work. What will work is for the Government to increase aggregate demand by deficit spending in areas of the economy we want to grow.

“Bureaucracy” is just a scare term. The big corporations that Ryan, the Republicans, and many Democratic Congresspeople serve are all just as bureaucratic, and in the case of the health insurance companies, even more bureaucratic than the Government. The dirty little secret of the social sciences is that bureaucracy comes with large size whether we’re talking about private or public organizations. So, unless Ryan has plans to break up the large banks, insurance companies, pharmaceutical companies, telecommunications companies, and exporters he loves so much, he really ought to shut up about “bureaucracy,” because his precious private sector has absolutely nothing to crow about when it comes to that feature of large organizations.

If we don’t like bureaucracy, then what we need is regulation that will break up large organizations, making them illegal beyond a certain size. Then perhaps we might create functioning markets and be able to shrink the Federal government too. But this kind of solution is off the table for Ryan and Romney since regulation is a no-no from the standpoint of their ideology.

On other nations acting soon enough when they rising debts:

”Just take a look at what’s happening to Greece, Ireland, the United Kingdom and other nations in Europe. They didn’t act soon enough; and now their governments have been forced to impose painful austerity measures: large benefit cuts to seniors and huge tax increases on everybody.”

First, I’ve heard just about enough of the mindless comparisons of Greece and Ireland to the United States and other nations that are sovereign in their own currency. Greece and Ireland use the Eurozone’s currency, so they have solvency risk not shared by nations like the United States. They can be driven into insolvency by the bond markets. Currency-wise Euro nations are like the states of the United States, and not like the Federal Government which is the creator of US currency. These cannot avoid insolvency by simply creating Euros, because they have given up their power to issue currency. We, on the other hand, can spend dollars, and in the act of spending create high-powered money in private sector accounts.

Second, Ryan may say that the British Government was forced into its austerity measures. But this is nonsense, no one forced it into its austerity moves. It just decided to follow the policies that Ryan wants for us here. And what’s happened to Britain since they introduced austerity policies should be a lesson learned for every other nation in full control of its currency that decides to ape Euro austerity.

Contrary to Ryan’s neoliberal economic theory, austerity has created economic contraction in the UK, since the fourth quarter of 2010. The UK National Accounts show a decline of 0.5% in real GDP growth in that quarter, a little over 6 months after the new coalition took office and passed its austerity program. That decline was prior to the implementation of some of the heaviest austerity measures, and reflected the attempts of UK households to anticipate the bite of austerity. The UK VAT was then increased by 2.5%. And its impact has been another decline in GDP caused by the Government’s removal of private sector financial assets through the increase in the VAT, and its spending cut policies since the Spring of 2011.

Everyone in America should be watching Europe very carefully. Ireland and Greece had the choice of austerity or withdrawing from the Eurozone. They chose austerity. Both economies continue to struggle with Greece on the brink of collapse, and Ireland still mired deep in depression. In addition, Spain, Italy, and Portugal are also choosing austerity, and all of them are in trouble as the Euro crisis treated with austerity policy, gradually kills the economy.

In the UK, the British public is suffering from the stubborn Tory-liberal experiment in austerity, with the ruling parties continuing to deny facts obvious to everyone about how their experiment is working out. Let’s hope that the deficit hawks and doves in this country watch that carefully, so that they can see that austerity won’t work, before they subject Americans to one of their variety of unnecessary long-term deficit reduction plans.

On endless borrowing and spending cuts:

”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.”

I believe that business as usual has to end too. For the past 30 years or more we’ve heard nothing but economic theory that confuses the Government with a household or other economic units that cannot create their own currency. And we’ve heard all through that time that we cannot keep borrowing, and that spending cuts must come first, while we’ve kept borrowing largely to provide lower tax rates for wealthy people, in the hopes that greater disposable income for them would trickle down. Ryan and Romney are giving us that same ideology again.

If endless borrowing is really not a strategy, than why won’t Ryan work to restore the marginal tax rates of the 1960s and close all loopholes? We all know why; because he doesn’t believe in shared sacrifice; only in sacrifices by the poor and the middle class so he can further enrich his supporters. Congressman Ryan, the Republican’s young guru is exactly the same as their old gurus. His one prescription for everything is to leave the poor little rich people alone, so they can, out of the goodness of their hearts, leave the rest of us a few scraps.

Apart from this however, while ending borrowing and cutting spending may increase the well-being of a private sector household, if everyone does that in the private sector, then there will be rapidly declining demand, and as surely as night follows day there will be a double-dip recession harming everyone, unless Government spending takes up the demand slack coming from the private sector.

The Government can borrow endlessly if it wants to, as long as its accompanying Government spending doesn’t cause demand-pull inflation. Or, alternatively, if Ryan and Romney are as bothered by the debt as they claim, then they can work to repeal the Congressional mandate forcing the Treasury to issue new debt when it deficit spends. That way, the debt will gradually be reduced to zero as time passes and they won’t have to worry about it anymore.

Even better, if Ryan and Romney hate the debt so much, they can propose that the Executive cause the US Mint to issue a $60 Trillion proof platinum coin, deposit it at the Fed in return for electronic credits which will end up in the Treasury General Account. With the $60 T in credits, the debt subject to the limit can be paid off entirely as it falls due, leaving $44 T in credits to use for deficit spending over the next 15 years or so. Romney and Ryan will never do this however, since if they did and also implemented this plan, then they’d have no excuse for cutting Federal spending that benefits the poor and the middle class.

The more important point is that cutting the level of Government deficit spending is not what ought to be done when we have an economy that is operating so far below its full capacity. If we do that and move to balance the budget as Ryan/Romney want us to do, then we will take financial assets out of the private sector, reduce aggregate demand and further decrease our use of the economy’s productive capacity. That is, we’ll have greater unemployment, greater suffering, and much less growth.

That’s because Government deficit spending, other things equal, increases net financial assets in the private sector; while Government surpluses decrease net financial assets. There’s just no getting around that macroeconomic identity. So, spending cuts and budget balancing are a strategy that won’t effect the Government’s capacity to spend at all, but it will impoverish the private sector.

If that’s really what Ryan, Romney, the Republicans, and a variety of Democrats, as well, want to do, then let them try to do it. But I guarantee that sooner or later the American public will have its revenge for their bringing back Herbert Hoover’s nightmare.

(Cross-posted from Correntewire.com.)

Still more Ryan’s follies from his answer to the President’s 2011 SOTU.

On the Affordable Care Act (ACA)

”Then the President and his party made matters even worse, by creating a new open-ended health care entitlement.

“What we already know about the President’s health care law is this: Costs are going up, premiums are rising, and millions of people will lose the coverage they currently have. Job creation is being stifled by all of its taxes, penalties, mandates and fees.”

Well, Congressman Ryan’s right about most of this. The ACA doesn’t contain direct measures to prevent insurance companies from raising premiums, but relies on exchanges that won’t be fully operative until 2014, by which time insurance companies will have raised rates far higher than they were when the ACA was passed in 2010. On the other hand, Paul Ryan and the Republicans wouldn’t support any cost-cutting measure that would be effective anyway, such as, for example, prohibiting increases in premium costs greater than the rate of inflation in the rest of the economy, because the Republicans and Ryan himself, along with many Democrats are bought and paid for by the health insurance companies and big Pharma.

Ryan’s claim that job creation is being stifled by the ACA bill, is currently unsupported by evidence. And his claim about job creation is pure theory, especially since most of the bill isn’t operational yet and its impact can’t be assessed. One thing’s certain, however, and that is that there’s no way that either the ACA, or alternatives based on the free competition and confidence fairy theories Ryan favors will produce the 2.5 million new jobs predicted by the California Nurses Association study if the Democrats had rid themselves of the filibuster in January of 2009 and passed Medicare for All, rather than collaborate with the Republicans and the Blue Dogs to cut the heart out of health care reform.

On the ACA and bankruptcy:

”Businesses and unions from around the country are asking the Obama Administration for waivers from the mandates. Washington should not be in the business of picking winners and losers. The President mentioned the need for regulatory reform to ease the burden on American businesses. We agree – and we think his health care law would be a great place to start.

“Health care spending is driving the explosive growth of our debt. And the President’s law is accelerating our country toward bankruptcy.”

Health care spending is driving the explosive growth of debt, both public and private, but as we saw in my first Ryan’s Follies post, the public debt accompanying health care deficit spending is reducing debt in the private sector and also increasing demand. Unfortunately, the explosive growth of private debt from health care costs visited upon individuals is causing great suffering in the form of bankruptcies and foreclosures. In addition, these costs result in deaths when people can no longer afford co-pays and decide to forgo treatment they need before illnesses or injuries cause serious damage.

I don’t believe that Ryan is right that “the President’s Law” is accelerating the Government towards bankruptcy, because it has no risk of “bankruptcy,” unless Congressman Ryan and his colleagues decide to force insolvency by not using their constitutional authority to appropriate Government spending or to raise the debt limit. The “explosive growth” of the public debt is, for reasons stated in my first Ryan’s Follies post, of little or no concern. However, I do believe that the growth of private sector debt due to health care costs is a major issue, as is the portion of the US GDP spent on the health care sector, which is way out of line with other industrial nations, and which at the same time produces much worse outcomes for too many Americans whether they have insurance “coverage,” or not.

Of course, the Congressman is not concerned about these real problems, but only about his imagined “problem” of the Government becoming insolvent due to excessive spending. That is, one of the reasons, why, I suppose, he opposes Medicare for All. If he and his Republicans were to join with Democrats to pass that, it would relieve both the increasing private sector debt problem, and also reduce the GDP proportion of health care spending by perhaps one-third. But, I guess we should just expect this kind of public service out of someone who proposes to return the United States to 19th century economic rules and behavior.

Congressman Ryan, criticizes the waiver process, by saying that Washington should not be in the business of picking winners and losers. But, this is one of the most hypocritical remarks in the history of politics coming from Congressman Ryan, since he has gone out of his way to see to it that lack of regulation would ensure that the health insurance companies, big Pharma, the FIRE sector, and businesses in his and other Congressional Districts that wanted to move jobs to other nations would be big winners while American workers and people needing Medical insurance would be big losers. The Congressman has always picked winners and losers.

Unfortunately, for America, however, he has never picked them in the public interest; but only to benefit his own political career. And this has meant, when it comes to jobs, that he has picked foreign winners and American losers while always wrapping himself in the flag.

And back to public debt:

”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.

“If we act soon, and if we act responsibly, people in and near retirement will be protected.”

As shown in my first Follies post, the national debt isn’t out of control at all. But Ryan is right to think that we have a fiscal crisis that we have to confront responsibly. That crisis is that the Government including Congress, the Federal Reserve, and the Executive Branch isn’t using activist fiscal policy to achieve the public purpose, even though there is no solvency risk and little inflation risk in the United States doing so. The United States has so many problems right now that letting these problems go unsolved, by kicking them down the road is the real meaning of fiscal irresponsibility.

When it comes to fiscal irresponsibility no one is better described by that term than Paul Ryan. Of course, he has a lot of company in Peter G. Peterson, the Koch brothers, and all the advocates of balanced budget amendments, Republicans and Democrats who think it’s responsible to manage the US Government’s spending as though it were a household or still on the gold standard. These people, who have, apparently been joined by Barack Obama, will destroy the economic foundations of the United States, and create a nation where everyday life is “nasty, brutish, and short,” and the sick “die quickly.”

And, of course, “tipping points” into dependency:

”Our nation is approaching a tipping point.

“We are at a moment, where if government’s growth is left unchecked and unchallenged, America’s best century will be considered our past century. This is a future in which we will transform our social safety net into a hammock, which lulls able-bodied people into lives of complacency and dependency.”

Anyone who has experienced unemployment, or living on Social Security alone, or Medicare, not supplemented by other medical insurance, knows that the social safety net is no hammock, and that it is not nearly as generous as social safety nets in other modern industrial nations. Our social safety net is the most stingy and mean of all these, and also the one most immersed in false economies that undercut demand and prevent the social safety net from doing its job of making recessions less punishing for poor people, people out of work, the sick, and most of the 99%.

Congressman Ryan makes Mr. Potter, the banker in “It’s a Wonderful Life,” look like a generous man, for he means to drain America of real wealth so he can serve the job exporters he loves so well better. If he has his way, the social safety net will become a bed of nails. If we simply leave it where it is, there’s no danger of hammocks anytime soon. And even if we were to extend it by passing enhanced Medicare for All, and say, doubling Social Security payments in recognition of the fact that the financial sector of the economy has, by now, nearly destroyed both the savings, and the pension legs of the proverbial three-legged retirement stool for a very large percentage of the middle class, there is no way that even that would tip us all over into “hammocks.”

A strong, generous, social safety net is not a social invention that will make people dependent. Instead, it is an invention to make them more free. FDR wisely said that “necessitous men are not free men.” What angers me so much about Romney, Ryan, the Koch Brothers, Peter G. Peterson, and all who follow him, is that they want to make most of us “necessitous” while they lack for nothing!

(Cross-posted from Correntewire.com.)

More on Ryan’s follies and the overall quality of thinking we find in this young “guru”! Here’s more from his answer to the President’s 2011 SOTU.

”On this current path, when my three children – who are now 6, 7, and 8 years old – are raising their own children, the Federal government will double in size, and so will the taxes they pay.”

It will be roughly 19 years until Ryan’s children are raising their own children, and guess what? GDP will be between two and three times what it is now, and, as we’ve already seen there’s no reason why taxes should be any higher as a percentage of income for most people, unless of course, people like Ryan keep lowering taxes for the rich and raising them for everyone else in order to achieve a damaging budgetary surplus.

Hopefully, the tax rates for the top 2% of the population will be far higher than they are now, and estate taxes will return to their levels in the 1950s, so that gentlemen like Congressman Ryan can begin to pay their fair share again, and the United States can once again have a wealth distribution that is more equal than the likes of Russia, China, Turkey, and Jordan.

I recently blogged on some Credit Suisse data related to the inequality problem. My analysis showed that the US was 24th in the world on Median wealth per Adult. Our Median Wealth per Adult was about $53,000. The nation that ranked first, Australia, had a Median Wealth per Adult of about $223,000 or 4.2 times ours. Also the ratio of the Mean to the Median Wealth per Adult, an even better measure of inequality, was 4.71 for us, and 1.79 for the Australians. One thing’s for sure it won’t be very good for most of our grandchildren if Romney/Ryan tax policies, which will make this situation even worse, are inflicted on us in 2013. Four years of that and we could very well see that Median Wealth number go down to $46,000 or so and that ratio up to 6 to 1. The political and social unrest that will cause here is anybody’s guess. Here’s another folly:

”The next generation will inherit a stagnant economy and a diminished country.”

That depends on Congressman Ryan, the Republicans, President Obama, and other Democrats who think we have a deficit/debt problem, which must be treated with Government austerity and tax cuts for the rich. That’s a sure recipe for condemning the United States to a stagnant economy and a diminished country. We’re seeing the results of such policies now in Europe and in the UK, which is fast becoming the laboratory case illustrating why austerity isn’t the thing to do to a down economy.

How do these exponents of Hooverian crackpot economics expect the economy to grow when they are going to drastically lower the aggregate demand provided by Government deficits? By blowing more private sector debt bubbles leading to a new collapse produced by lack of regulation and corporate account control fraud, he further impoverishment of the American Middle Class, and then more lemon socialist bailout?

That’s sarcasm, of course. But that kind of pattern is probably a feature, rather than a bug of the Romney/Ryan plan. Their grand design isn’t morning in America. It’s the New Serfdom with themselves and others like them as our new feudal lords.

”Unfortunately, instead of restoring the fundamentals of economic growth, he engaged in a stimulus spending spree that not only failed to deliver on its promise to create jobs, but also plunged us even deeper into debt.”

The Democrats have failed to end the recession, at least for most Americans; but Paul Ryan’s austerity policies, if followed in 2009, would never have restored “the fundamentals of economic growth.” Balanced budgets at the Federal level would only have depressed demand to such a degree that we’d be in a second Great Hooverian Depression right now. Really, Ryan’s version of economic science is at the very least 115 years old. Some whiz kid! Between he and Eric Cantor, they’d have the economy flat on its back for the next 100 years.

”The facts are clear: Since taking office, President Obama has signed into law spending increases of nearly 25% for domestic government agencies – an 84% increase when you include the failed stimulus.”

Much of this “spending” is a result of the operation of the automatic stabilizers in the safety net helping people get through the recession, created by the FIRE sector and its control frauds — spending over which the Obama Administration had no control that was also necessary. And much of it was due to Homeland Security and its expenditures, “domestic spending,” which I’m quite sure Ryan would be opposed to cutting? In any case, numbers like the ones just above don’t mean anything, unless one thinks these expenses increase the solvency risk of the Government. Since we’ve already seen that they don’t, these “facts” of Ryan’s are of little or no importance.

”All of this new government spending was sold as “investment.” Yet after two years, the unemployment rate remains above 9% and government has added over $3 trillion to our debt.”

Of course it’s now 3.5 years, 8.3%, and more like $5 Trillion in additional debt, otherwise known as world savings of USD in the form of Treasuries. As I said in my last post, the addition to debt doesn’t matter. And, again, much of the new Government spending was due to the response of the automatic stabilizers to the crash of 2008, and wasn’t “sold as ‘investment’” at all.

As for the stimulus package, only a relatively small part of it was justified as “investment,” as Paul Ryan very well knows. By the time the Republicans, the Blue Dogs, and the President got through with the ARRA, the tax cuts in the package and spending geared toward maintaining the States, ate up more than half the stimulus over a two year period, and were in no way “investment.”

The stimulus itself was also only one-half as large as it needed to be in volume of spending to end the recession (as many asserted, including myself, at the time), and was less stimulative than it should have been, due to the fact that low-multiplier tax cuts were such an important component of it. So, it wasn’t any surprise to many of us that it failed to lower unemployment below 8.3%, or that the deficit remained high, since the primary cause of big deficits was the combination of high unemployment and the operation of the social safety net.

Congressman Ryan is a rising star in the Republican Party, and is often characterized as their foremost policy wonk and budgetary guru. But his performance over the past two years, indicates that if he’s their guru, and if the Republicans remain in charge of the House, then we’ll all be in trouble; because while Paul Ryan may be better at adding and subtracting than most of his colleagues, there are very important things that he apparently fails to understand, or at least to heed, about Macroeconomics and its relation to fiscal policy.

In particular, Congressman Ryan, seems to have no clue about the sectoral balance model of macroeconomics. One of the things that model implies is that if the US is running a negative trade balance (imports exceed exports), and the private sector needs to save to pay back debt, the Government budget deficit must be equal to the value of the trade deficit plus the value of private sector savings. If the Government tries to work against the dynamic implied by this model, by taking active steps to reduce that deficit, as Paul Ryan and the Republicans so vigorously advocate, then the private sector is going to have to reduce its imports, its savings, or, most likely, both, because a reduced Government deficit will lessen demand in the private sector.

So, Government austerity is not going to create private sector prosperity as Ryan, and sometimes, President Obama and many Democrats, suggest, but private sector privation, instead. Less private sector savings, less real wealth, and a stagnating economy. Paul Ryan may actually want that, and the President may too, so he can say that he left a legacy of hard and courageous decision making, but most of the rest of us don’t.

We wish that our political parties and their leaders would leave that legacy of courage and sacrifice that they, their families, their friends, and the wealthy people and corporations they deal with daily, are calling for, to themselves and their families; while leaving us with things like enhancements of the social safety net including Medicare for All, and greatly increased Social Security payments, as well as with a Job Guarantee program. After 30 some-odd years of policies promoting extreme wealth for them, and stagnation for the rest of us; it’s time for them to make the sacrifices, and for us to get our share of the productivity gains in the form of a Green New Deal.

So, let’s have some really hard decisions from them. Decisions that involve their giving up some of the extreme wealth they’ve accumulated, very often through political influence and manipulation, and sometimes control frauds, rather than from honest work. Decisions that recognize that an America that is unusually unequal among the world’s wealthy nations cannot long stand without civil strife for everyone. Let those who have benefited disproportionately from the past 35 years not continue tempting fate. There must be a peaceful return to social and economic justice and fairness in America now, before we go any further down the road to plutocracy and the new serfdom. The alternative is too terrible to contemplate.

(Cross-posted from Correntewire.com.)

Paul Ryan (photo: love4utah / flickr)

In celebration of Paul Ryan’s nomination, and in consideration of his reputation among Washington, DC villagers as a fiscal guru, I thought it might be fun to do a series of posts, of which this is the first, critiquing examples of Ryan’s past wisdom. Here’s the first example:

”We face a crushing burden of debt. The debt will soon eclipse our entire economy, and grow to catastrophic levels in the years ahead.”

The debt referred to here by the Congressman is the accounting construct of the national debt subject to the limit, or the face value of the debt instruments the Government has yet to redeem. But just why the “burden of debt” is so crushing, or even a burden at all to you and I really needs to be explained carefully by Ryan and the other deficit hawks to the rest of us.

I don’t see any public debt burden on myself or any American people at all either at present or in the future. Why? Because a burdensome debt is one that you and I will personally have to pay back, and we just won’t ever have to pay the public debt of the US back from taxes that we are asked to pay to the Government. That is, we won’t unless Congress and people who believe the things Mr. Ryan believes, decide to pay the debt by levying taxes, cutting Government spending, and running Government surpluses until it is paid.

That was done once in American history during Andrew Jackson’s Administration, when the public debt was paid by raising more taxes than spending. The result was that Martin Van Buren, Jackson’s successor became a one-term President, following the panic and very serious depression of 1837. That depression was caused, in great part, by a shrinking of private demand caused by Government austerity, the successful pay back of the debt, and the continuing policy of balancing the budget. In addition, every sustained attempt in American history to run budget surpluses was followed by either a depression or a recession. A summary of the depressing record is here.

Vice-Presidential candidate Ryan either believes himself, or wants you to believe, that the “crushing debt” will have to be paid for out of taxes levied on you and I. But there are a number of different ways to handle the national debt that don’t place any burden on us at all.

First, there’s the way we’ve been handling it up to now, namely by rolling over previous debt and paying interest on it as it comes due. We’ll always be able to do that because a debt instrument is the functional equivalent of a savings account, and frequently those who hold USD including foreign nations have the effective choice of keeping their USD in a reserve account, or buying a debt instrument that pays higher interest. They’d rather buy the debt instruments, of course. However, low the rate of interest is, it’s better than the rate they’ll get on reserves.

Can our national debt increase indefinitely? The short answer is: yes it can. The reason is that a Government like the United States with a fiat non-convertible currency, a floating exchange rate, and no debts in any other nation”s currency, has no solvency risk because it can always create money to pay its obligations. Its debt instruments are therefore nearly risk-free. So, they’re a safe harbor for investors who’d rather earn a better return on the USD they hold than interest on reserves or no interest at all.

Second, in lieu of simply rolling over our debt and increasing it, as needed, Congress can decide to get rid of all the public debt, by simply removing its mandate forcing the Treasury to issue new debt when it deficit spends. Congress needs to replace it by granting authority to the Treasury to spend Congressional appropriations by directly marking up private sector bank accounts, or if it continues to spend through its Federal Reserve Accounts, Congress will have to give it authority to mark up its Federal Reserve accounts when it wants to deficit spend Congressional appropriations. If this is done, then Treasury will be able to make all its debt payments when they become due, and most of the public debt will be gone within 10 years, except outstanding longer-term instruments. If Congresspersons like Paul Ryan think the debt problem is so burdensome, then there is nothing preventing them from giving Treasury the above authority and getting rid of the debt. is there?
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I have a petition to President Obama up at: http://signon.org/sign/end-austerity-mint-the It’s about minting that $60 T coin and ending austerity. The wording of the petition is:

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

The purpose is:

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

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

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

The $60 T coin can free the Government from narrow green eye shade concerns and force both Congress and the Executive to evaluate the substance of legislative proposals based on their likely direct impacts and side effects on the lives of Americans, rather than their impact on Federal deficits and surpluses.

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

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

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

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

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

(Cross-posted from Correntewire.com.

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

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

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

The Law and Proof Platinum Coin Seigniorage

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

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

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

PPCS can free the Government from narrow green eye shade concerns and force both Congress and the Executive to evaluate the substance of legislative proposals based on their likely direct impacts and side effects on the lives of Americans, rather than their impact on Federal deficits and surpluses.

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

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

PPCS Alternatives

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Speech

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

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

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

My Fellow Americans:

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

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

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

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

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

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

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

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

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

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

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

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

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

(Cross-posted from Correntewire.com.

It’s hard to listen to the doomsday rhetoric of Austerians like Paul Ryan and intermittently the less hysterical, but equally mythical narratives of the President when he talks about deficit/debt reduction, when you know better; when you know that both are talking about a bogeyman that doesn’t exist. Here’s Ryan, the Republican wunderkind:

“We face a crushing burden of debt. The debt will soon eclipse our entire economy, and grow to catastrophic levels in the years ahead.”

”The next generation will inherit a stagnant economy and a diminished country.”

Why? Because the burden of public debt payback will too heavy for the next generation to bear. This is ridiculous, of course, because we can always roll over previous debt and pay interest on it as it comes due. In fact, during the past 11 years as Ben Strubel shows, we’ve rolled over $437 Trillions in debt. And as Mike Norman says, we’ve rolled over $32 Trillions thus far in Fiscal 2012 alone.

We’ll always be able to roll over our public debt if that’s what we choose to do because a debt instrument is the functional equivalent of a savings account, and frequently those who hold USD including foreign nations have the effective choice of keeping their USD in a reserve account or buying a debt instrument. They’d rather buy the debt instruments because they earn interest. However, low the rate of interest is, it’s better than the rate they’ll get if they keep their USD in their reserve account, unless the Fed decides to pay Interest-On-Reserves (IOR).

Can our national debt increase indefinitely? The short answer is: yes it can. The reason is that a Government like the United States with a fiat non-convertible currency, a floating exchange rate, and no debts in any other nation”s currency, has no solvency risk because it can always create money to pay its obligations. Its debt instruments therefore are nearly risk-free. They’re a safe harbor for investors who’d rather earn a return on the USD they hold, then content themselves with keeping it in a reserve account, that typically earns no interest.

The real problem with the debt subject to the limit is political

Even though there’s no real fiscal sustainability problem with the public debt, good luck trying to persuade the public that there is none, by using an argument like the one I just offered. The view that the Federal Government is like a giant household has been drummed into people for years. Also, everyone knows that local and State governments, as well as even very large corporations have real debt constraints (so long as the Government doesn’t bail them out). So, to persuade people that the Federal Government is different than other institutions isn’t easy, especially when the economic mainstream still contends that the Government has fiscal sustainability problems.

Proponents of Modern Monetary Theory (MMT) like myself often point out that Congress can always allow deficit spending without issuing debt instruments if it wants to, and has always had that power. Since it doesn’t do that it follows that the very existence of the “national debt” is Congress’s fault in the sense that the Government has issued debt instruments to close the gap between spending and tax revenues only because of the voluntary constraints Congress has placed on the Executive Branch.

This argument is also correct. But the prescription that the problem should be solved by getting Congress to get rid of these constraints and allow “pure” deficit spending with no debt issuance requires convincing Congress to do this. In the near term that’s not a practical prescription. Republicans and most Democrats have a vested interest in not recognizing that the debt is Congress’s fault, because they want to claim the mantle of “fiscal responsibility” by advocating for balanced budgets or long-term debt reduction, or reduced spending on the programs they don’t like.

So, neither Party will support “pure” deficit spending without a radical change in political understanding of what is possible for the Government brought about by a demonstration,within the limits of the current legal structure, that we can get free of the public debt subject to the limit any time the President wants to, without a by-your-leave from Congress.

The easiest way to get free of debt subject to the limit

The easiest way under current law to get to the point where there are no debt instruments outstanding is to persuade The President, or his successor, to use Proof Platinum Coin Seigniorage (PPCS), provided for under existing law, to generate the revenue needed to pay off the debt. Any other course to remove current constraints on “pure” deficit spending, will need Congress’s approval, which probably means it will also require overcoming the filibuster. The filibuster can be overcome for certain things, but not for major changes like the moving the Fed to the Treasury, or explicitly allowing “pure” deficit spending when it appropriates. In fact, to enact such a major change, it may be easier to get rid of the filibuster itself, since that requires only 50 + 1 votes, on the way to getting the major change.

So, from a political point of view, it is much easier to do PPCS for awhile than to get other alternatives done to overcome the “political debt problem.” Also, in effect, PPCS would subordinate the Fed to the Treasury anyway, since allowing the gap between tax revenues and spending to be closed through seigniorage would dictate the Fed’s actions in using IOR to hit its target interest rates.

In this post, I proposed minting a $30 Trillion proof platinum coin to accomplish getting rid of debt instruments and filling the public purse sufficiently to change the fiscal background so no one could use the argument that we don’t have the funds to spend on x, or y, or z, if these fulfilled aspects of public purpose. I also argued that minting that coin wouldn’t be inflationary in itself. Scott Fullwiler amplified that argument very thoroughly in a later post.

Later, I changed my proposal to minting a $60 T coin to increase the time horizon we would have to change public understanding, bring the Fed inside Treasury, and end the charade that the Government can’t create as much money as it needs to solve problems. That was done in three posts here, here, and here. There were also other posts in the same time frame using the $60 T assumption.

That level of PPCS hasn’t been met with great enthusiasm from my MMT compatriots. I suspect it’s because most think that the $30 T and $60 T proposals makes us sound crazy. Well, maybe it does, but that part of it is about messaging, and I think an eloquent President could sell it as a stop gap to get us out of our self-imposed fiscal constraints until Congress sees the wisdom of moving the Fed inside Treasury. The President could begin selling the $60 T coin with a speech like the one envisioned here.

Many people would be heartened and persuaded by a speech like that; but the President involved would certainly get charged with insanity for using PPCS in the way I’ve proposed. Rush Limbaugh, Laura Ingraham, and much of the mainstream press would probably join them along with other organs echoing the outrage of Peter G. Peterson’s deficit hawk/”fiscal responsibility” minions. But I think most of the firestorm would be ended within a week, if the President retires all the Intra-governmental debt, including debt held by the Fed within that time.

A news conference held immediately after that could announce that the debt subject to the limit was reduced by 40% in a week. Then at the end of every quarter the President could announce further reductions. The posts linked to above by Ben Strubel and Mike Norman suggest that over 4 quarters the President could report elimination of nearly all the debt subject to the limit other than a relatively small amount exceeding one year in duration. I haven’t tried to locate the precise number involved, but say it’s $2T. Then after a year, the President would be able to report that most (about 87%) of the public debt was gone, and he could also provide a schedule for fully paying the rest of it off, without either cutting spending or raising taxes.

If Scott Fullwiler and I are right and that no inflation would result from using PPCS, then no one would call he/she crazy because they used PPCS after that year of payback. It will have been demonstrated that the debt subject to the limit is a faux problem that can always be solved at will, and that the Government’s capacity to deficit spend with no solvency concerns is unlimited.

Deficit hawkism justified by solvency fears would be dead by demonstration, and a new era of deficit hawkism justified by a new round of inflation hysteria would dawn. We would be swamped by Weimar and Zimbabwe cautionary, Calvinist fairy stories told by the defenders of the 1%. This, however, is an improvement over their present insolvency fairy tales, because fiscal policy could be guided by actual, observable measures of impact, rather than by indicators that have only a tenuous connection to inflation or hyper-inflation at best.

Conclusion

So, summing up. I think progressives, including MMT economists, ought to support use of massive PPCS by the Executive Branch to pay off the debt, and change the political situation. We must fight to persuade the White House.

We can say that “the perfect” policy to get rid of the debt is to change the law and bring the Fed under the Treasury; but failing that, a “good” policy is to end any talk of fiscal solvency problems caused by the faux debt subject to the limit, by using massive PPCS. Since the President knows that “the perfect is the enemy of the good,” perhaps he’ll appreciate our practicality in being willing to accept PPCS in place of “the perfect.”

But regardless of whether he does so or not, at least we will be making the clear point to the White House and to everyone, that any “debt” problem we have from then on, will be, and for that matter is now, due only to the President’s unwillingness to use his legal powers to solve it. So, if everyone is as concerned about the debt, as they purport to be — concerned enough that they prioritize it above the social safety net for the poor, the middle class, working people who have lost their jobs and homes due to speculation by our feckless and fraud-committing financiers, the elderly, and the ill, and also prioritize it ahead of education for the young, reconstruction of the energy and infrastructure foundations of this country, and growing climate-change crisis, then why don’t they direct their concerns and place their blame where they both belong — namely at a President who will not use the powers Congress has given him to get rid of that public debt that is evidently so noxious to them? And, in the process, to take this silly faux issue, that has harmed so many people for so long, off the political table forever.

(Cross-posted from Correntewire.com)

"Writing to reach you" by Wim Mulder on flickr

Like many of us, every once in awhile I get an e-mail from Michelle Obama asking for a contribution in return for a chance at having an up close and personal dinner with her husband. Here’s how I replied.

Dear Mrs. Obama

My wife and I will not contribute to your husband’s campaign this time around unless he immediately

1) Abandons his ridiculous and harmful deficit reduction campaign;

2) Stops talking about the US running out of money;

3) PROVES that is not the case by using his authority under legislation passed in 1996 and minting a 1 oz. Proof Platinum $60 Trillion face-value coin, depositing it at the Federal Reserve, and the using the Mint’s seigniorage profits to fill the Treasury General Account (TGA) with approximately $60 Trillion in electronic credits;

4) Uses the proceeds to immediately pay off that part of the national debt that is owed to Federal trust funds, agencies, and the Federal Reserve, and pays off all Federal debt to other creditors as it comes due; without rolling it over by issuing new debt;

5) Makes a major speech telling everyone that he has solved the problem of the national debt through 3) and 4) and proven that there is no debt reduction and entitlement problem and that, in due course, there will be no national debt to burden anyone’s grandchildren;

6) Immediately proposes a Federal Job Guarantee bill providing full employment for all who want to work at a regionally cost-adjusted wage of $10 per hour, plus access to Medicare and a full range of standard fringe benefits including two weeks annual vacation and all paid Federal holidays; and Read the rest of this entry →

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(Cross-posted from Correntewire.com.