Warren B. Mosler

(Cross-posted with permission of the author from The Center of the Universe)

The intellectual dishonesty continues. As before, it’s the lie of omission.
R and R are familiar with my book ‘The 7 Deadly Innocent Frauds of Economic Policy’ and, when pressed, agree with the dynamics.

They know there is a more than material difference between floating and fixed exchange rate regimes that they continue to exclude from their analysis.

They know that one agents ‘deficit’ is another’s ‘surplus’ to the penny, a critical understanding they continue to exclude.

They know that ‘demand leakages’ mean some other agent must spend more than its income to sustain output and employment.

They know federal spending is via the Fed crediting a member bank reserve account, a process that is not operationally constrained by revenues. That is, there is no dollar solvency issue for the US government.

They know that ‘debt management’, operationally, is a matter of the Fed simply debiting and crediting securities accounts and reserve accounts, both at the Fed.

They know that if there is no problem of excess demand, there is no ‘deficit problem’ regardless of the magnitudes, short term or long term.

They know unemployment is the evidence deficit spending is too low and a tax cut and/or spending increase is in order, and that a fiscal adjustment will restore output and employment, regardless of the magnitude of deficits or debt.

Carmen’s husband Vince was the head of monetary affairs at the Fed for many years, serving both Alan Greenspan and Ben Bernanke. He knows implicitly how the accounts clear and how the accounting works, to the penny. He knows the currency itself is a case of monopoly. He knows the Fed, not ‘the market’ necessarily sets rates. He knows that, operationally, US Treasury securities function as interest rate, and not to fund expenditures. He knows it all!

Carmen, Vince, please come home! I hereby offer my personal amnesty- come clean NOW and all is forgiven! As you well know, coming clean NOW will profoundly change the world. As you well know, coming clean NOW will profoundly alter the course of our civilization!

Carmen, Vince, either you believe in an informed electorate or you don’t!?

The underlying rationale for “a Grand Bargain” and the President’s deficit reduction budget including cuts to both Social Security (SS) and Medicare and many valuable discretionary programs, apart from the pragmatic justification, that he may be able to complete such a bargain with the Republicans and blue dog Democrats in Congress, is that the fiscal health of the United States requires that we can’t keep running annual deficits of the size we’ve been running. Why? Because that results in increases to our debt-to-GDP ratio, which in turn will cause the bond markets to drive up our interest rates higher and higher and eventually make interest on the Federal debt such a large share of the Federal Debt that we won’t have money for anything else. So, we have to implement a long-term deficit reduction plan to ensure the fiscal sustainability of the Federal Budget. To do anything else would be fiscally irresponsible.

I think that’s the essence of the President’s case for long – term deficit reduction. Then if one asks, well why make the burden fall on spending cuts rather than tax increases, the answer is that “tax increases” will never happen in today’s political climate. So, really the president has no choice, if he really wants to end this period of budgetary uncertainty, and also deal with the budget in a fiscally responsible way, then he must take the self-described “courageous” step of proposing cuts to the safety net including Social Security.

For the last few years, many of us have set forth various arguments against this case, especially with respect to safety net cuts. Some arguments are about its moral aspects showing that the “Grand Bargain” is unfair because the President’s idea of “shared sacrifice” takes no account of economic concentration of wealth over the past 40 years, or culpability for the financial/economic crash, that has created the so-called “budget crisis”. Others show that Social Security doesn’t and can’t add to the deficit. Others focus on the economic damage the spending cuts will do to the economy versus the lesser, or even little, damage that would be done by reducing the deficits through tax increases on higher incomes and wealth. Still others argue against the cuts, saying that they’re too heavily focused on domestic discretionary programs and the social safety net and are not focused on defense where we have such a large budget compared to every other nation.

All of these are good arguments and help with the pushback against the Grand Bargain. But none of them really show that the so-called problem underlying long-term deficit reduction, the eventual Federal solvency problem, is a false problem. Here’s what makes it a non-existent problem.

It’s false that If we keep running large deficits then we get increases to our debt-to-GDP ratio, which in turn will cause the bond markets to drive up our interest rates higher and higher, and eventually make interest on the Federal debt such a large share of the Federal Debt that we won’t have money for anything else.

Why?

First, running a deficit and using debt issuance to run it are not the same thing. The Congress could reorganize the Fed under the Treasury, and then the Secretary could order the Fed to create the reserves needed in the Treasury General (TGA) to deficit spend. Of course, this isn’t legal now and would require action by Congress, but it’s worth pointing out that the coupling of deficit spending to debt is due to Congressional fiscal arrangements, the rules of the game they legislated. It is not due to any immutable laws of economics, finance, or politics.

The Treasury has something else it can do to both pay down all the existing national debt, cease issuing debt instruments, and decouple continuing deficit spending from increasing debt. That option is High Value Platinum Coin Seigniorage (HVPCS).

Under authority provided by Congress in 1996 the Treasury can have the US Mint issue platinum coins with face values specified by the Secretary. So, for example, the Mint could issue a $60 Trillion coin; deposit it at the Fed, where the reserves credited to the Mint’s account for this legal tender would eventually wind up in the TGA. I’ve discussed the technicalities, history, economic, legal, and political aspects of Platinum Coin Seigniorage (PCS) in my new e-book. But the main point here, is that if the President will use HVPCS, then

– debt issuance could be ended,
– all the old debt could be paid off,

– the debt–to-GDP ratio would eventually drop to zero, and

– any possible effect of the bond markets on the solvency of the United States would be gone for as long as we conducted our deficit spending with reserves created at the Fed resulting from HVPCS.

So, in short, it’s up to the President. If he really wants to remove any possible political problem related to solvency, and any possible insolvency-based justification for deficit reduction and for cutting Social Security, Medicare, Medicaid, and other necessary programs that ought to be expanded rather than cut, then all he has to do is #mintthecoin; the $60 T coin, that is, not the trivial band-aid Trillion Dollar Coin (TDC) that will only bring the same “austerity” problem back next year.

Second, even if the President weren’t able to #mintthecoin; the deficit reduction/austerity argument would still be false. That’s because the bond markets don’t control the interest rates paid by the government on debt. The central bank does. If the central bank sets the overnight rate for reserves near zero, which it can always do, and the Treasury Department issues nothing but short-term debt at 3 months and under, then the Treasury can offer securities at a rate near zero, and keep the rates there whatever the debt-to-GDP ratio is, and even if that ratio is growing faster than GDP. This isn’t just theory. Japan is the test case for it.

Its debt-to-GDP ratio is what, 220% right now? Increases in it have had no effect on interest rates, and interest costs are not eating their budget. When confronted with Japan, austerians say that it’s an exception because most of its debt is owned by Japanese. But they never say why this fact should serve to keep interest rates down. Are the bond investors in Japan immune from wanting a higher rate from the Government if they can get it? I doubt it.

The austerians also say that if the Fed keeps the rates down, then one day US foreign creditors will demand higher returns. Well, they may demand them. But their choices are to buy the bonds, accept the lower interest rate the Fed pays on reserves in reserve accounts, invest in the US, or stop trading so much with us, so that our balance of trade improves and domestic labor markets can begin to come back with returning industries. Well, as they say, it’s all good for us. The choice they will not have is to get higher returns on Treasury Securities unless the Fed and the Treasury want them too. (Btw, this raises a question about the President’s budget. They have interest rates on 90 day Treasury Bills rising from 0.1% to 3.7% over the 10 year projection period. Their interest paid and deficit projections are based on that. But that won’t happen unless the ed and Treasury allow it.)

So, for these two reasons there are no legitimate solvency concerns for a nation like the US that has control over its currency including an unlimited ability to issue reserves. Since the whole case for austerity and long-term deficit reduction is that there is such a problem, then it seems like messaging against sequesters, debt ceiling crises, budgetary crises, austerity, and safety net cuts should lead with attempts to educate everyone to the fact that this is a false problem, and that the damage and suffering arising from austerity efforts both here and around the world is all in vain, unnecessary, and also immoral for that reason.

The Ultimate Pushback

My own anger at the “Grand Bargain” and other austerity measures is all the more acute because I know it is all unnecessary. So, I believe that to deliver the ultimate pushback, we need to persuade the majority of Americans that the President and other austerity partisans are in the process of inflicting needless damage on most Americans — on the young, the old, the under- and unemployed, the students, the foreclosed upon, the bankrupt, the sick, the poor, the middle class, and, in fact, on most everyone who will be victimized by unnecessary economic decline and stagnation in the once proud “land of opportunity.”

I think that the best way to persuade people that this is true is to tell the story of HVPCS and its ability to allow us to pay back the public debt and stop issuing any more, and then to describe the full implications of that. I’ve outlined what those implications are in my book linked to earlier. What’s important to emphasize here is that to the extent we can broadcast the HVPCS story from the rooftops over the next few months, the case justifying the “Grand Bargain” can be undermined at its core, because people will come to understand that it is the President’s choice to do the bargain, when a much less damaging course for all concerned is his to embrace.

Also, to the extent we can spread the message about HVPCS and the non-existent solvency problem, we can also strengthen ourselves for the next round in this fight. I don’t know whether the President can get his Grand Bargain; but I do know he’s been pushing for it since January 2010, at least. So, it’s pretty clear that he will keep pushing towards it in the future as the silly austerians have done in Europe and as they are doing in most of the world. As we begin to widen the sphere of people questioning the need for long-term deficit reduction, we will see the anger against it grow, and we will develop the political support we need to end the “Grand Bargain” and other forms of austerity.

The President’s new budget (Table S-2 in the budget) projects no savings (costs to SS recipients) during 2013 and 2014. In 2015 the bite is $3 Billion relative to the current CPI; and in 2016, it is $8 Billion. So, we can get a new Congress to repeal the chained CPI, if we can elect one in 2014, and I’m sure the same is true for the “health savings” cuts, as well. We can make these repeals important goals for 2014, along with substantial increases to SS and the safety net, including Medicare for All. With HVPCS, the Government of the United States can afford all of this and much more.

In addition, to possibly blocking the Grand Bargain before it can be passed, or also repealing it and replacing it with a much stronger safety net, we can also make more and more people recognize; that President Obama’s “Grand Bargain” is no “legacy”, for which he ought to be fondly remembered, but the beginning of a curse on the rest of us for which he should live in infamy even greater than Herbert Hoover’s. For, at least we can say of President Hoover, that he was a caring man who knew no better than what he did to try to cope with the Great Depression.

But, in Mr. Obama’s case, he had the example of FDR and the period of largely Keynesian economic policy and low unemployment until the early 1970s to instruct him. And even though we are beyond Keynes now with Modern Money Theory (MMT), we can fairly say that our early Keynesian experiences should have taught him that austerity doesn’t produce jobs and end “long depressions” (h/t Richard Eskow), and that only very major and targeted job-creating deficit spending will do that.

All of which is to say that the ultimate pushback against the Grand Bargain is to use HVPCS to ruin Mr. Obama’s “legacy” by blocking it, or repealing it, and then making it well understood that it was not a legacy inspired by courage at all; but a curse inspired by ignorance and the cowardice of a man who would not choose a course open to him that would save the 99% unnecessary pain, because he was afraid of the noise and fury it would cause among those whose plans to weaken and eventually end the safety net were thwarted.

(Cross-posted from New Economic Perspectives.)

Our Congresspeople, corporate CEOs, tea partiers, most economists, Pete Peterson’s minions, and even our President, tell us that we’re running out of money; and that we can’t keep running huge deficits, and increasing our national debt forever, because eventually, our creditors will just cease lending us our dollars back.

They also tell us that the Government can only raise money by either taxing or borrowing, and that when it comes to taxing, we can’t tax “the job creators” very much or they’ll go on strike and won’t create any jobs because we’ll have killed their incentive. So, here we are, we have to reduce our borrowing, and we can have hardly any tax increases on “the job creators,” so what’s a fiscally responsible nation to do?

Well, they say, clearly “we” have to lower taxes on “the job creators” even more, raise them on the “unproductive” 47% or is it the 99%? And also, cut spending substantially on programs that provide benefits for the poor, the middle class, and even the 99%, so we can “. . . live within our means,” and remove the burden of excessive public debt on our grandchildren.

But, what if we say to these people, well, “the job creators” aren’t making any jobs? That’s a fact! They give all kinds of excuses, but the truth is that they have no sales, so they have no incentive to create any more jobs.

On the other hand, the more we lower their taxes, the more money they have sitting idle, and the more they have an incentive to use that money to invest in financial manipulation schemes rather than jobs. So, why not tax them at extremely high rates on net profits and provide them an incentive to lower their net profits by spending more of their gross profits on tax-deductible business expenses like employees and business expansion? Why won’t high taxes on them do more to create jobs than lower taxes? Didn’t we have far lower unemployment rates when marginal tax rates were sky-high, than we have now when they are a pittance on the wealthy?

And what if we say to them, well, Congress can always reorganize the Federal Reserve so that the regional Fed Banks are nationalized and both they and the Board of Governors are placed under the authority of the Secretary of the Treasury, so that the Secretary is empowered to create reserves out of thin air to fill the Treasury’s spending account, and keep it filled with sufficient funds to repay the national debt and cover the deficit without borrowing? And what if we tell them further, that we know that Congress has the Constitutional authority to do this? And what if we ask them, why doesn’t it do this, and get the national debt that you, our leaders, are so worried about, paid off, and keep us debt free? And what if we ask them still further, and if you do this then why would we have to have any spending cuts or tax increases, at all?

And what if we say to them, we also know that to pay off the national debt and cover the deficits for years to come; it isn’t even necessary for Congress to reorganize the Fed, because the Treasury can use the Fed to create money in Treasury’s account from seigniorage? What if we say to them that all that’s necessary is for the President to mint a High Value Platinum Coin (HVPC) with a face value of $60 Trillion dollars, deposit it at the Fed, and then begin to pay off the national debt and implement deficit spending using the electronic credits created in the process of seigniorage?

And what if we say to them, we also know that it is a myth that the Federal Government can only get money for spending from taxing or borrowing because Congress can modify the laws, as just described, so Treasury can generate US money out of thin air, just as the Fed does today, that Treasury can use to pay down the debt and cover deficit spending?

And what if we say to them, we know that you’ll say that this is “printing money” and will cause inflation? But what if we then say, sorry, but we know very well that it will not cause inflation; because reserves issued unaccompanied by debt are no more inflationary than reserves issued along with debt and, most importantly, we also know that if you legislate the ability for Treasury to do this, then you won’t have to worry about the deficit and debt or our grand children anymore; and we won’t have to worry about your cutting safety net and other necessary programs anymore?

And what if we say to them, we also know that it is a myth that the Federal Government can only get money for spending from taxing or borrowing, because the President can use Platinum Coin Seigniorage (PCS) to harness the power of the Fed to generate reserves that end up in the Treasury General Account (TGA), and Treasury can then use the reserves to pay down the debt and cover deficit spending?

And what if we say to them, we also know that this won’t cause inflation for reasons stated above, and, most importantly, we also know that if Treasury does this on orders of the President, then you won’t have to worry about the deficit and debt or our grand children anymore; and we won’t have to worry about your cutting safety net and other necessary programs anymore either?

And what if we tell them that, for all the reasons indicated in these questions, we also know that all your reasons for wanting to reduce the deficit and impose austerity on the 99% are bogus? We don’t know which of you believe in these reasons and which of you do not. But this isn’t as important as it seems, because we know that the debt commissions, the debt ceiling crises, the fiscal cliff, the sequestration, the continuing resolution, budgetary crises, and the constant propaganda campaign from all of you directed at all of us, is a grand “shock doctrine” process attempting to swindle us out of a government that works for 99% of us rather than the 1%. We know that “the Grand Bargain” is “the Great Betrayal”! And we won’t have it!

(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,”

he said.

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

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

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

Fed Independence?

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

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

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

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

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

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

The Wrong Kind of Coin

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Right Kind of Coin

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

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

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

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

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

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

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

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

(Cross-posted from Correntewire.com.)

Woodward (photo: Bektour / wikimedia)

Bob Woodward’s releasing a new book, so we are now seeing articles based on it. A few days back, The Washington Post published the ”Inside story of Obama’s struggle to keep Congress from controlling outcome of debt ceiling crisis.” This account is a pretty downbeat one of how our political leaders and President Obama handled the debt ceiling crisis of the summer of 2011. I want to comment on what for me was the most salient point: that during the crisis, the President had no “Plan B” to get around the debt ceiling beyond negotiating a deal with Congress.

According to Woodward, the President asked his Senior staff to come up with a Plan B, because the compromise Congressional leaders first proposed to him would have required a two-step increase in the debt limit, with the second step coming near the time of the 2012 election, opening the possibility that the House Republicans would be able to hold the country and the financial world hostage in the run-up to the election. The President rejected the deal, and sent Harry Reid and his Chief of Staff David Krone back to get another that would not require the hostage taking two-step. Meanwhile, Obama’s staff tried to put together a Plan B.

But when Harry Reid couldn’t get a deal from John Boehner, and the House Republicans passed a two-step plan on July 29th, the President again called for more options. Woodward reports none except for accepting the Republican deal, which Geithner favored, and vetoing the House Bill if Harry Reid “folded” and the Senate passed it, which the President favored. The President, concerned about the likely continuance of Republican blackmail and hostage taking, and believing that he was out of options, indicated that he would veto a two-step deal even if the Democrats folded. However:

”Obama never had to confront the veto question. A few days later, House Republicans dropped their insistence on the two-step plan. The final plan accepted a debt limit increase that would take the country through the 2012 presidential contest. It also postponed $2.4 trillion in spending cuts until early 2013.”

So, the President, and according Geithner, the world financial markets, survived that confrontation because the Republicans folded. But, if Woodward is right, if the Republicans had stood firm, Obama would have vetoed the bill, because no other options had been developed by the White House staff.

Yet there were at least four other options that were offered in the blogosphere and the news media at the time, three of them at CNN, that a well-informed White House might have been expected to know about. So, the obvious question is why is there no indication in Woodward’s account that the White House was aware of other options except a veto or surrender to the House Republicans to handle the crisis?

The four options were: Read the rest of this entry →

Who else thinks the President’s speech didn’t include any plans to create the 29 million full-time jobs for the dis-employed? Please raise your hand!

About jobs he said:

”We can help big factories and small businesses double their exports, and if we choose this path, we can create a million new manufacturing jobs in the next four years.”

”If you choose this path, we can cut our oil imports in half by 2020 and support more than 600,000 new jobs in natural gas alone.”

And, except to say he wants time to finish the job, that’s it! Over the next 4 years the economy will probably need another 4 million jobs just to employ new entrants into the job market, and not even to reduce that 29 million dis-employment figure. So he needs 33 million new full-time jobs to get to full employment, and he’s talking about 1.6 million in his acceptance speech. What planet is he living on?

Maybe, like Herbert Hoover, if he keeps saying prosperity is just around the corner, and does almost nothing to make it happen, then he thinks his beloved private sector will quit generating profits from financial manipulation and start creating jobs at a living wage. I think we’ve seen this movie; and it doesn’t end happily for working Americans.

The President had a lot more to say about deficits, then about jobs; showing that he lives in a fantasy world of faux problems:

”You can choose a future where we reduce our deficit without sticking it to the middle class. Independent experts say that my plan would cut our deficits by $4 trillion. And last summer, I worked with Republicans in Congress to cut billions in spending because those of us who believe government can be a force for good should work harder than anyone to reform it, so that it’s leaner, and more efficient, and more responsive to the American people.”

But why reduce our deficit at all? Have we got an inflation problem? Does either the level of our debt at $16 T, or our debt-to-GDP ratio of more than 100 percent either impair our ability to deficit spend in the future, or to pay off the debt without either taxing or borrowing? The answers to these questions are: There’s no reason to do it; No, and No! Here’s more from O:

“I want to reform the tax code so that it’s simple, fair, and asks the wealthiest households to pay higher taxes on incomes over $250,000, the same rate we had when Bill Clinton was president; the same rate we had when our economy created nearly 23 million new jobs, the biggest surplus in history, and a whole lot of millionaires to boot.

I love higher taxes on the wealthy, as much as the next person. I wouldn’t mind going back to the marginal tax rates of World War II and the inheritance tax rates of Harry Truman’s times. But does anyone really think that the same tax rates we had under Bill Clinton really caused the 23 million new jobs during his Administration; so that if we want to have that kind of job growth again, we really must have Clinton’s tax rates? Give me a break!

We know that the prosperity of the 1990s was primarily fueled by debt bubbles, and had little to do with Clinton’s higher tax rates. In fact, his surpluses, coupled with the Internet bust, produced the recession he bequeathed to Bush 43, a recession that was ameliorated, but never really ended for most working people by Bush’s deficit spending.

“Now, I’m still eager to reach an agreement based on the principles of my bipartisan debt commission. No party has a monopoly on wisdom. No democracy works without compromise. I want to get this done, and we can get it done. But when Governor Romney and his friends in Congress tell us we can somehow lower our deficits by spending trillions more on new tax breaks for the wealthy, well, what’d Bill Clinton call it? You do the arithmetic, you do the math.”

The problem, Mr. President, is that there’s more than arithmetic involved here, which is why the Bill Clinton/Jack Lew surpluses produced that recession at the end of their term, the one that played a part in Al Gore’s defeat. The economy is dynamic. If you try to cut deficit spending or run surpluses by raising taxes and cutting Government spending, then you had better estimate what impact that’s going to have on non-Government, including private, savings and investment, and the trade balance; because cutting deficit spending can lead to a net reduction or elimination in net savings and investment, as well as a reduction in the trade deficit.

Then the President told us what he wouldn’t do to cut the deficit:

“I refuse to go along with that. And as long as I’m President, I never will.

“I refuse to ask middle class families to give up their deductions for owning a home or raising their kids just to pay for another millionaire’s tax cut.

“I refuse to ask students to pay more for college; or kick children out of Head Start programs, to eliminate health insurance for millions of Americans who are poor, and elderly, or disabled, all so those with the most can pay less.

“I’m not going along with that.

“And I will — I will never turn Medicare into a voucher.

“No American should ever have to spend their golden years at the mercy of insurance companies. They should retire with the care and the dignity they have earned. Yes, we will reform and strengthen Medicare for the long haul, but we’ll do it by reducing the cost of health care, not by asking seniors to pay thousands of dollars more. And we will keep the promise of Social Security by taking the responsible steps to strengthen it, not by turning it over to Wall Street.”

I’m glad for all these refusals and lines in the sand. He’s told us what he won’t do to make things even easier for the wealthy; but as Digby says, that doesn’t mean he won’t trade some or all of these things, for tax hikes on the wealthy. Tax hikes on the rich will please people wanting greater fairness; but that will be cold comfort for people whose safety net benefits are traded away for a smidgeon of greater fairness.

There’s also another thing he hasn’t told us. Maybe someone will make him do it in the debates. And that is what he plans to do to solve that 29 million jobs problem. That question is a really interesting one considering that he plans for the US Government to average $400 Billion in deficit reduction over the next 10 years. That is really, really a bad idea, because in doing that he’s pretty much condemning the US to a stagnant economy with perpetually high unemployment for the next 10 years, giving us a 14 year period of high unemployment, Obama’s “new normal” legacy to future generations.

Why do I say that? Well let’s look at some basic macroeconomics from Bill Mitchell:

”The basic income-expenditure model in macroeconomics can be viewed in (at least) two ways: (a) from the perspective of the sources of spending; and (b) from the perspective of the uses of the income produced. Bringing these two perspectives (of the same thing) together generates the sectoral balances.

“From the sources perspective we write:

GDP = C + I + G + (X – M)

which says that total national income (GDP) is the sum of total final consumption spending (C), total private investment (I), total government spending (G) and net exports (X – M).”

That is, X is exports and M is imports. So, if X is greater than M, we have what is colloquially called a “trade surplus”; but if M is greater than X then we have a “trade deficit,” which is what the United States has enjoyed for many years. I say enjoyed, because people in other nations send us goods, real wealth, and we send them electronic bits of information called US Dollar electronic credits. Seems like we’d have the better of that kind of deal, if we had sense enough to employ the people put out of work by our persistent trade deficit on things that are valuable for people living here in the United States.

However, that aside, we should note that the US seems to be running a trade deficit of 4% of GDP right now. We’ll see shortly the importance of this number. Bill continues:

“From the uses perspective, national income (GDP) can be used for:

GDP = C + S + T

which says that GDP (income) ultimately comes back to households who consume (C), save (S) or pay taxes (T) with it once all the distributions are made.

Equating these two perspectives we get:

C + S + T = GDP = C + I + G + (X – M)

So after simplification (but obeying the equation) we get the sectoral balances view of the national accounts.

(I – S) + (G – T) + (X – M) = 0

That is, the three balances have to sum to zero.”

So, we have an investment/savings balance, a Government spending/tax balance, and a foreign trade (exports/imports) balance. The sum of these balances must equal zero, and this is true by definition alone. It is what economists call “an accounting identity.” Are accounting identities always “true”?

They are always “true” in the sense that they are logically valid. But reasoning from them can result in false conclusions, because 1) the wrong data is correlated to the one or more of the terms of the identity, or 2) further reasoning about the causal relations among the terms in an identity may give false conclusions, and/or 3) reasoning about the dynamics relating the terms in an identity over time may be in error.

If we want the private sector to collectively save, then S must be greater than I, and we must have an investment/savings balance deficit, or, in other words the private sector as a whole must be accumulating nominal financial wealth within some time period.

If we want to import more than we export, then M must be greater than X, and we must have a “trade deficit”, which means that US entities as a whole must be accumulating more goods and services from abroad and must be sending more dollars into accounts at the Federal Reserve owned by foreign entities than they are receiving from them in return for our own exports.

Notice here, that the USD provided to foreign nations when we run a trade deficit, go into their accounts at the Federal Reserve. They never do leave this country. So, don’t listen to people who constantly tell you that our trading dollars are going overseas. They’re not. They’re in our own central bank.

Lastly, according to the model, if we want the private sector to collectively save, and if we want it to collectively spend more on foreign goods and services than it receives in nominal financial wealth for our goods and services, then the Government sector will have to spend more than it taxes. That is, it will have to run a deficit in the Government balance to accommodate the savings and import desires of the private sector by replacing the leakage in aggregate demand that savings and more imports than export represent. But just how much of a deficit will the Government sector need to make sure that the balance called for in the model happens without decreasing savings or reducing the size of our trade deficit?

Well, I said earlier that we’re running roughly a 4% of GDP trade deficit in the US. We also know that the private sector needs to save to repair household balance sheets after the disaster of the financial crisis of 2008, coupled with the housing crash. Let’s say that US private savings desires are currently 6% of GDP, a reasonable estimate given behavior over the past few years.

Then, we’re saying that we want (I – S) to be – 6% of GDP and (X-M ) to be – 4% of GDP, which implies that we also want (G – T), the Government balance to be positive and equal to 10% of GDP. In other words, we’re saying that the Government ought to be running a budget deficit of $1.6 Trillion this fiscal year, which judging from how things are going is approximately $400 Billion more than we will actually be spending.

So, it should be clear that the Federal Government, far from running too large a deficit, is now running a deficit that is $400 Billion smaller than it should be to accommodate the desires of the private sector to import and save, and to replace the aggregate demand lost to savings and more imports than exports. Do you suppose this shortfall in the Government deficit spending we need could have anything to do with our stubbornly high unemployment rates?

Now, let’s say the Obama Administration compromises on a deficit reduction bill specifying $4 Trillion in Government deficit spending reductions over 10 years phased something like this: 8%; 8%, 6%, 6%, 6%, 4%, 4%, 3%, 3% and 2%, where the percents refer to the deficit spending levels as a percent of GDP. Then, there will be increasingly less space for private savings and imports.

No doubt the President would like to see a shrinking percentage of GDP spent on imports over the next decade because that means that the budget deficit can be smaller if private savings stay the same. But, it’s pretty clear that in the next two years, we won’t be able to shrink the trade deficit by even 1% of GDP or roughly $160 – $170 B annually.

So, that means that if we follow the plan for deficits I just stated, then the savings desires of the private sector can’t be accommodated at 6%, and household balance sheets won’t continue to build. As, deficits move down to 6% in 2015 – 17, imports will be squeezed further, as will savings. By the second half of the decade, both imports and savings will be subjected to very high downward pressure.

The result will be that our trading partners will resist efforts to re-balance trade. They will lower prices of their goods and services in an effort to maintain the balance. We, in turn, will also have to lower costs, and that probably means lower wages – a race to the bottom to continue to increase our levels of exports. That will feed back to domestic private savings, and also to aggregate demand here, which will both decrease; though maybe not by as much as demand will increase from the decrease in imports. Causality moves in conflicting directions and without rigorous modeling we can say what the overall increase in demand outcome will be.

In addition, the decreased space for savings will result in people seeking to save more and in increased economic conflict in the private sector with people and classes fighting over a shrinking pie. In the US currently, political power is arranged in such a way that an increasingly small group is able to direct nominal financial income its way by using the political system to its advantage.

So, austerity will mean that a very few wealthy people will grab the shrinking pie of savings, and more people will be faced with the choice of maintaining their consumption levels by going into debt, or maintaining their rate of savings by cutting back on consumption. This developing situation will be unsustainable; and the second half of the decade, after a period of a stagnating economy, will surely see a deepening depression, and a strengthened economic and political oligarchy.

That’s the scenario if things go smoothly with austerity policies being planned by the elite led by Peter G. Peterson and the President of the United States. However, it is likely that things will not go according to plan and that the politicians will not be able to maintain the deficit targets in any long-term deficit reduction plan. The reason is that if demand flags because people try to buck the program by imposing strict spending discipline on themselves, or if foreign demand for our exports flags so that export industries must cut employees, causing a weakening of demand here; then rising unemployment here will impact the automatic stabilizers like unemployment insurance food stamp benefits, and Medicaid, driving up deficits beyond the levels in the deficit reduction plan.

The experience of Europe tells us that ideological neo-liberal austerians will not then admit that they were wrong about austerity and the possibility of implementing a deficit reduction plan successfully. But that, instead, they will double-down on it, shrinking aggregate demand even more, and driving the economy down even further, as they have in every European nation where austerity is being tried.

What if the President, or Mr. Romney succeeds in making the “grand bargain” to raise a few taxes, and cut 3 times as much spending, including entitlements in the process of passing a long-term deficit reduction plan, and what happens if in the first three years the plan fails to meet its targets and also creates a new recession in our fragile economy?

Will the austerians then admit they were wrong and start paying attention to the sectoral balances and people’s needs? Or will political necessity prevent them from admitting error and force them to double- down on austerity because that is the only viable political choice? We know what they will do, because no politician ever admits they were wrong, until perhaps they’re thrown out of office, and not very frequently even then.

Look at Obama himself, it was apparent by the Fall of 2009, that his ARRA was too small to do the job of creating a full recovery. Did he and the Democrats admit it? Did they pull out all the stops to pass a jobs bills in the rest of 2009 and take care of their unfinished business? Or did they double-down on insisting that the stimulus worked, and move on increasingly to a health care bill that bailed out the insurance companies, and burned all their political capital, that coupled with the tepid recovery, lost them the election of 2010?

I think we know what will happen if President O wins on his “austerity grand bargain.” First, it will never succeed because it is inconsistent with what the sectoral balances tell us. And, second, when it doesn’t he will double-down and then plunge us into a worse recession than ever, and in 2016 an impoverished population will face at least four more years of looting by the 1%, and increasing poverty from the other corporatist party of the emerging plutocracy.

So, Mr. President, and Paul Krugman, don’t tell me we’re going to have both an economic recovery and a forced move towards a lower deficit over the next four years, because the sectoral financial balances model says, that without a new credit bubble, that will lead to an expansion of aggregate demand coming from rapidly increasing private debt, that will eventually burst and give us a new great financial crisis:

It just ain’t gonna happen.

(Cross-posted from New Economic Perspectives.)