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What Does The Trillion Dollar Coin Do?

8:34 am in Uncategorized by letsgetitdone

The Trillion Dollar Coin proposal for solving the debt ceiling problem is again experiencing a blogosphere explosion this past week. The precipitating factor may be that people are starting to believe that the Republicans will come to a “fiscal cliff” settlement with the Democrats including very little in entitlement spending; but will then come back, in 2013 with a very tough position on the price they want to agree to raise the debt ceiling to give the Executive operating room for any length of time. Bruce Bartlett had this to say on the issue:

In my opinion, the fiscal cliff is akin to the so-called Y2K problem in late 1999, when many people worried that computers would freeze, elevators would stop running and planes would fall from the sky. Of course, nothing of the kind happened.

So if the fiscal cliff is a faux problem, why do we hear that industry and financial markets are deeply fearful of it? The answer is that there is a very real fiscal problem that will occur almost simultaneously – expiration of the debt limit. Much of what passes for fiscal-cliff concern is actually anxiety about whether Republicans in Congress will force a default on the nation’s debt in pursuit of their radical agenda.

I think Bartlett is right about attention shifting to the debt ceiling now, and that’s why we have a sudden explosion interest in high value platinum coin seigniorage having face values mostly in the low trillions, once again. Since the Trillion Dollar Coin (#TDC) is being vetted again, I wanted to make a brief point about it that is not well understood by the mainstream bloggers who have been stampeding to blog about the PPCS solution this week. Let’s lay out the context.

Most people who’ve thought about how the Government creates money know that Congress delegated the primary power to create currency to The Federal Reserve Banks, the system of which combined with the Board of Governors and the Federal Open Market Committee, form the central bank of the United States. In modern times, currency means not only printed money, but also electronically created credits, reserves held in Federal Reserve accounts.

The reserves that have been created by the Fed at any point, are many multiples of the amount of paper currency in existence produced by the Mint on orders from the Fed. So, most of the currency created by the Fed is in the form of reserves rather than paper currency. Also it’s well-known that when the Fed creates reserves, it does so “out of thin air.”

In our fiat currency system there is no “backing” for either the reserves or the paper currency. In exactly that sense, all of our currency is now “printed,” and has been since we went off the gold standard in 1971. There is no distinction between existing currency, whether paper, or reserves, and newly created currency in that respect.

The Fed however, doesn’t make all our money. The Treasury too, has its role. Congress delegated the US Mint the authority to coin fiat money, the value of whose metal content, with respect to certain types of coins, need have no relation to its face value, which can be as high or low as the Mint wants to make it. However, this has created a problem.

If the Mint coins money in denominations appropriate for commonplace retail transactions than the coins involved can be exchanged among parties as needed. But what happens if the Mint coins platinum money with face values in the trillions of dollars? Then that money can’t be used for exchange as a practical matter, because there are no buyers who will accept the trillion dollar coins in exchange. So, if the Treasury wants to use such coins to fill the public purse with money it can later spend on debt repayment or Congressional deficit appropriations, it must transform high face value coins into divisible money; i.e. reserves in its Fed spending account.

Fortunately, since high value coins are legal tender, the Mint, and the Treasury, can force the Federal Reserve to transform high value coins into reserves, by just depositing them into the US Mint’s Public Enterprise Fund (PEF) account, which the Fed must credit with reserves in return for the high value coins.

For example, if the Mint deposits a $One Trillion coin in the PEF, then the Fed must accept the coin and credit the PEF with an equivalent value of electronic credits in reserves. Then, the Treasury has the authority to “sweep” the PEF of all seigniorage, i.e. profits resulting from the Mint/Fed transaction.

In the case of $One Trillion proof platinum coin, the profits are its face value minus a few thousand dollars. So that amount would be “swept” into the Treasury General Account (TGA), which is the account used by Treasury to perform Government spending.

A very good way to look at high value platinum coins is that they are legal instruments for the Treasury to use the unlimited “out of thin air” reserve creation authority of the Fed to fill the public spending purse, the TGA, for public purposes. In effect, platinum coin seigniorage involves the Treasury commandeering the power of the Fed to create reserves and place them in the TGA, perhaps, depending on what the Treasury chooses to do, in the many Trillions of dollars. Functionally, it produces the same result as if the Fed were subordinate to the Treasury within the Executive Branch, and the Treasury had unlimited authority to create both currency and coins by fiat. Is this good?

I think it is. The vaunted independence of the Fed has not served us well over the years. What it has amounted to is that the Fed has not been accountable to the public. Its independence has meant independence from the Treasury and, largely, from Congress. But it has not meant independence from the big banks and Wall Street, which the Fed fails to regulate to any visible extent to protect the economy and the public, and whose interests the Fed has served ahead of the interests of the public at large.

In short, I am all for the President ordering high value platinum coin seigniorage, because I think the constraints imposed by that upon the Fed, and also the filling of the public purse to such an extent that it will be clear to people that the US can never run out of the currency it alone can issue, will make the Congress, the Fed, and the Executive Branch all much more accountable to the wishes of the American people.

The Congress and the Executive won’t be able to hide behind “we’re running out of money” anymore, when they refuse to enact that majority support among the people. And the Fed won’t be able to hide behind its “independence” to justify its doing the bidding the big private banks. Using proof platinum coin seigniorage, will be better for supporting a progressive democracy; and ultimately, that is why I favor it! Read the rest of this entry →

Origin and Early History of Platinum Coin Seigniorage In the Blogosphere

12:15 pm in Uncategorized by letsgetitdone

This post records the history of platinum coin seigniorage in the blogosphere through the debt ceiling agreement on August 2, 2011. Its purpose is to correct errors in the record about the history of this idea appearing on mainstream blog posts by Joe Wiesenthal, John Carney, and Brad Plumer, during the past week. The idea of using coin seigniorage, the profits made from minting proof platinum coins, depositing them at the Fed, and receiving electronic credits in return, to remove the need for issuing debt, and so to always stay under the debt ceiling is due to a commenter (and occasional blogger) on economics and politics blogs whose screen name is beowulf (Carlos Mucha). Beowulf”s first comment on Platinum Coin Seigniorage (PCS) was on Brad Delong’s site on July 6, 2010 (h/t Cullen Roche, 01/05/13). But, the first comment of his I noticed on PCS was at New Deal 2.0. Unfortunately, when The Roosevelt Institute redid its New Deal 2.0 site, it wiped out the record of beo’s comment. However, I quoted his ND 2.0 proposal in a post on November 12, 2010 discussing a possible Government shutdown due to the debt ceiling. I cross-posted this at Correntewire too where beowulf commented further on the platinum coin option.

Beowulf continued his work on the coin seigniorage proposal as the weeks went by in various comments made at blog posts such as this one at FDL, and this one, also at FDL. Then on 12/15/2010 there was an exchange between beo and I about platinum coin seigniorage.

Following that beo wrote me, and we corresponded by e-mail from 12/15/10, roughly until the Christmas break, exchanging views about PPCS, with me urging beo to blog it, and telling him that I would blog in support of him soon after he did. On January 3, 2011, he posted the seminal blog on coin seigniorage. I followed two days later, raising the question of whether President Obama would use it to forestall an attempt to use the debt ceiling to extract cuts in the social safety net or not.

These posts were noticed by Warren Mosler, one of the originators of the Modern Monetary Theory (MMT) approach to economics, who sponsored what turned out to be a wide-ranging and very high quality discussion of the coin seigniorage option at his site. Beowulf contributed extensively and very creatively to this discussion, which remains one of the most important resources on the coin seigniorage option.

Throughout the next six months, I pushed platinum coin seigniorage in blog posts at Correntewire, FDL, and DailyKos from time-to-time and in comments at various sites. Then, in late June and July a spate of posts on platinum coin seigniorage appeared, beginning, I think, with wigwam’s at FDL and DailyKos.

He’s followed up since with a number of other posts including this one with a variation on how coin seigniorage might be applied by buying $2 Trillion in debt from the Fed to create “head room” relative to the debt limit.

Other important posts appeared in the first two weeks of July 2011 by Mahilena, DC Blogger, ubetchaiam, Cullen Roche, and Scott Fullwiler.

Accompanying the last two are extensive discussions of coin seigniorage and constitutionality of the debt ceiling with contributions from beowulf. Scott’s post also received extensive discussion with beowulf contributing at Cullen’s site. Trader’s Crucible, presented a post on the unconstitutionality of the debt ceiling. Its comment thread however, focused very much on platinum coin seigniorage with beowulf and myself making contributions.

In addition, I added a couple of my own posts, one on constitutionality of the debt ceiling and coin seigniorage (06/29/2011), and another on the President’s obligation, if no agreement on the debt ceiling is forthcoming (07/11/11).

At this point, the platinum coin seigniorage debate began to hit the mainstream blogosphere. Felix Salmon at Reuters provided the opening blog post (07/14/11) and he was followed a day later by Matty Yglesias at Think Progress. I replied to Salmon and Yglesias in this post, presenting a fairly comprehensive view of platinum coin seigniorage up to that time, with critiques of their posts (07/17/11).

My post appeared in an abbreviated form at Naked Capitalism, and was also cross-posted at MyFDL, New Economic Perspectives and Global Economic Intersection. It appeared amidst an explosion of blogosphere posts on the subject, including posts on the subject by many mainstream bloggers and others including: Tom Hickey: “Coin Seignorage Breaks into Mainstream,” (07/18/11) Scott Sumner: “Is coin seignorage Obama’s magic bullet?” (07/19/11) Joshua Holland: “There’s a Solution to the Debt Fight That Could Avert Catastrophe — Why Is Everyone Ignoring It?” (07/20/11) Darrell Delamaide: ”Smoke and mirrors with the federal deficit,” (07/20/11) Mark Kleiman: “Phony problem, phony solution,” (07/20/11) wigwam: “Mark Kleiman calls Coin Seigniorage a phony solution; to a phony problem,” (07/23/11) upyernoz: “Platinum Pieces Were Always My Favorite,” and Yves Smith: “We Discuss the manufactured UD Debt Crisis at the Real News Network.” (07/25/11)

These posts were an immediate wave, so to speak, of responses to the Salmon and Yglesias posts. But there was more to come in July. I posted again, presenting a variety of platinum coin seigniorage face value options, along with differing political and inflation implications of the options (07/20/11).

Then I followed with an open letter to Congress and the President on getting around the debt ceiling (07/25/11), and a post on the President’s apparent views on the debt ceiling. (07/26/11)

Meanwhile, Jack Balkin, a Constitutional Law Professor at Yale, had blogged about coin seigniorage telling a good story in an important post (07/18/11).

And Balkin next did a post at CNN, where he reviewed a number of options for getting around the debt ceiling (07/28/11). And, in doing so, brought the platinum coin seigniorage idea into the mainstream discussion.

Balkin’s efforts seemed to fuel another wave of the July 2011 platinum coin seigniorage explosion. These include:

”Capt. Fogg: Billion Dollar Coins and Exploding Options — oh my!” (07/28/11)

Logan Penza: “(Platinum) Pennies From Heaven (UPDATED);” (07/28/11)

Jonathan Chait: “The Coin That Will Save The World;” (07/28/11)

Matthew Yglesias: “The Platinum Coin Option;” (07/28/11)

Brad DeLong: ”The President’s Obligation to Take Care That the Laws Be Faithfully Executed Requires Him to Start Minting Large Denomination Platinum Coins” (07/28/11)

upyernoz: “platinum, baby, platinum” (07/28/11)

Master of Interesting Links: “The meme that will not die!”; (07/28/11)

Tyler Cowen: “Crank up the mint for the platinum coin!” (07/28/11)

Edward Harrison: “The #trilliondollarcoin meme”; (07/28/11)

Matthew Yglesia: Neutralizing Platinum Coin Finance; (07/29/11)

The Economist: “The trillion dollar coin solution;” (07/29/11)

Eric Hayden: “A $1 Trillion Coin Seems Like a Nice Idea” (07/29/11)

Paul Krugman: “Lawyers, Coins, and Money” (07/29/11)

Annie Lowery: “The $5 Trillion Coin” (07/29/11)

Johnsonville: “Debt Watch/Coin Trick: the Trillion Dollar Coin” (07/29/11)

Seneca Doane: “Cut the Gordian Knot with the Platinum Sword;” (07/30/11) This Post was a particularly important because it recognized the key political implications of PCS, and also was enormously popular at DailyKos and elicited 569 comments there.

Laurence Lewis: “The Debt Ceiling Dance and the Trillion Dollar Coin.” (07/31/11)

David Weigel: “The Platinum Coin Hysteria of 2011;” (07/31/11)

So, that was the second wave of responses by mainstream bloggers, and others, to the Platinum Coin Seigniorage idea. In addition, I added two posts on 07/31/11:

What If a Debt Limit Extension Is Voted Down?” (07/31/11) and

Progessives In Congress: Vote for The President To Do It!” (07/31/11)

Also, the last notable post on Platinum Coin Seigniorage (08/01/11) before the debt ceiling settlement of 08/02/11 was Scott Fullwiler’s Coin Seigniorage and Inflation. It’s still the most comprehensive and rigorous discussion available of the relationship between the two.

But then, and lastly, there was Beowulf responds to Dave Weigel of Slate.” (07/31/11) I think this reply is worth quoting, because, in a way, Weigel’s reaction is pretty typical of most mainstream posts, reacting to the idea in what only can be described as a superficial way, part brush-off; part poking fun, almost as if mainstream bloggers were afraid of discussing the idea without an obligatory heaping slice of skepticism accompanying their mention of it. Obviously beo’s reply doesn’t apply to everyone, so I don’t want to over-generalize it. But if you read all the posts, I think you’ll see that Weigel’s reaction is pretty common, so beo’s reply is pretty broadly applicable.

There’s nothing fanciful about it. The strange thing is that the USG is constrained by debt ceiling but a part of the USG (The Fed describes itself as “an independent government agency”) is unconstrained by a debt ceiling. Even more anomalously, Fed-held Treasuries are counted against the USG debt ceiling.

This isn’t about selling drilling rights on the moon but a practice almost as old as the Republic. The US Mint has used coin seigniorage continuously since the Coinage Act of 1792 (in a legal sense, a single $1 trillion platinum coin is the same as trillion $1 coins but with far less expense and effort). It violates no laws nor federal regulations nor prior obligations for the USG to transfer debts from the constrained whole to an unconstrained part (that is violates all logic is the fault of Congress).

The idea actually originated in a note I sent the Department of the Treasury on a collateral issue (as it happened, I had “buried the lede”). I posted about this on Firedoglake (and Correntewire) only after discussing the issue at Warren Mosler’s blog (Incidentally, I’m hardly a lefty. I voted for Romney in the 2008 GOP primaries, will probably do so again next year).

Writer Joe Firestone suggested to me that the platinum coin seigniorage issue was something worth posting a blog about and bugged me until I did (after which, Joe took the leading oar on developing the idea). I’d point out that Warren Mosler also picked up on the economic ramifications very early. But I trust that every reader here with an interest in economics has already read his book The Seven Deadly Innocent Frauds (you can download for free from his site if you haven’t), so that should come as no surprise.

Of course, there is historical precedence for using coinage to pay the national debt, the Legal Tender Act of 1862 authorized the issuance of fiat currency, US Notes or “Greenbacks” (the predecessor of today’s Federal Reserve Notes) required that Tsy pay debt service only with US Mint-issued coins. Of course Nixon freeing us from the gold standard changed everything, but if our politicians understood that, we wouldn’t have a debt ceiling now would we?

And finally, I should note, that once the debt ceiling compromise was agreed to on 08/02/11, the sudden explosion of posts on platinum coin seigniorage quickly faded away, as I predicted it would then. I’ve blogged a lot about it, since, trying to develop the political context further and to make people aware of the policy variations available in the platinum coin seigniorage toolbox. But bloggers doing posts on it were few until just this past week.

Now people are starting to see that there may be a fiscal cliff settlement and immediately afterward a new debt ceiling crisis for us to cope with. So, suddenly the mainstream has taken up where it left off with platinum coin seigniorage in early August 2011. It’s again in a frenzy about it, and it’s again making errors in its analysis of it and in the information it’s spreading about the history of the platinum coin seigniorage idea.

In future posts of mine, I’ll look at the new wave of blog posts and discuss the issues they raise. But for now I want to correct one immediate thing. Joe Wiesenthal, Brad Plumer, and John Carney have been saying that the platinum coin seigniorage idea originates with Cullen Roche’s blog post of 07/07/11 cited earlier with a commenter on that post. Plumer even says:

*Update: Cullen Roche appears to have been one of the first people to discuss the platinum coin idea in 2011 ― it came from one of his readers. See also here.

If Plumer had read the first of his references with the accompanying comment thread, he would have found a host of links to earlier work on PCS. And if he had read the 07/17/11 post of mine he references (also linked to in the review above), he would have found that the first statement of the PCS idea by beowulf, Cullen Roche’s commenter, was on November 4, 2010, more than 8 months before Cullen’s own post. As it turns out even this date is too late, since Cullen, himself, (h/t to Cullen Roche, 01/05/13) discovered an even earlier occurrence at Brad Delong’s blog in another comment of beowulf’s, a full 12 months earlier than Cullen’s first post on PCS.

Also the first full blog post on PCS, as you can see from both Plumer’s reference and the account above is on January 3, 2011. And after that, there are numerous blog posts on the subject before Cullen’s post on 07/07/11. So, I think that Wiesenthal, Plumer, and Carney, all got it wrong. Probably because they relied on each other, rather than on reading their own links, or on using “the google.”

(Cross-posted from New Economic Perspectives.)

Photo in the public domain.

These Folks are Soooo Clever . . .

6:55 pm in Uncategorized by letsgetitdone

Last week, Reps. Michael Honda, Keith Ellison, Raul Grijalva, Jan Schakowsky, John Conyers, Barbara Lee and Lynn Woolsey stalwarts of the Congressional Progressive Caucus (CPC) begged for mercy from “the Gang of Eight” in a letter.

Here’s what they said and my commentary on their “loser liberalism.”

”Thank you for your work – past and present – towards solving one of the greatest policy challenges facing us today: the unsustainable path of our national debt. We appreciate the bipartisan and collaborative spirit with which you’ve approached your negotiations. . . .”

Thanks vanguard progressives for embracing the major premise of the austerity ideology, namely that the national debt is on an unsustainable path. I’m here to tell you that this idea is false and also terribly harmful to progressive aspirations to end economic stagnation and get everyone, who wants to be, employed at a living wage. You can’t win an argument if you start by agreeing with your opponent’s false premise.

The US has a non-convertible fiat currency which it allows to freely float on international markets. It also has no debts in any currency not its own. It also has the constitutional authority to issue currency and coins in unlimited amounts to pay any debt obligations when they fall due. It also has a central bank, the Fed, that can determine the interest rates paid on new debt issuance unilaterally and in spite of any desire on the part of private markets to raise those rates. So, it should be obvious to you and everyone else that it doesn’t matter how high our national debt, or our debt-to-GDP ratio is, the US always has the capacity to deficit spend what it needs to in order to buy any goods and services for sale in USD, including the services of all the currently unemployed or under-employed who would like full-time jobs at a living wage.

So, why are they agreeing with the austerity mongers? Why are they validating what the deficit hawks have to say? Why are they engaging in “loser liberalism?” How many times do they have to be told that they’ll never persuade anyone that they’re in the right when they reinforce the framing of people who want to impoverish the poor and the middle class?

The right way to do this is to send a letter to the Gang of Eight denying that there is any debt/deficit crisis at all and pointing out that the US has many problems, the most important of which is high unemployment; but that the unsustainability of the debt path is not among them. And you should demand that they quit wasting everyone’s time and report back to the Congress that there is no debt problem; but that there are many other problems that Congress needs to solve.

”. . . .Given reports that a “down payment” is being considered to allow time to negotiate a broader budget deal, we write today to urge you to set a more balanced path and use only revenue for such a down payment in light of the billions in spending cuts agreed to so far.”

The down payment, of course, isn’t necessary because there should be no effort at deficit reduction, but rather a larger deficit than we have now to compensate for the aggregate demand leakage to domestic savings and foreign imports. You need here to point out that the full employment deficit should be more like $1.6 Trillion annually spent on the right things, rather than $1.2 Trillion incurred as a result of doing nothing to get to full employment. There are good and bad deficits. And right now the US is running bad deficits whose fiscal multipliers are relatively small. We need, instead, larger deficits spent on programs that will get people employed.

As far as using only revenue to make that down payment is concerned, it isn’t honest to deny that raising revenue from taxes, absent compensating deficit spending, won’t cost jobs. It will. If the taxes involve ending the Bush tax cuts for the rich, then the impact on the economy will be only $.30 per dollar taxed, while if it’s on the middle class and the poor it will be more like $1.25 subtracted from GDP for every dollar taxed. So clearly, it’s preferable to tax the rich, if one has to choose.

But we don’t have to choose. We don’t need to raise taxes to get money to deficit spend. The government can just create the money in the act of deficit spending. That is what it should do if one is interested in growing GDP and creating jobs.

It does make sense to have higher taxes on the wealthy, if one wants to level the paying field of economic inequality. And I am all for raising taxes on the wealthy for that purpose, since extremes of wealth are destroying our democracy. However, having said that, the issue here isn’t one of deficit/debt sustainability. And we should not pretend that it is.

There are two issues. One is getting to full-time employment for everyone, and the other is getting to greater economic equality so that the very rich can’t afford to influence politics and buy elections so easily that what most of us want becomes superfluous. Let us address both issues, but let us not conflate them by trying to raise revenue on the rich, while costing jobs for those who need them, because we legislate no compensating deficit spending for those tax increases.

”Over the past few years, the only lasting and substantial contribution we’ve made to deficit reduction has come from spending cuts. While Democrats have conceded nearly $800 billion in cuts as outlined in the spending caps of the Budget Control Act, this achievement has not been matched by any real commitment on revenue. Not a single cent of our recent efforts towards paying down the debt has come from the revenue side of the ledger. Additionally, because of the lack of specificity in the Budget Control Act, the spending reductions could fall largely to the non-defense discretionary categories. From infrastructure and education to research and small businesses, these investments are critical in keeping our nation economically competitive in the 21st century. Continuing down a course of misplaced cuts is destructive, unsustainable, and an impossible route to the long-term deficit reduction we all seek.”

Right! So since we did the wrong thing by making spending cuts earlier, now we should do the wrong thing again by raising taxes on people without compensating increases in deficit spending? Have the CPC stalwarts ever heard the expression: “two wrongs don’t make a right”?

They should never have agreed to the previous spending cuts and to the ridiculous idea of long-term deficit reduction come what may; and they should not now be supporting tax increases without insisting on compensating jobs programs. They should be calling for State Revenue Sharing of $1,000 per person, a Federal Job Guarantee, and a payroll tax holiday until full employment is reached. They should also be making this pledge for progressive candidates for office.

”Therefore, we urge you to send a signal that you are truly serious about brokering a balanced deal by breaking through the revenue stalemate. We believe any “down payment” should set the tone for the hard discussions to come by sidelining intractable pledges that are at odds with basic arithmetic. We believe you can send a strong message to the markets, to the credit rating agencies, and – most importantly – to the American people by adopting a down payment entirely of revenue. . . .”

They shouldn’t be doing any deals. Deals on deficit reduction are losers for liberals and progressives. We don’t need a deal on the revenue stalemate. What we need is no more deals that sacrifice the interests of poor people and the middle class. The CPC members are in Congress to represent them, not to beg for mercy from knuckle-dragging neanderthals who want to destroy the safety net.

As for the ratings agencies and the markets, don’t worry about them. They have nothing to say about interest rates. Order the Fed to keep those interest rates near zero. Get the ratings agencies investigated, indicted and prosecuted for continuing fraud and complicity in causing the crash of 2008, and also for blatantly and fraudulently downgrading the ratings of both the US and Japan when neither nation can ever be forced to go bankrupt. That’s what they should be writing letters to the Gang of Eight and doing press releases about, not begging “the Gang” for mercy in relation to further spending cuts.

The CPC letter then goes on to further implore the gang of eight to recognize previous spending cuts falling disproportionately on part of the polulation to take “. . . . into account the policies and priorities that have shouldered a disproportionate burden in the past.”

To that all I can say is fat chance! You don’t get anywhere by begging tea party folks for fairness and justice, or mercy. The only way you’ll get anywhere is to tell them that the whole CPC will vote against any further spending cuts whatsoever including and especially proposed safety net cuts.

”We look forward to working with you to pass a balanced, economically responsible deficit reduction plan.”

That’s been the problem from the beginning. They shouldn’t be working with the austerians at all on deficit reduction. The very idea of a long-term deficit reduction plan is stupid because government deficits are private sector savings to the penny, and as long we want to have both more imports than we export and private sector savings as well, we must run deficits or, alternatively, increase private sector debts, and why would anyone in the private economy want to see their debts increase.

Of course, there are times when we might want to decrease private sector savings to dampen demand-pull inflation caused by too much private sector demand. But we haven’t had a situation like that since the US was exporting much more than it imported more than 40 years ago; and it is unlikely that we will see that kind of situation for many years to come.

So, there is no long-term deficit reduction plan over the next 10 years that could possibly be “responsible.” Any such plan would tend to depress the economy or decrease private sector savings as long as we’re still importing 3-4% of GDP more than we export, and as long as private sector households retain their desire to repair the ~40% of the losses in their balance sheets that occurred during and after the crash of 2008.

And that’s why CPC members need to “just say no” to any proposals about long-term deficit reductions, whether those proposals come from Republicans, or whether they come from the President of the United States, himself.

Whoever suggests such a plan is being “irresponsible” and is also being anything but “progressive.” CPC members owe it to the people who elected them to refuse to cooperate, and to commit to that refusal right now, before the election!

(Cross-posted from New Economic Perspectives.)

Alan Grayson’s Right; But He Misses the Larger Point

5:23 pm in Uncategorized by letsgetitdone

The Cliffs of Sanity

The Cliffs of Sanity (Photo: aeu04117/flickr)

Alan Grayson’s e-mail on Moody’s warning that it might reduce the US’s AAA rating, suggested that Moody’s was either threatening a downgrade because it wants to get the Bush tax cuts for the rich extended, or, alternatively, that “Moody’s is living in what Aristophanes called “Cloud Cuckoo Land.”” He says this because Moody’s is upset about the possibility that the US may go over the so-called “fiscal cliff,” even though if it did, it would theoretically result in $560 Billion of deficit reduction annually, without further legislative changes, and it makes no sense on the surface for a ratings agency to think that the risk of US bond default is greater when the annual deficit is being reduced by $560 B per year, than by some lesser amount, which is likely to happen if Congress doesn’t take us over that “cliff.”

Grayson was right to call attention to this seeming contradiction and the possibility that Moody’s is just pressuring Congress to do more for rich people; but I think he should also have made the larger and more important point, that Moody’s warning, just like the one it delivered in January of 2010, is an empty threat without significant consequence, even if it were carried out. How do we know that? For a number of reasons.

First, as is widely known, all the ratings agencies including Moody’s gave the CDOs and CDSs that led to the collapse of AIG their highest AAA ratings. In addition, they downgraded Japan’s credit ratings a long time ago, with no measurable impact on its bond interest rates or costs, even though Japan’s debt-to-GDP ratio has continued to increase over time and is now in the neighborhood of 200%. More recently, in April of 2011, Standard & Poor’s downgraded the outlook on US debt from stable to negative. What happened thereafter? There was a flight to Treasuries on the International markets and interest rates have fallen more than 1% since S & P delivered its downgrade.

So, one may be forgiven for wondering why anyone should listen to the ratings ravings of Moody’s and the other agencies at all. In fact, one may begin to suspect that their ratings have little influence on the bond markets, and also, given the Japanese and US experiences, one might even suspect that the bond markets don’t influence to any appreciable degree or control the interest rates that Governments sovereign in their own currency must pay.

Second, since the United States is a nation with a fiat non-convertible currency system, with a floating exchange rate, and no debt denominated in any foreign currency, it is impossible for the United States to be forced into a default by any external party, simply because its ability to create the currency it owes its obligations in, is unlimited. Voluntary default could be caused by a Congress which acts stupidly, and in a manner contrary to the 14th Amendment of the Constitution, to constrain the Treasury from paying its obligations when they come due, coupled with a Treasury that accepts Congress’s constraint in conflict with the clear admonition of the Constitution that the debts of the United State shall not be questioned.
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No Plan B?

7:47 pm in Uncategorized by letsgetitdone

Woodward (photo: Bektour / wikimedia)

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

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

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

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

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

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

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

Our Money Isn’t Fake It’s Fiat!

8:58 am in Uncategorized by letsgetitdone

A report on protests at the Tampa convention appearing in the Hill (h/t Lambertstrether) partly focused on views about our economy and financial system of an Occupy protestor named Andrew Speirs. The report says:

Money scrabble tiles and cash

Photo: 401k / Flickr

“Protesters with the Occupy movement were also in full force with calls to dismantle the United States’ economic and political system.
“Our economy is mostly electronic,” protester Andrew Speirs told a group of reporters. “We have no backing to our currency. It’s fake money. It’s actually just printed debt by the Federal Reserve bank. And we can’t pay back our national debt; we can only create more debt by printing money.”

Perhaps the report is accurate in portraying Occupy as wanting to dismantle the political system; but let’s immediately note that neither the above quote, nor any others from the report document that conclusion. On the other hand, the quote from Andrew Speirs is very explicit, about his views on the monetary aspects of our economy, and clearly implies that he wants big changes in this area.

Speirs’s views don’t represent Occupy, which is known both for its diversity of views on economic matters, and the agreement of its members on a pro-individual/anti-big corporation view of both politics and economics. However, Speirs isn’t the only Occupy activist with the views he expressed above, and since these views are surely mistaken, I think it’s important that they don’t come to represent Occupy in the future.

First, our economy isn’t mostly electronic because it also includes goods and services, productive activity, and all kinds of real capital, both capital made by people and societies, and natural capital. These days financial capital is predominantly electronic; but that doesn’t make the economy all bits and bytes.

Second, it’s true that we have no commodity backing for our fiat currency. But that doesn’t mean there’s “no backing” for it and that it’s a fake. US currency is “backed” by the strength of the economy that uses the currency for trading, and also by the fact that it’s the only currency acceptable for fulfilling tax obligations to the US Government and generally our state governments as well. Also, our currency can buy whatever is for sale in our domestic economy, and that’s the bottom line, because this ability is all that’s “real,” and has nothing to do with it having any commodity backing such as gold, silver, platinum, oil, or any other concrete material.

Read the rest of this entry →

Fix the Debt The Progressive Way!

7:56 pm in Uncategorized by letsgetitdone

In the shadow of the election campaign, receiving comparatively little attention from the media is another accelerating effort to prepare the way for a “grand bargain” that will legislate a long-term deficit reduction plan embodying “shared sacrifice,” including entitlement cuts that will weigh heavily on the vulnerable including, the young, the elderly, the old, the disabled and other disadvantaged groups; and that will also further exacerbate the rapidly growing inequality problem and increase the threat to our increasingly fragile democracy.

The battle cries of the austerians supporting this effort talk a bit less about “fiscal sustainability” and “fiscal responsibility” these days and much more about “debating the debt” and “fixing the debt” than they did 2 years ago. Their view is well-reflected in the “Summary of Fix the Debt” which opens:

The Campaign to Fix the Debt is a non-partisan movement to put America on a better fiscal and economic path. We come together from a variety of social, economic and political perspectives, around the common belief that America’s growing federal debt threatens our future and that we must address it. The Campaign will mobilize key communities—including leaders from business, government, and policy—and people all across America who want to see elected officials step up to solve our nation’s fiscal challenges. Recognizing that the time for action is now, the Campaign will work in Washington, DC and around the country to build support for a comprehensive plan to fix our long-term debt and deficits. In our history, America has always been able to tackle its greatest challenges – we are confident we can again rise to the occasion.

“The campaign is built around the following core principles:

“– Policymakers should acknowledge that our growing debt is a serious threat to the economic well-being and security of the United States.”

Let’s stop right there! I don’t think policymakers should acknowledge that our growing debt is any kind of threat at all. The level of Federal Government debt is a very different matter from the level of State Government debt, or private sector debt. These last are a very serious problem for the US economy. But Federal Government debt is no threat at all, because it in no way affects the solvency of the United States Government, or its ability to deficit spend currently or in the future, as I’ve explained here, and in other posts.

– It is urgent and essential that we put in place a plan to fix America’s debt. An effective plan must stabilize the debt as a share of the economy, and put it on a downward path.

Even though the Federal debt isn’t a threat to the United States let’s accept, for the sake of argument, the notion that we do need to fix the debt. Then we have to ask how we ought to fix it? “Fix the Debt” answers this question by outlining a number of points which all assume that the Government’s financial resources are limited, and that limiting the growth of the debt in order to reduce it as a percent of GDP, will require cuts in spending programs and increases in taxes amounting to many Trillions of Dollars in reduced Government deficit spending over the next decade. The “Fix the Debt” summary mentions the Bowles-Simpson $4 Trillion in deficit spending cuts; but austerians often talk about “going big” and much higher numbers such as $7 Trillion over the next decade.

“Fix the Debt” says that the deficit reduction plan should protect the fragile economic recovery and be conducive to long-term economic growth. But it’s hard to see how they can arrive at such a plan, since even assuming reductions of $4 Trillion in deficit spending over a decade one is looking at an average of $400 Billion in deficit spending reductions per year.

Keeping in mind that the $800 Billion fiscal stimulus deficit spending program was implemented over two years, $400 Billion in deficit spending reductions per year translates to subtracting what amounts to the impact of 5 stimulus bills from the economy over the next decade. How austerians expect that to protect the fragile economy, and provide for long-term economic growth isn’t something they bother to explain, but I think they’re calling for a mission impossible for the US economy. They have no serious detailed and credible explanations of how continued growth will be possible with private debt at such historically high levels, State governments contributing nothing but fiscal drag to the economy, and the Federal Government also retrenching by an average of $400 Billion per year in deficit spending.

At this point, I could talk about the empirical evidence from the Eurozone and the UK, showing that Government cuts in deficit spending are producing nothing but misery in nation after nation; but I hope this passing reference to what we all see in the headlines is enough to remind readers that the austerians behind “Fix the Debt” are either not living in the real world, or are deliberately misleading the public about having a deficit reduction plan that will both reduce the debt-to-GDP ratio, and also protect the economy from a crash now, while being conducive to growth in the future, and “leaving our grandchildren better off.”

In any event, I’m glad that the goal of Fix the Debt is the compound one of both reducing deficits and protecting and growing the economy; because I’m willing to accept that compound goal as a basis for debating what to do about the debt; and I think I have a plan for not just reducing the Federal Government debt, but also for paying it off and removing the need to issue debt again. My plan will not hurt recovery efforts or harm long-term growth. In fact, it’s consistent with much heavier Government “deficit” spending to enable a much stronger recovery than we have now and much more rapid growth as well.

The Plan

I’ve been at pains to point out in many, many posts in the past, for example, here, here, and here, that there is no solvency problem for a Government like the US with a non-convertible fiat currency, a floating exchange rate, and no debts payable in currencies it doesn’t issue, because such Governments can always issue the money they need to pay any obligations, or to buy anything for sale in their own domestic economy. Here’s how the Executive branch could use its legal power to coin money to end the deficit/debt problem in a way that would not tank the economy now, or interfere with its future growth.

First, the President should use the authority provided by a 1996 law to mint a $60 Trillion coin and deposit it at the Federal Reserve. The deposit will eventually result in nearly $60 Trillion in Proof Platinum Coin Seigniorage (PPCS) profits being credited to the Treasury General Account (TGA).

Second, the Treasury should use that money to pay off all the intragovernmental and Federal Reserve-held portion of the current $15.9 Trillion debt subject to the limit. That portion is roughly $6.7 Trillion, or about 42% of the 15.9 Trillion. That action would immediately reduce the debt-to-GDP ratio to 58% of GDP or so.

Third, 10% or so of the remaining debt is short-term debt with a term of one-year or less. The Treasury should pay that off as it comes due. So within one year the Treasury will have paid off 52% of the debt. However, another $5.9 Trillion will come due over a ten year period. So by 2022, assuming robust GDP growth the debt-to-GDP ratio would be less than 5%, composed of debt with a maturity of up to 30 years from 2012, assuming that the Fed doesn’t buy up long-term debt and let the Treasury buy the debt back back early. Eventually, after 30 years the debt subject to the limit would fall to zero.

Fourth, the above assumes that Treasury would issue no new debt instruments, but would pay for all future deficit spending appropriated by Congress with coin seigniorage profits.

That’s it! The debt is “fixed” without tanking the economy; either now or in the future.

What About Inflation?

You know the first thing the austerians will whine about when people start pushing this PPCS stuff is “what about inflation?”

Well, we know that the first $6.7 Trillion of pay-off isn’t going to cause inflation because about $1.9 T is going to the Fed and will just sit there until they decide to do QE or something. But they can do the same QE or not whether they have these reserves or not, because they can always create new reserves out of this air anyway. So, transferring reserves to them can have inflationary impact. The remaining 4.8 T of the $6.7 T just goes into Government accounts and isn’t spent until needed anyway, so it won’t cause any additional inflation.

Next, the $1.6 T in Treasury Bills that would be paid off the first year basically come under the heading of QE done by the Treasury, since it’s a swap of the T-bills for reserves. We know from the Fed’s experience, however, that QE over a year’s time of that volume has little inflationary impact in an economy like the one we have now. The reason is that even though it adds reserves to the banking system, it adds very little to the net financial assets of the T-bill holders, which is also why the impact of the Fed’s QE on recovery has been so miniscule.

Now, how about the $5.8 T in debt that would be paid back over a 10 year period? The volume paid back each year would still amount to relatively small amounts of QE and would still add very little to net financial assets (only interest payments); so there’s no reason to believe this would be inflationary either. The final $1.2 T in bond debt would be gradually paid over a 20 year period and would hardly create a ripple in the money supply of our much expanded economy, so here too using coin seigniorage rather than debt to enable deficit spending make no inflationary impact.

So, finally, we come to the possible inflationary impact of using coin seigniorage profits for deficit spending. Here we do have the Treasury adding real financial assets to the economy in the form of bank reserves. And this can be inflationary if deficit spending exceeds the productive capacity of our economy. However, I want to emphasize very strongly that there’s no reason to believe that deficit spending accompanied by debt issuance is any less inflationary than is deficit spending using coin seigniorage profits. To believe that it is you have to believe that reserves are more inflationary than Treasuries. But the theory supporting that view, the quantity theory of money, was shown to be false by Keynes in the 1930s, and, the empirical evidence available since suggests, if anything, that Treasuries are more inflationary than reserves since they pay higher interest rates.

So, there’s nothing to the inflation argument the austerians are likely to make against PPCS, and the way is clear for progressives to use it in the coming debate over how to fix the debt.

The Progressives and the Plan

The austerians aren’t the only ones mobilizing for an upcoming political fight over deficit reduction plans. Progressive organizations are also gearing up for a serious fight over competing plans. Here’s Brian Sonenstein at FireDogLake from a Post announcing an FDL webinar to inform people about the accelerating effort to cut entitlements:

“The deficit scolds have set up a seemingly never-ending system of triggers and deadlines to force ‘solutions’ to Social Security, Medicare and Medicaid budgets that would reduce benefits and do irrevocable harm to these critical programs. From the debt ceiling debacle to the upcoming fiscal cliff, our country has been led into a vicious cycle of fear mongering and misinformation on the deficit that only becomes more entrenched with time.

“Now that secret committee meetings have failed twice to impose unpopular austerity programs on the public, corporate heavyweights and their friends on Capitol Hill are forming groups like Fix the Debt, raising millions of dollars to lobby Congress into passing harmful reforms that throw society’s most vulnerable under the bus in the name of so-called ‘fiscal responsibility.’

“By making our voices heard once more in opposition to benefit cuts, we can continue to fight back attempts to destroy some of the most successful programs in our country’s history.”

The problem with the progressive position in statements like the above is that 1) it doesn’t actually deny that there is a deficit/problem and 2) it doesn’t really say how the progressive groups would solve the problem whose existence they’re tacitly acknowledging. Instead, progressives rely on arguments against austerity emphasizing its negative economic impacts, fairness concerns, obligations to the vulnerable, and claims that the rich can afford and should be willing to experience increased taxation since this country has given them so much.

Those arguments are good ones; but they are mainly defensive ones aimed at conserving a social safety net under attack. How much more compelling would the progressive case be, if it both used those arguments and proposed a plan to fix the debt which required no austerity, but even provided plenty of scope for deficit spending investing in economic recovery, an expanded safety net, full employment, enhanced Medicare for All, and “green” economic growth?

Well, the plan I’ve outlined here is just such a plan. I urge progressive writers and organizations to pick up on it and urge this Administration to mint that $60 T coin, shut down all the deficit terrorist organizations, along with their sanctimonious holier than thou propaganda, and, most importantly, shift the debate to discussion of the real issues this nation faces. These issues are difficult enough to deal with, even when we are free of the false issue of measuring all Federal spending and tax policy against the standard of whether it is deficit neutral or deficit reducing over some arbitrary time period, according to nonsense long-term CBO, OMB, or private economic projections over that period.

(Cross-posted from

Debating the Debt!

2:07 pm in Uncategorized by letsgetitdone

Maya MacGuineas urges America to debate the debt. She even wants the presidential candidates to devote a whole presidential debate to it. But she’s not interested in debating the private sector’s debt and how we might reduce that, which is very, very strange, especially since middle class Americans have lost 40% of their net worth since 2007, and the private sector debt burden has been a key factor in depressing consumption and preventing the economy from fully recovering and creating full employment. However, in spite of this private debt crisis which has placed the United States more than 3.5 years into a lost decade, now, she and her cohorts at the various Peter G. Peterson Foundation-supported organizations, whether ‘left,” “right,” or “center” in the Washington, DC area, are hot for everyone to debate the “national debt problem” rather than the “private debt problem.”

Well, far be it for me to turn down such a reasonable request from such a wise lady and all her friends and supporters in the Washington, DC “village” community. I will happily proceed to debate the national debt by analyzing what Maya had to say in her piece for CNN at the end of April. I’ll begin by debating a question that Maya seems to have overlooked as a desirable one for debate. Specifically, “whether the national debt is really a “problem” or not, and if so, what kind of a problem is it?”

A Daunting Challenge Or Just “Shock Doctrine”

Maya starts off her article this way:

“It’s not news that the national debt presents a daunting challenge. The public debt is growing faster than the economy, a trend that cannot be sustained.”

It’s not news that all sorts of people are saying that the size of the national debt is a daunting challenge, but that doesn’t make it one. Nor does the fact that the national debt has been growing faster than the economy, necessarily make its growth unsustainable. In fact, to claim that its growth is unsustainable, you have to assume that the growth of the debt reduces the future capacity of the government to spend. There are at least three reasons why the national debt isn’t a daunting challenge, including one that denies that growing public debt reduces the US government’s capacity to spend.

First, the “debt problem” can be solved in a few afternoons with some simple legislation by the Congress, if only they were willing to pass it. That alone, makes it not very “daunting.”

Second, even if Congress won’t pass new legislation, it already has passed legislation that allows the Executive branch to solve the “debt problem,” by forcing the Federal Reserve to create money out of thin air and deposit that money into Executive Branch accounts at the Fed.

And third, continuing to issue debt, even at a rate faster than the economy is growing, doesn’t reduce the future capacity of the government to spend. In fact, it has no effect on that capacity at all. Let’s explore the first reason in more detail and then move on to the others.

Ours is a Government with a non-convertible fiat currency, a floating exchange rate, and no debt to foreigners in a currency our government can’t freely create. That means our government can always pay any and all of the debt instruments it issues and the interest on them, when payments on them fall due, by simply marking up the reserve accounts of its creditors to repay its debts.

At this point, Maya or some other deficit hawk might ask, “where’s it going to get the money to do that marking up? Treasury can’t freely create its own reserves, or borrow from the Fed, the government agency that can create reserves “out of thin air.” Treasury can only get reserves credited to its accounts by taxing or borrowing!”

This sound like a good question and a fair one; but actually, it’s neither good nor fair, because it dodges a still more basic question that she and other Petersonians like David Walker must be aware of, but don’t want to talk about, because it’s very inconvenient for them. That question is: since the Congress has unlimited constitutional authority to create money, and has delegated that authority to the Federal Reserve, then why doesn’t it also delegate the Treasury the same authority to freely create reserves when it needs to pay bills?

Indeed, why doesn’t it just pass legislation re-locating the Fed to the Treasury Department, so that 1) Treasury would have that authority, 2) the Fed would be more accountable to the people, and 3) the extra-constitutional existence of the Fed as an obviously executive function being performed outside of the Executive Branch in violation of the separation of powers clause of the Constitution, would be ended?

In other words, if the national debt is a problem; then it’s only one because of money creation constraints, including the debt ceiling, that Congress has placed on the Executive Branch over and above the normal constraints of the appropriations process. So, if there is a national debt problem, it’s clearly Congress’s fault, and the solution to “the problem” is for Congress to legislate the constraints away, and let the Executive Branch freely meet all its debt and appropriations obligations at will, rather than to pretend that the debt is dangerous, unless we all engage in extraordinary efforts to have the government spend less, borrow less, and raise more money in taxes.

Put simply, Congress can authorize the Executive Branch to create whatever money it needs to pay all debts as they come due, and to spend future appropriations without borrowing, ensuring that the debt will eventually disappear. So, what kind of problem is it that Congress can solve by passing a simple bill in one afternoon in each house? A false problem, I think, or at least a political problem, rather than an economic or financial problem that requires “shared sacrifice” to solve.

In fact, the claim that there is a government debt crisis, is so easy to solve with Congressional action that it is very hard not to think that all the noise about its being a monumentally difficult problem to solve that requires extraordinary courage is really about delivering more “shock doctrine” to Americans. Why? So that there is an excuse to legislate their already inadequate safety net away, while more nominal wealth is delivered into the hands of the already wealthy.

After all, why else would Maya McGuineas and the think tanks she works with, go to such extraordinary lengths and expense as they have been doing to suggest a “shared sacrifice” solution to this “problem” lasting many years, when all it would really take to solve it would be some Congressional action? If they’re so worried about the national debt why aren’t they circulating petitions asking Congress to place the Fed within Treasury, rather than petitions telling people that the fiscal sky is falling and only a long-term deficit reduction plan will prevent an eventual fiscal collapse?

The second reason why one should doubt that the national debt is a daunting problem, is that there’s a 1996 law that allows the US Mint to create proof platinum coins with arbitrary face values and deposit them in the Mint’s Public Enterprise Fund (PEF) at the Fed. Since the coins are legal tender, the Fed MUST accept the deposits and credit the PEF with the face value of any coins, however large those face values are. The Treasury is then allowed to periodically “sweep” the Mint’s PEF profits from “coin seigniorage” into the Treasury General Account (TGA).

For example, if the Mint created a proof platinum coin with a $60 Trillion face value and deposited it into the PEF account, the Fed would have to credit the PEF with $60 T in its account, while taking the coin and transferring it to one of its vaults, where it would sit, permanently. The Treasury could then transfer the sum of $60 T – about $3500.00 (the cost of producing a 1 oz. proof platinum coin), or nearly $60 T into the TGA. The credits in the TGA could then be used to pay down the national debt plus interest as various debt instruments come due. They could also be used to deficit spend appropriations used by Congress.

Essentially, the profits from the coin would fill the public purse (the TGA) in the form of electronic credits generated using the Fed’s power to create money out of thin air. But they couldn’t be spent except to repay debt obligations, unless Congress opened the purse strings by appropriating deficit spending.

In short, within a few days after minting such a coin, the Treasury would be able to begin paying down the debt subject to the limit without further taxing or borrowing, if it chose to do so. It could pay the $6.7 T or so of debt held by the Fed and other agencies within a week, and then it could continue to pay the remainder of the debt as it falls due. As of June 27th the Treasury had redeemed $4.9 Trillion in debt instruments in June of 2012. So, had it begun paying down the public debt on June 1, and also paid off its debt obligations to other agencies and the Fed as well. By this time it would have paid off 74% of the total debt subject to the limit. Only 4.1 T or 26% of the debt would have remained. So, if this is all we need to do to pay down the national debt, then I think it is no problem at all for the Treasury, and certainly not the great crisis depicted by folks like Maya MacGuineas who are calling for shared sacrifice and austerity.

So, again, I have to ask a question. Since by now, the idea that the President can cause the Mint to create very high value proof platinum coins has hit such mainstream blogs as CNN’s (Jack Balkin post), Reuter’s (Felix Salmon), Think Progress (Matthew Yglesias), and Naked Capitalism (a post of mine), and a number of others, how is it that Maya MacGuineas won’t discuss it as a possible solution to the debt problem, and won’t call on the President to solve this very, very, serious problem by minting one or more platinum coins with face values great enough to end this oh so serious crisis by paying down the national debt by 74% in 6 weeks?

The third reason why there’s no debt problem follows from the first two. If either Congress or the Executive can so easily fix “the debt problem” by either re-organizing the Government, or creating platinum coins, then why would our continuing to issue debt at a faster rate than the economy is growing reduce the future capacity of the government to spend? Let’s say the national debt owed to parties external to the Government grew to 91% by 2025, from its present level. Would it be any more difficult to continue to spend by creating money out of thin air, or by minting platinum coins, or even by borrowing more, if those buying our debt instruments knew that, come what may, we can always pay our debts by creating fiat money?

Somehow, I don’t think so. I think Governments controlling a non-convertible fiat currency with a floating exchange rate and no debts in currencies not their own have no spending capacity limits in their fiat currency, at any particular point. It doesn’t matter how much debt they’ve issued in the past, because neither the size of that debt, nor the size of the debt-to-GDP ratio associated with it, affects their capacity to create new fiat money. That capacity is a matter of the political survival and functioning of such a government, in the context of its constitutional authority to create money, it has nothing to do with economic or so-called “fiscal sustainability” considerations.

In brief, the United States Government (including Congress, the Executive, and the Fed) can’t have any involuntary solvency problems, because it has no involuntary limits on its capacity to spend except those implicit in Congressional Appropriations. It may want to limit deficit spending in any fiscal year to prevent demand — pull inflation. But the repayment of debt doesn’t add any net financial assets to the private economy. It’s just a swap of debt instruments for money; and that’s not inflationary. So, there’s no “daunting debt challenge” for the United States. It’s all just “a deadly innocent fraud” as Warren Mosler would say. What about the “fiscal cliff,” vs. “the debt tsunami” that the austerians like to talk about?

The Fiscal Cliff vs. The Debt Tsunami

Maya MacGuineas says:

“Even more immediately, at years’ end we will face a $7 trillion fiscal cliff—a series of policies will kick in, from the blunt, across the board spending cuts (or sequester) to the expiration of the tax cuts that would reduce spending and raise taxes so abruptly and mindlessly it would put us back into recession. But ignoring and waiving the policies instead would add additional trillions to the debt and set us up for a fiscal crisis.”

Since, I’ve just pointed out that the US has no real debt/solvency ‘problem,” it’s pretty clear that this choice is no dilemma at all. When the debt ceiling crisis during the lame duck comes, just mint that $60 Trillion coin, start paying off the national debt, and refuse to make any spending cuts or support any tax increases on the middle class. Since the debt’s getting paid off, there’s no down side to that course.

”A fiscal cliff or a mountain of debt. It will require presidential leadership to avoid either threat. While the likely approach will be to replace the slated policies with a gradual debt reduction plan that would bring the deficit down and leave the debt so that it is no longer growing faster than the economy, there are many different ways to achieve this — all with pros and cons — and many specifics that need to be filled in.”

None of this is necessary. The mountain of debt isn’t a problem. The fiscal cliff can be safely destroyed by a Congress and President unwilling to drive the country off of it, and there’s no need for a long-term deficit reduction plan to flatten that cliff. In fact, having one is a bad idea because the deficits we run need to be determined by spending programs directed toward public purpose in the context of current economic conditions.

Whether there’s a deficit or not and how large it or the debt is should not be forced by fiscal policy aimed at reducing either one or both; but should be determined by policies designed to improve both the economy and the society it serves. When you can run out of money and become insolvent, then you have to make sure that debts and deficits don’t impair your future capacity to spend.

But when solvency isn’t an issue, all that counts is the economic and societal impacts of fiscal policies, not their impact on the abstract debt or deficit numbers. It’s not that deficits don’t matter. They may matter very much if they’re large enough to cause demand – pull inflation. But if fiscal policies are evaluated from the viewpoint of their impact, then inflation becomes one of the possible impacts of policy, to be assessed against other outcomes as necessary in estimating and planning for a fiscal policy that will achieve public purpose.

The Debates and the Debt

Maya continues:

”However, the tendency during campaigns, of course, is for politicians to talk about what they promise not to do, rather than own up to the tougher decisions their stewardship would require.

Instead of allowing the presidential candidates to duck and bob to avoid specifically saying how they would stem the flow of red ink, what if voters insisted that all presidential candidates directly answer the question, “how would you fix the debt?””

If voters insisted on that, then it would be a very big distraction from real issues. As I’ve already said, the idea that there is a debt crisis is “a deadly innocent fraud”; and part of its deadliness is that people become preoccupied with this false fiscal, but real but minor political problem, and spend far too little time on the myriad of real economic and societal problems we face as a nation. Everyone knows the litany of these problems well enough. I needn’t repeat it here. But I can’t emphasize heavily enough that voters ought to insist that presidential candidates directly answer questions about how they would handle real problems, and the question “How would you fix the debt?” is not directed toward one of these.

But questions like: “How would you help to create full employment?” “How would you create a health care reform bill that covered everyone and cut total health care expenditures as a percent of GDP by 1/3?” “How would you reduce economic inequality in the United States?” “How would you expand the social safety net to implement FDR’s economic bill of rights?” ‘How would you rebuild the energy foundations of the United States to create an economy no longer based on fossil fuels?” “How would would you rebuild the public education system in the United States, so that we are among the top few nations in the world in educational quality?” And, of course, “How would you stop and reverse the trend towards plutocracy in the United States to save our democracy?” All of these are questions that are targeted on real problems.

So, I think that these are the kinds of questions that presidential candidates ought to debate. But, under no circumstances should they waste another moment of time debating how to meet the non-existent “debt problem.” And as for detailed deficit reduction plans and scoring candidates performance on these is concerned, forget it! It’s just a waste of time, a diversion for people who’d rather play games than solve real problems.

(Cross-posted from

An Imminent Spending Blitz (?) and the Debt Ceiling

10:51 am in Uncategorized by letsgetitdone

About Two and a half months ago, Mike Norman pointed out that when Federal spending and tax collections in fiscal 2012 were compared with those for the same calendar date in 2011, data from the Daily Treasury Statements (DTS) showed that 2012 Federal spending was lagging behind 2011 spending by $433 Billion; while 2012 tax revenue was running ahead of 2011 by $45 Billion. So, the Federal stimulus for the macroeconomy in 2012 was $478 Billion less than it was in fiscal 2011 at a comparable time in the fiscal year, or looking at it another way, we can say that the 2012 fiscal drag produced by the Government was $478 B more in 2012 than at a comparable time in 2011. Given these numbers, and the continued reluctance of banks to lend for business expansion, the slow down in the economy and continued high unemployment are exactly what one would expect.

In a sense, austerity, has already come to America, courtesy of the Obama Administration, because the $109 B per month in deficit spending it has averaged so far this year is too small to do more than support slow growth, even though it corresponds to an annual deficit of almost $1.3 Trillion.

is a Spending Blitz Coming?

I checked the DTS again on June 21st, because I was curious about where the fiscal drag was relative to last year and also to see where the debt ceiling vs the debt subject to the limit was. I found that the closing balances on June 20th showed that Federal spending had caught up a bit with 2011 and was now behind by $412 B. However, tax revenues compared with 2011 had increased by $66 Billion. So, at almost 9 months into fiscal 2012, the total fiscal drag compared to 2011 was still at $478 B, almost as if someone was managing spending against revenues so that deficit spending would not increase in the 3rd quarter.

So this raises the question: what will happen in the 4th quarter of FY 2012 and the first quarter of FY 2013? Will the Administration suddenly ramp up Federal deficit spending, so that there is a massive deficit spending shock delivered to the economy over the next four months?

Let’s go to the DTS again for June 20, 2012:

– Statutory Debt Limit: 16,394,000 in millions

– Total Public Debt Subject to the Limit: 15,737,388 in millions

The difference or space between current debt subject to the limit and the debt ceiling is: $657 Billion with a little more than 4 months left until the election. In addition, there was another $140 B in operating cash in the Treasury general Account as of June 20th. Adding the two together, we see that the President has almost $800 B in head room before he reaches the debt ceiling, and amount comparable to the size of the Recovery Act of 2009.

So, the President can increase deficit spending to $170 B per month, provided Congress has already appropriated the money, an increase of $65 B per month for the next 4.3 months, and still have about $70 B in deficit spending to spare for November and December, before Geithner has to start juggling things to prevent default. In other words, the Administration can probably deficit spend at an annual rate of $2.0 T for the next 4.3 months in a blitz that can perhaps reduce U-3 unemployment quite a bit below the 8% level, a reduction that is probably enough for him to win going away in November.

So, 1) I think President Obama has been holding back 2012 deficit spending a good bit, probably thinking that if he can spend the money in July, August, September, and also in October, then he can see the U-3 numbers go substantially below 8% and also talk about a trend toward a stronger recovery but 2) I still don’t think he’ll get close to the debt ceiling until the middle of November.

The Debt Ceiling: What Will Happen?

On the question of what will happen in a debt ceiling crisis this time around, I think that depends on whether we come to the ceiling in October or November. The analysis I just did suggests that the President can make sure it will be in November, but If something goes out of control and it is October, then I think the President may go out of character and use the 14th Amendment, or the Trillion Dollar coin, or even Beowulf’s latest consols idea (which the President may prefer because it can be seen as a slick, merely technical solution taken to get around the debt ceiling) to avoid giving away stuff on key entitlements. He won’t want seniors going to the polls and voting disproportionately for Romney, or progressives staying home, because he gave away SS and Medicare, and other important “discretionary” programs like Head Start, rolled over on defense spending, and accepted tax cuts for the rich without a fight. He also really doesn’t want a Republican Congress next time, even if he wins himself, because then, they’ll try to impeach him.

So, he’ll fight this time if it’s in October. If it’s in November, the much more likely occurrence, however, then, if he wins the election, I think, he’ll do kabuki, make some BS statements, and do something in the Bowles-Simpson framework, but with more in spending cuts and less in tax increases than progressive Ds say they want.

Judging from his past behavior, I think he’ll start negotiating from Bowles-Simpson, go down from there, and then end up with a “compromise” that’s much worse from the viewpoint of progressives than even Bpwles-Simpson. He’ll do this especially, if the Rs win control of Congress. But even if the Ds win both Houses, I think he’ll still do it, because I believe his vision has always been to get rid of the New Deal as much as he can, and to implement neoliberalism more fully.

If Romney wins, finally, I still think that Obama will try to broker a deal based on Bowles-Simpson in the lame duck, and will probably call Romney in to bring some of the Republicans over on tax increases. So, given all the possibilities I think it’s November for the crisis and then a settlement using Bowles-Simpson or some variant of it, and that the middle and working classes, women, seniors, and the vulnerable will take another big hit from the austerians, while the rest of us experience the lost decade, or even more if we can’t get rid of the neoliberals before then.

What He Should Do?

What President Obama should do is to take the whole debt ceiling issue off the table right now, and for the foreseeable future by minting the $60 T proof platinum coin, and follow up by paying down the debt subject to the limit drastically, and pressuring the Rs with massive stimulus bills that won’t involve any “deficits” in the sense of a gap between revenue and spending. I’d like to see the Rs oppose massive spending to get the economy going, or Medicare for All, when the money to pay for these is already in the Treasury General Account (TGA). Good luck with that!

(Cross-posted from

A Reply to the President About Real Choices

9:30 pm in Uncategorized by letsgetitdone

A few days back, the President had some remarks on taxes, fairness, “The Buffett Rule,” “fiscal responsibility,” and making real choices with real consequences. From my point of view, informed, in part, by the Modern Monetary Theory (MMT) approach to economics, these remarks were so wrong-headed, that I’m afraid I can’t let them pass without a rebuttal. Below is a paragraph-by-paragraph commentary on some of his remarks.

The President:

“Now it’s not that these folks are excited about the idea of paying more taxes, this is something I’ve always made clear, I have yet to meet people who just love taxes. Nobody loves paying taxes. In a perfect world, none of us would have to pay any taxes. We’d have no deficits to pay down and schools and bridges and roads and national defense and caring for our veterans would all happen magically.”


We have no need to pay down deficit-associated debts, since the Treasury can always roll over such debts by issuing and selling new debt instruments. But if the Government does want to pay down the Federal debt subject to the limit, it can certainly do that, under current law, by using the Trillion Dollar coin solution, also known as Proof Platinum Coin Seigniorage (PPCS). Using PPCS is perfectly legal at this time. And if a $60 Trillion coin were minted tomorrow, then that would allow all the debt subject to the limit outstanding right now to be paid as it comes due, and all the debt (about $6.2 Trillion) owed by the Treasury to other agencies of Government including the Federal Reserve within a week.

In addition, it would probably also cover 15 – 20 years of deficit spending yet to be appropriated by Congress. This process of using PPCS can be thought as filling the public purse. And there’s no magic involved in it, just the Mint creating a coin according to law, and then the Fed as the Mint’s bank, crediting the deposit on the coin to the US Mint Public Enterprise Fund (PEF) account. Then, also according to law, the Treasury may “sweep” the Mint’s PEF account for its coin seigniorage profits, by transferring the seigniorage to the Treasury General Account (TGA).

The President:

“We’d all have money we’d need to make investments in the things that help us grow; investments, by the way, that have always been essential to the private sector success as well. They’re not just important in terms of the people that directly benefit from these programs; but historically those investments that we’ve made in infrastructure and education and science and technology and transportation, that’s part of what has made us an economic superpower.”


Again, we already have the capability to generate as much money as we need to use for whatever public investments we need to make to secure the future of the United States. The easiest currently legal way to generate that money is to use PPCS. But, since the constitution allows Congress to create as much money as the US needs to make any investments it deems necessary, Congress can also delegate its constitutional power to create money to the Treasury, by simply moving the Fed under the supervisory authority of the Treasury Department. Of course, doing this won’t affect the exclusive Congressional power over the purse under the Constitution, since the Treasury won’t be able to spend any money it creates unless the spending involved has been appropriated by Congress.

The President:

“And it’d be nice if we didn’t have to pay for them. But this is the real world that we live in. We have real choices and real consequences. Right now we’ve got significant deficits that are going to have to be closed. Right now we have significant needs if we want to continue to grow this economy and compete in this 21st century hypercompetitive, technologically integrated economy.”


Well, Mr. President, in the real world, Governments like the United States with non-convertible currencies, floating exchange rates, and no debts in currencies they can’t create and control, aren’t like individual households, States, Eurozone nations dependent on a foreign currency or corporations. Governments like these can create reserves at will. So, they can never become insolvent, and they can always buy anything that is for sale in their own currency.

Because the US Government can’t become insolvent, it can always pay its debts on time, and it can choose whether to roll over these debts by issuing new debt instruments, or, alternatively, to pay off these debts with newly created reserves. So, whether we “close” our deficits or not is the Government’s choice. From a solvency standpoint it doesn’t matter either way.

That’s the US Government’s real world. That real world does require real choices that have real consequences as the President says. But those choices are about whether the President will acknowledge the real world and use fiscal policy to end the recession, create full employment, Medicare for All, a first class educational system, new energy foundations, a re-invented infrastructure, accelerate technological innovation, and expand and enhance the social safety net to update it for a 21st Century World of unprecedented productivity, or whether he will continue to believe the precepts of deficit hawkism and insist that a Government with a capability to produce as much money as it can possibly need, really needs to get back its own money by taxing or borrowing only.

The real consequences of these alternative choices are not something this President has been willing to face. One choice leads to lost decades and the de-evolution of the US into a third world nation dominated by a small group of kleptocratic oligarchs. The other one leads to the reconstruction of the United States and to the fulfillment of its goal values of liberty and equality of opportunity. The President may be OK with this first choice; but I’m not!

Unless and until the President escapes from his austerity fantasy and sees the reality of our modern money system he will continue to make very bad fiscal choices and to sacrifice the futures of hundreds of millions of Americans on the altar of his neo-liberal old time religion. He needs to end his adherence to the old-time religion, and start learning some post-Keynesian economics, and particularly MMT, with its commitment to full employment at a living wage with price stability.

The President:

“That means we can’t afford to keep spending more money on tax cuts for wealthy Americans who don’t need them and weren’t even asking for them. It’s time we did something about it. I want to emphasize this is not simply an issue of redistributing wealth; that’s what you’ll hear from those who object to a tax plan that is fair.”


There is no problem about affording the tax cuts. We can afford them because we can always make new money for the programs people need.

But there is another and much more important reason why we should end the Bush tax cuts for the rich and even raise marginal tax rates way beyond the rates under the Clinton Administration. That reason is that a democracy needs to re-distribute wealth when it reaches a state of extreme inequality.

Extreme inequality is a critical issue! It is not about envy! It is about justice, fairness, and above all the future of American democracy! In the end, extreme inequality of the kind we have now is a threat to political democracy that we cannot live with for very long.

It gives the few too much say over politics, too much influence over office holders. It undermines one-person one-vote. It makes democracy unstable and threatens its very existence. We. Just. Can’t. Have. That. Extreme wealth and income inequality must end. “A House Divided Cannot Stand!” People must become economically more equal, if our way of life is to survive!

The President:

“This is not just about fairness, this is also about growth. This is also about being able to make the investments that we need to succeed; and it’s about we as a country being willing to pay for those investments and closing our deficits.”


No, Mr. President, the “fiscal responsibility” through austerity you are calling for is really “fiscal irresponsibility.” It is not about growth! (See the results all over Europe.) It is not about the future! It is not about investments! It is about your failure to look at the Government and its impact on the world as it really is, and to see it instead as just another household or business. It is not that, and so we need no austerity!

Instead, we need leaders who are willing to use the fiscal power of the Government to enable the economy to create real wealth. But, right now, you and the other austerity mongers in Congress and among the emerging elite are standing in the way of healing our economy and building our individual and collective futures. Please stop it!