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An Open Letter to Don Beyer, VA – 8th Candidate for Congress

8:08 am in Uncategorized by letsgetitdone

(Author’s note: My apologies: this one’s about 6 times longer than the ideal 1000 word post. I just didn’t feel right about breaking it up into parts, however, because that lose the continuity. So, please bear with it. I think a lot of candiates for Congress need to get these questions from angry constituents.)

My Congressman, Jim Moran, is retiring this year and his seat is up for grabs in the VA – 8th Congressional District. This is a solidly blue district made even more solid by the Republican gerrymander following their win in the disastrous elections (for poor people, for women, for the middle class, and for minorities) of 2010 in Virginia. So, the question is, which of the eleven candidates who are running in the primary will win it, and become the heavy favorite to win the Congressional election in November.

The heavy primary favorite is Don Beyer, a noted auto dealer in Northern Virginia, who has served as Lieutenant Governor twice, and also as Ambassador to Switzerland. My impression of Ambassador Beyer has been favorable. I have a friend who bought cars from him over many years and who had his Volvos serviced at his dealership all the while, and he had nothing but good things to say about the integrity of the service he received.

That said, however, and personal characteristics aside, I’d like Beyer to clarify his positions on the issues. So, I’m addressing this open letter to him. Read the rest of this entry →

Peterson Thinks We Need Austerity While He Lives It Up!

9:46 am in Uncategorized by letsgetitdone

Pete Peterson’s long-term fiscal problem is a figment of his lack of imagination

The Peterson Foundation reacted to the President’s budget document with a report repeating its usual whining about the debt problem, and the need to cut entitlements. Here are quotations from the report and my explanations of why they are ridiculous deficit/debt terrorist nonsense.

While today’s deficits are much lower than those during the financial crisis and recession, over the next ten years debt will remain at historically high levels under the policies outlined in the President’s budget. Over the long term, our debt is on a rising and unsustainable path that harms our economy and threatens our future standard of living.

First, Government deficits that don’t exceed the sum of private sector savings and trade deficits are not bad for the private economy. They are good because they contribute directly to private sector savings and the aggregate demand and subsequent economic growth it can create. It would be nicer for all of us if Mr. Peterson learned that lesson before his propaganda turns the US into a third world banana republic; unless, of course, that’s what he’s about. Read the rest of this entry →

How to Restore the Good Name of Government

2:28 pm in Uncategorized by letsgetitdone

There are four very important things the president can do before the elections of 2014 that would help to restore some faith in Government and, as a by-product, at least tentative trust in the possibility that renewed Government deficit spending may help people.

Why is it that Washington village “progressives,” and their associates in other parts of the country who are nevertheless part of the Washington village culture, often ask useful questions, but, almost always deliver, underwhelming answers? Here’s an example from Richard Eskow, probably the best writer at Campaign for the American Future.

How do we restore the good name of government spending, which is especially important during periods of high unemployment and slow growth like these? First, by supporting those politicians who are unafraid to make the case. Second, by demanding that the reluctant ones take a bolder stand – without mixing their messages between spending and premature austerity. Third, by rejecting the insanity that today’s Republican Party represents. Some in the GOP are even opposing infrastructure spending – as America’s bridges, schools, highways and dams decay around us.

Underwhelming, right? Why? First, because there aren’t too many politicians who are unafraid to make the case. Second, because people who are reluctant aren’t likely to respond to only “demands” from people who fiercely desire more government spending. Third, because merely rejecting Republican insanity is very unlikely to cut it, since that is what Democrats have been doing and it seems to be having little or no effect. And fourth, because the only way to restore faith in Government spending is to take actions that have consequences that are highly visible and unambiguously good for the vast majority of people. In other words, those who want to restore faith in Government spending have to get the Government to take actions delivering things for people that they see as important. So, how can this be done?

At this juncture, little can be done that involves the Congress because Republicans and Democratic corporatists won’t let it happen. They won’t legislate anything useful before the election.

Nor will they legislate anything useful after it unless 1) Democrats get a majority in both Houses and 2) Democrats who constitute those majorities are willing to move away from corporatism and legislate in the interests of people. So, if something can be done in this area, it must be done by the President. There are four very important things he can do before the elections of 2014 that would help to restore some faith in Government and, as a by-product, at least tentative trust in the possibility that renewed Government deficit spending may help people.

1. The President can re-institute the rule of law in the area of national security and secrecy by ending mass surveillance of the US population immediately, ceasing all investigations and attempts at prosecutions of journalists who have been trying to tell the public about the overreach of our intelligence agencies, beginning investigations and prosecutions of intelligence operatives who have broken existing laws in gathering intelligence, ending current prosecutions of whistle blowers, and issuing pardons for those who already have been tried, convicted, and jailed.

2. The President can re-institute the rule of law in the area of FIRE sector control and mortgage frauds by beginning investigations and prosecutions of high level executives at too big to fail FIRE sector organizations who have committed fraud including those that caused the financial collapse of 2008, which, in turn, led to the Great Recession and the destruction of so much middle class wealth.

These first two initiatives are supremely important because they will deliver a very visible presidential message that the Government is re-instituting honest government and a single system of law, which, in turn, will give people some reason to believe that renewed spending by the Government will be carried out honestly for the benefit of people, and not for the benefit of FIRE, health care, energy and other elite corporations. Giving people this is an essential step in restoring faith in additional spending, since from their point of view, it looks like the financial power of Government has been used to save big corporations and Wall Street and see to it that they prosper, while leaving working people and home owners to twist slowly in the economic winds of “the long depression” (Eskow’s memorable phrase). How can they believe that renewed spending will help them if they believe that the Government promising good results from new spending is a corrupt government, in the pocket of the 1% or perhaps even the 0.001%?

3. The President can next do something that is very essential to developing widespread support for renewing spending, because it will make plain that the US Government has and always will have whatever amount of funds it will take to create full employment and to finally end the long depression. The President has to remove the perceived problem of the national debt from the consciousness of the public by paying off a large proportion of it WITHOUT running economy-destroying surpluses. There’s only one way that can be done by the President acting alone right now, in time to affect the campaign environment in the 2014 election by eliminating the debt as an issue backing continued austerity propaganda.

That way is to cause the US Mint to create and deposit a platinum coin with a face value high enough to repay the debt subject to the limit entirely as it falls due, and to cover deficit spending for a long period of time thereafter. If the President does that, and sees to it (as he has the power to do) that the Mint’s account, and ultimately the Treasury’s spending account are credited with reserves equal to the value of the seigniorage resulting from the Mint’s deposit at the Fed; and also, if he follows that up by immediately paying off a large percentage of the debt, then everyone will know that the seigniorage is being used to get rid of the debt quickly.

When people know this they will know two other things. One, that the Treasury is easily paying off the debt, and two, that it has and always can easily create whatever funds it needs to follow through on its promises to end the long depression without either cutting spending or raising taxes. This will be a revelation to people which the President and the Democratic Party must drive home.

4. The White House and the Democratic Party must then run a campaign advocating a list of programs people will immediately view as likely to solve their economic problems. These must promise full employment recovery within a year using full payroll tax cuts and a Job Guarantee program at a living wage with good fringe benefits, strengthening social security and other trust fund programs by guaranteeing their annual spending regardless of the size of their trust fund balances, and by greatly increasing the size of safety net benefits and the protections they afford in case of inflation, truly universal and comprehensive health care using enhanced Medicare for All, revenue sharing for states on a proportional basis by population, fixing US infrastructure over 5 years, fixing the Housing crisis with various specific measures redressing the injustices done to homeowners by the big banks since 2007, fixing the student loan crisis with a “debt jubilee” and a grant program covering post-secondary education, and, lastly, dealing with environmental, climate change, and sustainability issues with a massive 5 year transition away from fossils fuels and nuclear and to renewable energy.

Democrats must then meet the cynicism and ridicule greeting these campaign promises by guaranteeing that if people give them a victory, then they will get rid of the Senate filibuster and other impediments to rapid action, and will legislate their program within the two year period of the next Congress without fail. These guarantees must be backed with a further promise not to run for re-election if they break any of their promises. Only then will some of the cynicism greeting their promises be dispelled.

Finally, these Democratic promises will surely be met with a campaign emphasizing the bogeyman of hyperinflation. Democratic promises will be estimated in a primitive way totaling up what will they cost over the two year period. The assumption will be made that they won’t be countered by automatic stabilizers producing increasing fiscal drag as the US approaches full recovery.

Democrats will have to respond with their own projections estimating that drag. It will come from gradual and automatic re-imposition of payroll tax cuts calibrated to kick in gradually as unemployment decreases, and gradual shrinking in Government spending on the Job Guarantee (JG) program as the private sector responds to increased demand by hiring people from the JG rolls.

In addition, it will come from increasing private sector savings and increasing trade deficits as recovery moves forward. It will also come from the White House working with Congress to phase in some of the programs I’ve mentioned gradually and in response to increasing fiscal drag.

The bottom line is that if the Democrats are successful in winning the Congress in 2014, and in legislating these programs, then faith in Government will be restored. But, there will be a fly in the ointment, as there is always is in life. The debates over fiscal policy will shift to debates about the likelihood of inflation, and managing the economy to avoid inflation at full employment will become a prime concern. We will have traded increasing government illegitimacy, chronic unemployment, stagnation, and “long depression” problems for renewed faith in government, full employment, prosperity, and inflation concerns.

That’s a great trade-off for all of us, I think. And I will take it anytime over the current neoliberal evolution toward a feudal/fascistic order.

(Cross-posted from New Economic Perspectives.)

Photo by l’ennui d’ennui, used under Creative Commons license

What Now?

8:34 pm in Uncategorized by letsgetitdone

Today, John Boehner bowed to the inevitable logic of the impending political season and placed a “clean” debt ceiling increase bill on the floor of the House. At this writing, the bill passed with 28 Republican and 193 Democratic votes. Now it moves on to the Senate, where it is expected to pass in time to allow the Treasury to keep issuing debt instruments.

So, now we have had agreement on a budget partially rolling back the sequester, and the Republican leadership appears to have decided not to have another debt ceiling crisis. I wrote a post called “What Happens Now?” just after the Government shutdown ended last October. There I analyzed the political situation and made a number of predictions about the short-term future. Here’s how I answered the question: “Growth and Jobs or Shutdowns and Debt Ceiling Crises?” Read the rest of this entry →

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 V: Differences Are Everything

7:38 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 IV: Differences Among Options

7:05 am in Uncategorized by letsgetitdone

In Part I, Part II, and Part III, I listed and analyzed seven options, analyzed them and also pointed out that the President’s 14th amendment option, actually makes turning to the 14th as a justification for continuing to issue debt beyond the ceiling, a last resort, and also places an obligation on the President to exhaust other available options, whose legality is probable, but not finally determined by the Supreme Court. But, in his recent Press Conference, the President also failed to recognize any differences among the options in relation to his main point: that loss of public confidence caused by legal challenges would affect sales of debt instruments and other options including Platinum Coin Seigniorage (PCS).

Differences in levels of legal uncertainty among the options would surely affect the confidence issue. Option 1, selective default, seems legal, if not followed by Fed forgiveness of Treasury debt. It would probably have the effect of a partial government shutdown. But, as long as there’s no default on repayment of debt to everyone but the Fed, confidence related to buying Treasury debt should not be affected.

Option 2: the exploding option, is one of those that might result in both a legal challenge, and some uncertainty in markets, but I don’t think very much uncertainty, since whatever the Supreme Court decides about the legality of this, it’s hard to see them being able to do anything about it except ordering the Treasury and the Fed to stop breaking the law prohibiting the Fed granting credit to Treasury. Since the Treasury would be using the exploding option to acquire reserves from the Fed, but would not be issuing debt instruments, the Court wouldn’t be able to decide that the Government had no obligation to repay illegally issued Federal debt, which is the scenario the President used in his News Conference.

Option 3, is Platinum Coin Seigniorage (PCS). Legal questions about the coin have been raised, but as I said in Part II, the preponderance of opinion is that the coin is legal and will survive if challenged.

So, the question becomes whether a challenge to it will create a lack of confidence in markets affecting Treasury bonds? I really doubt that, however, since the “house ownership” metaphor, used by the President doesn’t apply to the coin, either. Its practical force comes from the idea that the market will reject debt instruments offered for sale after the debt limit is reached. However, the primary initial use of the coin would be to pay down the debt level, so no debt issuance would be involved in its use. Why should there be a problem with “bond market confidence” when debt repayment is continuing?

Only new creation of reserves by the Fed would be involved. So, the issue of confidence affecting debt marketability doesn’t arise in this case, since the private markets would not have to “buy” new reserves offered by the Treasury after the debt limit is reached, as they would questionable debt instruments issued by the President.

And certainly while legal challenges are going on, the President could be drastically reducing the debt subject to the limit by using coin proceeds to pay back debt, increasing confidence in markets with every significant payoff. Of course, this depends on whether the President mints a High Value Platinum Coin (HVPC), say $60 Trillion in face value, rather than “a small ball” TDC alternative, but that’s his choice, after all. So, in the end, whether there’s a problem with bond market confidence depends, in the end on the politics of choice, and not whether he uses PCS or not.

As for the Fed, it may or may not cooperate with the Executive on crediting the coin. But the law provides that in cases of disagreement in interpretation between the Fed Chair and the Secretary of the Treasury, that the view of the Secretary shall prevail.

In other words the Fed can be made to cooperate when it comes to crediting the coin, and it is highly doubtful that if the Fed is between the rock and the hard place of crediting the coin or allowing a default, that it will then choose the latter and risk the financial system collapsing. The Fed, after all, is pretty “chicken” about financial system crashes, and is likely to embrace its own version of There Is No Alternative (TINA), since, in addition to the rock and the hard place, the Fed’s compliance is unambiguously required in the law.

If the President did mint a really big coin, say the $60 T one, and then quickly paid off the intragovernmental and Fed debt, about $6.7 Trillion, and continued paying off short-term debt, and if the Court then granted standing, and, after six months or so, for example, declared his action unconstitutional, what would be the remedy the Court could implement to unwind the action, and the repayment of about $2 Trillion in debt to non-Federal entities? The Court might relatively easily be able to undo the $6.7 Trillion in repayment, but once the debt to non-Federal entities is redeemed; then it is redeemed. The former US bondholder “creditors” aren’t giving their money back.

As a practical matter the Court can’t do anything about that, since the reserves paid out are in private hands. Further, even if the Court ordered that the Treasury return the reserves used to repay the intragovernmental and Fed debt to the Fed and to issue new bonds to restore the status quo, all that would do is stop the President from paying down further debt, but still not eliminate the headroom under the debt ceiling he had created by paying down debt held by non-Government entities. So, even in this case of extreme reaction by the Court, he’d still improve the debt limit situation by minting the platinum coin, without taking the chance that the markets might reject the debt instruments without requiring higher interest rates.

Option 4, is the 14th amendment option nullifying the debt ceiling. The President has a point here, that if this were challenged in Court then bond markets might feel uncertain about buying bonds issued during the period the debt was exceeding the ceiling. However, even if the Court ruled not only that the debt issuance was illegal, but also that the debt instruments should not be honored, a very long-shot finding, I think, does anyone seriously think that the Congress would cause a default by refusing to guarantee those bonds after the fact of Treasury’s issuance of them? If you believe that, then I have the proverbial pretty big bridge to sell you.

The uproar would be far worse in that case than it was in relation to the issue of whether Federal workers would get back pay at the end of the shutdown or not. In any event as I said earlier, using the 14th amendment to justify violating the debt ceiling on grounds of constitutionality can only be a last resort when all other options haven’t worked. So, the President has an obligation to try the others before he even turns to this option.

Option 5 is the consols option. If challenged in Court, this is probably the least likely option to be overturned. The law doesn’t prohibit issuing consols, and while anyone with the money can sue over anything, the buyers of consols will certainly evaluate what the chances are that debt instruments of this type can be viewed as violating the debt ceiling, or as prohibited.

I think the chances here are slim and none, and that people would feel very comfortable buying consols because they would be confident a) that the Federal Government would not default on its interest payments, and b) that the consols would always be redeemable in private markets where buyers looking for these kinds of instruments would be willing to buy them. So, I think it’s incorrect to lump consol offerings into the same category as conventional bonds clearly issued in reliance on the 14th amendment and in obvious defiance of the debt ceiling. They would not be nearly as subject to doubt and uncertainty as conventional bonds would be.

Option 6, premium bonds, is another bond option that, like consols, seems to provide a way of escaping the debt ceiling while being less likely to shake the confidence of the bond market. I think that’s true because it’s hard to see what’s illegal about this kind of bond issue. All that’s different is a higher interest rate offering which allows Treasury to sell at a higher price at auction while obligating itself to a lower face value that must be repaid.

However, Matthew Yglesias and Kevin Drum are persuaded that such bonds are “. . . .bound to set off an avalanche of litigation and uncertainty about what’s really what.” Well, anything is possible, of course, but even if there is litigation aimed at this very simple and apparently legal expedient, why would that shake the markets very much? And if they did react with a bit of unsteadiness, wouldn’t there be a good deal less uneasiness than there would be with Treasury Bonds that might turn out to be unauthorized by Congress. I certainly think so.

Option 7, sales of Treasury material and cultural assets, is another option that involves the Treasury getting reserves from the Fed in return for an asset. It is in the same category, in this way, as the platinum coin, and the exploding option. But an asset sale, while possibly having the questionable political aspects I discussed earlier, is simpler and easier to understand than the exploding option, and less “out there” from the standpoint of financial practitioners and economists than the platinum coin. In addition, the Federal Government sells material assets continuously, but not to the Federal Reserve. However, I know of no legal prohibition against such sales. And faced with the choice of making such sales, or Government default threatening an international financial crash, I expect the Fed might well invoke TINA and take the plunge.

I also know of no reason why sales of assets like these would shake confidence in the markets. After all, the Treasury would be doing everything it can do to pay the debts of the United States and would be successfully doing so. So, why should that lead to “. . . an avalanche of litigation and uncertainty about what’s really what.” In Part V, I’ll continue this reply to the President’s TINA claim by summarizing my evaluation of differences among the options.

(Cross-posted from New Economic Perspectives.)

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.)

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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.)

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