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What Happens Now?

7:12 pm in Uncategorized by letsgetitdone

In the aftermath of the great 2013 government shutdown/debt ceiling crisis, and the kicking of the can down the road while maintaining austerity once more, the subject on many minds is where do negotiations over fiscal policy go from here? Will the new “budget committee” produce more austerity and do a grand bargain including the “chained CPI”? Will Congress finally turn towards economic growth and job creation, or will we continue to have more shutdowns and debt ceiling crises in 2014?

Chained CPI and the “Grand Bargain”

Let’s begin with “chained CPI” and possible “Grand Bargains.” The President seems to still want one, but the question is, does anyone else? And, if they don’t, can he still get it through?

It’s dangerous for anyone running in 2014 to vote for chained CPI. Surveys show that overwhelming majorities of all Americans want no cuts to Social Security and Medicare, and also that 40% of tea party respondents are 55 or over, and are not likely to support such cuts, either. Nor do they appear to be anti- “their” Medicare. It’s the corporate Republicans who oppose these things. So, I don’t think the corporate Republicans would get much love from the tea baggers for supporting entitlement cuts, apart from Medicaid, which I think the tea party views as welfare. Certainly any credit the Congressional Republicans would get from their tea party base for voting for “chained CPI” would not outweigh their having given in on the CR and the rise in the debt ceiling just passed.

So what can the corporate Republicans in Congress gain from voting for chained CPI? Very little, I think, unless the Democrats get behind it, and then they can run against the Democrats as having sold out Social Security, as long as not many Republicans vote for it. In that case, however, the Democrats won’t have enough cover to vote for it, so they are unlikely to do so.

So, then we have to ask, what can induce the Democrats to vote for entitlement cuts knowing it will hurt them in the elections? Will the President be a big factor in the Congressional elections? He wasn’t in the elections of 2012, and, he was a negative in the 2010 wave election. Can he deliver votes by campaigning for other Democrats? Does he even want to? Does it matter to Congressional Democrats if he gets annoyed at most of them? I doubt all of these things.

Why will Patty Murray and Harry Reid (both of whom may want to run again in 2016) vote for chained CPI? To end the sequester? As Joan McCarter says, the coming second round of the sequester hurts the Republicans more than the Democrats. So, where’s the incentive for Democrats to go along with the President on chained CPI? I don’t think there is any.

If the President wants chained CPI this Spring, then he needs to assemble a corporate, Wall Street-supporting coalition from both parties, and that has to be large enough for a majority in the House. Since many Republicans would see passing the chained CPI as a victory for the President if he continues to support it, and the Democrats in Congress don’t, then we’re talking about a situation where the Tea Partiers and their allies would be called upon to pull the President’s chestnut out of the fire. How many votes do you suppose he’d get from the Tea Partiers and other Republicans for this? Keeping in mind that they just got 144 votes in the House to continue the ruinous shutdown/debt ceiling crisis, maybe 40, or 50? Or even that many, given that they’ll want to run against the Democrats on Social Security in 2014, if possible, and won’t see any political gain in holding hands with him as everyone jumps off the “I voted against SS” cliff?

And how many House Democrats would he get to play along? 150? 100? More? I think if he can’t get 200, an almost impossible outcome with at least 90 “progressives” very uncomfortable with the proposal, then this dog won’t hunt. The more he’s likely to fall short, the more likely it is that Democrats will see themselves as walking the plank for nothing, and will just run away from the proposal, and vote against it if need be.

Now you may see this scenario as far-fetched, because you may be thinking there would be some big omnibus deal with the Republicans that chained CPI would just get tucked into, and that would be irresistible for “progressive” Democrats. But what do the Republicans have to give? They certainly won’t offer any additional taxes on the wealthy. That’s poison to them. And they certainly won’t offer any increased deficit spending, say on infrastructure, because that would weaken the deficit/debt play they plan to run for all they’re worth in the election, and also because they know that infrastructure spending will reduce unemployment, and perhaps improve prospects for Congressional Democrats in the elections.

So what can they offer? Only concessions on the sequester. But here, if Pelosi, Murray and Reid play tough, as they certainly ought to do, then as Joan McCarter explains, the Republicans either have to shoot themselves in the foot again by keeping in place the sequester, or they would have to come to agreement. Then, if the Democrats know what’s good for them in 2014 (not a sure thing by any means, but still likely, in light of how well refusal to budge has served them over the past two weeks), then they won’t accept anything less than full lifting of the sequester. It’s harmed the economy for long enough, we need them to get rid of it, and they need that too.

The Republicans will then play games proposing lifting the parts of the sequester they don’t like, while giving the Dems nothing or only very little. At this point the Democrats need to take an all or nothing position on the sequester, rejecting the Republican’s salami tactics, and calling on the public for an end to the sequester nonsense, which has hurt the economy so grievously already.

The Rs will respond either by agreeing to lift it, or they will refuse. If they refuse, then the Democrats get to blame them for the down economy, we will surely see in the run up to the election, and the Democrats can run against that down economy which they would then claim was caused by the Republican shutdown, multiple debt ceiling crises, sequester, and blocking of any efforts to lower unemployment with jobs programs. (“They promised us “jobs,” “jobs,” “jobs,” and what did we get? Debt ceiling crises, sequesters, a government shutdown, more unemployment, and an economy in the ditch.)

Given that CBO projections will probably show the deficit going down to $400 Billion or less in FY 2014, which is about 2.5% of GDP, the Republican emphasis on “teh debt” and the deficit will not trump a Democratic campaign blaming Republicans for the lack of recovery and calling for jobs programs. Add to the above themes the Republican War on women, and suppression of voting rights of seniors, blacks, hispanics, and urbanites, and we have a Democratic victory in 2014 large enough to get back the House and keep the Senate.

Given all this, I don’t think there will be any Grand Bargain or chained CPI “compromise” in the near future and in the run-up to the election. It just makes no political sense for most Democrats and many Republicans. It may come up again in the lame duck and possibly in the next Congress, Republican or Democrat, if the President continues to push it. But I don’t think we’ll see it again this fiscal year.

Continued Austerity?

What we will see however, is continuing austerity from CRs or budget agreements, whether or not the sequester is lifted. Where a trade deficit exists, Government austerity is either running a surplus, or a deficit so low that it doesn’t make up for the leakage in demand due to the trade deficit. Let’s say one’s trade deficit is 3.5% of GDP, then the Sectoral Financial Balances (SFB) Model (whose terms refer to flows of financial assets among the three sectors of the economy in any defined period of time):

Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0

tells us that the domestic private sector, taken as a whole, can’t increase its net financial assets, unless the Government has a deficit greater than 3.5%. And, if we wanted to provide for the domestic private sector to save 6% while it was running that 3.5% trade deficit, anything less than a Government deficit of 9.5% of GDP would not meet that objective.

Of course, no budget proposed by anyone in Congress or the White House envisions a deficit this large. Patty Murray’s Senate Budget proposed in the Spring of 2013 envisioned a 4.2% of GDP deficit for FY 2014, just a bit more than the austerity boundary of 3.5%. Paul Ryan’s House Budget proposed a 3.2% deficit, which is an austerity budget, in the precise sense that given a 3.5% trade deficit, it would entail the private sector running a deficit and losing 0.3% in net financial assets.

Will either a compromise bill coming out of the budget committee, or a CR, after a failure to agree on a budget, be closer to Ryan’s or Murray’s deficit figure? I think it will be closer to Ryan’s; partly because the Congress just passed a CR for the first approximately three months of the fiscal year that is closer to Ryan’s view than to Murray’s and which maintains the sequester, and partly because I doubt that the Democrats will even propose a more expansive budget involving a deficit, but will just focus on getting the sequester removed in early 2014, and will then turn to other problems and to positioning themselves for the fall elections.

Growth and Jobs or Shutdowns and Debt Ceiling Crises?

I think the answer is neither. We may have shutdown and debt ceiling threats before the 2014 elections; but we will not have either of these types of crises, because the cost in public opinion, if it keeps trending the way it has been, will be too heavy for many Republican candidates, except for those in the reddest gerrymandered districts, to bear in 2014. I believe they know this, and that many of them are increasingly willing to chance getting primaried by tea party candidates in order to avoid probable defeat from Democrats, if they toe the tea party line and then try to run.

So, I think the shutdowns and debt ceiling scares are over until after the elections. That means there will have to be an agreement on a CR for the first part of FY 2015 by next October 1. That will happen because there’s no way the Republicans will chance another hostage-taking taking a month before the next elections.

That’s the good news. The bad news is that there will be very little growth and very few new jobs. If the sequester remains in place for the rest of FY 2014, unemployment is likely to increase, not decrease, because Government will continue to be a fiscal drag on the economy, and the private sector is likely to avoid expansion without increased demand. That demand could be manufactured by a credit bubble; but it doesn’t look like that is in the offing for 2014. So, the shortfall in demand produced by the Government will not be made up from private sector spending.

On the other hand, if the sequester is lifted, then this will make some difference. We will probably see declining unemployment if that happens, but since the deficit was much too small to sustain a vigorous expansion, even before the sequester, the decline in unemployment, increased job creation, and economic growth, will all happen only slowly, and by election time we will still see an unhappy public, but maybe one that is a little more hopeful about the future than we are now seeing.

I don’t know yet whether the falloff in economic activity due to Government austerity or near austerity, will be enough to produce another recession in the middle of this long stagnation period, Richard Eskow has aptly named “the long depression.” But there is some chance that this will happen before the fall elections. If it does, then we will see a messaging war on who bears the blame for the downturn, and the outcome of the elections will hang on the outcome of that war.

(Cross-posted from New Economic Perspectives.)

Off the Debt Limit Hook for at Least the Next Four Months

10:21 am in Uncategorized by letsgetitdone

(photo: L. Marie)

Provided that the Senate and House follow through on the scenario now on the table, it looks like the game of chicken worked for the Democrats this time. We’re off the hook on default and Government shutdown for now, and Washington village pundits are in full-throated cries of celebration.

Congress is off the hook too. They don’t have to offer any solutions to real, rather than manufactured, problems.

The President is also off the hook, he won’t, for now, need to exercise any of the options, like minting the coin, using consols, or premium bonds, or asset sales to the Fed, or others available to him to render the debt limit legislation impotent. So, he gets to preserve debt limit threats from the Republicans as a negotiating tool they can use to “force” him into entitlements cuts later on.

In fact, as I write Jay Carney is already talking about the President taking “a balanced approach” to future negotiations of fiscal policy so that the burdens of sacrifice will fall on everybody fairly. And, a bit later, there’s Nancy Pelosi echoing the Administration line on future negotiations. That, of course is also the Pete Peterson, Bowles-Simpson, catfood line for justifying further victimization of food stamp recipients, seniors, children, and the people who have paid the price for the Crash of 2008 and the neoliberal period in American fiscal policy beginning in 1977.

However, the deal that looks like it will happen isn’t a solution, but just kicking the can down the road including built-in pretty good possibilities for future Government shutdown and debt ceiling crises in just three – four months, if Congresspeople have the guts to subject the American people to this nonsense again in an election year.

Here’s Annie Rose-Strasser’s outline and analysis of the deal at Think Progress:

– Government funded through January 15 at sequestration levels

– Debt limit extended until February 7, subject to vote of Congressional disapproval, which Obama can veto

– A budget conference established to come up with long-term spending plans by December 13

– Income verification for recipients of subsidies under Obamacare’s newly-established exchanges

– Backpay for furloughed workers

Also, notably, here are some of the demands that Republicans have made in the last few days, but that are NOT in the bill:

No repeal of the “extraordinary measures” provision that allows the Treasury to do accounting tricks to avoid default

No ‘Vitter Amendment‘ that would have taken away employer contributions from the health plans of Congressional staff

No provisions related to birth control access

No flexibility in how government agencies make budget cuts to their programs, as they are required to under sequestration

No repeal or delay of the medical device tax

No repeal or delay of the reinsurance tax

No repeal, replacement, or delay of any aspects of Obamacare’s exchanges or individual mandate

It might look like this is overall a good deal for Democrats given the number of things that Republicans aren’t getting. It is good: It reopens the government and lifts the debt ceiling without doing any major additional damage to existing programs.

The word “additional” is the key here, since enormous damage has already been done to people and programs due to the various compromises made to avoid shutdown and debt ceiling threats since August 2011. These deals have placed increasing fiscal drags on the American economy and, increasing Government austerity that is preventing full recovery from the Great Recession. The current “deal” already involved a pre-surrender by Democrats to Republican proposed CR spending levels. Annie Rose – Strasser recognizes this.

But it’s important to remember that the baseline for negotiations wasn’t exactly even: Democrats accepted the major budget cuts of sequestration (slated only to get worse on January 15, the same day their budget deal expires), and their only demand was actually the status quo: Keeping the government running and having the country fulfill its financial obligations. They didn’t request to restore the funding sequestration took away, they didn’t demand any new programs or initiatives that Democrats support. And if the previous budget conference is any indication, the one established under this deal has the potential to blow up in Democrats’ faces, leading to more cuts instead of an actual, long-term budget. In that sense, while it is the best, cleanest deal we can get, the Democratic party has been pulled slightly from center to right, not from left to center.

Meanwhile, Republicans threw everything but the kitchen sink into their negotiations. It’s no surprise they’re taking a lot of losses.

Yes, we will have the Government open and the debt ceiling temporarily raised to get us through a few months, and the President is saved from going outside his comfort zone and giving the teahadists an excuse to try to impeach him, but the fundamental problem of the gradual imposition of increasing levels of government austerity creating economic stagnation is not being addressed, and, in addition, the even more serious problem of having laws in place that give a small minority in Congress the possibility of holding both the US and world economies hostage to their ideology is also neither being addressed nor solved.

So this is no victory, and no cause for celebration. The conditions are still there supporting a Great Betrayal, and another slide into recession, along with the possibility of another Global Crash due to financial manipulations in the mortgage international derivative markets.

Meanwhile, what can we look forward to? A brief respite from budget battles and then a rush through a manipulated membership budget conference designed to produce a Bowles-Simpson austerity “solution” to be completed by December 13, to be voted up or down, and with a good likelihood that this Conference will either fail to come up with a result, or that its results will be rejected by teahadists or fellow travellers who will never accept tax increases, and by progressives who will be unwilling to vote for entitlement cuts in the face of upcoming elections.

Meanwhile, the drag on the economy and the unhappiness of the 99% will continue with no real relief in sight because no in either party has the courage to repudiate the dogma that a sovereign fiat currency nation like the United States can have a long-term debt problem requiring a long-term deficit reduction solution. Truly, everyone in Congress needs to be replaced by people who understand the Modern Money Theory (MMT) approach to economics and who are willing to explain it to their constituents and to advocate for fiscal policies based on it.

(Cross-posted from New Economic Perspectives)

Photo by L. Marie under Creative Commons license

Rationalization and Obligation, Part VI: What He Ought to Do, What He Probably Will Do

6:46 pm in Uncategorized by letsgetitdone

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 →

Rationalization and Obligation, Part II: Coins, the 14th, and Consols

6:33 pm in Uncategorized by letsgetitdone

This six-part series is a reply to the President’s glossing over the options open to him apart from playing “chicken” with the Republicans over the debt ceiling. Part I, presented the President’s explanation, a summary of the kinds of difficulties characterizing it, and discussed two of seven options, selective default, and the exploding option, the President has to deal with it, apart from the way he seems to have chosen. Part II will discuss his platinum coin, 14th amendment, and consols.

Platinum Coins, the 14th amendment, and Consols

3. Using the authority of a 1996 law to mint proof platinum coins with arbitrary face values in the trillions of dollars to fill the Treasury General Account (TGA) with enough money to cease issuing debt instruments, and even enough to pay off the existing debt. This option, originating with beowulf (Carlos Mucha) in its Trillion Dollar Coin (TDC) form has gotten a lot of attention. But a variation of it in its High Value Platinum Coin Seigniorage (HVPCS) form, requiring a coin with face value of $60 Trillion for example, has received much less attention, except in my own writing.

The difference in the TDC and HVPCS variations in their political implications are great. The TDC looks like a temporary expedient to get around debt ceiling problems, whose use can be repeated when needed. But, it doesn’t quickly remove the political problem of “the national debt” from consciousness as one of our most serious political problems. On the other hand, minting a $60 T coin would change the background of politics by providing for relatively rapid payoff of the debt subject to the limit without balanced budget-creating recessions.

There’s been much analysis about the legality of using platinum coins with high face values for seigniorage revenue. There’s no overwhelming consensus on the matter; but most commentators with a legal background including some prominent law school professors and a former Director of the U.S. Mint, who was co-author of the 1996 law seen as providing the authority for PCS believe that its perfectly legal; but there are also law school professors, and the other co-author of the law, on the other side who argue that PCS violates the intent of the law.

My view is that the consequences of applying both laws and constitutional amendments often go way beyond any reasonable construal of intent; and that the Courts usually weight the plain language of laws more heavily than arguments about intent in determining their legality. In the case of PCS, with one co-author of the enabling law (Philip Diehl) currently writing about his view that PCS is consistent with the intent of the law, and the other co-author (Mike Castle) taking the opposite view, I think the Courts will be disposed to rely on the plain language of the law rather than trying to divine the intent of both Houses of Congress in passing it.

I also think that, with Government fiscal default at issue if the Courts overturn PCS, and with precedents in place denying standing to individual members of the House and Senate to sue to overturn laws, that it’s very unlikely the Courts would even grant standing to only one House of Congress to sue to overturn the President’s use of PCS. In short, the Supreme Court would not touch this at all if the President used PCS. But, even if they did grant standing to the House, then the explicit language of the law, the bloc of four Democratic justices on the Court, and the threat of default and its probable consequences for the financial system and the world economy, all weigh against overturning any use use of PCS by the President.

Indeed, since I can’t see either Anthony Kennedy or John Roberts doing anything to rock the boat of the financial system, I think any Supreme Court action, if it gets by the standing problem would likely result in a 6-3 vote in favor of PCS. But there’s even a possibility that Alito would align with Roberts, due to his strong corporatist orientation, and that Scalia would also support PCS, due to his love for the Unitary Executive Doctrine, producing a low likelihood, but not completely surprising, final outcome of 8 -1 in favor of PCS.

4. Using the authority of the 14th Amendment to keep issuing conventional debt instruments subject to the debt limit in defiance of the debt ceiling, while declaring that the debt limit legislation was unconstitutional, because it violated the 14th Amendment in the context of Congressional appropriations passed after the debt ceiling mandating deficit spending. While the President mentioned the practical consequences of uncertainty over whether use of the 14th amendment would be declared unconstitutional he didn’t mention the most important point about this option.

That is, the President can’t validly claim that there’s a conflict between his duty to spend mandated appropriations, his duty to prevent default on US debts, and his duty to uphold the debt limit law, when he has what appear to be several legal options to enable him to spend those appropriations, but is refusing to implement any of them, and use his constitutional authority under the 14th amendment to avoid default, because he’s speculating that the Supreme Court might overturn one or more of the options he can use, if there’s a legal challenge to them. On the contrary, the President is obligated by the 14th amendment to exhaust those options, before he takes action on the basis that the debt ceiling law is preventing him from fulfilling his spending mandates. As long as those options exist and are untried by him; it is not.

So, the relationship of the 14th amendment option to the others is that it stands behind them in sequence priority, and cannot be invoked with validity unless and until they are exhausted. In addition, the 14th amendment binds the President to try these other options to comply with both his mandated spending obligations and his obligation to obey the debt ceiling law, before he tries to overturn it. So, the President has no free choice among all the options, but, from a legal point of view, must view the 14th amendment/debt ceiling nullification option as a last resort only after all other known options that have not been excluded by the Court have been tried.

5. Beowulf has offered yet a fifth option for getting around the debt ceiling by issuing consols. Consols are debt instruments that pay a fixed rate on interest in perpetuity, but never promise principal repayment at a maturity date. The debt ceiling law is written in such a way that what counts against the ceiling is the principal repayment guaranteed by the instrument. Since consols provide no principal repayment, one can have unlimited consol issuance without increasing the debt-subject-to-the-limit.

Consols seem to be a very clean alternative from a legal point of view. The Treasury is not explicitly restricted by law to issuing any particular type of debt instrument. Debt instruments with fixed maturity dates are the US instrument of choice. But, other debt instruments are not excluded from Congress’s grant of borrowing authority to Treasury. Of course, members of Congress can suit the Administration if it chooses to use consols. But, they would, once again, have a standing problem, and since the debt ceiling law is not an issue with consols it is hard to see what kind of argument would be used to challenge them. While consols do have face values, these values don’t constitute an obligation of the Government to ever repay. On the other hand, consols are callable by the issuing authority. So, if the Treasury wanted to buy them back at face value to avoid paying interest on them in perpetuity it could do so.

Update: At the European Tribune, my friend Chris Cook offers the following comment on my post:

Joe,

Credit to Beowulf for suggesting Consols recently, but the use of Consols to create a National Equity is something I’ve been publicly advocating for over 4 years in the UK (where of course they began, and still exist as an anachronism)

Debt Free or Date Free? What can we do with our National Debt?

Sovereign Equity can revolutionise financing of UK Assets

More recently in the context of solving Cyprus’s € problems

The Case for Cypriot National Equity

I advocate Obama’s Conversion, analogous to Goschen’s Conversion of 1888 when UK Chancellor George Joachim Goschen converted and consolidated existing fragmented classes of stock into a single class of perpetual Consolidated Stock (“Consols”).

A single class of US Consols could be issued and exchanged at a suitable price reflecting the tenor (date of redemption) and nominal rate of interest of all existing classes of US dated credit (mis-named as ‘debt’).

There would be a single market for a single instrument, and the question of default would disappear. The rate of return would literally depend upon the rate at which of taxation is collected by the US government. The market price would depend upon supply and demand.

Obama’s Conversion would literally be a debt/equity swap on a national scale, since undated ‘stock’ was the original form of funding which pre-dated a 300 year aberration into interest-bearing debt (Loan Stock) and distinctly inequitable equity (Common Stock).

The ethical dimension of such a 21st century debt jubilee, could also be thought of as a conversion in more than one way.

(Cross-posted from New Economic Perspectives.)

Read the rest of this entry →

Rationalization and Obligation, Part I: No Magic Bullets?

6:59 am in Uncategorized by letsgetitdone

The media and politicians in both parties are still largely echoing the Administration’s framing of the fiscal situation and absolving the President of his share of the blame for the debt limit crisis. They’re reinforcing his message They’re 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,” including passage of the chained CPI cuts to Social Security over the objections of a large majority of the American people.

The mainstream news outlets still haven’t seriously questioned the President’s claims that There Is No Alternative (TINA) to just facing down the Republican’s shutdown and debt ceiling related threats without giving in or resorting to any options to de-fang the debt ceiling threat. They have begun to mention other options, but in a way that is largely supportive of the President’s reluctance to use them. In reinforcing TINA, the mainstream is allowing the President to escape from responsibility and obligation, while, ironically, allowing him to characterize himself as “the adult in the room.”

When it comes to our repeated and unwelcome debt ceiling crises, President Obama is like the person who says he has a problem, but when confronted with a variety of options for alleviating or even solving the problem, comes up with some rationalization about why each will not work. After awhile, it becomes obvious that the person with the problem doesn’t want any help help solving it, but actually loves having it, and is fixated on a single objective having little to do with solving the problem (“the Great Betrayal”), that is very difficult to get, and wants to claim that there is no alternative, because, as the problem produces more and more negative effects he/she will be able to push through that objective.

This post is the first in a series in reply to a part of the President’s recent News Conference in which he referred to debt ceiling crisis options people had been writing and talking about, and explained why the Administration will not be invoking those. I found his explanation to be misleading and overgeneralizing gloss on a process of complex decision making, designed to hide the real political considerations underlying his behavior. Hence this series. In Part I I’ll begin with the President’s explanation, briefly characterize the difficulties with it, and then analyze the first two of seven options he has: the selective default and exploding option alternatives. In Part II, I’ll cover his Platinum Coin Seignorage, 14th amendment, and consols options. Part III will analyze two options I haven’t written about before: premium bonds and asset sales. In Part IV, I’ll examine differences among the options in legal challenges and likely impacts on bond market confidence. Part V will evaluate these differences. And Part VI will deal with what he ought to do, and what he will do.

The President’s Press Conference: No Magic Bullets?
In his press conference yesterday, President Obama mentioned other options, including both the 14th amendment and the platinum coin:

Here’s the key piece of the transcript:

And I know there’s been some discussion, for example, about my powers under the 14th amendment to go ahead and ignore the debt ceiling law. Setting aside the legal analysis, what matters is that if you start having a situation in which there’s legal controversy about the U.S. Treasury’s authority to issue debt, the damage will have been done even if that were constitutional, because people wouldn’t be sure, it would be tied up in litigation for a long time. That’s going to make people nervous.

A lot of the strategies people have talked about, the president can roll out a big coin and — or he can resort to some other constitutional measure, what people ignore is that ultimately what matters is what are the people who are buying treasury bills think?

Again, I’ll just boil it down in very personal terms. If you’re buying a house and you’re not sure whether the seller has title to the house. You’re going to be pretty nervous about buying it. And at minimum you’d want a much cheaper price to buy that house because you wouldn’t be sure whether or not you would own it. Most of us would walk away, because no matter how much we like the house, we would say to ourselves the last thing I want after I bought it is I don’t actually own it.

The same thing is true if I’m buying treasury bills from the U.S. Government and here I am sitting here. What if there’s a Supreme Court case deciding that these aren’t valid? That these aren’t valid legal instruments, obligating the U.S. Government to pay me. I’m going to be surprised. Which means I may not purchase it. If I I do purchase them I’m going to ask for a big premium.

So, there are no magic bullets here. There’s one simple way of doing it, and that is Congress going ahead and voting.

There are many difficulties with this formulation. The first is neglecting any listing and analysis of most of the individual options the White House has considered. This prevents the Press and the rest of us from knowing how extensive their consideration of alternatives has been.

The second is glossing over the relationship of the 14th amendment option to the others. In his speeches, News Conferences, and interviews, the President has a tendency to be less than candid by giving explaining why he won’t do one of a number of things, by making an example of the worst alternative fitting his explanation, and glossing over the rest.

The third is a failure to recognize any differences among the options in relation to Obama’s main point above: that loss of public confidence caused by legal challenges would affect sales of all types of debt instruments, as well as, all other options equally seriously including Platinum Coin Seigniorage (PCS). Let’s look at and analyze the options the President has.

The First Two Options

In three previous posts, here, here, and here, I listed 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 with some additional comments, along with two new options I’ve not listed before, 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. This option may work even if the Fed doesn’t cancel Treasury debt, because failure to pay the Fed won’t have the impact on the private sector that other failures to pay would have, and may provide considerable room for Treasury to manage its payments to the private sector in such a way that market confidence isn’t damaged a great deal once it is seen that the Treasury has room for fiscal management.

On the other hand, canceling Treasury debt would affect the balance sheets of the regional Fed banks negatively so that their net worth would become negative. And if anyone believes they are damaged by the cancellation, sues, and gains standing, the Courts could rule that the Fed has, in essence, given credit to the Treasury, an action which is prohibited by law.

2. An exploding option involving selling a 90-day option to the Fed for purchasing Federal property such as 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. This option is based on the idea that the Treasury can sell Government assets to the Fed. This is an interesting alternative, but could also be upended by a suit contending that this too, is a prohibited free gift; in substance, if not in form, a prohibited grant of credit.

In Part II I’ll continue my discussion of options covering Platinum coins, the 14th amendment and consol securities.

(Cross-posted from New Economic Perspectives.)

Read the rest of this entry →

Stop “the Great Betrayal”: Kabuki Update

10:19 am in Uncategorized by letsgetitdone

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.
We need to get this to the Fiscal Cliff! What could go wrong?
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 →

Stop the Kabuki: It’s About “the Great Betrayal”

10:23 am in Uncategorized by letsgetitdone

MSNBC continues on with its campaign to cast the Tea Party Republicans in the role of principal villains in the imminent Government budget/ government shutdown crisis and the likely coming debt ceiling crisis. The teabots, you see, are using the Republican majority in the House to demand more austerity in government and defunding of the Affordable Care Act (ACA). They’re using their bloc of votes in the House, along with the Hastert rule requiring a majority of the majority Republican caucus to veto any possible compromise vote of the whole House on a budget or a continuing resolution that would get bipartisan majority support keeping the government open past October 1.

Speaker Boehner is coming in for his share of the blame, being called feckless, spineless, weak, a failed leader, and unpatriotic for his decision to respect the Hastert rule, give into teabot “lunacy,” and help them pass a budget implementing further budget cuts and defunding the ACA. MSNBC’s thrust is clearly to call the Republicans bad names while painting the Democrats and the Administration as the adults in the room, willing to compromise to keep the Government running and prevent a default which could crash the world economy. The Washington Post is also reflecting this Party line in its wonkblog Posts with Ezra Klein leading the charge supporting the Administration’s adulthood and the Republicans perfidy at both the Post and MSNBC.

I think this campaign is hiding the real story here, as it is designed to do. Let’s stipulate, to begin with, that the tea party Republicans are mean, evil, stupid, and crazy dudes and gals funded by Ayn Randian billionaires whose primary interest is to replace society with a state of nature in which life is nasty, brutish, and short for those of us who don’t have private armies. It’s still true that they do not bear the sole blame for this crisis, because it is simply not the case that there is nothing the Administration can do to both short circuit the crisis and defuse its impact. It has a number of options it can pursue to completely defuse the debt ceiling crisis and at least a few to create even more pressure on the Republicans to avoid a Government shutdown.

TINA does not apply in this case, and the President’s choices are not limited to just refusing to negotiate or giving in to defunding Obamacare. By framing things in this way, the media are echoing the Administration’s framing of the situation and absolving the President of his share of the blame for the crisis. They are also preparing the way for a compromise, that if it doesn’t defund Obamacare, 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 my last post, I mentioned the following five options the Administration can use to lessen the impact of the Republican thrust:

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;

3. Using the authority of a 1996 law to mint proof platinum coins with arbitrary face values in the trillions of dollars to fill the Treasury General Account (TGA) with enough money to cease issuing debt instruments, and even enough to pay off the existing debt; and

4. Using the authority of the 14th Amendment to keep issuing debt in defiance of the debt ceiling, while declaring that the debt ceiling legislation was unconstitutional because it violated the 14th Amendment in the context of Congressional appropriations passed after the debt ceiling mandating deficit spending.

5. Beowulf has offered yet a fifth option for getting around the debt ceiling by issuing consols. Consols are debt instruments that pay a fixed rate on interest in perpetuity, but never promise principal repayment at a maturity date. The debt ceiling law is written in such a way that what counts against the ceiling is the principal repayment guaranteed by the instrument. Since consols provide no principal repayment, one can have unlimited consol issuance without increasing the debt-subject-to-the-limit.

Yves Smith at Naked Capitalism used the list in this recent post to make the point:

“. . . the larger point is that this budgetary Battle of the Titans is a phony war. Obama can finesse the Republicans if he needs to. . . .

So hang tight for way too much unnecessary melodrama over the next month. It’s another round of watching the two parties play chicken, with each posturing that it won’t be the one to steer out of the impending crash. The fact is that Obama really wants his Grand Bargain. All of this high drama is necessary for him to pretend to his base that he was forced to do what he’s been trying to do for years: sacrifice old people since he perversely believes that “reforming” Social Security and Medicare will get him brownie points in the presidential legacy ledger. . . .

Yves and I agree on that. The Administration is raising the zombie Grand Bargain, Great Betrayal again. In addition, she thinks:

Of all the items on the list, option 1 looks far and away the most likely, although an Administration with more guts might try a bit of option 2 along with it. Unlike a platinum coin, which just sounds too weird to people who haven’t heard about the idea (and the Administration would need to be selling it hard now to see if it could legitimate it in the court of public opinion), options are something the public hears about regularly and sounds less gimmicky.

This is a brief analysis of the relative likelihood of the various options. Let it serve as an introduction to this more detailed analysis.

Option 1: I agree that this is a pretty likely option. It allows the Administration to prevent default for a time with both skillful management of cash flow from tax collections and some risk (increasing over time), and to pressure Congress with partial government shutdowns. It also keeps the risk of default in front of people, and is consistent with the President’s likely goal of getting that Grand Bargain through, at last. The first part of Option 1 is classic shock doctrine, so it’s likely the President will select it. However, I don’t think the parts of this option relating to the Fed allowing the Treasury to default temporarily by not paying back the debt it owns when it falls due, or the Fed canceling part of the Treasury debt it owns, will work.

First, the Fed is prohibited by law from giving the Treasury any appreciable credit facilities, and letting Treasury be late in their bond principal and interest payments would be extending it credit. That’s what prevents the Fed from buying Treasury securities directly from Treasury in the first place.

Second, nor can the Fed just cancel the debts the Treasury owes it. The reason why not is that the actual debt instruments are owned by the Fed regional banks, which, in turn, are privately owned. The Treasury bonds are assets of the Fed regional banks. If they just canceled those assets, then they would be violating their fiduciary duty to their stockholders.

Option 2: I think this is less likely than Option 1. I don’t agree that it is less “gimmicky” from a person in the street point of view. People have heard of “options,” of course, but relatively few people could explain what an option is, or how one works, or have ever used an option. And the idea of options generating Trillions in reserves for the Treasury would sound at least as “gimmicky” to the lay public as minting a platinum coin will.

Just from a personal point of view, the idea of the Government minting a platinum coin with a particular value is very familiar to someone like myself who has worked widely in political science, and the social sciences and more recently in economics. I can easily understand the idea applied to a coin with a $60 Trillion face value, as long as I think that minting such a coin is legal.

So, to me the coin idea is not “weird,” so long as it can be shown that it is legal. I think that “it’s the law,” even though it has never been used before is the sound bite that has to be endlessly repeated to the public to get it legitimacy. And I think the President can make that claim and explain his authority to have it minted under the law in a speech announcing that one has been minted. If people get mad about it, then the proper answer is “This is a democracy, repeal the law if you don’t like it.”

Second, I also think Option 2 may be legally more questionable than Option 3. After all, the Fed is prohibited by law from simply creating money and giving it to Treasury without due consideration. But what is a $2 Trillion option redeemable by the Treasury for $1.00 other than a gift of $2 Trillion to it? Certainly, substance over form governs here, and such an effective grant of $2 Trillion to the Treasury from the Fed would be considered a violation of the law, and certainly a financial manipulation “gimmick” by the Fed and the Treasury.

Option 3: As people who read my posts know, I’m very much in favor of Option 3. But I wouldn’t say it’s the favorite Modern Money Theory (MMT) option. I think MMT economists, by and large, would rather the current crisis were resolved by repealing the debt ceiling law, or getting rid of it by exercising the 14th Amendment option. It’s true that many MMT writers have mentioned the platinum coin in the past in a favorable context, but MMT views reserves, currency, cash, and government securities as all debts of the Government, so the general opinion is that if the platinum coin has any special value over other expedients for facilitating deficit spending, that value is political, rather than economic or financial.

Also even though Option 3 is the one I favor. I agree with Yves that it is not very likely the Administration will use it. However, I don’t think its “weirdness” is the main problem with it from an Administration point of view. Instead, I think their problem with it is that if they use it, it will be very hard for them to explain thereafter what they mean by saying that “we need a Grand Bargain” or long-term deficit reduction, because “we’re running out of money.”

In any event, I’ve discussed the pros and cons of Option 3 voluminously in my e-book Fixing the Debt Without Breaking America, including the issue of “weirdness.” So anyone interested can read about the pros and cons there.

Option 4: My view of the 14th amendment option, is that a decision to continue issuing debt appealing to the 14th amendment, may very well work because the Supreme Court refuses to grant standing to the House to challenge it. However, if the Court does allow a challenge then I think it will find that the debt ceiling isn’t unconstitutional as long as Congress allows PCS and consols, because those can be used to get credits to pay off securities as they fall due.

I also think that using the 14th amendment option is a more likely move from the Administration, then using the coin, or the exploding option, because the balance of advantages and disadvantages will appeal to the President’s constitutional lawyer side. The 14th amendment option has the following advantages. 1) It makes the President look strong by standing up to the Republicans; 2) It continues current practices, so no one will say it’s “weird,” just illegal; 3) It maintains the air of crisis the President would like to have to go after the Grand Bargain, but also decreases economic risk by putting the debt limit problem on the back burner; 4) It has a good chance of surviving a Court suit through a denial of standing to the House; and 5) It carries with it the chance of getting the debt ceiling law invalidated by the Supreme Court.

Its disadvantages are a few. Unless the Court actually declares the debt ceiling unconstitutional, the House will probably impeach the President, claiming he acted illegally; so this option is risky. If something unexpected happens on the surveillance state front, the risk might unexpectedly increase through a sudden alliance of the left and right against the President.

Of course, the risk of impeachment increases even more if the Court both grants standing and upholds the debt ceiling law. All that said, I think the likelihood of the disadvantages happening is low, and it may be the kind of risk the President is willing to take because, as a lawyer, he will assess its likelihood as low.

Option 5: The advantage of Option 5 is that it would be quick, clean, and easy to implement. There is precedent in other nations for it as well. The UK has issued consols from time-to-time in its history.

The disadvantages are a few. First, it takes the pressure off people to come to the Grand Bargain. Second, the interest on consols will likely have to be higher than the interest on standard debt instruments. Third, this option is a bit “gimmicky,” but not a really strange idea, and only slightly “clever” as a way of getting out of a debt ceiling impasse.

On balance, I’d say this option is very likely if the Administration knows about it, especially after an initial use of Option 1 and possible strong resistance to compromise from Republicans. In that case, as the Administration sees increasing cash flow difficulties in coping with the debt limit, it may ease the way by using consols, and once their use becomes commonplace, then proceed further with a negotiation to get rid of the debt ceiling, since it will have been shown to be of little use anyway.

So, from the likelihood point of view, I think the most likely option is the first half of Option 1, followed by Option 5 (consols); then Option 4 (the 14th); then Option 3 (the coin); and last Option 2 (the exploding option), which I don’t think can withstand a legal analysis.

The option I prefer is Option 3, because, especially in the case of High Value Platinum Coin Seigniorage (HVPCS), it has the most positive effects relative to public purpose, including educating people about fiat money and MMT, and in addition, its political/economic impact over time is likely to be, by far the most favorable of all the options,because the size the reserves in the TGA and gradual repayment of the debt will be a source of constant political pressure on Congress to seriously consider solving our mounting problems regardless of whether the policies required will involve deficit spending.

And, finally, whatever the options one thinks are likely or one prefers, I think it’s very important that the blogosphere start debating the options once again, as it did in 2011 and during the fiscal cliff/sequester periods, so the President will find it more difficult to plead TINA when he wants to slip through his Grand Bargain. The TINA/kabuki game he is playing is the enemy of the economy, the safety net, and the public purpose.

In addition, the Grand Bargain, along with the upcoming Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Partnership (TAFTA) are three more nails in the coffin of the middle class. We must not let him, the corporate partisans in both parties, and the cable networks drive the first of these nails home by getting people to accept their narrative about the issues involved here.

To stop it from coming about, the first thing we must do is unmask (as Yves and I have been trying to do) the news networks, the cable media, and the village progressives like Ezra Klein, as actively attempting to constrain debate by ignoring the options the President has, apart from a simple “I will not negotiate, or I must cave stance.” Let us make them come to grips with the alternatives and, in doing so, spread the news that there are a number available, and that whatever unpalatable compromises the President proposes, are his choices and his fault; not necessary expedients, he is being forced into because he has no effective weapons to use in countering the Republicans using the debt limit law to take hostages.

*Previous versions of this item on the list of options used the figure $1.6 Trillion in Treasury securities owned by the Federal. The revised $2.05 Trillion total is current as of close of business 09/18/13.

(Cross-posted from New Economic Perspectives.)

Reply to Reinhart and Rogoff’s NYT Response to Critics

7:27 pm in Uncategorized by letsgetitdone

Warren B. Mosler

By Warren 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!?

Hell No! The Ultimate Pushback against the Grand Bargain

7:09 am in Uncategorized by letsgetitdone

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.)

The Great Austerity Swindle!

9:45 pm in Uncategorized by letsgetitdone

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.)