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Downsides to the Platinum Coin; or Just Defense of the Status Quo?

4:27 pm in Uncategorized by letsgetitdone

As part of a wonderful discussion thread on the legal basis for using Platinum Coin Seigniorage (PCS), following a post by beowulf (Carlos Mucha), the first to propose the Trillion Dollar Coin (TDC). Michael Sankowski, one of the founders of the Monetary Realism approach to economics offered a very long reply directed at High Value Platinum Coin Seignorage (HVPCS), and the TDC itself. Mike’s reply is a good example of the many misgivings people have about using PCS with face values in the trillions. Since Mike is a supporter, rather than opponent of PCS and believes that PCS is legal, I thought it would be worthwhile to deconstruct his long comment and show that his downsides are pretty speculative and don’t provide good grounds for supporting incrementalism is using PCS.

Mike begins:

There are huge downsides to printing a high value coin. Like it or not, our current setup requires the buy in of a large number of participants.

I don’t think it does. Using PCS requires only a decision by the President and his willingness to command the Treasury Secretary to do his bidding. In turn, the Secretary must command the Director of the Mint, and also the Chair of the Fed, to play their roles in creating the coin and seeing to it that the Fed credits the face value of the coin to the Public Enterprise Fund (PEF) account at the New York Fed. The fact that the President can command the Secretary is well-known. What’s not so well-known is:

12 USC § 246 – Powers of Secretary of the Treasury as affected by chapter
Nothing in this chapter contained shall be construed as taking away any powers heretofore vested by law in the Secretary of the Treasury which relate to the supervision, management, and control of the Treasury Department and bureaus under such department, and wherever any power vested by this Act in the Board of Governors of the Federal Reserve System or the Federal Reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.

So, one of the powers vested in the Secretary of the Treasury before creation of the Federal Reserve was certainly to spend its legal tender into the economy. But to do that under an arrangement where the Fed is its bank, requires that the Fed deposit and credit its legal tender into its spending account, the TGA. So, I think it follows that under 12 USC 246 the Secretary has the authority to order the Federal Reserve to credit that coin so Federal spending can proceed.

The coin is new. The coin is weird. Even if the effect of the coin is the same – or similar – to quantitative easing, it’s still new and weird for nearly everyone in the United States.

Well, it’s a new use of coinage, sure. That will make it “weird” for some people; not so weird for others. Using the coin forces the Fed to add reserves to the PEF which in turn gives the Treasury the ability to fill the pubic purse with most of the face value a platinum coin. I don’t find that “weird.” I think it’s the way things ought to be done. What purpose is served by using the term “weird” to describe PCS? Is it to discredit the idea because it’s new; or is Mike trying to show that even though he’s a supporter of PCS, he’s still a Very Serious Person (VSP).

Actually minting a very high value platinum coin could easily disrupt markets, it could easily freak out the larger investment community. This proposal is totally out of left field – heck the mainstream is only now thinking about the coin. We’ve had a few years over here at MR and in the MMT community to think through the pros/cons, and I bet we still haven’t covered many of those pros and cons.

First, I think a good many of the pros and cons were vetted in a single thread at Warren Mosler’s site soon after the first blog post by beowulf appeared focused mainly on the coin. And there’s been an awful lot of discussion of it since then, including a lot of mainstream discussion in the Summer of 2011 and for the past two months.

Second, labeling the coin as “out of left field” is is strange because beowulf is certainly not “left,” but a long-time Republican. His idea is new, that’s all, and it’s about Treasury creating fiat money. Looking at the history of the United States, Treasury has created fiat money from time-to-time under strong Executives. So, why is the PCS proposal to do that again “out of left field”?

And third, what exactly does “freaking out the investment markets” mean. I understand that there will be lot of excitement and maybe some hysteria if the President mints a $60 T coin. But if he uses it only to pay down Government and Fed-held debt immediately and to cover deficit spending, then why would people be overly concerned for too long; especially if the Federal Reserve takes care to assure people, that as Treasury Securities get more scarce, it will be compensating by paying Interest On Reserves (IOR), to provide a continuing vehicle for risk-free investment.

Market confidence isn’t something that is easily shaken, but when it is shaken, the results are disaster. The actual flows in the market only shut down for about a month or so in 2008 before they started to recover, but the job losses were horrific. The impact could have been much worse had the fed not reacted like it did.

“Market confidence” is a slogan that the financial community uses to scare the rest of us. Mostly, it’s just the “confidence fairy.” It was lost in 2008; but there was a concrete reason for its collapse in the collapse of Lehman Brothers and the exposure that created for the rest of the FIRE sector. That is, back in 2008, following on the housing crash, and Lehman’s failure, there was reality behind the reaction to hold on tight and panic.

But, if the President mints a $60 T coin and uses it to pay down nearly 40% of the debt subject to the limit; rendering debt ceiling conflicts immediately a thing of the past; then why should that shake market confidence for more than a few days, if at all? I don’t see the factors that would reinforce any initial irrational psychological reaction to that event. Also, I think that if the financial system is that fragile that we have to postpone implementing direct issuance of money by the Treasury, when we need to have that done to defuse austerity; then that is just another reason for taking the big banks into resolution and rebuilding the whole system from the ground up.

The world is not ergodic, as Paul Davidson points out. There are random features of the world which cannot be foreseen, cannot be accurately forecast, cannot even be put into a probability distribution. Keynes called this uncertainty, as opposed to risk, and Keynes was right.

Stepping out into the world with something which is in every sense revolutionary for our existing monetary system isn’t something to take lightly. Not only that, there are no boundaries or programs in place to constrain the power to directly issue money. As it stands, we’re just making it up without any constraints at all.

Taleb calls these “Black Swans,” and they certainly do exist. But we can’t deal with Black Swans by pursuing all innovations incrementally, or in safe-fail modes. We have to weigh the likely costs of waiting to fully implement an innovation with the explicit costs we’re experiencing without taking advantage of it.

Right now we’ve got 15-16% of the work force wanting full time jobs and unable to get them. We’ve got millions of home owners underwater. We’ve got 55,000 fatalities due to lack of health insurance, since the ACA hasn’t really gone into effect yet, and even after that, we’re likely to still have 35,000 annual fatalities unless we pass Medicare for All. We have a crumbling infrastructure which needs $3 T in new investment and on and on and on. I won’t counsel an incremental introduction of PCS over a period of a decade when the minting of a $60 T coin could free up the whole political system to begin to solve these problems in a matter of months; because of the possibility of a Black Swan that escaped my analysis.

And as far as constraints are concerned, the ones that are important here aren’t constraints on how much can be put into the public purse. They’re constraints on the purse strings. Those constraints are fully in place even with huge PCS face values. Congress still controls appropriations of deficit spending so that no seigniorage can be spent unless Congress appropriates that. The only other spending of seigniorage that would be allowed is repayment of scheduled debt.

Putting together a program where this change is introduced to the market in small increments seems wise to me. I do like the “target” plan you’ve suggested. It’s measurable. We know how much it will be in advance of the program being implemented.

I’ve already critiqued the “target” plan of beowulf’s Mike refers to, in this piece, which is a lengthy evaluation of incrementalism in using PCS. The bottom line is, that incrementalism won’t work, because it will end in likely repeal of the PCS authority.

Many people who trade bonds are severely freaked out by the inflation prospects of QE. Yes, they are dead wrong. They are terribly wrong. But this doesn’t mean we should flip them the bird and shove $60T down their throats, just because we can. It’s possible, but is it wise – even if some parts of our financial overlords are directly responsible for criminal activity?

No one’s suggesting that $60 T should be shoved down their throats. The $60 T proposal is to end debt issuance accompanying deficit spending and use seigniorage instead, and to repay the $16.4 T debt as it falls due, except for the intragovernmental and Fed debt which would be paid immediately. The other $43.6 T would be spent in accordance with Congressional deficit appropriations over 15 – 25 years. Is this a “wise” proposal? Well, I think it’s a lot wiser than one that leaves austerity politics in place for a decade or more, and costs our fellow citizens so much in foregone government financial investment in the public purpose.

Like Bill Black, I am pissed the banksters never got charged with any crimes. They knew. They freakin’ knew. They did bad things. But not everyone did bad things, and I’d argue even most of the finance industry did not do bad things. But this does not excuse the criminals, and there were many criminals.

If you’re so pissed at the banksters then why aren’t you out there doing something about them. There’s an institutional structure out there that nourished the banksters and the fraudsters. At the center of it is the big banks and the Federal Reserve which refuses to regulate them. The Fed needs to be subordinated to the Treasury if this system is going to placed under control. And the first step toward doing that is minting very big coins as part of a process of subordinating monetary policy to fiscal policy.

So we’re here, with a slightly better understanding of how the world of money works. It’s not a perfect understanding, because you see disagreements even among people with a deep level of understanding of the monetary system on our side. But it is better than the current status quo.

So What do we do? First, do no harm.

Pushing the country into another recession because we flip out the repo market by taking away every last safe asset they are using is probably not a good or wise path. Even if this was a good way to strip the bankers of their power – and I don’t agree with it being a good method – it would probably be worse for most people in the United States. There would be many job losses.

Beowulf’s plan to use a series of coins to pay the interest owed at the end of the year is a pretty good one.

The $60 T coin, in itself, does no harm. In fact, it does a lot of good by allowing the political issue of austerity to finally be taken off the table, and allowing the political system to get back to legislating to meet the real issues face. I also don’t think that “flipping out the repo market” will be a problem because IOR means the continued existence of a risk-free, interest-earning place for USD reserves.

That place is at the Fed in reserve accounts. What’s so bad about that, if IOR interest is comparable to bond interest? Why should there be any job losses as a result of this move; and if there are, then the $60 T in the kitty will allow the Federal Government to quickly respond with MMT policies that would have the economy roaring in 3-6 months, in contrast to the economic stagnation we have now.

Finally, the plan to pay interest on the debt using seigniorage isn’t good enough; because it leaves the national debt still in place, even increasing it. So, it leaves austerity politics in place, and fails to create the political background needed for economic legislation that will finally end the Great Recession. That is, it’s a big fail; as are so many attempts at incrementalism.

(Cross-posted from New Economic Perspectives.)

Beowulf and Diehl Embrace Trillion Dollar Coin Incrementalism!

11:34 am in Uncategorized by letsgetitdone

A wonderful discussion thread has been going on at Monetary Realism (MR) after a very good new post by beowulf (Carlos Mucha), who first brought forward the proposal for the Executive Branch to use the authority provided in the 1996 Platinum Coin Seigniorage (PCS) legislation to fill the public purse, on whether the Fed had a legal basis for turning down PCS in the form of the Trillion Dollar Coin (TDC). I’ll leave the legal discussion for another blog post, since I agree with beo on these, and also need to review some legal arguments against the TDC by some George Washington University Professors. Here I want to write about some of the MR discussion relating to High Value Platinum Coin Seigniorage (HVPCS) vs. incremental PCS options.

Why the $60 T Coin Is Needed

Beowulf addresses himself to my call for High Value Platinum Coin Seigniorage (HVPCS) using a $60 T coin in this way:

Once you blow past the size of the public debt is there a reason to go right to $60T? You need to ease into something that’s such a break from current practices. Even a trillion dollar coin is too big to be practical (of course, like Mike said, once you think it, you can’t un-think). IIRC it was Philip who suggested minting $25B coins would be a good place to start.

“Philip” is Philip N. Diehl, former Director of the US Mint in the Clinton Administration and Co-author with Mike Castle, (Rep. DE) of the PCS legislation. In comments of the post, Philip joined beo in advocating for an incremental process of PCS introduction.

An important reason for using a $60 T coin, isn’t because we need all that money right away. In fact, we can spend very little of it because the spending hasn’t been appropriated by Congress, and most of the outstanding debt subject to the limit, will have to be paid as it falls due rather than immediately.

Still we need the $60 T coin to be minted because:

– a) the coin legislation may be repealed at any time by people who don’t want seigniorage to be an alternative to taxing or borrowing; but once the $60 T coin is minted, the cow would be out of the barn, and the proceeds would last 15-25 years, by which time we’d have a chance to get political acceptance for reorganizing the Fed under Treasury and ending its existence as a politically unaccountable agency dominated by private banks and Wall Street;

– b) the seigniorage from a $60 T coin would serve as a potent symbol of the truth that the Federal Government can never involuntarily run out of money. This is one of the central ideas of MMT that the public needs to accept routinely to understand that the Government’s budget isn’t like their household budget;

– c) the mere presence of the $60 T in the public purse makes clear that the claim of those favoring austerity that we can’t afford to enable full employment; or to pass Medicare for All, or to rebuild our infrastructure or do 101 other things that need doing are false, and to oppose them the austerians would then have to argue on the merits of the policy proposals and not almost solely on grounds that we just can’t afford it because of all the debt we’re going to leave to our grandchildren; and

d) the presence of the $60 T in the public purse would be a positive enabler of progressive legislation creating benefits that people want now but austerians say we can’t pass because “we can’t afford it.”.

Easing Into PCS and Being Practical

Beo also says we have to ease into something that is such a break with current practices. But, I ask, why?

Are current practices so beneficial to us that we want to preserve them as much as possible? Haven’t they been a critical part of a public financing system that’s been failing us for a long time now in enabling us to do what must be done to create full employment and various other elements of public purpose that would create a better life for Americans? Haven’t they failed us in a very critical way by creating such complexity in public financing that the public can’t see that Federal “debt is not debt,” and instead are easily fooled into believing that we can “run out of money,” and can’t afford to pass progressive economic legislation?

Beo knows what the answers to these questions are. And he must also know that our current procedures for financing deficit spending are poison to progressives, to the need to fulfill public purpose and to the American people. The only people who really like them are people who directly benefit from the system of issuing debt instruments. These procedures are not something we should want to conserve for another moment; because they do not benefit the 99%.

Beo. also says that the TDC is ‘too big to be practical . . . ” But what’s “impractical” about it? Assuming it’s legal, which he and Philip both believe, it strikes me that in its $60 T version it’s both efficient and effective in ridding us of austerity politics. Beo goes on to talk about the fear of inflation:

Considering that the fear of inflation is the biggest political hurdle to “printing money” (and needs to be addressed when it comes up), a shock and awe $60 megaton coin strategy will lose more political support than it gains. Besides, there’s no point to creating a Strategic Petroleum Reserve-like buffer stock of something the govt has the ability to create at will, especially if its just going to scare the hell out of people (and that it certainly would).

I can’t see how beo can possibly know that, due to inflation fears, a $60 T coin strategy will lose more political support than it gains. Maybe, he’ll oblige me by doing a political analysis showing the transmission mechanisms involved. Here’s mine.

The $60 T in seigniorage would allow the President to pay off all the debt instruments held by the regional Federal Reserve banks and by Federal Agencies. Since the reserves used to redeem these instruments would not be spent into the economy, they can’t possibly cause inflation without a causal transmission mechanism. That’s a pay off of nearly 40% of the debt subject to the limit. If the Treasury pays that off in the week following minting and depositing of the coin, the most likely reaction on the part of the public will be very strong approval of this action.

When the Treasury then pays off $1.7 T in Treasury Bills over the next year, and the Administration points out that debt subject to the limit has been reduced by 50% overall, people will be even happier. When, next, people see that no more debt subject to the limit is issued over the first year to cover deficit spending, I think they will be happier still.

When, finally, they see that there is no inflationary impact from paying off half of the national debt, they will be ecstatic and conclude that Obama is a genius for coming up with this great new platinum coin trick that has stopped both spending cuts and further tax increases, and yet still allows the debt that their grandchildren might have inherited, to be paid off as it falls due, with NO NEW DEBT ISSUANCE needed!

The proof of the pudding is always in the eating. We, including beo, and maybe Philip too, know now that paying off that first $8.2 T in debt will not cause demand-pull inflation during the first year after minting the coin. The public will know that too when they experience it.

During that first year, inflation fears will gradually recede from the first day the money is used to pay off debt. By the end of the year those fears will be largely gone among most people, except for those for whom that fear is part of a “religious belief,” leaving inflation hysteria to “the gold bugs,” and Austrian school economists.

I would have done the $60 T coin in May of 2011; or most recently the day after the election. And, then I would have given a speech like the one in this post followed by a mobilization of Organizing For America (OFA) behind the initiative.

The Senate, then, never would pass a House bill to repeal PCS, because everything would have become so visible that sticking with the coin would be a litmus test for any Democratic candidate want to run with Party support. Then, if Obama got a high percentage of the debt paid by November 2014, I doubt there’d be any trouble in the mid-terms in either keeping control of the Senate or winning back the House. After all, what’s not to like: 1) debt rapidly disappearing; 2) the end of any need for austerity and no entitlement cuts; 3) no battles with Congress over debt ceilings or fiscal cliffs or austerity budgets; 4) Congress still controls the purse strings; and 5) attention turned to real issues about how to create good times here in America.

So, the brouhaha over the $60 T coin would pass. The Rs wouldn’t be able to repeal the coin capability until they got hold of both Houses of Congress, and if Obama played his cards right, actually doing things for people rather than the banks, and Wall Street, I don’t think we’d see Republican control of both Houses again for some time; in spite of wholesale gerrymandering. Their earliest opportunity to get the Senate again might not be until 2018, when there will probably be many more D Senate seats than R Senate seats at risk. As for the House, if the Democrats win in 2014, and don’t screw up (a big assumption I know), then they’ll win in 2016, and again the Republicans will have to wait until 2018, provided their party doesn’t split apart before then.

On beo’s buffer stock of reserves in the public purse point, of course there would be no point in creating one if the Treasury always had the power to create Trillions to pay off that national debt; or to deficit spend Congressional Appropriations; but the authority to do that is dependent on a Congress that has little understanding of fiat currency, and that may repeal that authority at any time. So, the “buffer stock” of reserves in the public purse is needed for that reason and the other three reasons I gave earlier.

The Incremental Approach

Philip Diehl, and beo joined together in an exchange advocating an incremental approach to introducing PCS which would feature a step-by-step approach to gradually increasing the amount of PCS annually. Beo suggested starting out with a $25 B coin, and said this:

On first day of fiscal year, Tsy deposits coinage equal to net interest paid the previous year. I like plays that end in the first act. . .

If you’re looking for a more incremental strategy, perhaps the way to ride the TDC wave while also defusing opposition is to propose a “responsible alternative.” Say, Tsy and the Fed should cooperate on a pilot program using $25 billion coins to see what effects positive or negative the use of debt-free money would have on our financial system, which is swimming in debt. If it’s negative, that should quiet critics who are pushing for a trillion dollar coin. If it’s positive, then it will be worthwhile to slowly expand the program, to gauge its impact in larger amounts. The only time we should ever mint a trillion dollar coin is sometime after the evidence is clear to everyone the $500 billion coin, the $100 billion coin and the $25 billion coin worked just fine (a red herring of course, the Mint can strike 40 $25 billion coins almost as easily as a single $1 trillion).

I guess it’d be worth stressing that it’s not a transfer of power from Tsy to the Fed since it is the Fed who orders coins from the Mint. You could call the article, “Beating trillion dollar coins into plowshares: Can a political weapon be converted into a useful monetary policy tool?”

I think beo meant to say a transfer of power from the Fed to the Treasury, just above.

Philip Diehl added this to the case for the incremental approach:

Beo, I like the step by step approach but I’d go faster and with a specific target in mind–like increments of at least $50 billion a year to reach the goal of covering the annual carrying cost of the debt. I figure that with the debt continuing to rise and interest rates also rising, it would take, say, ten years before HVCS is covering the full annual interest on the debt. Let’s say that’s $500 billion a year. At that point, we’d be minting a half trillion dollar coin every year to continue covering the annual interest on the debt, is that correct?

A slow ramp up like this would not only alleviate fears over the inflationary effect of HVCS (assuming we’re right that there won’t be any), it would also make plain its significance as a way of relieving the zero sum game of budgetary politics. A constituency will form inside and outside Congress to continue or even accelerate the pace HVCS is ramped up in order to ease the squeeze on the rest of the budget as entitlement and other spending increases.

Also, wouldn’t we expect interest rates to fall from what they would otherwise have been if Treasury was no longer longer competing in credit markets? And wouldn’t we expect tax revenue to rise if there were fewer tax free bonds in the marketplace? If I’m correct on this, it seems like HVCS would develop a powerful public constituency for the lower interest rates it would bring.

What’s wrong with this picture? It seems to good to be true. Where’s the downside, the tradeoffs?

The HVCS acronym means High Value Coin Seigniorage, and is intended to refer to all coins with face values in the millions, billions, or trillions. Here’s another contribution from beo, supporting the incremental approach in the context of a comparison with HVPCS (which refers to platinum coins with face values of $30 Trillion or more), using this scenario:

. . . Philip was once Chief of Staff to Tsy Sec. Lloyd Bentsen, imagine if Philip presented him as policy options:

1. a trillion dollar coin (against the Fed’s wishes)
2. a $60 trillion coin (against the Fed’s wishes)
3. a joint Tsy-Fed pilot program beginning with a $25 billion coin ( or whatever face value the Secretary was comfortable with, maybe it starts with a $1 billion coin).

Does anyone really think Lloyd Bentsen (or any Tsy Secretary) would take a “screw the flight simulator, lets see us try this in a real plane” attitude?”

So, that’s the case for the incremental approach, which I’ve tried to present fairly, and in its strongest possible light. So, now we can get to answering Philip’s question about the downside.

The Downside of the Incremental Approach

First, if an upside of the $60 T option is that its implementation through a “lightening strike,” to quote Philip, eliminates the chance for its opponents to mobilize against it until after it’s a fait accompli, and also removes the efficacy of any move towards repeal, before repeal no longer matters; then the opposite is true of the incremental option. Beo and Philip envision years, perhaps a decade, of ramping up until coin seigniorage is making an appreciable impact on the conditions underlying the drive towards austerity.

During that time, surely a very well-funded and powerful opposition to deficit spending and debt instrument payoff will form and do everything it can to repeal the platinum coin. And they will be able to mobilize and work against the coin before it has had a chance to solve any problems, or do any good; before, in other words, the coin can get enough love from the broader public, to ensure that the capability won’t be repealed.

Philip points out, correctly I think, that during the PCS rampup, the coin, if left in place as a capability, would develop a powerful constituency of its own, both in an out of Congress. This is true. But at $25 or $50 B per year in PCS value, can enough people grow to love its impact to counter-balance an all-out propaganda and political campaign by Wall Street, the Fed, and right-wing austerians like the Koch brothers? I seriously doubt it.

They will see the threat from the coin, probably have already seen it, judging from the reaction to it at AEI. And they will try to get rid of it soon; at the very first opportunity. I’m sorry to say that I think an incremental strategy is not just impractical, but even feckless, given that they are now, or shortly will, come after the coin with everything they have, in much the same way that the health insurance has come after any serious health care reform. So, incrementalism in applying coin seigniorage, will only lead to its repeal before its own constituency is powerful enough to protect it.

And what do beo and Philip hope to accomplish by this incrementalism? They hope a) their proposal will be viewed as “reasonable,” compared to HVPCS options like the $60 T or even the TDC; b) to calm inflation fears by minting coins with values low enough that they cannot possibly trigger inflation, and then increase face values gradually until over a period of years the fear of inflation is calmed and people are ready to consider really serious uses of PCS; and 3) to show people more and more positive impacts of the coin, so that they build a more and more powerful constituency as time goes on.

So, when it comes down to it, they want incrementalism to mollify people against the coin enough that they will be allowed “a seat at the table” and taken seriously by their opponents. They also want it because they care a lot about calming inflation fears, and they also care about having a general consensus about using it, before they “go big” with the coin.

The problem with this approach is that people who want the FIRE sector defended from the coin, and its lessons about fiat money, will never give them a seat at the table, have no incentive to do anything but discredit and ridicule them, and won’t be convinced about the low likelihood of inflation from PCS because they have a vested interest in continuing to claim and/or believe that the coin is inflationary. Even those among them who come to believe it isn’t inflationary will still oppose it on grounds that it is, because they won’t consider the advantages and disadvantages of the coin in good faith.

But in addition to these problems, there is the still more serious problem that an incremental approach taking a decade to implement has very serious likely costs. Apart from the possibility of losing the capability for PCS, there are also unemployed, partly employed, uninsured sick people, ill-educated young people, and people whose careers and social mobility are heavily impacted by the refusal to use the full power and potential of HVPCS when it is available for use.

Beo and Philip are, in effect, suggesting that the underlying condition supporting austerity politics remain out there for perhaps a decade or more, when the President has the power to eliminate it now, because they want to calm fears, get a seat at the table, and have consensus before they go ahead with PCS in a big way. Is this really a serious proposal when we look at the full political context we face? Is it actually “practical,” or does it just avoid facing the most important problem we need PCS to solve for more than a decade?

“First, Do No Harm,” is a great maxim; but when excessive caution and waiting have the very high costs just mentioned; then we have to weigh those already experienced and continuing costs of not minting a $60 T coin, against the potential cost and very low likelihood of inflation resulting from it filling the public purse, and getting used only to pay down debt and cover Congressional deficit appropriations. I’ve done the inflation analysis, and I’ve been unable to find any causal transmission mechanism directly from PCS to demand-pull inflation. I invite beo, Philip or anyone else to critique my analysis and show me where I’ve made a mistake.

Of course, demand-pull inflation can result if Congress appropriates too much deficit spending; but that would happen whether seigniorage, or Treasury Securities or both, are used alongside deficit spending. So, before we so easily propose and decide to follow an incremental PCS strategy, perhaps its proponents ought to make clear the causal mechanisms they see that are at least minimally likely to cause inflation, beyond the inflation from deficit spending accompanied by debt issuance? Until that’s done, I don’t think the incremental PCS proposal can be considered a serious one.

Second, let’s look at beo’s three options in the Lloyd Bentsen type of scenario. I think the President does 1) or 2) if he wants to start a long political struggle that he may very well lose, or if he wants to engage in kabuki. But if he wants to destroy the foundation of austerity politics, then he will select 3) or maybe a $100 T coin (because it’s more powerful as a meme), because those alternatives will actually do the job.

So, what coin seigniorage option should be pursued depends on what the goals of the President are, and his/her perception of the problem. Beo, Philip, and other incrementalists seem to think that the problem is how to get everyone used to fiat money, so it can be introduced on a large scale, fairly non-controversially, and with a good deal of consensus support. They think we can afford to wait for that result for a decade, and that it will be worth waiting for.

I, on the other hand, think the problem is how to destroy the political power of the austerians, now, so we can build a more equal and prosperous economy and society. The incremental approach could well leave us with austerity, a stagnant economy, and growing inequality, for a decade or more.

I don’t think we have that much time left, before our society sees its democracy extinguished by a soft, but, nevertheless, totalitarian plutocracy. That is much too high a price to pay for the benefits of the patient, careful, and experimental introduction of platinum coin seigniorage that beowulf, Philip Diehl, and others who like the incremental approach have in mind. Incrementalism is always favored by the Very Serious People (VSP), as the “practical” alternative; but all too often it is “impractical” in the highest sense of the term, because it simply will not work!

(Cross-posted from New Economic Perspectives.)

Good Luck Stopping Austerity With Incremental Platinum Coin Seigniorage!

5:05 pm in Uncategorized by letsgetitdone

Some have responded to the recent boomlet for using Platinum Coin Seigniorage (PCS) as a solution to the debt ceiling problem, by reacting to the ridicule visited upon PCS advocates by know-nothings like Heidi Moore of the Guardian and Matt O’Brien of the Atlantic, by proposing “smaller ball” PCS than the clearly inadequate Trillion Dollar Coin (TDC) itself. This post will focus on J. D. Alt’s interesting post which makes five points about the TDC debate as it was addressed on a recent Chris Hayes show.

– 1. Stephanie Kelton’s reframing of a question about financial constraints to point out that the real issue is resource and productive capability constraints and not purely financial constraints, is a point that is essential to keep in the forefront our discussions and also that this is “. . . the central truth of MMT.

– 2. It’s not laws but social norms that:

. . . that form the living tissue, muscle and sinew that cling to the bones. Social norms change, but they change slowly, over time—they do NOT, by their nature, change “all at once.”

Clearly, it is a social norm that will not allow the Trillion Dollar Coin to be considered as a plausible solution to the national debt—and which necessitated so much giggling on the show. Legal or not, economy-saving or not, minting trillion dollar coins is NOT how our society pays its bills. Any shift in this social norm has to be very incremental.

– 3. Producing too much money and spending it into the economy, as Joe Wiesenthal pointed out on the show can cause inflation if the amount of spending injected exceeds the resources of the economy to absorb it. On the other hand, if it doesn’t exceed those resources then “the result will not be inflation but rather a growing of the economy and an expansion of national assets; in that case, in could be argued, to withhold the spending is indefensible.”

– 4. “Paying your debts and living within your means”:

. . . is a very powerful message to the religious psyche that permeates our cultural norms. It can only be countered by explaining WHY, in fact, the sovereign government is in debt (see item no. 5 below) and making clear, over and over, Dr. Kelton’s point that the “means” we have to live within are not FINANCIAL means but, rather, RESOURCE means.

– 5. A point not directly addressed in Hayes’s show is that the constantly and casually reiterated idea that the Federal Government can only raise money for spending by either taxing or borrowing is false; and that it can also create money though issuing currency. He also points out that it has to be made clear to people that the reason for the existence of the debt is this false assumption. And then he ends with:

“Issuing” currency (rather than borrowing in the bond market) to pay for sovereign spending over and above what is collected in taxes might be one of those things that could be done incrementally. Instead of threatening the institutional and social norms of the bond market with total annihilation, MMT could propose that sovereign spending be “monetized” only on a limited basis, to accomplish certain specific and special goals that would strengthen and benefit the nation as a whole. Over time, as people saw the benefits of monetized sovereign spending—and became assured it did not, if properly managed, lead to inflation—the social norm would likely shift. If that happened, the next time Chris Hayes had a panel discussion about the national debt, there wouldn’t have to be so much giggling.

I agree with the first of these five points. But I have either questions or qualifications to raise about the rest.

On Social Norms, and their impact on MMT Policy Advocacy

First, I don’t flatly disagree with the notion that social norms change slowly over time, but do not change all at once. I just wonder about the application of this generalization to reality. For example, if something were called “a social norm” and that something did, apparently, break down rather quickly, to be replaced by another something we called a social norm, would we then change our mind about the first thing we called a norm, or would we conclude that it was not, after all, a “real” social norm. In other words, what evidence would J. D. Alt accept as sfficient for him to falsify the generalization that social norms change only slowly? There has to be some or we’re looking at tautology here, not empirical social science.

Second, in looking at a specific social norm that doesn’t “change all at once” how would we mark the beginning of the process of change of that social norm over time? In a recent article, Ellen Brown points out that the idea of using coin seigniorage to pay off the national debt was first suggested in the early 1980s by a chairman of the Coinage Subcommittee of the U.S. House of Representatives. Does this count as the beginning of a process to change the social norm that Federal spending must be based on either taxing or borrowing?

How about the beginning of the MMT synthesis in 1996, and the thinking associated with it that the Governments with fiat currencies can spend freely by printing money? Is that the beginning? What about the acceleration of MMT work in the late 1990s and early 2000s? Is that the beginning of the change in social norms involved here? How about the publication of Ellen Brown’s book in 2007; which mentioned the possibility of coin seigniorage being used to disintegrate “the Web of Debt”? Is that the beginning?

I could go on with this; but you see the point. Unless we can agree on the starting point of the process of change for a social norm, J. D. Alt’s generalization is pretty meaningless for any coherent application.

He wants us to think that High Value Platinum Coin Seigniorage (HVPCS) won’t happen anytime soon because it violates a social norm, and these change only very slowly; but if we don’t have the starting date of such a change, we can’t very well evaluate whether we’re looking at an overnight change about to happen; or whether a change that happens tomorrow, or next week, or next month, has actually been 42 years in the making; say since Nixon took the US entirely off the gold standard; or even since FDR took the domestic economy off the gold standard 80 years ago.

Third, I have some background in Complex Adaptive Systems Theory (See Ch. 2), plus many years of research in Conflict studies, Civil Strife, mass movements, and the social sciences more generally. I know that when complex systems are having difficulties maintaining themselves at “the edge of chaos,” they can easily fall into the death spirals of either rigid mechanical order, or seemingly chaotic dynamics, before they reorganize into a new pattern that successfully maintains their identity as a complex system. During the process of reorganization new global properties of the reorganized complex system emerge in very short time frames. These new global properties can easily involve social and cultural norms that were never dominant in the previous state of the complex system subject to system transformation.

Does that mean that the old dominant social norms changed very rapidly or only very slowly? Again, that’s going to depend on your perspective. If you look at the rapid breakdown and transformation of the system involved you’d swear that the change was very rapid.

On the other hand, if you do a historical analysis, it’s almost never hard to show that the change you’re analyzing has deep historical roots and was a long time coming. Do I really have to cite historical examples on this point? What about the norm that the major European powers wouldn’t fight major wars against one another. That one lasted for 1815 – 1914, almost 100 years; and then was gone with the wind. How about the social norm, that Russia would always be ruled by a Czar? That one lasted for hundreds of years, until 1917, even if we date it from the first Romanov? How about the gold standard? How about slavery in the US? How about no taxes on income? How about the norm of not having a Central Bank in the United States?

Fourth, it’s important to keep in mind that social and cultural norms are properties of social systems, and that there are many levels of social systems ranging from families and small friendship groupings to international social systems. J. D. Alt says that there’s a norm against using the TDC as a plausible solution to the national debt, and he flat out claims that this is not how our society pays its bills.

Well, it’s certainly true that we haven’t done it in the past; and it’s certainly true that people working for, or identifying with, the FIRE sector are opposed to using PCS as a solution to the debt problem and take refuge in ridiculing us and trying to activate a social norm and frame that they think is dominant. But these things don’t show that there really is a social norm preventing this in the United States when viewed as a large-scale political/economic system. Or that President Obama has to move incrementally to change “the social norm” because he would have a problem with implementing High Value PCS with a bold lightening strike minting a $60 T coin, since the country as a whole would rise up in opposition to such a move due to the strength of the social norm that we shouldn’t use PCS.

There’s no evidence to suggest that this would be the case, and every reason to believe that most people don’t care how the national debt is paid off; so long as it’s paid off, and is not there to burden themselves, and “their grandchildren.” After all, most people are completely unaware of how deficit spending and debt instruments work, and completely unaware that “debt is not debt” as we MMTers like to say. What they do know is that the United States has more than $16.4 T in debt instruments out there. That scares them, because they’ve been made to believe that it’s their debt, and I think they really don’t care if this “debt” is paid off by taxing more than we spend, or through using platinum coins to get the Federal Reserve to create money out of thin air for Treasury to use in a way that has no obvious short-term effects on them.

Joe Wiesenthal and Inflation

Joe Wiesenthal’s formulation on inflation during the Chris Hayes panel discussion was a good one. But in Joe’s writing he’s taken pains to point out that while the inflation issue doesn’t affect the Trillion Dollar Coin (TDC); Higher Value PCS applications are likely to create inflation and perhaps even hyperinflation. Joe Wiesenthal has no basis for saying this that is apparent in his writings. But, it is a position opposed to HVPCS, and biases him towards what I’ve called “small ball” PCS applications, rather than game-changing ones.

Paying Your Debts and Living Within Your Means

I agree that this meme is powerful and representative of our cultural norms, and also that it needs to countered with explanations of why the public debt exists, and also that the issue of “means” is not financial, but involves our resources and our productive capacity. But I don’t agree that telling or teaching people this is the “only” way to counter the norm as applied to financial means.

Telling and teaching is important for both the short and long terms; but even more important is action that will remove the public debt, while not tanking the economy or causing inflation. This is what a $60 T PCS solution will do, that small ball PCS activity will not.

In fact, if the President used a $60 T solution to pay off large chunks of the national debt, people would quickly get the point that the debt existed only because Congress and the Executive blocked using coin seigniorage on the debt and the deficit and insisted that only taxing and borrowing could be used for spending. Using the coin would illustrate that there was never any issue of financial means. When that debt began to get paid off quickly it would be “a teachable moment;” one in which we could get the message across that the real constraints are in resources and capacity, and that we need to quit worrying about the financial end and start building a prosperous sustainable economy characterized by economic and social democracy.

Currency Issuing Incrementalism

J. D. Alt’s last point is that “issuing” currency to pay for deficit spending might be introduced incrementally, “instead of threatening the bond market with total annihilation.” He thinks that if we propose to use seigniorage to do deficit spending on specific policies that would be clearly of benefit to the nation, and these policies were legislated than as people saw the benefits, and also saw that there was no inflation accompanying the currency issuance, then the social norm against using seigniorage or just issuing currency without debt would change, and then there wouldn’t be “so much giggling” about us PCS advocates, by panelists on TV shows representing the FIRE Sector.

The first problem with this is that people like me who favor HVPCS, don’t favor “threatening the bond market . . . “, but rather, destroying its foundation, new debt issuance, nearly over night. I don’t intend this flippantly. I don’t think the President should threaten HVPCS. I think he should just do it; and let the chips fall where they may.

The second problem with this and similar proposals, is that neoliberal deficit hawks will be unalterably opposed to PCS, no matter the context in which it is used. They will work as hard as they can to prevent the PCS camel from getting its nose into the public financing tent.

They will do everything possible to repeal the PCS legislation. And they will try to impeach any President who uses PCS for any significant purpose at all, because they know very well that if either small ball or game-changing PCS works, then their austerity politics game, so important for the developing plutocracy, is up.

J. D. Alt assumes that “small-ball” or incremental PCS will be less threatening to the FIRE sector than game-changiing PCS, and so, will elicit less vigorous opposition. It is the same kind of assumption that led progressives to turn away from supporting Medicare for All, and to push for the “public option” sparkle pony, prior to caving in to the ACA, because “it’s better than notihing,” and the same kind of assumption that led the Clintons to propose managed care rather than Medicare for All in the 1990s, which got them a great, big fat loss to the opposition.

These kinds of “pre-compromises” do not work, because they elicit just as vigorous opposition as a “full-monty” option, would, but don’t offer the same level of benefits to people. That is, people often don’t love the compromise legislation, so you can’t get them to support it, or to support you in the next election. That’s certainly what happened with the ACA, which was a big factor in costing the Democrats the election of 2010.

In the case of PCS, incrementalism will lead to a series of exhausting political conflicts in which progressive victories will be pyrrhic, because they will drain political capital, but won’t solve the problem that people are concerned about, and that the deficit/debt hawk/austerians use for leverage to make austerity politics seem reasonable. That problem is not getting PCS or currency issuance accepted. But acceptance WILL occur as a by-product of solving the problem that most people care about.

That problem is a national debt that seems self-evidently outrageous in size to most people and opposed to common sense. We can’t solve that problem in a visible way that people will instantly understand with ‘small-ball“ PCS. We can only solve it with game-changing PCS, that eliminates the national debt, covers projected deficits for a long time to come, and so transforms the basis of progressive politics addressed toward the economy.

Conclusion

The idea that we need to move slowly with policies that will significantly change politics and economics, because social norms are arrayed against such policy changes is perhaps the central idea of Conservative Ideology (notice I’m using the capital “c” and not the small “c” here). Edmund Burke might have made the same argument against PCS as J. D. Alt put forward in his post.

It is an argument that is vague in nature, lacks criteria for application, and is opposed to the rational progressive temperament that is in the tradition of long-time MMT authors like Bill Mitchell, Randy Wray, Warren Mosler, Mat Forstater, Stephanie Kelton, Scott Fullwiler, and Pavlina Tcherneva. And it’s also opposed to the temperament of newer MMT writers like Marshall Auerback, Mike Norman, Bill Black and Michael Hudson.

The position of MMT is that the preferred situation for a nation sovereign in its own fiat currency is that its Treasury Department simply create currency in the act of deficit spending without issuing accompanying debt. Let’s be clear here.

A $60 T or $100 T platinum coin would, if minted and deposited, achieve this MMT preference for some time to come. Not forever, but it would be the proper pilot experiment for legislating that MMT preferred change, because it would give people years to assess how that kind of system would work. So why aren’t all MMT writers supporting this change? It isn’t quite pure MMT; but it’s damned close, and much closer than incremental PCS would be.

The counsel of pursuing incrementalism makes no sense here. There are some problems that incrementalism just won’t fix. Getting rid of the national debt, and the discomfort of people with it, can’t be done incrementally, because the opposition to incremental initiatives would be too fierce, and the benefits from those initiatives too little, to justify the political conflicts that would ensue. Also, there’s the question of opportunity.

Right now, the President has the opportunity to make High Value $60 T PCS a fait accompli, and to eliminate fiscal austerity politics forever. How long that opportunity will exist I don’t know. But it is much more risky to give the opposition a chance to mobilize against PCS, than it is to just mint that $60 T coin, get the electronic credits into the public purse (the TGA), and the begin to pay off huge chunks of the national debt quickly.

That is what will get “issuing currency” accepted. But incremental “small ball” PCS that will be fought with propaganda, money, law suits, mass media opposition, and constant ridicule, before it has had a chance to be effective, won’t work, and we shouldn’t advocate it.

The right kind of answer to Heidi Moore, Matt O’Brien, and others who ridicule HVPCS, isn’t PCS incrementalism. It’s an answer like the ones here and here. It is, more directly, #mintthe60Tcoin

(Cross-posted from New Economic Perspectives.)