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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.)

That’s Not All!

9:35 pm in Uncategorized by letsgetitdone

After opposing the Job Guarantee proposal as part of the broader MMT policy program in service of the goals of public purpose, full employment with a living wage and price stability, and for many weeks now, combining with Mike Sankowski and Carlos Mucha to found “Monetary Realism” and also saying:

“You guys see no need for unemployment. I do. I think it serves an incredibly important psychological component to any healthy economy. I’ve feared for my job and been unemployed. Those moments shaped who I am and what I’ve become. They were invaluable in retrospect. If I’d been able to apply for a JG job I might not be half the man I am today. Maybe it’s just personal entrepreneurial experience speaking here, but I know what it means to hunt and kill for ones dinner. Very little, aside from great parenting and education, was handed to me in life. My psychological development through having to earn things has been a building block that no govt program can ever provide. Ever.”

And then later saying that he’s for: “prosperity, increasing living standards,” and says that subsidiary goals are innovation, increasing productivity, and a “real goal” of “full productivity.” And also saying that:

“. . . . massive increases in living standards come from increases in innovation and productivity (which are MOSTLY pvt sector and profit driven). So my thinking is rather basic. Why obsess over FE (I am referring to low unemployment here) when the real goal is full productivity (which is a vague concept I know)?”

Cullen Roche, in a post entitled “I Am For Full Employment” says today:

“That’s All.”

To which I say: that can’t be all because:

The MMT normative structure is: JG in the context of payroll tax cuts, State Revenue Sharing, and selected anti-inflation measures such as higher taxes → Full Employment at a living wage with price stability → Public Purpose

while MR’s normative structure based on Cullen’s various posts appears to be:

Payroll tax cuts, State Revenue Sharing, other as yet undefined productivity enhancing measures, along with selected anti-inflation such as higher taxes and interest rate targeting by the Fed → Innovation → Full Productivity with Price Stability → Full Employment → Increased Prosperity, which appears to be MR’s top-level goal.

I think the MMT normative structure posits a much more direct connection between policy and FE with PS than the MR normative structure does. Also, the quotes above seem to indicate that MR values FP, Innovation, and Increased “Prosperity” much more than FE which we should not “obsess over.”

So, with all due respect I’d have to say:

That’s not all!

Update: After I posted this Cullen replied, in part by pointing out that he had “rescinded” the first quote I provided above in reply to a comment of mine saying:

“I shouldn’t have even bothered with the anecdotal. Lesson learned. It totally distracted from my main point which was not to say that we don’t need full employment, but that we should seek full productivity (and hence FE). The personal experience doesn’t prove anything….”

And he went on to claim that I was taking him out of context by not noting his reply. My response was and is:

I’m happy to have your amplification above and to acknowledge your further reply.

However, your reply doesn’t say that your previous comment about the virtues of unemployment is wrong, or that you prioritize FE over FP and are not advocating a variant of MMT that will not maintain an unemployed buffer stock rather than a full employment buffer stock. Nor do you question my characterization of the MR normative structure above. As I’ve already said to you in correspondence:

So, here’s a challenge. I say that your goal structure as so far stated is as I represented it in my post above. If you think I’m wrong then state what your goal structure is explicitly. Locate FE within it and prioritize FE relative to FP. I’d be very interested in seeing that and if you prioritize FE over FP then I’ll be happy tp admit I’m wrong, and agree with you that you favor FE even if you don’t favor the JG. Then I’ll further admit that you and I have very similar goal structures but only disagree on the means of achieving it.

Then we can go on to argue about means. In making such an argument however, I recommend that you tell us all what you mean by “full productivity.” As i said in another post to you:

So far, at least, I’ve not even seen a definition of FP from you. So how can I possibly tell whether FP will lead to FE, let alone whether it would be more effective than the JG at accomplishing that.

Finally on this bit:

“I am really stunned that you keep using that comment to try to prove your argument. It proves nothing and was rescinded in direct response to you because you and others kept taking it out of context.”

Readers can judge above whether your comment above “rescinded” your previous comment or not. I do not consider it taking back your previous comment that:

“You guys see no need for unemployment. I do. I think it serves an incredibly important psychological component to any healthy economy. . . . “

That part of your comment says that unemployment is needed, and implies that an unemployed buffer stock is more valuable than an employed one. I see your reply comment as saying that your anecdotal statement was a tactical error which distracted from your main point that we “should seek FP (and hence FE).” You have not shown us in anything you’ve written that FP implies FE either logically or empirically. That, right there, is a main point of the disagreement between us.

At this writing, Cullen and his new MR group have not clarified the goal structure of their MR knowledge claim network (KCN) nor have they explained why they think that FP leads to FE either logically or empirically.

The Job Guarantee and the MMT Core Series: An Introduction

9:42 pm in Uncategorized by letsgetitdone

This is an introduction to a series of 16 posts I wrote in reply to a number of posts by John Carney at the CNBC blog and Cullen Roche at Pragmatic Capitalism, and comments replying to them. The posts by Carney and Roche criticized the MMT Job Guarantee (JG) proposal. They did so by calling into question whether the JG would be effective in achieving Full Employment (FE) and Price Stability (PS), and also by calling into question the MMT goals of “Public Purpose”, and “FE with a living wage” as appropriate. The critics proposed that “Full Productivity” (FP) and PS be goals of MMT, and that “prosperity” be the higher level goal. They also proposed that MMT concentrate on description and avoid policy prescriptions, and that it deal only with “facts” and not with “theory.”

The first 13 posts in this series refute these proposals, and also discuss the question of the appropriate hourly rate for the JG program. They also discuss various fallacies of composition inherent in many of the objections made to the MMT JG program, the issue of whether an FE or an unemployed “buffer stock” is more in line with public purpose, and also the issue of whether it’s possible to deal only with “facts” and not with “theories.” In the 14th post, I introduce the idea of the MMT Knowledge Claim Network (KCN) consisting of Social/Value Gaps, Knowledge Gaps (problems), Descriptive Knowledge Claims, Prescriptions, and Narratives. I also argue that the MMT KCN is a fused fact-value network with important value commitments, that it was developed holistically by its originators. that it is not focused on descriptive aspects of economics alone, that it offers explicit value claims, and that it’s normative aspect is clear.

I also argue that many of its practitioners, offer policy prescriptions rather than simply concentrating on the way the world is right now. I note further that the social/value gap, problems, and prescriptive aspects of the MMT KCN are progressive and Second New Deal oriented, and that is why many people who are persuaded by parts of the descriptive aspect of MMT want to do what they can to place these aspects into a secondary role and drive them out of the KCN altogether.

In the 15th post, I offer my view of the current components of MMT in its five categories of knowledge claims as preparation for the concluding 16th post in the series, which answers the questions I posed at the beginning of the series; namely:

– What is part of the MMT core right now? and

– how ought we to change it in the future?

Since I finished the series, its importance as a resource was underlined by new posts from Cullen Roche and Mike Sankowski (Trader’s Crucible), and by Cullen’s revision of his earlier paper on MMT which is now an introduction to a new approach called “Monetary Realism.” Here’s Cullen on MMT and MR.

”As many of you now know, the divide within some of the MMT thinkers has grown fairly substantial. The schism over the Job Guarantee revealed several points of disagreement that lead to vastly different conclusions than those espoused by the primary MMT thinkers. Several commenters and vocal proponents of MMT have made it clear that my positions are not those of the MMT economists and founders and are in fact something different. I won’t do the developers of MMT the disservice of pretending that my ideas are completely in-line with theirs. That would only serve to confuse those learning MMT and could undermine the efforts of the MMT developers.

I feel that the core operational aspects of MMT are among the most important ideas in the world and my goal here has always been to help promote those ideas. Because I believe in those ideas I will not stop promoting them. So I’ve been working with Michael Sankowski, Carlos Mucha (who most of you probably know as reader Beowulf) and several others to help formulate our thinking. I’ve also been in detailed talks with Warren Mosler over the last several weeks hashing out some differences. It’s safe to say that we have his blessing even though he’s not 100% in agreement with all we’ve concluded.”

I’m not sure I agree with the claim that Cullen, Mike, and Carlos have “Warren’s blessing” beyond his wishing them luck in pursuing their orientation, which I also have done. Certainly, Part Seven of my series doesn’t indicate to me that they have his blessing in the normal sense of this term, and I also think that no group that departs from the core value of “public purpose” as the goal of Government economic policy would ever have his full blessing.

”Importantly, I want to be clear that I do not view Monetary Realism as a competing idea to MMT. Rather, it is merely the form of Mosler Monetary Theory that I wish to promote (without confusing readers into thinking that I am promoting the exact MMT ideas and prescriptions). After all, Warren is still the father of the theory and it’s incredibly important to note that he is, by far, the most influential thinker in this offshoot of MMT. If anything, I hope that by focusing on the operational realities of MMT via Monetary Realism that I will bring even greater credibility to MMT and its operational realities. The fact that we have differences regarding prescriptive uses, in my opinion, gives the idea even greater credibility. But in the end, it should be clear who gets the credit for these ideas – Warren and the other developers. Monetary Realism is merely standing on their shoulders.”

And Cullen also goes on to state that he has revised his introduction to MMT, so that it is now an introduction to MR. In that paper, he also has added “innovation” and “growth” to the goal structure of MR, and also stated that: “The core value of Monetary Reality is transparency of the global monetary system.” He also states that a new web site is being created to promote MR. Two posts have also appeared at the Trader’s Crucible web site here and here, announcing the new development.

My take on MR is that even though it tries to minimize the differences between MMT and its “offshoot,” these are at the core of the two systems and that if they were not there would be no MR. If MR proponents still accepted ‘public purpose” as the highest level goal in their KCN, and had not replaced it with “prosperity,” if they had not replaced FE with FP as a key second-level goal, then there would have been no split.

The replacement of FE as a goal indicates that MR doesn’t consider a job at a living wage as a right of every individual. That is a huge difference between the two approaches that cannot be minimized, as the MR adherents are trying to do.

Beyond these explicit differences there is the further implicit difference that the MMT commitments to public purpose and to FE are commitments to greater equality in American and global society. The abandonment of FE and the JG suggest that the MR proponents are much less concerned about social and economic justice than are the MMT founders and others who practice the MMT approach. In a time when democracy is threatened by plutocracy throughout the world, that difference between the two approaches is fundamental and will shape their future development.

In the future, I’ll try to clarify further the differences between MMT and MR and illuminate some of the foundational problems of MR that are already apparent.

The various posts in the series have been previously published on this blog. In addition, the series is available in blog book form with convenient sequential links among the various parts of the series.