This is Part V of a six part series replying to a claim by the President at his recent White House News Conference. Part I covered the News Conference and the first two (the selective default, and the exploding option) of seven options the President might use to try save the US from defaulting in the face of continued deadlock in the Congress on raising the debt limit or repealing the law enabling it in its entirety. Part II discussed Platinum Coin Seigniorage, invoking the 14th amendment to justify continuing to issue conventional Treasury debt instruments, and consols. Part III discussed premium bonds, and Treasury sales of the Government’s material and cultural assets to the Federal Reserve. Part IV, then evaluated all seven options in light of variations among them in likely degree of legal difficulties they might face, and also the likely impact of each on confidence in the bond markets, if used. Read the rest of this entry →
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In Part I, Part II, and Part III, I listed and analyzed seven options, analyzed them and also pointed out that the President’s 14th amendment option, actually makes turning to the 14th as a justification for continuing to issue debt beyond the ceiling, a last resort, and also places an obligation on the President to exhaust other available options, whose legality is probable, but not finally determined by the Supreme Court. But, in his recent Press Conference, the President also failed to recognize any differences among the options in relation to his main point: that loss of public confidence caused by legal challenges would affect sales of debt instruments and other options including Platinum Coin Seigniorage (PCS).
Differences in levels of legal uncertainty among the options would surely affect the confidence issue. Option 1, selective default, seems legal, if not followed by Fed forgiveness of Treasury debt. It would probably have the effect of a partial government shutdown. But, as long as there’s no default on repayment of debt to everyone but the Fed, confidence related to buying Treasury debt should not be affected.
Option 2: the exploding option, is one of those that might result in both a legal challenge, and some uncertainty in markets, but I don’t think very much uncertainty, since whatever the Supreme Court decides about the legality of this, it’s hard to see them being able to do anything about it except ordering the Treasury and the Fed to stop breaking the law prohibiting the Fed granting credit to Treasury. Since the Treasury would be using the exploding option to acquire reserves from the Fed, but would not be issuing debt instruments, the Court wouldn’t be able to decide that the Government had no obligation to repay illegally issued Federal debt, which is the scenario the President used in his News Conference.
Option 3, is Platinum Coin Seigniorage (PCS). Legal questions about the coin have been raised, but as I said in Part II, the preponderance of opinion is that the coin is legal and will survive if challenged.
So, the question becomes whether a challenge to it will create a lack of confidence in markets affecting Treasury bonds? I really doubt that, however, since the “house ownership” metaphor, used by the President doesn’t apply to the coin, either. Its practical force comes from the idea that the market will reject debt instruments offered for sale after the debt limit is reached. However, the primary initial use of the coin would be to pay down the debt level, so no debt issuance would be involved in its use. Why should there be a problem with “bond market confidence” when debt repayment is continuing?
Only new creation of reserves by the Fed would be involved. So, the issue of confidence affecting debt marketability doesn’t arise in this case, since the private markets would not have to “buy” new reserves offered by the Treasury after the debt limit is reached, as they would questionable debt instruments issued by the President.
And certainly while legal challenges are going on, the President could be drastically reducing the debt subject to the limit by using coin proceeds to pay back debt, increasing confidence in markets with every significant payoff. Of course, this depends on whether the President mints a High Value Platinum Coin (HVPC), say $60 Trillion in face value, rather than “a small ball” TDC alternative, but that’s his choice, after all. So, in the end, whether there’s a problem with bond market confidence depends, in the end on the politics of choice, and not whether he uses PCS or not.
As for the Fed, it may or may not cooperate with the Executive on crediting the coin. But the law provides that in cases of disagreement in interpretation between the Fed Chair and the Secretary of the Treasury, that the view of the Secretary shall prevail.
In other words the Fed can be made to cooperate when it comes to crediting the coin, and it is highly doubtful that if the Fed is between the rock and the hard place of crediting the coin or allowing a default, that it will then choose the latter and risk the financial system collapsing. The Fed, after all, is pretty “chicken” about financial system crashes, and is likely to embrace its own version of There Is No Alternative (TINA), since, in addition to the rock and the hard place, the Fed’s compliance is unambiguously required in the law.
If the President did mint a really big coin, say the $60 T one, and then quickly paid off the intragovernmental and Fed debt, about $6.7 Trillion, and continued paying off short-term debt, and if the Court then granted standing, and, after six months or so, for example, declared his action unconstitutional, what would be the remedy the Court could implement to unwind the action, and the repayment of about $2 Trillion in debt to non-Federal entities? The Court might relatively easily be able to undo the $6.7 Trillion in repayment, but once the debt to non-Federal entities is redeemed; then it is redeemed. The former US bondholder “creditors” aren’t giving their money back.
As a practical matter the Court can’t do anything about that, since the reserves paid out are in private hands. Further, even if the Court ordered that the Treasury return the reserves used to repay the intragovernmental and Fed debt to the Fed and to issue new bonds to restore the status quo, all that would do is stop the President from paying down further debt, but still not eliminate the headroom under the debt ceiling he had created by paying down debt held by non-Government entities. So, even in this case of extreme reaction by the Court, he’d still improve the debt limit situation by minting the platinum coin, without taking the chance that the markets might reject the debt instruments without requiring higher interest rates.
Option 4, is the 14th amendment option nullifying the debt ceiling. The President has a point here, that if this were challenged in Court then bond markets might feel uncertain about buying bonds issued during the period the debt was exceeding the ceiling. However, even if the Court ruled not only that the debt issuance was illegal, but also that the debt instruments should not be honored, a very long-shot finding, I think, does anyone seriously think that the Congress would cause a default by refusing to guarantee those bonds after the fact of Treasury’s issuance of them? If you believe that, then I have the proverbial pretty big bridge to sell you.
The uproar would be far worse in that case than it was in relation to the issue of whether Federal workers would get back pay at the end of the shutdown or not. In any event as I said earlier, using the 14th amendment to justify violating the debt ceiling on grounds of constitutionality can only be a last resort when all other options haven’t worked. So, the President has an obligation to try the others before he even turns to this option.
Option 5 is the consols option. If challenged in Court, this is probably the least likely option to be overturned. The law doesn’t prohibit issuing consols, and while anyone with the money can sue over anything, the buyers of consols will certainly evaluate what the chances are that debt instruments of this type can be viewed as violating the debt ceiling, or as prohibited.
I think the chances here are slim and none, and that people would feel very comfortable buying consols because they would be confident a) that the Federal Government would not default on its interest payments, and b) that the consols would always be redeemable in private markets where buyers looking for these kinds of instruments would be willing to buy them. So, I think it’s incorrect to lump consol offerings into the same category as conventional bonds clearly issued in reliance on the 14th amendment and in obvious defiance of the debt ceiling. They would not be nearly as subject to doubt and uncertainty as conventional bonds would be.
Option 6, premium bonds, is another bond option that, like consols, seems to provide a way of escaping the debt ceiling while being less likely to shake the confidence of the bond market. I think that’s true because it’s hard to see what’s illegal about this kind of bond issue. All that’s different is a higher interest rate offering which allows Treasury to sell at a higher price at auction while obligating itself to a lower face value that must be repaid.
However, Matthew Yglesias and Kevin Drum are persuaded that such bonds are “. . . .bound to set off an avalanche of litigation and uncertainty about what’s really what.” Well, anything is possible, of course, but even if there is litigation aimed at this very simple and apparently legal expedient, why would that shake the markets very much? And if they did react with a bit of unsteadiness, wouldn’t there be a good deal less uneasiness than there would be with Treasury Bonds that might turn out to be unauthorized by Congress. I certainly think so.
Option 7, sales of Treasury material and cultural assets, is another option that involves the Treasury getting reserves from the Fed in return for an asset. It is in the same category, in this way, as the platinum coin, and the exploding option. But an asset sale, while possibly having the questionable political aspects I discussed earlier, is simpler and easier to understand than the exploding option, and less “out there” from the standpoint of financial practitioners and economists than the platinum coin. In addition, the Federal Government sells material assets continuously, but not to the Federal Reserve. However, I know of no legal prohibition against such sales. And faced with the choice of making such sales, or Government default threatening an international financial crash, I expect the Fed might well invoke TINA and take the plunge.
I also know of no reason why sales of assets like these would shake confidence in the markets. After all, the Treasury would be doing everything it can do to pay the debts of the United States and would be successfully doing so. So, why should that lead to “. . . an avalanche of litigation and uncertainty about what’s really what.” In Part V, I’ll continue this reply to the President’s TINA claim by summarizing my evaluation of differences among the options.
(Cross-posted from New Economic Perspectives.)
It now looks like the big media and leaders in both parties are no longer focusing on the Government Shutdown crisis, but are now moving on to the notion that the shutdown is melding with the upcoming probable breaching of the debt limit to create a combined mother of all fiscal crises. Along with this, the media and many politicians, encouraged by the President’s standing “strong, strong, strong,” are now directing attention away from whether ObamaCare will be delayed or compromised, to other types of ransom the Administration might pay in return for both re-opening the Government and also providing an increase of an undetermined amount in the debt limit. Meanwhile there are reports that under increasing Wall Street pressure John Boehner is preparing to negotiate with House Democrats and allow a vote to pass a CR and a clean debt limit increase bill, in return for concessions he can take back to his caucus.
TINA does not apply in this case, and the President’s choices are not limited to just refusing to negotiate or giving in to ransom demands whether focused on Obamacare, the Keystone Pipeline, entitlement cuts,“tax reform frameworks” or any other measures that give “tea party” Republicans “the respect” they think is due them. By continuing to frame things in this way, the media and politicians in both parties are echoing the Administration’s framing of the situation and absolving the President of his share of the blame for the debt limit crisis. They are also preparing the way for a compromise, that will, almost certainly, result in hurtful cuts to Government spending including renewed consideration of “the Great Betrayal,” also known as the Grand Bargain, and probably passage of the chained CPI cuts to Social Security over the objections of a large majority of the American people.
In two previous posts, here and here, I listed the five options the Administration can use to lessen or nullify the impact of Republican intransigence on increasing the debt limit. I’ll now list them again to emphasize that there is no TINA. The President has options to defeat the debt ceiling without doing the “Great Betrayal.”
1. A selective default strategy by the Executive, prioritizing not paying for things that Congress needed, and perhaps not paying debt to the Fed when it falls due and working with the Fed to get the $2.05 Trillion in bonds that it was holding canceled;
2. An exploding option involving selling a 90-day option to the Fed for purchasing some Federal property for $ 2 Trillion. Then when Congress lifts the debt ceiling, the Treasury could buy back the option for one dollar, or the Fed could simply let the option expire; Read the rest of this entry →
This series provides a framing document for Platinum Coin Seigniorage (PCS). In the four previous parts of the series, I pointed out that there are three classes of opponents of High Value Platinum Coin Seigniorage (HVPCS, $30 T and above). The first and largest group opposes all Platinum Coin Seigniorage (PCS) of whatever type. The second, opposes HVPCS, but favors using the Trillion Dollar Coin (TDC) for the limited purpose of avoiding the debt ceiling. The third, opposes HVPCS, and doesn’t really favor using the TDC either, except, perhaps, as a last resort to avoid the debt ceiling. It favors an incremental approach to PCS beginning perhaps in the millions or billions in face value, and over a long period of time, after giving people years to adjust to Treasury using platinum coins with unusual, and unprecedented, face values, eventually building up to a TDC.
Parts two, three, and four, and this post (Part Five), and the remaining post in this series considers further objections to HVPCS brought forward by people in one or more of these categories, and my replies to them. As you’re seeing, if you’re following the series, the opponents of HVPCS are throwing everything but the proverbial kitchen sink at it. In this post, I’ll consider some objections to PCS and HVPCS based on their predicted institutional impact.
The platinum coin is “the first cousin of defaulting on our debt”
This objection is from Ezra Klein; he says:
. . . It is a breakdown in the American system of governance, a symbol that we have become a banana republic. And perhaps we have. But the platinum coin is not the first cousin of cleanly raising the debt ceiling. It is the first cousin of defaulting on our debts. As with true default, it proves to the financial markets that we can no longer be trusted to manage our economic affairs predictably and rationally. It’s evidence that American politics has transitioned from dysfunctional to broken and that all manner of once-ludicrous outcomes have muscled their way into the realm of possibility. As with default, it will mean our borrowing costs rise and financial markets gradually lose trust in our system, though perhaps not with the disruptive panic that default would bring.
The “banana republic” stuff is just name-calling. What does using HVPCS, which is authorized by legislation passed in 1996, have to do with being a banana republic? Sure, we’ve never used HVPCS before to pay down debt and cover deficit spending, but why is it not a superior way to do these things than issuing debt instruments, which require us to deal with bond markets and to provide risk-free interest payments mostly to wealthy elites and foreign nations? It seems to me that it is that method of financing that is much more consistent with the methods used by the Latin American banana republics in the 20th century than HVPCS would be.
And why is the platinum coin the first cousin of defaulting on the debt? Ezra Klein says that it proves to the financial markets that we can’t be trusted to manage our economic affairs in a rational and predictable way. But why would it prove that?
It would prove that we’ve changed our way of paying off debt instruments and deficit spending alright; but that doesn’t mean that our new way of doing things wouldn’t be predictable and rational, and that financial markets wouldn’t know exactly what we were going to do. They’d know, for example, that the US wouldn’t be rolling any more debt by issuing new debt instruments, even though they may not like that as well as they like what we’re doing right now. They’d also know that with austerity off the table; we’d be likely to deficit spend a lot more to create full employment here, which they might guess would also be good for their flagging export-based economies.
As for our borrowing costs rising; just how does Ezra Klein suppose that would happen since 1) we’d use HVPCS to end sales of debt instruments altogether; and 2) our interest rates on still outstanding debt are mostly fixed, except for the relatively small volume of bonds that are inflation-protected?
This last notion of Ezra Klein’s makes two things clear. First, he’s fixated on using Trillion Dollar Coins or less; and has never thought through the implications of using a $60 T coin, having freaked out over the small-ball TDC proposal. And second, he hasn’t yet figured out that our bond interest rates can only go up if the Federal Reserve raises the Federal Funds Rate which it, and it alone, controls. He still thinks that the bond vigilantes and their “confidence” in US bonds determines our interest rates.
Compromises the independence of the Federal Reserve
That’s true. But, the vaunted independence of the Fed has not served us well over the years. What it has amounted to is that the Fed has not been accountable to the public. Its independence has meant independence from the Treasury and, largely, from Congress. But it has not meant independence from the big banks and Wall Street, which the Fed fails to regulate to any visible extent to protect the economy and the public, and whose interests the Fed has served ahead of the interests of the public at large. I am all for the President ordering the Secretary of the Treasury to use HVPCS, because I think the constraints imposed by that upon the Fed, and also the filling of the public purse to such an extent that it will be clear to people that the US can never run out of the currency it alone has the authority to issue, will make the Congress, the Fed, and the Executive Branch all much more accountable to the wishes of the American people.
Destroying the institutional structure of the financial system
I don’t know about its destroying the institutional structure of the system; but I will point to a few critical impacts I think HVPCS is likely to have. First, as Warren Mosler has pointed out in his characteristically pithy way,
“And all the coin does is shift interest expense from the Treasury to the Fed. . . “
This is Warren’s assessment of the financial system impact. But, second, an HVPCS coin would have a critical impact politically, because as I have pointed out time and again, it would end austerity politics for good, because it would end the debate over the national debt.
Third, it would make Treasury financing operations much more transparent than they are now. “The secrets of the temple” would be much more out in the open. That’s important, because right now the Federal Reserve and the banks escape accountability, since the American people don’t understand their role.
Fourth, the Federal Reserve Banks would have to pay IOR to maintain their target Federal Funds Rate. From the viewpoint of the public, that kind of operation would look like the bank savings accounts that people are familiar with. The Fed holds reserves and pays depositors an interest rate. Right now, when the Treasury pays interest on securities, that looks like debt to the public, not like the savings accounts that security accounts are like functionally. So, IOR replacing securities in response to HVPCS would greatly improve the political optics of government financing deficit spending.
And fifth, John Lounsbury makes this important point:
The reason Mosler’s one-liner is so significant is that, once discovered that it is no longer necessary for private banking to create the credit to pay for government appropriations when they exceed tax revenues, the banks have lost their umbilical cord to the federal government. The government will have demonstrated that private banking is not necessary to fund government operations.
A primal fear of private banking: The government might discover that public finance and private finance can be divorced. An entitlement can be ended: the need for government to pay interest to private institutions to finance operations would be no more.
That might well be beginning of the end for today’s institutional structure of the financial system. And I have to confess that after the many banking fiascos of the past 30 years, I can’t view that as a bad thing for either this country, or the rest of the world.
But that’s just me; maybe Ezra Klein has a different opinion?
(Author’s Note: h/t to Jack Foster for proposing a framing document for HVPCS. This is it; but divided into 6 parts for blogging convenience. The rest of the series will continue with objections made to HVPCS and my answers to them.)
(Cross-posted from New Economic Perspectives.)
As I pointed out in Part Two of this series, there are three classes of opponents of High Value Platinum Coin Seigniorage (HVPCS, $30 T and above). The first and largest group opposes all Platinum Coin Seigniorage (PCS) of whatever type. The second, opposes HVPCS, but favors using the Trillion Dollar Coin (TDC) for the limited purpose of avoiding the debt ceiling. The third, opposes HVPCS, and doesn’t really favor using the TDC either, except, perhaps, as a last resort. It favors an incremental approach to PCS beginning perhaps in the millions or billions in face value, and over a long period of time eventually building up to a TDC.
Part two, this post (Part Three), and the three remaining posts in this series consider the many objections brought forward by people in one or more of these categories, and my replies to them. As you’re seeing, if you’re following the series, the opponents of HVPCS have already thrown everything but the proverbial kitchen sink at it. In this post, I’ll consider some political objections to PCS.
The Executive will never do it because it’s too crazy, weird, bizarre, or outré for words and is beneath the dignity of the United States. Also, it’s too big to be practical.
Mostly, this kind of characterization is just name-calling and labeling and is really beneath contempt. A big problem exists. That problem is austerity politics and it is blocking the emergence of progressive economic policy during a time when the presence of nearly 31 million dis-employed people, unprecedented inequality, a stagnating economy, and many other serious challenges requiring an activist Federal government to enable solutions. This is what is too crazy, weird, bizarre, or outré for words and is beneath the dignity of the United States. This is what is profoundly impractical; not minting an HVPC of whatever face value to fill the public purse so we can pay off the debt and cover deficit spending for years to come.
HVPCS can provide the fiscal background that will open the way to constructive economic policies. HVPCS is a novel solution in the sense that it has never been used before. But that doesn’t make it crazy, weird, bizarre, or outré. It just makes it “new.”
Fearful, or conservative people will frequently characterize new initiatives in uncomplimentary ways; but their real objection is that the new proposal is outside of their comfort zone; and they believe in as little change as possible because they think that change is most often bad and rarely, if ever, a good thing. From their point of view, this is the best of all possible worlds, however evil it may be for the majority of people.
There’s no point to creating a Strategic Petroleum Reserve-like buffer stock of something the govt has the ability to create at will, especially if it’s just going to scare the hell out of people
This is an objection offered by those who prefer an incremental approach to PCS, rather than HVPCS with its consequence that enough seigniorage would be generated to pay off the national debt and cover deficit spending for many years to come. They emphasize the importance of making people comfortable with the idea of PCS before we use it to really change the situation of fiscal politics and move it away from austerity.
Making people comfortable and moving toward consensus is a laudable goal. But PCS will immediately be perceived as a threat to powerful vested interests (as I’ll explain below). These interests won’t allow the Treasury Department to have the power to create electronic credits in the Treasury’s spending account for very long. They will vigorously pursue repeal of the 1996 law to constrain Treasury once again to taxing or borrowing in order to fill the public purse. That’s why we do need a buffer stock of funds in the Treasury General Account (TGA) whether or not it scares people.
In addition, just what does “scaring people” people mean? Scaring bond traders? Scaring Wall Street? Scaring the big banks? Scaring the media who have gotten in bed with these interests? Scaring the people who have devoted their lives to propagandizing for austerity? Or does it mean scaring “average” Americans?
I don’t think it means scaring most people, because I think they will be comforted to know that the Treasury has enough funds to pay off the public debt as it comes due; and to cover deficit spending appropriated by Congress for many years to come. They will also be comforted to know that there’s no need to cut major popular safety net or discretionary programs, or to raise taxes on them.
Let’s get real! Using HVPCS may scare elites here in the United States and in other nations around the world. But it won’t scare the American people once they understand how it will impact their own lives.
It’s the same as “printing money”!
“Printing money” is an epithet from gold standard days used to characterize paper money that wasn’t convertible to, and thus “backed by” gold. When the US and other nations ended the gold standard in 1971, all money became fiat money, unbacked by convertibility into any commodity. So, today, when people refer to “printing money” they usually mean the Government issuing currency or bank reserves while deficit spending, without also issuing debt instruments of equal face value to withdraw an equal amount of money from the economy. When debt is sold along with new money created in deficit spending, this is often viewed as “debt-backed” money, and is also thought to be less inflationary than deficit spending unaccompanied by new government debt.
The objection to using PCS then, is precisely that it would provide the credits needed to add new money into the economy without issuing debt, and the basis of the objection is that this is more inflationary than adding the same money into the economy after subtracting an equal amount from it by selling debt. In turn, the idea that PCS-based deficit spending and debt pay off would be more inflationary than debt-based spending is based on the Quantity Theory of Money (QTM). The problem is that the QTM is false, and that both logical analysis of the theory and the empirical evidence available to us refute it.
I’ll discuss this a little more below under the inflation objection. But the main point here is that there’s no reason to believe that PCS-based deficit spending or debt repayment would be more inflationary than deficit spending or debt repayment accompanied by debt issuance. So, there’s nothing to the “printing money” objection. The US isn’t either Zimbabwe, or Weimar. It doesn’t have crippling external debts in currencies it does not create; or wholesale destruction or appropriation of its productive capacities to contend with. So, PCS won’t lead to our becoming like either of those historical basket cases.
The political blowback will be fierce, and minting the coin will strengthen the extremist faction in the Republican Party and lead to paralysis in the Congress.
Minting a platinum coin with any appreciable face value over $1 Billion Dollars will create a political firestorm. It doesn’t matter if the face value is $100 Billion or $100 Trillion, the act of using PCS, including HVPCS, will be met with outrage, propaganda, labeling, name-calling, and predictions about the decline and fall of the United States. The extremist faction of the Republican Party will have a field day and will be fully supported in their outrage by Wall Street, the big banks, and the financial and political MSM.
However, it won’t lead to political paralysis in Congress, provided HVPCS is used rather than “moderate” PCS options. If $60 T gets credited to the TGA, and the President pays down $6.5 T in intragovernmental debt, during the first week after minting the coin, then the Congress will be faced with a game-changing fiscal backdrop to deal with. The President can advocate for action on a variety of measures that will meet national problems with no questions about the fiscal capacity to accomplish these things. If the Republicans simply refuse to pass them, or to work through compromises without having the excuse that we must balance the budget, reduce the deficit, or repay debt because we are running out of money; then they will suffer severe losses in 2014, and the President will get what he wants in 2015.
It really is as simple as that. Without being able to “poor mouth” the country, the Republicans will have no rationalization for their obstructive fiscal politics, and the President will have no excuse for cutting programs people need and want. If the extremist Republicans continue on with their normal economic nonsense, then they will be dead men/women walking as we approach the next election. The 80 CEOs and their “fix the debt” stuff, as well as Peter G. Peterson will also be gone, as political factors. And both parties will have to get about the business of solving our nation’s problems, or suffer the consequences in 2014.
The platinum coin will only delay a reckoning we need to have
The “reckoning” here is over the Republicans’ “reckless threat to force the United States into default.” Using either the TDC or HVPCS, lets the Republicans off the hook on this issue and makes the new hot issue the President’s irresponsible action in minting a platinum coin. I think whether this happens or not depends on the face value of the platinum coins involved. If the platinum coin is a $60 T or some other HVPCS alternative, then I think the political system will quickly begin frying bigger fish than either of those issues.
The issue of whether to let Republicans off the hook is small potatoes compared to the issue of whether HVPCS should be used in place of debt issuance to pay off old debt and perform deficit spending without issuing any new debt instruments. Both this issue and the issue of whether we should end austerity politics when there’s no longer any need to worry about solvency or debt when deficit spending, are far bigger issues than whether the Republicans were “reckless” or the President “irresponsible.” In addition, the issue of the President’s “irresponsibility” will be gone in a week once he pays off that first $6.5 T in debt subject to the limit.
We can’t mint a platinum coin because this would violate a social norm!
Social and cultural norms are properties of social systems, and there are many levels of social systems ranging from families and small friendship groupings to international social systems. You can certainly say that there’s a norm against using HVPCS as a plausible solution to the national debt, and claim that this is not how our society pays its bills. And, it’s certainly true that we haven’t done it in the past; and that people working for, or identifying with, the FIRE sector are opposed to using PCS as a solution to the debt problem and take refuge in ridiculing us and trying to activate a social norm and frame that they think is dominant.
But these things don’t show that there really is a social norm preventing this in the United States when viewed as a large-scale political/economic system. Or that President Obama has to move incrementally to change “the social norm” because he would have a problem with implementing High Value PCS with a bold lightening strike minting a $60 T coin, since the country as a whole would rise up in opposition to such a move due to the strength of the social norm that we shouldn’t use HVPCS. There’s no evidence at all to suggest that this would be the case, and every reason to believe that most people don’t care how the national debt is paid off; so long as it’s paid off, and is not there to burden themselves, and “their grandchildren.”
After all, most people are completely unaware of how deficit spending and debt instruments work, and completely unaware that “debt is not debt” as we MMTers like to say. What they do know is that the United States has more than $16.4 T in debt instruments out there. That scares them, because they’ve been made to believe that it’s their debt, and I think they really don’t care if this “debt” is paid off by taxing more than we spend, or through using platinum coins to get the Federal Reserve to create money out of thin air for Treasury to use in a way that has no obvious short-term effects on them.
In part four, I’ll discuss more political as well as some economic objections.
(Author’s Note: h/t to Jack Foster for proposing a framing document for HVPCS. This is it; but divided into 6 parts for blogging convenience. The rest of the series will continue with objections made to HVPCS and my answers to them.)
(Cross-posted from New Economic Perspectives.)
A little disconnect: what President Obama, through Treasury and the Federal Reserve, really said last Saturday:
“We’re running out of money because the Republican House may not allow us to float any more debt; so I took the Platinum Coin off the table just to ensure that we would!
Next month, I’ll give you the gift of austerity, because, naturally, we’re now really gonna run out of money!”
Despite Saturday’s announcements by the Treasury and the Fed the Platinum Coin Seigniorage (PCS) legislation is still on the books. For the President not to use it to fill the public purse with enough funds to banish the fiscal conditions that underlie austerity politics — the national debt, and the ability to cover the deficit for a long time to come — is inexcusably corrupt, fiscally and economically irresponsible, and completely opposed to the public purpose that the President is supposed to serve.
So, I want to tell the President that for as long as PCS is on the books, and he and others are claiming that we need austerity because we are “running out of money,” he has the duty and the obligation to mint a game-changing High Value Platinum Coin, for example, a $60 T platinum coin. After this legal tender coin is credited by the Fed, the presence of $60 T in the Treasury General Account (TGA), and its immediate use to begin paying off the national debt, will make it very plain that there is no need for austerity; no need to cut SS, Medicare, and Medicaid; no need to cut Head Start, no need to cut anything that’s working.
Yesterday, the White House line was that temporary fixes to the debt ceiling problem like the platinum coin would not solve the budgetary and political problems faced by the Government. Our mainstream media people did their thing by failing to call out the President on that – probably because they, themselves, have never dared think about any other PC option apart from the Trillion Dollar Coin. It’s easy to see, however, that a $60 T coin wouldn’t be a “temporary fix,” spawning crises every few months, even if it wouldn’t last forever. The fact that a $1 Trillion Dollar Coin would not solve our debt ceiling problem for very long, isn’t an argument for taking High Value PCS (HVPCS) off the table at all.
So, I call on the President to mint that $60 T coin now! I call on him to abandon austerity and to create financial plenty in Federal fiscal policy by using game-changing HVPCS. Austerity and “grand bargains” are “the great betrayal!” We don’t need such “greed bargains.” We need a full public purse, and then we need to get Congress to open the purse for programs that fulfill public purpose.
I call on others to join me in beginning again to blog, comment, facebook, and tweet about PCS; but this time to forget about the TDC, which was always the wrong coin, and focus on #minttheHVPC instead.
Up the ante! Make this about ending austerity, and using the right platinum coin to create the political space needed for doing it! Forget about them taking PCS off the table! As long as it’s legal it’s still on the Table! Mint that HVPC! End Austerity!
(Cross-posted from Correntewire.com.)
Yesterday, Ezra Klein reported in the Washington Post that:
The Treasury Department will not mint a trillion-dollar platinum coin to get around the debt ceiling. If they did, the Federal Reserve would not accept it.
That’s the bottom line of the statement that Anthony Coley, a spokesman for the Treasury Department, gave me today.
“Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit,”
The inclusion of the Federal Reserve is significant. For the platinum coin idea to work, the Federal Reserve would have to treat it as a legal way for the Treasury Department to create currency. If they don’t believe it’s legal and would not credit the Treasury Department’s deposit, the platinum coin would be worthless.
This statement from Ezra Klein would have us believe that the Federal Reserve is an independent agent in this matter, and that it can refuse to credit the deposit of a newly minted high face value proof platinum coin, if the Treasury makes such a deposit. It also assumes that if the Treasury insisted on the deposit of the coin, that the Fed would be in a position to go Court to contest that; that it has a choice in the matter.
I don’t believe that either of these things are true. I also think they are just a rationalization, so the President, who most probably decided this can pretend that this decision isn’t on him; or at least can be partially blamed on the Fed. Let’s review some critical aspects of the relationship between the Fed and the Treasury.
First, here are a some quotes from the US Code and comments.
“…banks, when required by the Secretary of the Treasury, shall act as fiscal agents of the United States; and the revenues of the Government or any part thereof may be deposited in such banks, and disbursements may be made by checks drawn against such deposits.”12 USC 391
The coins are legal tender, and disbursements can’t be made unless a deposit is credited. So, both imply that all banks that receive such deposits must credit them, and that the Bank officers at the New York Fed cannot refuse to credit the face values of a deposit of coins by the US Mint in its Public Enterprise Fund (PEF) Account. As for the Board of Governors, including the Fed Chair, forbidding the New York Fed from crediting the deposit, there is this part of the USC:
“. . . wherever any power vested by this chapter in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.” 12 USC 246
The US code says that the Secretary has supervision and control, not the Fed Chair, or the bank officers at any of the banks, however exalted, within the Fed system. So, if anyone in the Fed system wants to go to Court about this; it’s hard to see that they could get standing even to file an injunction. In fact, if they attempted to get an injunction and to sue after a Treasury order prohibiting them from doing that, apparently the Treasury Secretary could fire the offending parties if “supervision and control” means what it usually means.
In short, the Platinum coin is still on the books. The legal rationalizations of the Treasury and the Fed are a smoke screen to obscure the President’s deciding not to use the authority he is granted by the Platinum Coin Seigniorage (PCS) legislation. And finally the coin certainly would work if the President decided to use it, provided he ordered the Secretary to mint and have a platinum coin deposited in the Mint’s PEF at the New York Fed; and provided the Secretary sent instructions to the New York Fed and the Board of Governors ordering that the coin be credited and no attempts be made to contest the Secretary’s action in a Court of Law.
The Wrong Kind of Coin
After a hiatus of 16 months the Trillion Dollar Coin (TDC) surfaced again in the mainstream blogging and MSM World at the beginning of December. The outbreak of posts and discussions was fairly intense as people began looking beyond the “fiscal cliff “crisis and started looking ahead to the debt ceiling fight to come. During the second half of December however, posts and commentary slowed as we got closer and closer to the “cliff,” and most commentary focused on that.
But at the beginning of the New Year, after the ‘cliff” was partially deflated, new posts from mainstream bloggers on the possibility of minting a Trillion Dollar Coin (TDC) to avoid the debt ceiling appeared, including a post from Paul Krugman. In addition, Jerrold Nadler (D-NY) became the first Congressman to advocate for the TDC to get around the debt ceiling, the TDC was suddenly ubiquitous on MSNBC, and began appearing on other networks as well.
The ground swell for the TDC continued through the first week of January and kept growing larger and larger facilitated by the #minthecoin twitter campaign. The hashtag #mintthecoin was originated By Stephanie Kelton of the Economics Department of the University of Missouri at Kansas City. Joe Wiesenthal, blogging at Business Insider, picked it up, used it to name a White House petition, and marketed a viral petition drive urging the President to mint a TDC and use it to pay down debt so the debt ceiling could be avoided.
The twitter campaign became a phenomenon and a trending topic, accompanied by more and more blog posts across the political spectrum, both pro and con, about using the TDC. Signatures on the petition grew fast, finally resulting in questions at White House news conferences about the TDC, asking whether the President was going to use it or had considered it.
Increasingly, after January 5th, the platinum coin was everywhere even getting covered by the Colbert show. Finally, on June 12, as the web frenzy continued to grow and after a very notable panel discussion of Platinum Coin Seigniorage on Chris Hayes’s Up show, including both Wiesenthal and Kelton, among others, this past Saturday morning at MSNBC, the Treasury and the Fed tried to put an end to speculation by announcing that the Administration would not mint the coin.
So, now the web echos with cries that the platinum coin is dead, some of the cries are joyful. Some of them are angry. Perhaps they’re right. Perhaps the coin is dead. But perhaps also it will come back again, in a new guise, when conditions are right. How can that be?
Well first, we need to recognize that the TDC, with its intense and frenzied web-based campaign was based on the wrong coin and the wrong cause. The cause or the problem it was addressed to was getting past the debt ceiling by creating some head room below it with the seigniorage proceeds. After that, the TDC bloggers envisioned that deficit spending would continue to require issuing debt instruments, and that there would be no further “disruption” in the normal way of doing things, and also that the President would cope with the coming sequester, and continuing resolution (CR) conflicts separately.
So, the TDC, even if used, would really change very little. It wouldn’t stop the Republicans from pursuing spending cuts in entitlements and important discretionary programs. It wouldn’t change the fundamental drive for austerity in both parties, fueled as it is by the view that “national debt” is both frighteningly large, and also unsustainable. So, at best, the TDC was a tactic to put off the day of reckoning with the Republicans, and perhaps to use the law authorizing it as the basis for a swap with the Republicans of the PCS legislation for the debt ceiling law, a very silly and odious idea proposed by a mainstream blogger, wanting to return the system to “normal” but not change it.
Considering this background, it is easy for the President to say that we won’t use PCS. Maybe not as easy he would have liked. But still the TDC was only a tactic. The President can abandon it and talk about other tactics, or his apologists can talk about his desire to avoid default by having a government shutdown that will break Republican resistance, as President Clinton was able to do. If they and he can do that for long enough, then the President can keep Democratic Congresspeople in line for as long as it takes for him to make his “grand bargain” for austerity with enough Republicans to join with the supine Democrats to pass it.
Even though I have blogged more frequently about PCS than anyone, I have never been for minting one TDC and returning to normal Treasury/Fed procedures for deficit spending. I have always proposed substantial and significant change in the financial system, change that would end with paying off the national debt, and with destroying the underlying political rationale for austerity based on the debt and the related idea of fiscal unsustainability.
During the whole current TDC campaign I have blogged constantly about High Value Platinum Coin Seigniorage (HVPCS) and its potential for changing the fiscal and political landscape and destroying the basis for austerity politics, while changing the game radically for progressive attempts to create greater economic and social justice. I referred to HVPCS as the big story the mainstream was missing, and also as game-changing PCS that would change the context of politics.
I believe that if the MSM bloggers hadn’t set up one of their usual “only talk to fellow villagers” echo chambers, but instead had embarked on an honest discussion of PCS options, they would have ended with a groundswell of support for HVPCS to fight austerity and that idea, since it is more strategic than tactical, would have been much harder for the President, Geithner, and Bernanke to dismiss, after a campaign that had identified it as the way out of austerity for the United States.
The President must, if he’s going to be successful in making the “grand bargain” continue to present himself as preferring not to make serious cuts to entitlement and other valued domestic programs, unless the Republicans “make him do it.” To the extent possible, the Democrats who will support him, also want to deny responsibility for the actions they will take. For the President and his Democrats to be seen as forced into the “grand bargain,” the President cannot be seen as acting to take an important way out of the austerity trap “off the table.” And that is what he would have had to do if the TDC campaign had been replaced with an HVPCS campaign sold as an answer to austerity.
The MSM and the blogosphere generally have missed the chance to generate such a campaign with the really heavy pressure it would have placed on the President and the Democratic Party. That is its failure; yet another disservice to the American people by the MSM Press.
The Right Kind of Coin
I’ve been blogging about the right kind of coin for a long time now, and very frequently since the latest wave of PCS began in December. That kind of coin is a platinum coin with a face value of $60 T. Why $60 T? Because that’s the face value needed to pay off the national debt, and to cover deficit spending for 15 – 25 years, enough time to educate people about the nature of fiat money and the desirability of changing the current financial system so that the Federal Reserve is reorganized as part of the Treasury Department, and the Treasury’s authority to create reserves as it spends, without either debt financing or seigniorage, is recognized as the way things ought to be done.
The idea that after Congress appropriates money for Federal deficit spending, that spending can only occur if and when the Treasury can raise the money, is a hangover from gold standard days and ridiculous for a fiat sovereign government like the United States. The authority to spend should be delegated by Congress to the Treasury at the point appropriations are approved.
Appropriations are a mandate on the Executive; that mandate, in a sane nation, would be accompanied by the delegation of the authority to fulfill the mandate. That is the system we should eventually have because it is the only one that makes any sense and that can keep both the Executive and Congress accountable for their actions.
But until Congress passes legislation creating that system, it ought to be recognized by all that the PCS legislation is on the books, and that for the President not to use it to fill the public purse with enough funds to banish the underlying fiscal conditions that underlie austerity politics, the national debt, and the ability to cover the deficit for a long time to come, is inexcusably corrupt, fiscally and economically irresponsible, and completely opposed to the public public purpose that the President is supposed to serve.
So, I want to tell the President that for as long as the PCS law is on the books, and austerity is impending, he has the duty and the obligation to reject it and to mint a game-changing PCS solution using a very high value platinum coin, that after it is credited by the Fed, will make it very plain that there is no need for austerity, but that there is a need for whatever deficit spending Congress needs to appropriate, and he needs to implement, to put America back on the road to the economic and social justice we ought to be pursuing as part of a Green New Deal.
I call on him to mint that $60 T coin now. And if he fails to do that; and instead, along with the Democrats, goes ahead with his plans to impose unnecessary austerity and sacrifice on most Americans other than the wealthy, in the face of his ability to create financial plenty, then I, and others who I am able to persuade about game-changing HVPCS, will do all we can to place the blame where it belongs for “the great betrayal,” and to see that Congresspeople who join in the “grand bargain” travesty of justice pay for it at the polls!
But before we get to that point, I call on others who want to see an end to austerity join me in beginning again to blog, comment, facebook, and tweet about PCS; but this time to forget about the TDC, which was always the wrong coin, and to focus on #minttheHVPC instead. That is up the ante! Make this about ending austerity, and using the right platinum coin to create the political space needed for doing it!
Forget about them taking PCS off the table! We’re putting it back on the Table! Make ‘Em Mint the HVPC! Make ‘Em Do It!
(Cross-posted from Correntewire.com.)
(H/T to Lambert Strether for the title!)
But there’s nothing benign about the platinum coin. It is a breakdown in the American system of governance, a symbol that we have become a banana republic. And perhaps we have. But the platinum coin is not the first cousin of cleanly raising the debt ceiling. It is the first cousin of defaulting on our debts. As with true default, it proves to the financial markets that we can no longer be trusted to manage our economic affairs predictably and rationally. It’s evidence that American politics has transitioned from dysfunctional to broken and that all manner of once-ludicrous outcomes have muscled their way into the realm of possibility. As with default, it will mean our borrowing costs rise and financial markets gradually lose trust in our system, though perhaps not with the disruptive panic that default would bring.
Name calling, labeling, and fear mongering aside, does Ezra understand the first thing about PCS? Does he know that if a $60 T coin were minted, and the Treasury General Account (TGA) filled with $60 T in electronic credits, the US would be able to just say goodbye to the international markets? If we were paying off the national debt as it fell due, we would not only not be defaulting, but would be paying all our creditors on time and in full, and without benefit of further debt instrument issuance. Nor would we care whether the markets trusted us or not; since we would not be borrowing money from them for the foreseeable future. So, how could our borrowing costs rise?
And, as far as predictability is concerned, what would then be predictable is that we would be paying all our obligations to everyone whether Wall Streeters, denizens of the global markets, pensioners, Medicare, and Medicaid recipients, and everyone else we have obligations too without anyone getting the short end of the stick. Now, I’d like to see that kind of predictability from this Government, without any drama, histrionics, deficit terrorism, or whining about how our moral character is too weak to endure the Washington Post’s favorite meme, “shared sacrifice.”
The argument against minting the platinum coin is simply this: It makes it harder to solve the actual problem facing our country. That problem is not the debt ceiling, per se, though it manifests itself most dangerously through the debt ceiling. It’s a Republican Party that has grown extreme enough to persuade itself that stratagems like threatening default are reasonable. It’s that our two-party political system breaks down when one of the two parties comes unmoored. Minting the coin doesn’t so much solve that problem as surrender to it.
Well, Ezra, that’s your notion of the worst problem we face. My notion of a problem is that our national debt is hopelessly misconstrued by people, and that its existence is being used by radical “free market” extremists who want to sharply cut the social safety net, and who also want to block the passage of other Government programs that would benefit most Americans. So, I want to get rid of “the national debt” as a political issue. The best way to do that is to get rid of that national debt. That can be done by using PCS, and in a way that will not drive the economy into depression, or working people into even deeper poverty.
The platinum coin is an attempt to delay a reckoning that we unfortunately need to have. It takes a debate that will properly focus on the GOP’s reckless threat to force the United States into default and refocuses it on a seemingly absurd power grab by the executive branch. It is of no solace that many of the intuitive arguments against the platinum coin can be calmly rebutted. It’s the wrong debate to be having.
Only your version of the platinum coin. You clearly have in mind the Trillion Dollar Coin (TDC) PCS option. I agree that it would only delay a reckoning, and that a debate over its legality is not the debate to have. But a $60 T coin, would eliminate the debt ceiling as a factor, make the debate about getting rid of austerity irrelevant, and also make it impossible to use any of following to oppose progressive legislation:
– “The Government is running out of money.” (Not with a $60 T coin in the bank.)
– “The Government can only raise money to spend by taxing and borrowing” (Not with PCS)
– “We can’t keep adding debt to our national credit card.” (We won’t be using any of the money on the credit card.)
– “We need to cut Government spending and make do with no more money.” (Only if more spending would definitely cause inflation.)
– “if the Government borrows more money, then the bond markets will raise our interest rates.” (The Government won’t be borrowing anymore.)
– “If we continue to issue more debt, our main creditors: the Chinese, the Japanese, and our oil suppliers, may cease to buy our debt, making it impossible for us to raise money through borrowing which, in turn, would force us into radical austerity, or perhaps even into insolvency, which would then be followed by radical austerity and repudiation of our national obligations.” (Again, the Government won’t be borrowing anymore, so who cares if they no longer want to buy our debt)
– “Our grandchildren must have the burden of repaying our national debt.” (There won’t be any debt or any burden.)
– “Now, the final step – a critical step – in winning the future is to make sure we aren’t buried under a mountain of debt.” (Again, no debt; either mountain or molehill.)
– “Our government spends more than it takes in. That is not sustainable. Every day, families sacrifice to live within their means. They deserve a government that does the same.” (But it is sustainable. If we use PCS, then we can have gaps between taxes and spending every year.)
– “We need to cut entitlements like Social Security and Medicare, because we are running out of money and they are not fiscally sustainable.” (But they are with PCS, because we won’t be running out of money!)
– “If we make the hard choices now to rein in our deficits, we can make the investments we need to win the future.” (Given PCS, what we do now about deficits has nothing to do with our capability to make the investments we will need)
– “We need to reduce our deficits to be fiscally sustainable.” (Deficits have nothing to do with fiscal sustainability in the sense of continued capability to spend, which will be very plain to people if $60 Trillion is sitting in the TGA.)
– “We face a crushing burden of debt. The debt will soon eclipse our entire economy, and grow to catastrophic levels in the years ahead.“ (Can’t say that if most of the debt is about to be paid off.)
– “Our debt is out of control. What was a fiscal challenge is now a fiscal crisis. We cannot deny it; instead we must, as Americans, confront it responsibly.” (PCS can confront it responsibly, but the bipartisan horror just enacted can’t.)
– “We believe the days of business as usual must come to an end. We hold to a couple of simple convictions: Endless borrowing is not a strategy; spending cuts have to come first.” (Right! So let’s stop borrowing and use PCS.)
– “Everyone knows that the U.S. budget is being devoured by entitlements. Everyone also knows that of the Big Three – Medicare, Medicaid and Social Security – Social Security is the most solvable. . . . “ (The budget can be as big as we need it to be with PCS.)
– “The Social Security Trust fund is a fiction, a mere bookkeeping device.. . . There is no free lunch. There is nothing in the lockbox.” (There will be if we pay back the trust fund through PPCS.)
– “There is a deficit/debt reduction problem for the Federal Government that is not self-imposed.” (What’s the problem? We can’t run out of money with PCS!)
– “The Federal Government is like a household and that since households sacrifice to live within their means, Government ought to do that too.” (What nonsense! As PPCS shows very well; the Government is not like a household. Households can’t create unlimited funds through PCS; but the Federal Government can.)
– “The only way to tackle our deficit is to cut excessive spending wherever we find it.” (It’s always good to cut spending that’s not in the public interest. But if spending is having good results, and we’re using PCS, then there’s no reason to cut it, whether taxes cover the spending or not.)
– “We should also find a bipartisan solution to strengthen Social Security for future generations.” (With PCS, we can easily strengthen SS by extending benefits, and we don’t need to do it through a bipartisan Rube Goldberg contraption.
– “The United States is in danger of becoming the next Greece or Ireland.” (Even without PCS it can’t become Greece or Ireland, only the next Japan. But with PCS it can become the United States again.)
– “Fiscal Responsibility means stabilizing and then reducing the debt-to-GDP ratio and achieving a Federal Government surplus” (With PCS, the debt-to-GDP ratio will be stabilized and reduced, but no “surplus,” in the sense of more tax revenue than spending, will ever be necessary for revenue purposes.)
Ezra goes on to say that using the Platinum Coin will trigger a debate within the Republican Party, that will strengthen its worst factions, because its extremists will be able to argue against:
. . . a wild, unprecedented, inflationary power grab by an overreaching president. Making matters more difficult, it will become impossible for more cautious Republicans to break ranks. It’s one thing to argue, as many are already doing, that inducing default risks destroying the Republican Party for a generation. It’s another to abet such a blatantly unconstitutional, dangerous move from the executive branch.
Well, it’s not blatantly unconstitutional at all Harvard Law Professor Laurence Tribe thinks it’s legal. Yale Law Professor Jack Balkin thinks it’s legal. The lawyer who came up with the idea, beowulf (Carlos Mucha), thinks it’s legal. Philip Diehl, former Director of the US Mint thinks it’s legal. And, I, a Ph.D. political scientist with some background in Constitutional Law, also think it’s legal.
Even Ezra says it’s legal earlier in this very column. So, who are the Republicans to label it “blatantly unconstitutional”? What evidence would they have that it’s “blatantly illegal? If the President uses it he will have legal opinions supporting its legality. In addition, the plain language of the law says it’s legal. Arguments that it’s not are more complex and detailed than the plain language of the law. So, how will this play in the court of public opinion?
Ezra goes on to suggest that using the coin won’t end the conflict; but will cause the Republicans to work even harder and in a united fashion to get what they want. Well, isn’t that too bad, they’re just going to work harder at being even more nasty, so the rest of us shouldn’t do anything that will get them really ticked off. What kind of advice is that, the advice of a columnist who works for a newspaper with a deficit hawk editorial director, and a financial deal with the world’s most prominent deficit hawk: Peter G. Peterson?
Can’t you just picture it? Ezra gets called into a meeting with Fred Hiatt who asks him whether he can’t do anything to dampen this platinum coin wave that everyone is riding, and Ezra replying says: well, maybe I can write something that will make people very, very afraid of the tea partiers fomenting a new American Revolution.
Of course, Ezra may be right about a big coin making Republicans even more determined to destroy the US economy than they are now. Things could happen that way; but if a very high face value coin, like a $60 T coin, is minted; then the mere presence of the $60 T in the Treasury General Account (TGA), and its use to pay down debt, will change the political context, and make Republican propaganda look much more fanciful, than it does in an imagination that assumes the political context and the future won’t be changed by minting a big enough coin and using it to fill the public purse.
So, Ezra, notice what happens to the memes Iisted above. They’re just not going to work anymore, if a $60 T coin gets used. If the Republicans remain stiff-necked, what justification would they then have for austerity? Now, they have the debt, and no apparent means of paying it off except lowering spending and raising taxes. But what would they have after that coined filled the public purse? The answer is ZIP!
It is likelier that the platinum coin would drive the Republican Party towards a much more dangerous and enduring standoff. If Republicans never permitted another debt increase, would we just keep minting platinum coins? Would the Federal Reserve abet the strategy and work to hold down inflation, effectively putting itself in the middle of a titanic political fight? Would the market eventually begin to panic because American governance has entered into unknown territory?
If the Administration minted a $60 T coin, then it would probably never have to mint one again, since the first one would lead people to understand that the world won’t come to an end if Treasury can print money to fill the public purse to spend Congressional appropriations. Would the Fed help hold down inflation? Of course, it’s their mandate. It’s not about politics. They’d have to act that way. If they didn’t; there’d be immediate talk of folding them into Treasury! Finally, minting and using a $60 T coin to pay for debt and deficit spending won’t be inflationary.
There are two ways to truly resolve the debt-ceiling standoff. One is that the Republican Party needs to break, proving to itself and to the country that the adults remain in charge. The other is that America is pushed into default and voters — and the world — reckon with what we’ve become, and what needs to be done about it. Sadly, there’s no easy way out. It’s heads America wins, tails America loses.
Well, rule out the platinum coin, and sure, these may be one’s only two choices. But Ezra hasn’t shown that using a really BIG coin would elicit real problems, other than getting the Republicans and the right wing really, really, mad (maybe they won’t have lunch with him anymore), and there are compelling arguments suggesting the contrary. So, I think that Ezra’s gone off the deep end in this column, especially when you consider the cost of default to people, and also the cost of the austerity alternative. Both default-induced austerity; and major party-induced austerity by compromise are both utterly unacceptable.
We must find a third way! Ezra can’t just assume that there is no way out of his Hobson’s choice. He and we need to consider game-changing PCS before condemning the nation to default.
(Cross-posted from New Economic Perspectives.)
This post concludes my critical evaluation of Dylan Matthews’s, post published on Ezra Klein’s blog called “You know the deficit hawks. Now meet the deficit owls.”
Dylan’s post is in some ways typical of what one finds in WaPo these days. What was once a proud example of journalism has descended into a “he said/she said” format with only two sides to every question and a kind of parroting back of talking points the journalist or columnist constructs which she/he believes are associated with the two sides. Dylan’s article addresses the question of what we ought to do about the deficit by viewing it from the perspective of the deficit hawks vs. the deficit owls. However, there aren’t just deficit hawks and deficit owls in the economic aviary. There are also deficit doves as well.
Matthews ignores that position as a distinct one, even though he cites a deficit dove like Paul Krugman when it suits his purpose. So what is the deficit dove position? How does it differ from the other two? We don’t know based on his post. But there are MMT posts on this subject that Dylan might have and I think should have, researched.
In addition, the ping-pong talking point format of the post leaves one with a very superficial analysis of what hawks and owls and different people believe. The excuse for this, of course, will be lack of space in a short blog form. But that doesn’t change the fact that even though the journalist or writer involved makes an attempt to be neutral toward the contending parties, no real objectivity involving a deep understanding of the contending positions is presented. Only caricatures on the incomplete fair critical comparison set of positions survive the journalistic malpractice of faux objectivity.
Reading the post, you get the impression that MMT questions the mainstream with very distinct and opposed policy positions, and that the mainstream has counter-arguments to MMT. But you really can’t get any sense of the underlying deficit hawk, deficit dove, deficit owl reasoning behind their policy positions.
You don’t learn that the hawks are viewing the Government from the viewpoint that it is like a giant household, and that some of the doves share that perspective.
You don’t learn that the hawks often claim that the Government can run out of money.
You don’t learn that the hawks accept the Quantity Theory of Money, or that both hawks and doves, but not the owls believe in the existence of an Inter-temporal Governmental Budgetary Constraint (IGBC) on spending.
And most important of all you don’t learn about the Sectoral Financial Balances (SFB) Model, and how it works from the hawk, dove, and owl points of view.
In other words, from reading the Matthews piece you don’t learn anything about the depth of the owl position, relative to the others, and you also don’t get an impression that Dylan really understands the deficit owl position, and that he is capable of assessing with reasonable fairness how well it stands up to the criticism from the hawk or mainstream approaches.
So, in the end, even though people who like MMT were very happy to have the coverage from WaPo, and very happy that the post was relatively friendly as these things go, I think we have to conclude that Dylan’s wasn’t a good post, but another indication of WaPo’s decline as a paper of record. Nor am I alone in having a negative view of this post. Michael Hudson has recorded a strong reaction to it, as well, in a note to Stephanie Kelton which was blogged at Mike Norman Economics by Tom Hickey.
So, I call for WaPo to try again. People need an MMT post from WaPo written by one of the MMT leaders, alongside parallel posts from leading deficit hawks like David Walker and deficit doves like Paul Krugman, Jared Bernstein, or Dean Baker, with a concluding post recording extensive debates among the representatives of the major approaches. If we had that then all of the readers of The Post would be better able to judge for themselves which approach has the most to offer in the way of policies for setting our economy on a course that doesn’t waste people and that is culturally, socially, politically, economically, and environmentally sustainable in the foreseeable future. I’m sure that’s what we all want, but I’m afraid that this opening bid on MMT by WaPo didn’t get us very far down the road toward that result.
Having said all this about what was wrong with Dylan’s post, however, I will now end on a positive note, which perhaps explains why so many MMT supporters have a positive view of the post. There’s one very important and very beneficial thing that Dylan Matthews did that deserves a real shout-out!
For many years now, MMT economists and others who write in support of them have been trying to make a very important point to the mainstream. And that is that the claim:
is a myth, a fairy tale, or a deadly innocent fraud.
Dylan doesn’t say that in so many words. But he and the economists he cites, even Greg Mankiw grant this very important MMT/deficit owl point in passing.
If this post is any indication, mainstream economics, and certainly deficit doves, and hawks like Mankiw, now acknowledge that a nation like the US which is sovereign in its own fiat currency can never run out of money, or be prevented by the pure fiscal aspects of any situation from paying its debts or buying whatever goods and/or services it needs that are available for sale in its own sovereign currency.
So, that part of the great debate is now over. It will be very hard from here on, for the deficit hawks to maintain their deficit/insolvency terrorism in the face of the general recognition in economics that the Federal Government is not like a household, because it can never run out of the currency that it has the sole legitimate power to issue.
If they try, they will now be the ones facing ridicule and marginalization. And, increasingly, those politicians who try to claim we are running out of money, will also face ridicule and be viewed as ignoramuses by others.
That may not bother many of the Republicans coming from districts resistant to the realities of modern life. But, increasingly, “serious people” in Washington will stop repeating the myth about coming insolvency and move on.
Dylan’s post already does that by assuming that the real issue about MMT vs. the mainstream isn’t about solvency, but about excessive deficit spending causing either inflation or hyperinflation. Every critic of MMT cited in the post raises the objection either implicitly or explicitly that MMT policy proposals will lead to worrisome inflation, or hyperinflation. Now, that’s progress, because unlike the level of one’s national debt, or the size of one’s deficit in the abstract, or the nonsense debt-to-GDP ratio, which means nothing in itself, inflation is a real issue, not an artifact of some economist’s fevered theories.
More generally, the real issue is the generalized consequences of Federal fiscal policies and the programs associated with them. They have employment consequences, inflation/deflation consequences, environmental consequences, safety net consequences, medical consequences, educational consequences, inequality consequences, climatological consequences and all the rest. The position of MMT is that alternative fiscal policies need to be evaluated in terms of our best estimation of their impacts on our societies, cultures, polities, environments, and futures, and not in terms of their narrow, purely fiscal impacts on present and future Federal budgets.
Changes in unemployment and in inflation are two such real impacts, but we need to go beyond them to other real impacts. We need to evaluate the whole thing. Let the hawks put forward their budgets, and the doves theirs, and we owls will put forward ours, and then let everyone evaluate what consequences are likely for all of the alternatives, and which alternative is best overall in terms of real consequences and in terms of public purpose and not in terms of arbitrary debt, deficit, and debt-to-GDP ratio targets, that, in themselves have no meaning for people.
In other words, let’s get real. Let’s talk about real problems of real people that can be alleviated through fiscal policy and Government programs. Let’s stop taking about fairy tales, myths, and bogeymen. And let’s get on with the job of rebuilding the United States for our children and grandchildren and using every tool we have, including our fiat currency system, to realize the blessings of liberty and equality of opportunity for everyone.
(Cross-posted from Correntewire.com
This post continues my critical evaluation of Dylan Matthews’s, post published on Ezra Klein’s blog called “You know the deficit hawks. Now meet the deficit owls.”
Here’s the next exchange envisioned by Dylan:
“According to Galbraith and the others, monetary policy as currently conducted by the Fed does not work. The Fed generally uses one of two levers to increase growth and employment. It can lower short-term interest rates by buying up short-term government bonds on the open market. If short-term rates are near-zero, as they are now, the Fed can try “quantitative easing,” or large-scale purchases of assets (such as bonds) from the private sector including longer-term Treasuries using money the Fed creates. This is what the Fed did in 2008 and 2010, in an emergency effort to boost the economy.
“According to Modern Monetary Theory, the Fed buying up Treasuries is just, in Galbraith’s words, a “bookkeeping operation” that does not add income to American households and thus cannot be inflationary.
“It seemed clear to me that . . . flooding the economy with money by buying up government bonds . . . is not going to change anybody’s behavior,” Galbraith says. “They would just end up with cash reserves which would sit idle in the banking system, and that is exactly what in fact happened.
“The theorists just “have no idea how quantitative easing works,” says Joe Gagnon, an economist at the Peterson Institute who managed the Fed’s first round of quantitative easing in 2008. Even if the money the Fed uses to buy bonds stays in bank reserves — or money that’s held in reserve — increasing those reserves should still lead to increased borrowing and ripple throughout the system.”
Evidently, Gagnon has no idea that increasing the amount of reserves does not lead to increased borrowing, because banks don’t need more reserves to make loans. All they need are credit worthy borrowers and access to the Fed discount window to make whatever quantity of loans they want to. This is one of the main points about the banking system MMT makes. Put simply: lending is not reserve constrained! It’s constrained by bank willingness to lend to credit worthy borrowers.
Dylan’s next point is:
“Mainstreamers are equally baffled by another claim of the theory: that budget surpluses in and of themselves are bad for the economy. According to Modern Monetary Theory, when the government runs a surplus, it is a net saver, which means that the private sector is a net debtor. The government is, in effect, “taking money from private pockets and forcing them to make that up by going deeper into debt,” Galbraith says, reiterating his White House comments.
“The mainstream crowd finds this argument as funny now as they did when Galbraith presented it to Clinton. “I have two words to answer that: Australia and Canada,” Gagnon says. “If Jamie Galbraith would look them up, he would see immediate proof he’s wrong. Australia has had a long-running budget surplus now, they actually have no national debt whatsoever, they’re the fastest-growing, healthiest economy in the world.” Canada, similarly, has run consistent surpluses while achieving high growth.”
Gagnon must be kidding, or at least totally ignorant about Jamie’s background, and the major contributors to the MMT synthesis, Of course, Jamie is quite familiar with Canada having close ties to the land of his father’s birth, and MMT economists know all they need to know about Australia, since MMT leader Bill Mitchell is constantly writing about the Australian economy and its various tragedies. However, the point here is that Gagnon doesn’t see that these two nations show that MMT’s Sectoral Financial Balances (SFB) model is exactly right in its explanations, since they are able to run surpluses without disaster, only because, unlike the United States, the foreign sectors of their economies run deficits (that is Canada and Australia run trade surpluses) large enough to accommodate the private sector savings desires of Australians and also the Government’s desire to run a budget surplus. The US however, currently has a need to run Government deficits of 10% to support both our private sector savings desires of 6% of GDP, and our foreign sector’s desires to export 4% of US GDP to US consumers so they can accumulate US dollars in the form of electronic credits.
Default vs. Hyperinflation?
“But MMT’s own relationship to real-world cases can be a little hit-or-miss. Mosler, the hedge fund manager, credits his role in the movement to an epiphany in the early 1990s, when markets grew concerned that Italy was about to default. Mosler figured that Italy, which at that time still issued its own currency, the lira, could not default as long as it had the ability to print more liras. He bet accordingly, and when Italy did not default, he made a tidy sum. “There was an enormous amount of money to be made if you could bring yourself around to the idea that they couldn’t default,” he says.
“Later that decade, he learned there was also a lot of money to be lost. When similar fears surfaced about Russia, he again bet against default. Despite having its own currency, Russia defaulted, forcing Mosler to liquidate one of his funds and wiping out much of his $850 million in investments in the country. Mosler credits this to Russia’s fixed exchange rate policy of the time and insists that if it had only acted like a country with its own currency, default could have been avoided.
“But the case could also prove what critics insist: Default, while technically always avoidable, is sometimes the best available option.”
Well, this last is a mouthful. Yes, Warren Mosler made a lot of money on his “bets” on Italy, and lost a lot on Russia. But what this shows is that Governments can voluntarily default if they choose to. MMT economists have always said this and still say it. So why is political stupidity or perfidy counted against the truth of the MMT proposition that Governments sovereign in their currency have no fiscal solvency problems, only voluntary constraints and political problems?
On the contrary, I think the Russian case is one of the primary illustrations of a point that deficit owls have been trying to spread far and wide. Namely, that sometimes default is due to stupidity and perfidy and not to economic forces and that citizens in a democracy need to be aware of that, and of the full capabilities of currency sovereign Governments to always pay debts incurred in their fiat currency and to spend whatever is necessary to enable full employment in their nations. They are never, never, out of money except by choice. So, the real questions are:
– why are they choosing to default?
– Who will benefit from this political choice?
– And who will be asked to pay the price?
And how does the Russian case “prove” that: “Default, while technically always avoidable, is sometimes the best available option”? Is Dylan, through this quote from Gregory Mankiw suggesting that “public purpose” in Russia was better served by its voluntary default than it would have been if the Russians repaid their ruble debts in the rubles they might have created had they wished to? I’m afraid that both Dylan and Mankiw will have to prove that statement to me, since Russian citizens seem to have suffered quite a lot by taking the default choice and accepting austerity when they didn’t have to do so.