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Rationalization and Obligation, Part IV: Differences Among Options

7:05 am in Uncategorized by letsgetitdone

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(Cross-posted from New Economic Perspectives.)

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Rationalization and Obligation, Part III: Premium Bonds, and Asset Sales

7:34 pm in Uncategorized by letsgetitdone

In Part I of this six-part series I presented the President’s explanation of why he can’t use alternative options for coping with the default threat arising out of refusal to raise the debt ceiling, a summary of the kinds of difficulties characterizing it, and discussed two of seven options, selective default, and the exploding option, the President has to deal with it, apart from the way he seems to have chosen. In Part II I discussed the next three options, platinum coins, 14th amendment, and consols, and commented on the legal issues related to them. Here, in Part III, I’ll cover two options which have started getting attention most recently.

Premium Bonds

6. Premium Bonds (See wigwam’s discussion):

“. . . are those whose interest rates are sufficiently high relative to their principal that they are expected to sell at a premium (i.e., negative discount), bringing their full issue price (principal plus premium) to the Treasury while adding only their principal to the national debt.”

Matt Levine explains the idea in more detail here, and here. But what it amounts to is that the debt subject to the limit is the total face value of all the unredeemed fixed maturity date debt instruments of the United States. So, if the Treasury auctions off a bond and sells it for more than its face value, then it gets enough money to not only roll over debt equal to the face value, but also to pay down additional debt, or deficit spend, as well. But, how can it sell a debt instrument by more than its face value? The answer is to offer interest rates higher than the rates offered for conventional bonds.

How high the rates would need to be, and the duration of the premium bonds offered, would need to be determined by how much in additional funds would be needed to stay under the debt ceiling and spend all appropriations. Levine suggests a “. . . 10-year at a 1.836% yield and the 30 at 3.026%” for example. So, interest rates for the premium bonds would not have to be sky high. Nevertheless, there is a problem with the idea of premium bonds:

”Of course then you’d have to pay the interest! This would be a fairly short-term solution; after a year of doing this you’d be incurring an extra $250+ billion in interest payments that you’d have to fund by issuing ever-higher-coupon Treasuries, leading I suppose to a death spiral. If I were doing this on a tabula rasa I’d probably bump the interest rate a bit at the cost of deferring payments for a year or two, making this a breathing-room rather than permanent solution, but obviously the further you get from regular-Treasury-bond structure the weirder this looks.”

And there is another problem too. The Federal Reserve controls interest rates in the United States by targeting its Federal Funds Rate, which is currently very near zero. This rate in turn influences Treasury offering which are only a bit higher for short-term debt instruments, and progressively higher for longer-term instruments. These rates, in turn, percolate throughout the economy and keep interest burdens where the Fed thinks they should be in the current fragile economy. However, if the Treasury begins to offer securities at much higher interest rates, than this will affect other investments throughout the economy that will have to offer rates higher than Treasury premium rates throughout the economy. In short, premium bonds will undermine Fed monetary policy even as they stave off default.

Kevin Drum also offers some negatives to the premium bonds idea after remarking favorably on it. He hints at legal difficulties and wonders about what a judge would say about it. But he has no real legal objection to this. He also remarks on the confidence issue. I’ll take that up below.

sales of material and cultural assets to the Fed,

7. The last option, sales of material and cultural assets to the Fed, just arose out of a multi-party e-mail exchange about debt ceiling issues. Warren Mosler pointed out:

the coin is about the fed buying an asset from the govt.
they could buy other gov assets as well? national parks? military equipment? spr? etc. etc. any asset sale to the Fed by the gov. works same? legal restrictions?

And L. Randall Wray expanded on the idea and shortly thereafter blogged this piece offering the following proposal, a bit tongue in cheek.

. . . We’ve got museums and national parks shut down. Why not sell them to the Fed? We can find a few trillion dollars of Federal Government assets to sell–and the Treasury can pay down enough debt to postpone hitting the debt limit for years. Heck, if we run out of Parks and Recreation facilities to sell, why not have the Fed start buying up National Defense? How much are our Nukes worth? That should provide enough spending room to keep the Deficit Hawk Republicans and Democrats happy for a decade or two.

This proposal shares with Jack Balkin’s “exploding option” proposal the idea that the Treasury Department can sell assets to the Federal Reserve to raise revenue. I’ve been able to find no prohibition in law that would make this illegal. And, as long as a fair price reflecting likely market value is paid by the Fed, I don’t think such transactions would raise legal problems.

This option is a temporary one. But it might buy enough time for Congress to become Democratic again, whereupon the Democrats could repeal the debt limit legislation, ending debt ceiling crises.

There is a problem with this option relating to who within the Fed system buys Treasury’s assets. The Federal Reserve Board of Governors is a self-funding Federal Agency; but it is nevertheless Federal, so the sale of Government property to it still leaves the assets in the hands of Government. But what happens if the assets are sold to one or more of the regional Fed Banks. These are agents of the Federal Government, but they privately owned. The transfer of Federal assets would surely raise the issue of turnover of federal property to the private sector. Also, if the regional Fed Banks ever sold any of those assets to private organizations that are not agents of the Government, for example, the big banks whose representatives sit on the regional Fed Bank Boards, we would see immediate charges of corruption and private sector looting of Government property. The next post, Part IV, will cover differences among options in their likelihood of having severe legal problems, or seriously undermining loss of public confidence in debt instruments.

(Cross-posted from New Economic Perspectives.)

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Krugman Goes Platinum!

6:42 pm in Uncategorized by letsgetitdone

Another platinum coin surge in the Second Wave rippled through the mainstream media yesterday and this time hit the Congressional Progressive Caucus. Domenico Mantanaro of MSNBC kicked things off on one of the morning shows by mentioning the Trillion Dollar Coin (TDC) as a possible solution to the debt ceiling problem. Then, in the afternoon, on MSNBC’s the cycle, Krystal Ball, and Steve Kornacke, in discussing the coming debt ceiling conflict talked rather matter-of-factly, I thought, about minting some TDCs to get around the debt ceiling.

Then Paul Krugman blogged about platinum coins. In the context of answering a question about whether we can “print money,” to get around the debt ceiling, he answers no, and then says:

The peculiar exception is that clause allowing the Treasury to mint platinum coins in any denomination it chooses. Of course this was intended as a way to issue commemorative coins and stuff, not as a fiscal measure; but at least as I understand it, the letter of the law would allow Treasury to stamp out a platinum coin, say it’s worth a trillion dollars, and deposit it at the Fed — thereby avoiding the need to issue debt.

An admirably brief statement of the basic idea, but followed then by this puzzler:

In reality, to pursue the thought further, the coin really would be as much a Federal debt as the T-bills the Fed owns, since eventually Treasury would want to buy it back. So this is all a gimmick — but since the debt ceiling itself is crazy, allowing Congress to tell the president to spend money then tell him that he can’t raise the money he’s supposed to spend, there’s a pretty good case for using whatever gimmicks come to hand.

So, it’s gimmicks for gimmicks to get around the debt ceiling, and no notion on Paul Krugman’s part that Platinum Coin Seigniorage (PCS) might have a much broader use than simply countering a gimmick the Republicans are using to try to trash the social safety net and drown the Government in a bathtub.

Apart from that, however, this “. . . the coin really would be as much a Federal debt as the T-bills the Fed owns, since eventually Treasury would want to buy it back” is a bit strange. A very high value platinum coin deposited by the Mint in its account at the Fed would have its value credited to the Mint’s account in the form of electronic credits. The Fed would then keep the coin in a vault forever, as an asset on its balance sheet, and the seigniorage profits from the deposit of the coin would be swept into the Treasury General Account (TGA) where it would be used for repaying debt or other spending appropriated by Congress. So why would the Treasury ever want or need to buy that coin back from the Fed? And why would the coin be a Federal debt that the Treasury must repay?

It’s true that base money issued by the Federal Government is a Federal debt in the sense that the Government has an obligation to accept it in payment of taxes. But in this case, the Fed holds the coin and it has no taxes to pay. Also, the coin never goes into circulation, but sits in a Fed vault, so where does a debt that the Treasury must repay come into this picture and why?

Paul Krugman goes on to make a number of comments about the Fed printing money and the need for the Fed to pull that money back by selling its Treasury debt at some future time when the economy is growing rapidly to prevent inflation. But these comments aren’t directly relevant to using PCS, since using it is no more, and perhaps less, inflationary than using debt financing.

The appearance of PCS in Paul Krugman’s blog apparently had an immediate impact. Congressman Jerrold Nadler (D-NY), in an interview reported in Capital New York said: Read the rest of this entry →

Beyond Debt/Deficit Politics: The $60 Trillion Plan for Ending Federal Borrowing and Paying Off the National Debt

7:46 pm in Uncategorized by letsgetitdone

Well, here we are again, House leaders have agreed on a compromise continuing spending resolution at the same level as before from October 2012 through January 2013. It’s likely now that the President(s?) will probably try to make the money available for deficit spending as of today, last through the time period of the continuing resolution so that one deal including both the budget and raising the debt limit can be made by March of 2013. According to the July 31, Daily Treasury Statement, there’s $499,424,000,000 left until the debt ceiling. That’s an average of $62,428,000,000 deficit spending per month for the next 8 months, ending March 31, 2013.

For the past 10 months, average deficit spending was at $114,802.3 Billion per month, and that amount was not enough stimulus for a full recovery. So, the likely 46% reduction in average deficit spending over the next 8 months is unlikely to be any more effective in pulling us out of the extended employment recession we are experiencing, than the deficits in the preceding 10 months were. On the contrary, deficit spending over the next 8 months is unlikely even to allow us to maintain the unemployment levels we have now. So, what ought to be done?

The most important thing that can be done is to change the fiscal context of politics from one of apparent scarcity “justifying” austerity to one where spending capacity is so plentiful, that Congress will be hard-pressed to impose austerity, because its justification in the form of apparent limitations on spending capacity will just seem silly. In the summer of 2011 I proposed a solution to the debt ceiling crisis calling for the minting of a $30 T platinum coin to overcome the problem and also improve the fiscal context for progressive legislation. Now, I want to update that post and apply it to the present political situation, where based on the above events, the next serious fiscal crisis is likely to happen in February and/or March of 2013. So, here’s the update.

The Law and Proof Platinum Coin Seigniorage

Congress provided the authority, in legislation passed in 1996, for the US Mint to create platinum bullion or proof platinum coins with arbitrary fiat face value having no relationship to the value of the platinum used in these coins. These coins are legal tender. So, when the Mint deposits them in its Public Enterprise Fund account at the Fed, the Fed must credit that account with the face value of these coins. This difference between the Mint’s costs in producing the coins and the credit provided by the Fed is the US Mint’s profit. The US code also provides for the Treasury to periodically “sweep” the Mint’s account at the Federal Reserve Bank for profits earned from these coins. Coin seigniorage is just the profits from these coins, which are then booked as miscellaneous receipts (revenue) to the Treasury and go into the Treasury General Account (TGA), narrowing or eliminating the revenue gap between spending and tax revenues. Platinum coins with huge face values, here $1, $2, and $3 Trillion coins have been mentioned, could close the revenue gap entirely in ant fiscal year, and, if used often enough, technically end deficit spending, while still retaining the gap between tax revenues and spending that can produce full employment in an economy like the US’s, with private sector savings and a current account deficit.

Proof Platinum Coin Seigniorage (PPCS) is now frequently and increasingly being mentioned on popular blogs as a possible solution to the debt ceiling crisis. It is one of the two solutions currently being suggested that requires no further legislation from Congress and also no challenge to either the debt ceiling law itself, or to the Congressional prohibition on the Fed extending credit to the Treasury.

However, PPCS is not only a solution to avoid a debt ceiling crisis. It also has the potential to take off the legislative/fiscal table the whole austerity mind set that bedevils our current budgetary process and provides it with a constraining conservative cast focused on narrow monetary costs considerations, rather than a broader progressive framework that weighs the real costs and benefits of proposed fiscal activities of the Federal Government.

PPCS can free the Government from narrow green eye shade concerns and force both Congress and the Executive to evaluate the substance of legislative proposals based on their likely direct impacts and side effects on the lives of Americans, rather than their impact on Federal deficits and surpluses.

Government deficits and surpluses are important in themselves when the supply of Treasury funds is restricted to the amount that can be taxed or borrowed; but they are not intrinsically important when, through using PPCS, the supply of Federal funds is limited only by the President’s or the Treasury Secretary’s orders to the US Mint to use PPCS to fill the public purse without either taxing or borrowing

The PPCS alternative comes in more than one flavor. It’s actually a class of alternatives. Here are some different coin seigniorage proposals.

PPCS Alternatives

First, mint a $1.6 Trillion coin and have Treasury use the profits from it to buy all the outstanding debt instruments held by the Fed. This would retire a substantial part of the national debt and immediately create $1.6 T in “headroom” relative to the debt ceiling. This alternative involves the least amount of change in current procedures. The coin, once deposited at the Fed, would remain in a Fed vault, and would not go into circulation.

The Government would then go right back to issuing debt in order to meet its debt obligations and spend previous Congressional appropriations. With this alternative it is hard for critics to raise the inflation issue, since the new credits created by the coin are never spent into the economy, but are only used to buy back the debt held by the Fed because that debt counts against the debt ceiling. Of course, this proposal is a solution to the debt ceiling problem alone. It would prevent a default crisis caused by anti-government tea party Republicans. But, it wouldn’t do very much to defeat the austerity/deficit hawk mind set in politics.

One objection made to coin seigniorage proposals is that the high face values of the coins would drive up the market price of platinum. However, the Mint is already scheduled to produce 15,000 platinum coins having relatively small arbitrary face value. There would be no conceivable need for more than enough material for 100 very high face value proof platinum coins, and at least one alternative PPCS proposal would require only two coins to implement. So there really is no platinum supply/market price issue.

Having said that, every time the Mint creates a high value coin for deposit at the Fed, it would have to create a duplicate coin, so that it had the means to swap with the Fed if it ever decided to redeem the coin for currency of equal value. This is not a likely event; but it is possible. So, it would be necessary to create duplicate coins. The Fed would place one of the coins in its vault after deposit and the Mint would place the other coin in one of its vaults.

A second proposal is to mint a $6.7 T coin to pay back all debt held by the Fed, and all Intra-governmental debt, including that owed to Social Security, Medicare, and a host of other other agencies. That would create $6.7 T in headroom relative to the debt ceiling, that’s more than enough to carry us through the 2014 elections without breaching the ceiling. Again, this wouldn’t result in any “money” immediately going into circulation, but over time SS and Medicare payments to individuals and organizations would be adding to bank reserves without any reserves being withdrawn from the private sector due to debt issuance. But this isn’t a change from the present situation so it would not add to inflation.

This alternative would render the debt ceiling problem a dead letter for some time to come, and it also might take some of the austerity pressure off. But it probably wouldn’t end the austerity drive, because the deficit hawks would still point to long-term problems in entitlements that would be projected as running up the public debt in future years.

Some might think this alternative would be inflationary, because they believe that net reserves added to the private sector are more inflationary than debt instruments added would be. However, there’s plenty of evidence that debt instruments provide much higher leverage than added reserves, and, in addition, they lead to greater interest payments than reserves do, even if the Fed decides it wants to pay interest on reserves, which it doesn’t always do.

A third proposal for applying coin seigniorage is to mint a coin with face value large enough to cover the $6.7 T intra-governmental and Fed debt repayment, plus all private debt coming to maturity, and all Congressional Appropriations expected to require deficit spending. I’ll estimate, roughly, that a $20 T coin is enough for that, including about $4.0 T to more than close the expected gap between tax revenues and Government spending through the 2014 elections, and the rest for paying down the national debt further. Issuing a coin that large, using the profits from seigniorage, and assuming that Congressional appropriations continue the pattern of the past 2 years or so, that would result in a remaining public debt outstanding of roughly a few trillion dollars in long term debt, which would please the bond markets except for the fact that the US wasn’t issuing any more debt instruments, which would probably make the bond vigilantes scream for those safe harbor debt instruments again.

Again, would this coin seigniorage proposal be inflationary? Well, the intra-governmental and Fed debt repayments won’t be, for reasons already stated. Also, there’s no reason to believe that the repayment of further debt will be, unless one believes, that reserves swapped for bonds, and not swapped again for more bonds, is inflationary. But, other than the interest payments which certainly add to private sector assets somewhat, payback of debt instruments is just an asset swap, followed by destruction of securities. There’s no addition of Net Financial Assets (NFA) to the private sector.

How about the seigniorage profits of $4.0 T set aside for closing the gap between tax revenues and spending during the next two years? Will that be inflationary? Actually, I don’t know if Congress will appropriate a $4.0 T spending/tax revenue gap over the next two years or so, but if such a gap is needed to move towards full employment, and if it does, then the coin profits will cover it without new Federal borrowing. And as long as Congress does the right kind of spending and creates a large enough gap to add sufficiently to private sector assets to support full employment, their appropriations, backed by PPCS won’t be inflationary.

If, also, Congress does the right kind of spending to bring full employment inside a year, then tax revenues will come back as they did during the Clinton Administration, and then there will be no need for all the profits from the proof platinum coin to be used completely between now and 2014. In fact, if the right jobs creating program is immediately enacted, as much as $2T could be left before the President might want the US Mint to strike another proof platinum coin.

So far, I’ve discussed three alternative coin seigniorage proposals ranging in scale from a minimal proposal to handle the current crisis to one that would provide enough funds to both pay down debt, and support a gap between spending and taxes that might be sufficient to enable full employment. Now here’s a fourth, enough to handle even generous Congressional appropriations and deficit spending for at least 15 years, until 2025 and beyond.

Why not mint a $60 T coin and then another one in case the Fed gets obstreperous sometime down the road and presents the $60 T coin, that was deposited in the Mint PEF account, for redemption?

I favor this fourth alternative above all, because it institutionalizes the idea that there is a distinction between appropriations, the Congressional mandate to spend particular amounts on particular goods and services, and the capability to spend the mandated accounts by having the funds (electronic credits) in the public purse (the TGA). In a fiat currency system, the capability always exists if the legislature provides for it under the Constitution. But the value of the $60 T coin, and the profits derived from it, is that it is a concrete reminder of the Government’s continuing ability to buy whatever it needs to meet public purposes. It demonstrates very concretely that the Government cannot run out of money, and that the claim that it can is not a valid reason for rejecting spending that is in accordance with public purpose.

So, in reading what follows, please keep in mind the distinction between the capability to spend more than government collects in taxes, and the appropriations that mandate such spending. The capability is what’s in the public purse, and it is unlimited as long as the Government doesn’t constrain itself from creating credits in its own accounts. With coin seigniorage its capability could be and should be publicly demonstrated by minting the $60 T coin, and getting the profits from depositing it at the Fed transferred to the TGA.

On the other hand, Congressional appropriations, not the size or contents of the purse, but whether the purse strings are open or not, determines what will be spent and what will simply sit in the purse for use at a later time. So there is a very important distinction between the purse and the purse strings. The President can legally use coin seigniorage to fill the purse, but only Congress can open the purse strings through its appropriations.

This fourth alternative is the one that best solves both the debt ceiling problem and the problem of taking austerity, justified by “we’re running out of money,” off the table. The debt ceiling would no longer be an issue if the Treasury immediately paid off $6.7 T in Fed and intra-governmental debt, and was poised, with the money in its account, to pay off the rest of the debt subject to the limit as it falls due. Nor would there be any justification for austerity policies if the Treasury had a public purse with $44 T of unearmarked funds in it to cover future deficit spending.

At that point we’d be free to seriously debate: 1) full payroll tax cuts for both employers and employees until full employment is reached; 2) revenue sharing payments to the States of $1,000 per person to save and restore State government employment to pre-crisis levels; 3) creating a Federal Job Guarantee program which would guarantee a job offer at a living wage with full fringe benefits to anyone seeking full time work; 4) passing HR 676, John Conyers enhanced Medicare for All bill; 5) public education reforms to create a world class educational system open to all, from preschool to graduate school; 6) passing an infrastructure program re-creating the energy foundations of the United States and rapidly eliminating dependence on fossil fuels; 7) passing new legislation stopping human-created climate change; and passing a $3 Trillion infrastructure program for renewing the US’s infrastructure.

This brings us again to inflation. I’ve already pointed out that repaying the debt won’t be inflationary. So, the inflation issue then focuses on the $44 T in seigniorage profits in the TGA that would be used to cover gaps between Federal spending and tax revenues in the years following minting the $60 T coin. How much of that is spent ,and when, will depend on what Congress appropriates. To avoid demand-pull inflation, the kind caused by Government deficit spending, Congress must not spend more than is needed to create the aggregate demand necessary for full employment.

How much that is will depend on the savings and import desires of the American people. Right now, desired savings seems to be at the level of 6% of GDP, while import desires greater than export amounts seem to be at roughly 4% of GDP. So, roughly speaking that tells us that a full employment budget should involve a deficit of $1.6 T or 10% of GDP, give or take a few hundred billion depending on the fiscal multipliers associated with the specific government spending involved. As long as deficit spending is within those limits demand-pull inflation will not occur.

This doesn’t mean that cost-push inflation caused by supply problems, or monopolistic activities, or other supply bottlenecks won’t happen. But these won’t be caused by excessive government deficit spending, and can’t be cured by backing off such spending or by raising taxes. They have to be treated in other ways. The best discussion of the relationship between coin seigniorage and inflation has been provided by Scott Fullwiler.

The Speech

If the President decided to rise above the debt ceiling controversy, safeguard the social safety net, and do something really, really important from the perspective of history by using $60 T coin seigniorage to short circuit the upcoming fights over the debt ceiling and the budget, say in January, or better still during the lame duck, then there would be a spectacular uproar in the Congress and the Press over what he had done. All kinds of overblown and downright crazy claims would be made because the President’s action would shock people, everyone would have a tough time getting their minds around it, and the media would report on what was going on in a very sensationalist way using stereotypes created by the neo-liberal perspective that journalist at places like the WaPo, NYT, and CNN are superficially well-schooled in. Places like CNBC and Fox would be absolutely foaming at the mouth in response to something like this, and Timmy Geithner might very well resign over it, as might Ben Bernanke, since he’d be forced to have the Fed credit the coin.

There would also be an immediate move in Congress to repeal the 1996 law that enabled the President’s action. This would fail however, because even if it got through the Congress, the President would simply veto it. The opposition couldn’t possibly get the 2/3 vote necessary to override the veto. Even if by some miracle, repeal got through, however, it would be too late. The coin would have done its work and the $60 T would be in the TGA, a fait accompli, and a vivid demonstration that the government can create as much money as it wants, and can only run out of money by choice.

However, the President would then have to defend himself with a political campaign aimed at persuading the public that his move was a bold and liberating move and the first step in finally getting out of this protracted economic depression. And yes, he should use the D-word, whatever the Republicans and the so-called “fact-checkers” say about it in that campaign. And he should also begin the campaign by explaining to the public the issuance and deposit of the first $60 T coin in a high profile TV address, this way (the second coin just stays at the Mint for safekeeping. Its existence to be kept secret). Here’s the speech.

My Fellow Americans:

1) Until now the Treasury has been borrowing the money the Government created back from the private sector, in order to cover our deficit spending, so the national debt has been steadily growing.

2) That’s silly! According to the Constitution, this Government, of the people, by the people, and for the people, is the ultimate source of all US money. So why should we ever borrow US money back and pay interest on it, since we can create it any time by the authority of the Constitution and Congress?

3) Congress has also imposed a debt ceiling, so, if and when we reach it, we can’t borrow back our own money without Congressional approval, anyway, and lately Congress has been using the need to raise the debt ceiling as an excuse to extort cuts in safety net and discretionary programs that the majority of Americans oppose.

4) So, on my order, and in accordance with legislation passed by Congress in 1996, and with the US Code, the US Mint has issued $60 Trillion using a single 1 oz. platinum coin, and deposited it at the NY Fed. It’s legal tender, so the Fed credited the Mint’s Public Enterprise Fund (PEF) account with $60 Trillion in USD credits using its unlimited authority from Congress to create US Dollars.

5) This is not inflationary because the Fed will put our coin into its vault, and keep it there permanently out of circulation, and the Treasury will use the $60 T in USD credits only to pay back debt and to spend what Congress has already approved, which is only a small fraction of these credits and far from the amount needed to cause inflation.

6) My action ends any possibility of a debt ceiling crisis in February or March, because we have no further need to borrow our own money back in the markets, and that’s why we don’t need the tea party or other Republicans, or even my fellow Democrats to agree to raise the debt ceiling any more.

7) Now the Treasury, has plenty of money, much more than we need, in fact, to pay for all appropriations Congress has already approved for 2013, and may approve in March, including all deficit spending and, again, we won’t have to borrow our own money back, either to repay debts or to implement future deficit spending.

8) So we will pay all Government debts which will come due in 2012 and 2013. Treasury securities and all other debts included. We will also pay back all debts held by other agencies of Government and the Federal Reserve. When we do this we will lower the national debt by about $12 T, reducing the “debt burden” by about 75% by the end of 2013, and creating an actual Social Security trust fund with 2.7 T in cash reserves in it; and again, to do this we don’t have to borrow our own money back, and we will also reduce our interest costs on the outstanding national debt all through the remainder of 2012, continuing through 2013, 2014, and beyond until it is all paid off.

9) None of the $60 T in new credits created by our actions is “money” in the private sector economy until the Treasury spends it. For now it is just capability to spend awaiting the appropriations of Congress to mandate deficit spending, should it need to compensate for the reduction in demand, probably close to 10% of GDP right now, caused by your own desire to save (which we want to do our best to facilitate), and your desire to import goods from foreign nations.

10) We have created $60 Trillion in new credits even though we probably needed less than that to cover anticipated deficit spending and debt repayment until 2027. The reason for this, is that I wanted to have enough capability created in the Treasury account, so that the national debt could be completely paid off (except for a small amount in very long-term Treasury debt still not mature by 2027), and all projected Federal deficits covered over the next 15 years, even extraordinary deficit spending needed to be performed without further borrowing over this period.

11) Of course, we can always make new coins if our projections about future deficits turn out to be wrong; but I thought it would be best to ensure that all $16 T plus of the “debt burden” can be completely eliminated from our political concerns; and also to provide enough funds in our spending account at the Fed, so that it would be very clear to Congress and all newly elected Representatives and Senators, that even though they, as required by the Constitution, continue to control the purse strings, the national purse is very, very full, and that we would be able to cover from the Treasury Account whatever deficit spending for the public purpose, including for full employment, Medicare for All, infrastructure, education, and other things, that Congress, in its wisdom, chooses to appropriate now, before the next election, and for some elections to come.

Good night, my fellow Americans! Rest well knowing that our beloved country won’t be defaulting on any of its debts when the debt ceiling is reached in February or March, and that I’ve prevented this without going over the legal debt ceiling or borrowing any more, by providing money for spending mandated appropriations, in compliance with the laws authorizing coin seigniorage, while supporting the Constitution’s prohibition against our Government ever defaulting on its debts. I hope that in the future everyone will obey the 14th Amendment’s prohibition against questioning the validity of Federal Government debts, and think twice before they indulge themselves in loose talk about the possibility of the Federal Government defaulting on its obligations.

America will always pay its debts in US Dollars according to the terms of the contracts it has concluded, and in line with the pension payments and other obligations that it owes. Neither you, nor the rest of the world need ever doubt that again! Nor need you ever think that our Government is running out of money for the things we must do. We can never run short of money unless Congress refuses voluntarily, to use its unlimited constitutional authority to make more of it. But as long as it delegates to me the authority to create high value bullion and proof platinum coins to cover our needs, you can be sure that running out of US money will never happen!

(Cross-posted from Correntewire.com.

We’re No. 24! We’re No. 24!

7:37 pm in Uncategorized by letsgetitdone

We keep hearing bad news about where the US stands on various social and economic indicators. The US’s ranking in math capability is 27th in the world. Our health care system is ranked 37th. Our 2011 life expectancy is 51st in the world. Our estimated 2012 infant mortality rate is 49th in the world. So we’re pretty far down in a number of international statistical comparisons of performance. Some here point to better performance on economic indicators. For example, GDP per capita is often cited as an area where the US performs much better. But even here the latest CIA world handbook estimate shows the US ranked 19th on this measure at $48,400.

It gets even worse if you take a look at the recent Credit Suisse Global Wealth Databook 2011. Dylan Matthews, writing on Ezra Klein’s Wonkblog, did that on July 18th in a blog entitled “Are Canadians Richer Than Americans?” Matthews says yes, based on the Credit Suisse data on 2011 Median Wealth per Adult, and he goes on to also point out that:

”So not only does Canada beat the United States on median net worth. Just about every developed country save Sweden and Denmark does. The UK, Japan, Italy (!) and Australia more than double the U.S. Median.”

This important conclusion of Matthews gets a bit lost in the post’s central focus on a US/Canada comparison and his attempt to answer his lede question. A few days later, wigwam posted at MyFDL blogging on the Matthews piece, and presenting a table wigwam developed from the graphic used in the Matthews piece.

Wigwam’s numbers are approximate because he developed his table, from Matthews’s graphic, but his emphasis on the context of where the US stands relative to other nations is much greater than in Matthews’s post, and he also ties it into other issues such as foreign aid to Israel, the 99% vs. the 1%, and rising poverty in the United States. Wigwam’s money lines are:

“This is a chart that I’m going to show when Mitt Romney fans talk about “what makes American exceptional.” It vividly documents how badly America’s 99% are being screwed by its 1%. We’re a wealthy nation only when you count the trillions controlled by the 1% but not so wealthy when you look at the net worth of the median household.”

So, that’s what got me looking at the Credit Suisse Report. When I did, I found that Matthews had truncated the Credit Suisse data, and that in doing so he had missed some important aspects of US economic performance compared to other nations when viewed from the perspective of a “middle” US economic position. Wigwam, as well, in basing his post on Matthews’s, also reflects the same problems.

Specifically, Matthews and wigwam both included only 19 nations in their analyses, and ranked the US 17th out of 19th. In addition, in approximating the numbers in his table he departed a good bit from the actual median wealth per adult numbers in a number of cases. Here’s a chart that includes the first 36 ranks in the Credit Suisse data.

2011 Median Wealth per Adult

I’ve included more than Rank, Nation, and 2011 Median Wealth per Adult in the chart. There’s also, Credit Suisse’s data on 2011 Mean Wealth per Adult and values I’ve computed giving the ratio of the mean to the median. I’ve included the last measure because I think the ratio is revealing as a measure of inequality in each of the nations. The Credit Suisse Databook does give the GINI index which is a better measure of inequality than the ratio I’ve used here, from a strict social science point of view; but I don’t think it’s as intuitive as the ratio of the mean to the median.

Looking at the results, you can see that the United States isn’t 17th on Median Wealth per Adult, it’s 24th. Now Luxembourg, Belgium, Iceland, Singapore, Austria, Qatar, and Kuwait, are all also ahead of the US in median Wealth. The “median person” is more than three times as wealthy in Luxembourg, more than two-and-a-half times as wealthy in Belgium, and more than twice as wealthy in Iceland and Singapore than in the US. Among nations that were included in the original WaPo and MyFDL comparisons, the “median Australian” is nearly 4.5 times as wealthy as the “median American; the “median Italian” is three times as wealthy. Japan and the UK have medians in the neighborhood of 2.5 times the US median, while Switzerland and Ireland have medians in the range of double the US number.

In short, the comparison with 36 nations included, shows that the US stands even worse, relatively speaking, than in the 19 nation comparison. The numbers show that many nations with recent and current severe banking/financial problems still have median wealth numbers that greatly exceed ours.

These include: Italy, Belgium, Iceland, Ireland, and Spain. The first four show more than double the median wealth of US adults and the last has a 40% greater median wealth figure. The US Fed is being called upon to use US nominal financial resources “created out of thin air” to bail out the financial systems of these nations, and will probably continue to provide such backing to “save the financial system.” The irony of our doing that when we refuse to use vigorous fiscal policy to help our own middle and working class people to remain employed, get new jobs, and work for a living wage, is another of those outrages to our democracy we experience every day.

The mean-to-median ratio numbers are also interesting to say the least. Nations with a ratio under 2.00 include Australia, Luxembourg, Italy, Japan, Ireland, Spain, Malta, Slovenia, Brunei, and the Bahamas. A majority of nations have ratios between 2.00 and 3.00. Nations over 3.00 include: Switzerland (5.35), France (3.25), Norway (4.07), Israel (3.25), Germany (3.49), the US (4.71), Sweden (6.56), China (4.88), and Denmark (9.30). So, the US is among the most unequal nations in the world on this measure. Among the nations that exceed it in inequality, the numbers for Sweden and Denmark may be statistical artifacts. The World Bank Gini number for Denmark is 24.9 and for Sweden is right behind at 25 with Norway coming in at 26, while the Gini is 41 for both the US and China, and 34 for Switzerland. This suggests that there may be something about the way welfare state transfer payments are accounted for that doesn’t get into the Credit Suisse Median Wealth per Adult statistics. Wigwam suggests:

“One of the anomalies in this data is that personal retirement plans (e.g., IRAs) usually count toward “net worth,” while general retirement plans (e.g., a public employee’s defined-benefit plan and/or Social Security) don’t. I’m told that Sweden and Denmark have excellent plans that take care of the elderly. Not only don’t those plans count toward their citizens’ “net worth,” but the excellent quality of those plans encourage their citizens not to save. If you had super-excellent government coverage to care for you in your elder years, would you set aside as much as the typical American? My point is that the median American is really at the bottom of this graph.”

Finally, I think the Credit Suisse Report gives the best picture yet of the failure of the US political/economic system to progress as rapidly as the systems in other modern nations. The jingoistic beating of our chests, insisting that the US is “the richest nation in the world”, with an unequaled political/economic system, just doesn’t square with reality. It may make a great many Americans feel good. But it’s not true and it doesn’t help us to face and adapt to our circumstances. In the end “all life is problem solving;” and you can’t keep on living well if you won’t recognize and then solve your problems.

Our system hasn’t produced the advantages for most Americans that other systems have produced for the citizens of their nations. How long will we continue to deny this in the face of mountains of cross-national data, and instead insist that our way is best? It may be best for 1% of us, but for the overwhelming majority, it is close to the worst among advanced modern industrial nations. Other nations produce better health for their citizens, healthier children and seniors, better education for their citizens, better work lives, less stress, more happiness, low cost universities. You name it; they’ve got it!

What we’ve got, instead, is an ideology about the free market that works for very few of us and makes the rest us less free, less wealthy, less secure, and less happy, as time goes on. Our economic system isn’t delivering for us. Our political system isn’t delivering for us either, it’s corrupt through and through, and our leaders won’t prosecute the rampant control fraud in the financial sector. And, finally, all we get from our representatives is excuses and rationalizations about why we can’t adapt to the changes, we, ourselves, had a great part in bringing to the world.

So, what can we do about it? I’m afraid this post isn’t about that. But, I think what we have to do is to create a new web-based Information Technology platform we can use to create a meta-layer of political activity that will take control of the major parties and either make our representatives accountable to the 99%, or replace them with new people who will be responsive to them. I’ve written about this a number of times previously. See here, here, and here, for example; and yes, it can’t be done in time for the 2012 election. Sorry about that, but what we have to do can’t be done in three months, and we should have started doing it three years ago if we wanted to be ready now.

(Cross-posted from Correntewire.com)

What If a Debt Limit Extension is Voted Down?

10:14 pm in Uncategorized by letsgetitdone

(Thanks to DailyKos commenter 2laneIA for suggesting this post and the title)

It’s only a few days now until August 2nd. Perhaps a compromise on lifting the debt ceiling will be reached before then. Perhaps none will be reached. Perhaps the President will veto a compromise if it doesn’t extend the ceiling sufficiently to support deficit spending until after the 2012 elections. If a debt ceiling extension is voted down, or if the President vetos an unacceptably small extension, then what is to be done? I’ve now run into six primary options the President can select among to avoid default. The six are:

– Challenging the debt ceiling based on the 14th Amendment Section 4
– Selective default
– Proof Platinum Coin Seigniorage (PPCS)
– Running an overdraft at the Fed
– The Fed burning its Treasury Bonds
– The “exploding option” plan

Let’s look at them in more detail.

1. The 14th Amendment option

This option is the most well-known one right now, having been discussed on the web at least since last Fall.

The 14th Amendment to the Constitution says in part:

“Section 4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. . . . ”

People, including myself, have claimed that the debt ceiling is in conflict with the 14th Amendment and is therefore unconstitutional, and have called for the President to go ahead and issue more debt and wait for a legal challenge. That challenge may never come, because the House of Representatives alone will lack standing in the Supreme Court. In an article appearing today, at CNN, Jack Balkin offers an argument interweaving legal and political considerations, points out that the President would first have prioritize repayment of debt to conform to the Amendment, which might cause an inability to make Social Security payments fully and on time, creating great political pressure on Congress to pass a clean extension of the debt ceiling.

I’m not sure this analysis is entirely correct, since it may be possible for the Social Security Trustees to go to the Treasury with its Bonds, demanding payment for them so that Social Security payments can be made. Since the bonds are debt, and actually count against the debt ceiling, the President may not be able to hold up the payments. In any event, Professor Balkin continue his argument with:

Assume, however, that even a prolonged government shutdown does not move Congress to act. Eventually paying only interest and vested obligations will prove unsustainable — first because tax revenues will decrease as the economy sours, and second, because holders of government debt will conclude that a government that cannot act in a crisis is not trustworthy.

If the President reasonably believes that the public debt will be put in question for either reason, Section 4 comes into play once again. His predicament is caused by the combination of statutes that authorize and limit what he can do: He must pay appropriated monies, but he may not print new currency and he may not float new debt. If this combination of contradictory commands would cause him to violate Section 4, then he has a constitutional duty to treat at least one of the laws as unconstitutional as applied to the current circumstances.

This would be like a statute that ordered the president to hire 50 new employees provided that none of them is a woman. The second requirement violates the Constitution, so the president can hire the 50 employees and ignore the discriminatory provision.

Here the president would argue that existing appropriations plus the debt ceiling create an unconstitutional combination of commands. Therefore he chooses to obey the appropriations bill — which was passed later in time anyway — and ignores the debt ceiling. He orders the secretary of the Treasury to issue new debt sufficient to pay the government’s bills as they come due.

I’m not at all sure that the President will have to wait for a prolonged Government shutdown, to invoke the 14th Amendment: but whether he waits or invokes it on August 3rd, I think Balkin’s argument is too narrow in focusing only on the possibility that the President may invoke the 14th against the debt ceiling. Perhaps, for example, as my friend Beowulf suggests (in e-mail corrspondence), he could make “a flanking attack” on the Congressional limitation of $300,000,000 on Treasury printing US Notes? This limitation is older than either the debt ceiling legislation, or the current appropriations bill, and if he did challenge it successfully, then the Treasury would have its unrestricted power to create currency restored, a very powerful hedge against debt ceiling legislation, and an enabler for ceasing to issue debt at all.

2. Selective Default

The second option, is the Treasury declaring a selective default only on Federal Reserve-owned debt instruments in order to wipe these off the books, and create headroom relative to the debt ceiling. This is clearly an extra-legal procedure. The Federal Reserve Board of Governors is a Government agency; but those bonds are owned by the Fed Regional Banks, which in our system, are not Government agencies, but rather privately owned “Federal instrumentalities.” Here’s wikipedia:

“The Federal Reserve Banks have an intermediate legal status, with some features of private corporations and some features of public federal agencies. The United States has an interest in the Federal Reserve Banks as tax-exempt federally-created instrumentalities whose profits belong to the federal government, but this interest is not proprietary.[74] In Lewis v. United States,[75] the United States Court of Appeals for the Ninth Circuit stated that: “The Reserve Banks are not federal instrumentalities for purposes of the FTCA [the Federal Tort Claims Act], but are independent, privately owned and locally controlled corporations.” The opinion went on to say, however, that: “The Reserve Banks have properly been held to be federal instrumentalities for some purposes.” Another relevant decision is Scott v. Federal Reserve Bank of Kansas City,[74] in which the distinction is made between Federal Reserve Banks, which are federally-created instrumentalities, and the Board of Governors, which is a federal agency.”

Since the Bonds held by the Fed are held by the regional banks, this second option would involve a major hit to the assets of these banks and also an operating loss. It would involve not just questioning, but also denying a debt of the United States, and would therefore violate the 14th Amendment.

3. Proof Platinum Coin Seigniorage

Congress provided the authority, in legislation passed in October 1996, for the US Mint to create platinum bullion or proof platinum coins with arbitrary fiat face value having no relationship to the value of the platinum used in these coins. These coins are legal tender. So, when the Mint deposits them in its Public Enterprise Fund account at the Fed, the Fed must credit that account with the face value of these coins. This difference between the Mint’s costs in producing the coins and the credit provided by the Fed is the US Mint’s profit. The US code also provides for the Treasury to periodically “sweep” the Mint’s account at the Federal Reserve Bank for profits earned from these coins. Coin seigniorage is just the profits from these coins, which are then booked as miscellaneous receipts (revenue) to the Treasury and go into the Treasury General Account (TGA), narrowing the revenue gap between spending and tax revenues. Platinum coins with huge face values, $1, $1.6, $2, $3, $6.2, $15, and $30 Trillion coins have been mentioned, could close the revenue gap entirely, and, if used often enough, technically end deficit spending, while still retaining the gap between tax revenues and spending.

4. Running an Overdraft at the Fed

This option suddenly got some press this week as people begin to cast about for a solution. John Carney at CNBC says that overdrafts are more like “gifts” from the Fed than they are the kind of debt instruments the Fed is prohibited from buying from the Treasury, and that’s the gist of his argument. The problem with this argument, also quickly echoed by Felix Salmon is outlined by my friend Marshall Auerback in correspondence this way:

In the past, Treasury had access to both a cash and securities draw authority (hat tip, Cullen Roche of “Pragmatic Capitalism”). Intermittently between 1942 and 1981, Treasury was able to directly sell (and purchase) certain short-term obligations to (and from) the Federal Reserve in exchange for cash. Congress first granted this cash draw authority temporarily in 1942:

1. allowed it to lapse several times, and extended it 22 times until 1979, when it modified some of the terms and added controls.

2. In 1979, Congress also authorized a securities draw authority, which permitted Treasury to borrow securities from the Federal Reserve, sell them, and then repurchase the securities in the open market and return the securities to the Federal Reserve within a specified period.

3. The securities draw authority was never used. After Congress authorized Treasury to earn interest on its Treasury Tax & Loan (TT&L) account balances in 1977,

Congress allowed both draw authorities to expire in 1981.

That Congress allowed them to lapse would imply that it’s no longer operative . . .

In short, in 1981, Congress ended the Treasury’s drawing authority by allowing it to expire.

5. The Fed “Burning” its Treasury Bonds to Get Them off the Books

Ron Paul suggested this one. If the Fed agreed to the proposal, it would create at lead $1.6 Trillion in headroom between debt subject to the limit, and the debt limit. The proposal hasn’t been met with notable enthusiasm. In fact, I don’t think the Chairman has even dignified it with a reply. However, the objection to it is similar to the objection to Treasury declaring a default on its Fed-owned debt. The result would be a big whole in the Assets of the Fed Banks owning the debt instruments. They’re unlikely to support this proposal.

6. The “Exploding Option”

Jack Balkin presents the “exploding option” idea this way:

The government can also raise money through sales: For example, it could sell the Federal Reserve an option to purchase government property for $2 trillion. The Fed would then credit the proceeds to the government’s checking account. Once Congress lifts the debt ceiling, the president could buy back the option for a dollar, or the option could simply expire in 90 days. And there are probably other ways that the Fed could achieve a similar result, by analogy to its actions during the 2008 financial crisis, when it made huge loans and purchases to bail out the financial sector.

As near as I can make out, the idea here is for the Fed to pay for an option on the property, that it would not then exercise by some date certain. When the option expires, the Government, having an increase in the debt ceiling by then, would pay back the Fed, give it a small profit, and keep the property.

Presumably, this could be done indefinitely, if Congress has still failed to raise the debt ceiling by the end of the option period, or the option period could be made long enough that it is very improbable that the debt ceiling would not be raised. The “exploding option” idea is undoubtedly ingenious; but:

– I wonder whether the option isn’t functionally a debt instrument, and also whether
– the option isn’t being “monetized” by the Fed in complete analogy to the monetization of debt instruments that is expressly prohibited by Congress?

Comparison of the Options

From my point of view, selective default and the fed burning its bonds are both far out options. I just don’t think the accounting rules governing the Fed would allow it to approve procedures that resulted in huge losses for the Fed regional banks. The Fed would never agree to such alternatives.

The overdraft and “exploding option” alternatives are likely to be much more acceptable to the Fed than options that destroy the financial assets of regional banks. However, both of these options are a bit legally questionable. As I said above, the overdraft procedure appears to have been ended by Congress in 1981, when it had every opportunity to renew the Fed’s drawing authority.

Felix Salmon is taken with the Fed allowing overdrafts. He thinks this solution is a realy elegant one because it would allow Treasury to keep on spending until it could arrive at a new debt ceiling. He also thinks that the Fed would have to honor Treasury checks by allowing an overdraft because if it didn’t do so, that would “trigger a massive recession” and violate the Fed’s full employment mandate.

I find this unconvincing because the Fed has been violating its full employment mandate since passage of the Humphrey-Hawkins during the 1970s. It has always taken its price stabilization mandate much more seriously than its full employment mandate. So, I think that the Fed may not honor Government overdrafts, because Government special drawing authority was ended in 1981.

The “exploding option” alternative is certainly inventive. However, if I understand it correctly, it’s a transparent artifice for allowing monetization of the functional equivalent of federal debt instruments. So, I think it’s legality is questionable, and that the President should be careful before he resorts to it.

In fact, the first four options being compared all propose procedures of questionable legality. All might turn out to be politically feasible, because the House Republicans may not be able to get standing to challenge the President. Nevertheless, if many representatives feel that the President’s solution to the debt ceiling problem is of questionable legality, and they also find themselves unable to get standing in Court, they may well feel justified in pursuing impeachment. They won’t get far, because the Senate will never sustain them; but nevertheless another impeachment circus is likely to be very costly for an Administration that wants somehow to improve the jobless rate before the elections of 2012.

This brings us to the Constitutional option. This is a legally fascinating option especially since the President might challenge the debt ceiling or other legislation such as the limits on Treasury printing money, or the legislation withdrawing the Treasury’s overdraft authority; It’s also a politically attractive option, because it makes the President look strong, relative to the House Republicans. It’s also interesting because if he issues a constitutional challenge and goes on issuing debt, it’s very doubtful that the House Republicans will have a practical legal route to contest what he’s done. On the other hand, as with some of the other options, their very inability to get redress from the law may goad them into attempting to impeach the President, and I suspect that the Administration would want to avoid that outcome, with all its distractions.

Coin seigniorage isn’t some crazy or radical idea, even though some who want to be considered Very Serious People (VSP) have had that kind of reaction to the idea. Instead, it is a legal instrument that the President may, depending on how things work out, have to use in a bit more than two weeks to comply with his oath of office. It may be the only way for him to avoid breaching one of the laws which he is supposed to enforce. As such, it has to be taken seriously, and treated with more than just a few dismissive conclusions, accompanied by a lack of explanation.

Many writers on the current debt ceiling crisis have been taking the view that the 14th Amendment constitutional challenge route is the best thing for the President to do if there is no agreement on the debt ceiling. But, a constitutional challenge requires violating the debt ceiling, or some other legislation, claiming that the chosen law is unconstitutional, and relying heavily on the House’s inability to have standing to take the President to Court in order to sustain the President’s action. The President may get away with this, but it is radical in the sense that it claims the Executive’s right to make a unilateral judgment of constitutionality in opposition to clearly written legislation, without getting a by your leave from the Supreme Court. Surely we can all see how dangerously radical this kind of practice is for the rule of law in the United States?

In other posts, I’ve made the case that the debt ceiling isn’t in violation of the 14th Amendment as long as PPCS is an option for the President. Also in an e-mail communication, beowulf, the blogger who wrote the seminal blog on coin seigniorage, offered the following opinion on why a 14th amendment-based challenge will not work, given the existence of PPCS.

. . . No federal judge — Supreme Court justices included — will take the extraordinary step of enjoining an Act of Congress if the President who asks them to had an opportunity to sidestep the constitutional issue lawfully but neglected to do so. . . . .

. . . The moral of the story is if the Court thinks there is no alternative to breaching the debt ceiling, it probably would find it unconstitutional (or rather, it would decline to hear the case on Standing grounds, leaving the President’s decision to ignore the debt ceiling in place). On the other hand, if the Court thinks the President had a lawful alternative– like coin seigniorage– but neglected to use it, they’re not going to bail him out.

This argument is compelling to me given the history of the Court. The Court defers to the legislature if it possibly can, and prefers the President to avoid constitutional challenges if he has a means of doing so. In this case, he does, and the means is proof platinum coin seigniorage.

(Cross-posted from Correntewire.com.

The President’s Address on the Debt Ceiling: An Exercise in Fantasy

7:24 pm in Uncategorized by letsgetitdone

Many people have been, deservedly, very quick to jump on John Boehner for the lies he told in answering the President’s Address; but they have been a lot less anxious to lay out the lies or at least falsehoods told or implied by the President, himself. I don’t intend to excuse the Speaker’s lies or the Speaker, by showing that the President doesn’t have clean hands. I don’t intend to say that lying is alright because everybody does it. All I want to do is show that the President was feeding us fantasy too, because I believe, strongly, that we won’t solve our national problems if we don’t firmly reject fantasy, whoever may be its author. So, let’s look at some quotations from the President’s speech, and see where the fantasy is.

“For the last decade, we’ve spent more money than we take in. In the year 2000, the government had a budget surplus. But instead of using it to pay off our debt, the money was spent on trillions of dollars in new tax cuts, while two wars and an expensive prescription drug program were simply added to our nation’s credit card.”

No. Mr. President, during the years the Government had a budget surplus, the Government simply borrowed less than it did in other years, and also less than it paid back when its debt instruments came due. So, the Government did use its surpluses to “pay back” part of the debt during the years of surplus, and no money was saved for future years when it was then spent on new tax cuts, new wars, and the drug prescription program.

As for the “our nation’s credit card” business, the Government’s “credit card” situation is very different from our own. First, the limit on the Government’s ability to issue debt is not based on the Government’s ability to borrow, or on the Government’s ability to generate financial assets, which, aside from Congressional constraints, is constitutionally unlimited. Nor is the limit imposed by any creditor, as it is with us.

Instead, the limit on what the Government can borrow is determined by the Government itself. Specifically, it is determined by Congress which imposes the debt ceiling, now causing a fiscal crisis. Without that ceiling, that self-imposed constraint, the limit on what the Government can borrow in US Dollars is indeterminate, if it exists at all.

Second, you and I can’t keep adding debt to our credit cards, not only because we have a limit, but long before we reach such limits, we may well want to stop adding debt, because our ability to maintain and pay off our debt burden, may be running out. That ability is limited because we can’t produce financial resources at will.

The Government is different however. It is not like a household or even the largest corporation. It is not the user of our national currency. It is the creator of it. All of our dollars come from the authority of the Government to spend, and, in the act of spending to create dollars.

If the Government has debt, it can always pay that debt simply by marking up the accounts of its creditors. Also, unlike your household or mine, it doesn’t matter how much is on the Government’s credit card, it can always repay its debts whenever they come due, unless Congress does something stupid to stop it from doing so.

In fact, its own constraints aside for a moment, the Government has precisely the same ability to repay its debts, however high those debts are, and however high its debt-to-GDP ratio is, so long as those debts are owed in the currency (USD) it has the authority to create. It doesn’t matter whether the Government owes $14.3 Trillion, or $30 Trillion, or only $50,000. Its ability to pay, self-constraints aside, is exactly the same. It doesn’t matter if its debt-to-GDP ratio is 10% or 100% or 300%, it’s ability to meet its debt obligations is exactly the same, if it only decides to shed its self-constraints.

So, when President Obama says or implies that we can’t keep putting debt on our national credit card what is he really talking about? He’s not talking about the Government’s intrinsic ability to pay or not. What he’s talking about is that Congress has 1) placed a debt ceiling on the Executive Branch’s ability to borrow, and 2) passed a mandate requiring the Government to issue debt when it deficit spends. These are Congress’s constraints on the Treasury and they are causing our current so-called fiscal crisis, assuming the President’s continued unwillingness to raise revenue for deficit spending other than by issuing more debt.

The austerity mavens, including the President are telling us that we, the people, have spent too much and run up debts that are too large on our national credit card when Congress has a) required us to use our credit card and, as a result, maintain and increase our national debt, and then b) given us a ceiling of debt which they raise from time-to-time, which has nothing to do with our Government’s ability to pay. How unjust is it to create this Catch-22, claim there is an objective problem with a national debt that only exists due to their own restraints, and then say to us, after they’ve just finished extending the Bush Tax Cuts for the rich and providing an estate tax giveaway, that this phony fiscal crisis requires that everyone (except the rich, of course) accept “shared sacrifice”?

It is not true that we can’t keep placing debt on our national credit card, so long as Congress removes its arbitrary and unnecessary debt ceiling. If it does that we can keep placing debt on that credit card if we want to without threatening our solvency as a nation.

It is also not true that we must keep issuing debt instruments and keep increasing the national debt when we want to deficit spend, because of some intrinsic feature of the economic system. As I’ve written in many recent posts, we can generate all the revenue we need by using proof platinum coin seigniorage, including the revenue we need to pay the national debt entirely, as US debt instruments fall due.

In connection with his reconstruction of how the nation came to this pass Mr. Obama said that as a result of the tax cuts, wars, and the prescription drug plan:

“. . . . the deficit was on track to top $1 trillion the year I took office.”

But this anticipated deficit was not due simply to these factors. Most of the anticipated $1 Trillion deficit was due to the loss of tax revenues accompanying the Crash of 2008. If not for the recession, the tax cuts, wars, and prescription drug costs would not have produced a deficit of this size.

“To make matters worse, the recession meant that there was less money coming in, and it required us to spend even more -– on tax cuts for middle-class families to spur the economy; on unemployment insurance; on aid to states so we could prevent more teachers and firefighters and police officers from being laid off. These emergency steps also added to the deficit.”

They did, but what is misleading in this account is that the President fails to tell us is that his grossly inadequate stimulus left too many people unemployed, and provided so little assistance to the States, that while it stabilized the unemployment rate, it did so at a very high level ensuring that Federal tax revenues would remain low and that the deficit would still be very high; but without the benefit of having enabled full employment.

“Now, every family knows that a little credit card debt is manageable. But if we stay on the current path, our growing debt could cost us jobs and do serious damage to the economy. More of our tax dollars will go toward paying off the interest on our loans. Businesses will be less likely to open up shop and hire workers in a country that can’t balance its books. Interest rates could climb for everyone who borrows money -– the homeowner with a mortgage, the student with a college loan, the corner store that wants to expand. And we won’t have enough money to make job-creating investments in things like education and infrastructure, or pay for vital programs like Medicare and Medicaid.”

And later he says:

“For the first time in history, our country’s AAA credit rating would be downgraded, leaving investors around the world to wonder whether the United States is still a good bet. Interest rates would skyrocket on credit cards, on mortgages and on car loans, which amounts to a huge tax hike on the American people. We would risk sparking a deep economic crisis -– this one caused almost entirely by Washington.”

The falsehood here is assuming that the bond market actually controls the interest rates that Governments like the United States must pay. Sure, they can determine interest rates if the Government and the Fed sit idly by, and lets them do so. However, the Federal Reserve and the Treasury, can target bond interest rates and set these for the bond markets by manipulating overnight bank reserves. Specifically, one way to do this, is that the Treasury can cease issuing long-term bonds, and sell only three-month bonds. Three-month bond interest rates are generally controlled by overnight rates for bank reserves, and overnight rates can be driven down to near zero by flooding the banks with excess reserves. That’s basically how the Japanese keep their bond interest near zero, even with a debt to GDP ratio of nearly 200%, and that’s how we can do the same.

Alternatively, the Fed ihas driven down interest rates through its policy of Quantitative easing (QE). QE currently involves providing banks with cash reserves in return for non-cash bank assets including Treasury Bonds. QE results in an increase in cash reserves, which drives down overnight interest rates for borrowing such reserves. Low rates in the reserve market again, drives down bond market interest rates on three month Treasuries, and exerts downward pressure on bond market interest rates across the board.

Yet another move we can make to remove the effects of the bond markets and the ratings agencies upon public finances, is for the Treasury to stop issuing debt for every dollar it deficit spends. It can do this by using coin seigniorage to generate additional revenue, and by borrowing only for a portion of its deficit spending. If Treasury did this, interest rates in the bond market would be driven down because of the shortage of treasury bonds in the marketplace.

Of course, if Congress allowed the Executive to deficit spend without issuing debt, or the Executive decided to deficit spend only after raising revenue through coin seigniorage, then the Executive Branch could choose to issue no more debt, and then bond market interest rates wouldn’t be an issue at all. So none of the effects described by the President just above would happen, all the problems he points to are due to more debt causing higher interest rates through the bond markets. If increasing debt can’t cause that, because of interventions outlined above, then the bond market/interest rate scare is “off the table.”

In short, the bond markets aren’t in control of US public finances. They are not in a position to influence what our taxing or spending policies ought to be, or whether we will default on our obligations.

“This balanced approach asks everyone to give a little without requiring anyone to sacrifice too much. It would reduce the deficit by around $4 trillion and put us on a path to pay down our debt. And the cuts wouldn’t happen so abruptly that they’d be a drag on our economy, or prevent us from helping small businesses and middle-class families get back on their feet right now.”

Calling his plan “balanced” is just propaganda. First, it assumes that there is a deficit/debt problem; but this assumption is based on the idea that the US Government can become insolvent or is otherwise constrained in its spending by economic necessity. It also assumes that we’ve borrowed too much, and that this requires us to slow down deficit spending over time. However, these assumptions are just false. As the currency issuer, the US can’t ever run out of money, and the only real world constraint it has on its spending is demand-pull inflation, which we needn’t worry about until we’ve reached full employment.

Second, $4 Trillion over 10 years in spending cuts and/or increased taxes, averages out to $400 billion per year less money either going into the private economy from the Government sector, or being taken back by the Government. If the spending is high fiscal multiplier spending, as much of it appears to be, then we may be looking at as much as $1 Trillion per year in reduced GDP. Anyway you slice it friends, that will cost jobs, careers, family hardship, and lower economic growth, and it is unlikely to reduce deficits very much or at all, simply because the effects of the economy’s automatic stabilizers will ensure that more government spending and less taxes will result from these cuts.

Third, this $400 Billion per year of “shared sacrifice” which is supposed to ensure that no one suffers too much is, to use a popular phrase of yesteryear, “lipstick on a pig.” We know that the impact of the spending cuts contemplated will fall disproportionately on the poor and the middle class. They will be “sacrificing” income, jobs, and services that are very important to them, but any “sacrifices” made by the wealthy and large corporations will be largely symbolic and will not cut to the bone.

Fourth, the President says that the cuts wouldn’t happen so abruptly that they’d hurt the economy. But this assumes that current Government deficits are large enough to compensate for savings desires and imports, and that the economy has already received enough of a boost that it will fully recover by the time the full impact of austerity is felt. If they are not large enough, and the economy doe not recover; then what? Do we then follow this inflexible austerity plan and go ahead withdrawing net financial assets from the private sector at the rate of $400 Billion per year, in the expectation that this will lower the debt-to-GDP ratio?

“So the debate right now isn’t about whether we need to make tough choices. Democrats and Republicans agree on the amount of deficit reduction we need.”

Democrats and Republicans do not agree on the amount of deficit reduction we need. Nor do they agree on how deficit reduction should be achieved. There are even many Democrats, though, perhaps not in Congress, who believe that there is no debt or deficit problem at all, and that the President’s whole exercise in austerity is motivated by a false economic ideology, and by a desire to show “the independents” that he is a responsible “bipartisan” grown-up who deserves their support in 2012. Here he is using the left-right frame, viewing the independents as people in the middle who are relatively homogeneous and ideologically disillusioned with the right and the left.

So, he thinks he can pick up these folks “en bloc” by showing that he has made both progressives and conservatives angry at him. In this, I think he is ignoring the possibility that there are independents from all parts of the left-right spectrum, who have become independent because the two parties represent their interests very badly, preferring to see to it that the wealthy and the corporations are represented at the expense of their constituents. In any event, President Obama’s attempt to appeal to independents may fail, because they really have no interest in his independence relative to the bases of the legacy parties; but care much more about his actions in supporting the big banks, a corrupt financial system, continued globalization of the economy, and failure to produce jobs, and viable health care reform for everyone.

“That’s not right. It’s not fair. We all want a government that lives within its means, but there are still things we need to pay for as a country -– things like new roads and bridges; weather satellites and food inspection; services to veterans and medical research.”

We do have to live within our means; but a phrase like this is meaningless, when it comes to the Government’s ability to generate new net financial assets in the private sector. That capacity is unlimited. And while we do have to worry about demand-pull inflation under certain conditions. The US never has worry about running out of money as do, for example, the members of the Eurozone or other nations that aren’t sovereign in their own fiat currency system. What “our means” really refers to is our real resources and our capacity to produce further real resources in a sustainable way. It does not refer to financial sustainability, or to fiscal sustainability in the meaning of that term spread by Peter G. Person, and Barack “Hoover” Obama.

“Understand –- raising the debt ceiling does not allow Congress to spend more money. It simply gives our country the ability to pay the bills that Congress has already racked up. In the past, raising the debt ceiling was routine. Since the 1950s, Congress has always passed it, and every President has signed it. President Reagan did it 18 times. George W. Bush did it seven times. And we have to do it by next Tuesday, August 2nd, or else we won’t be able to pay all of our bills.”

This is one of the biggest falsehoods told by the President. Let’s say there is no agreement, then, is it true that we won’t be able to pay our bills? Only if the President fails in his own constitutional duty and doesn’t take the measures he is able to take to make it possible for Treasury to spend appropriations. Yves Smith, in a recent interview with Paul Jay of the Real News Network, points to three alternatives the President can use: 1) the constitutional challenge; 2) selective default; and 3) Proof Platinum Coin Seigniorage (PPCS).

Yves characterized PPCS as the most “radical” of the three alternatives. Depending on the coin seigniorage option selected, that may be true; but I think that from the legal point of view, at least, PPCS is the least radical of the alternatives. I think that’s true because it’s the only one of the three that is completely within the law as currently written and interpreted.

The first option, the constitutional challenge, requires violating the debt ceiling, and then claiming that the law is unconstitutional and relying on the House’s inability to have standing to take the President to Court in order to sustain the President’s action. The President may get away with this, but it is radical in the sense that it claims the Executive’s right to make a unilateral judgment of constitutionality in opposition to clearly written legislation, without getting a by your leave from the Supreme Court. Surely we can all see how dangerously radical this kind of practice is for the rule of law in the United States?

The second option, is the Treasury declaring a selective default only on Federal Reserve-owned debt instruments in order to wipe these off the books, and create headroom relative to the debt ceiling. This is clearly an extra-legal procedure. The Federal Reserve Board of Governors is a Government agency; but those bonds are owned by the Fed Regional Banks, which in our system, are not Government agencies, but rather privately owned “Federal instrumentalities.” Here’s wikipedia:

“The Federal Reserve Banks have an intermediate legal status, with some features of private corporations and some features of public federal agencies. The United States has an interest in the Federal Reserve Banks as tax-exempt federally-created instrumentalities whose profits belong to the federal government, but this interest is not proprietary.[74] In Lewis v. United States,[75] the United States Court of Appeals for the Ninth Circuit stated that: “The Reserve Banks are not federal instrumentalities for purposes of the FTCA [the Federal Tort Claims Act], but are independent, privately owned and locally controlled corporations.” The opinion went on to say, however, that: “The Reserve Banks have properly been held to be federal instrumentalities for some purposes.” Another relevant decision is Scott v. Federal Reserve Bank of Kansas City,[74] in which the distinction is made between Federal Reserve Banks, which are federally-created instrumentalities, and the Board of Governors, which is a federal agency.”

Since the Bonds held by the Fed are held by the regional banks, this second option would involve a major hit to the assets of these banks and also an operating loss. It would involve not just questioning, but also denying a debt of the United States, and would therefore violate the 14th Amendment to the Constitution. From a legal point of view I think the Treasury unilaterally deciding to inflict a substantial loss on privately owned banks, whether Federal Instrumentalities or not. and also violating the 14th Amendment, is a very radical option.

Getting to the third option of Coin seigniorage, the authority to do this was legislated by Congress in 1996. If the President uses PPCS, he 1) won’t exceed the debt ceiling; 2) won’t be challenging the constitutionality of the debt ceiling; 3) will be able to spend all Congressional Appropriations; and 4) will be able to uphold his constitutional obligation to see that all US debts are paid. In other words, there are no legal downsides to this course of action, even if it may involve a very different way of raising revenue than issuing debt instruments.

On the positive side, if the Administration were to use PPCS, it wouldn’t have to make a deal with the Republicans about the debt ceiling at all. It wouldn’t have to create hurtful cuts in the safety net or in discretionary programs, because it would not need a deal at all. I’ve argued elsewhere, that in case there is no agreement on extending the debt ceiling, that it becomes the President’s constitutionality duty to use one of a number of PPCS options to avoid default, since only they are unambiguously legal. In that case, some form of PPCS, would no longer be a choice, but a mandate, which the President would have to fulfill.

So, it’s not true that we won’t be able to pay our bills on August 3rd, if the debt ceiling isn’t extended, unless the President fails in his constitutional duty. The Congress may be acting stupidly in not extending the ceiling; but in doing so, it would not be forcing the US into default. It would, instead be placing a constitutional burden on the President. It is he who would force the US into default if he fails to shoulder this burden and do his duty.

(Cross-posted from Correntewire.com.

Beyond the Debt Ceiling: The $30 Trillion Plan for Ending Borrowing and the National Debt

9:30 pm in Uncategorized by letsgetitdone

Congress provided the authority, in legislation passed in 1996, for the US Mint to create platinum bullion or proof platinum coins with arbitrary fiat face value having no relationship to the value of the platinum used in these coins. These coins are legal tender. So, when the Mint deposits them in its Public Enterprise Fund account at the Fed, the Fed must credit that account with the face value of these coins. This difference between the Mint’s costs in producing the coins and the credit provided by the Fed is the US Mint’s profit. The US code also provides for the Treasury to periodically “sweep” the Mint’s account at the Federal Reserve Bank for profits earned from these coins. Coin seigniorage is just the profits from these coins, which are then booked as miscellaneous receipts (revenue) to the Treasury and go into the Treasury General Account (TGA), narrowing the revenue gap between spending and tax revenues. Platinum coins with huge face values, $1, $2, and $3 Trillion coins have been mentioned, could close the revenue gap entirely, and, if used often enough, technically end deficit spending, while still retaining the gap between tax revenues and spending.

Coin seigniorage is now being mentioned increasingly on popular blogs as a possible solution to the debt ceiling crisis. It is the only solution currently being suggested that requires no agreement in Congress and also no challenge to the debt ceiling law itself. If Congress fails to increase the debt ceiling by August 2nd, it may even become the constitutional duty of the President to use coin seigniorage to avoid default.

But the proof platinum coin seigniorage alternative comes in more than one flavor. It’s actually a class of alternatives. Here are some different con seigniorage proposals.

First, mint a $1.6 Trillion coin and have Treasury use the profits from it to buy all the outstanding debt instruments held by the Fed. This would retire a substantial part of the national debt and immediately create $1.6 T in “headroom” relative to the debt ceiling. This alternative involves the least amount of change in current procedures. The coin, once deposited at the Fed, would remain in a Fed vault, and would not go into circulation. The Government would then go right back to issuing debt in order to meet its debt obligations and spend previous Congressional appropriations. With this alternative it is hard for critics to raise the inflation issue, since the new credits created by the coin are never spent into the economy, but are only used to reduce buy back the debt held by the Fed because that debt counts against the debt ceiling.

One objection made to coin seigniorage proposals is that the high face values of the coins would drive up the market price of platinum. However, the Mint is already scheduled to produce 15,000 platinum coins having relatively small arbitrary face value. There would be no conceivable need for more than enough material for 100 very high face value proof platinum coins. So there really is no supply issue.

Having said that, every time the Mint creates a high value coin for deposit at the Fed, it would have to create a duplicate coin, so that it had the means to swap with the Fed if it ever decided to redeem the coin for currency of equal value. This is not a likely event; but it is possible. So, it would be necessary to create duplicate coins and place them in a vault at the Mint.

A second proposal is to mint a $6.2 T coin to pay back all debt held by the Fed, and all Intra-governmental debt, including that owed to Social Security, Medicare, and a host of other other agencies. That would create $6.2 T in headroom, more than enough to carry us through the 2014 elections. Again, this wouldn’t result in any “money” immediately going into circulation, but over time SS and Medicare payments would be adding to bank reserves without any reserves being withdrawn from the system due to debt issuance. Some might think this would be inflationary, because they believe that net reserves added to the private sector are more inflationary than debt instruments added would have been. However, there’s evidence that debt instruments provide much higher leverage than added reserves, and, in addition, they lead to greater interest payments than reserves do, even if the Fed decides it wants to pay interest on reserves, which it doesn’t always do.

A third proposal for applying coin seigniorage is to mint a coin with face value large enough to cover the $6.2 T intra-governmental and Fed debt repayment, plus all private debt coming to maturity, and all Congressional Appropriations expected to require deficit spending. I’ll estimate, roughly, that a $15 T coin is enough for that, including about $4.5 T to close the expected gap between tax revenues and Government spending through the 2014 elections, and the rest for paying down the national debt further. Issuing a coin that large, using the profits from seigniorage, and assuming that Congressional appropriations continue the pattern of the past year or so, that would result in a remaining public debt outstanding of roughly $4.6 T, which would please the bond markets except for the fact that the Us wasn’t issuing any more debt instruments.

Again would this coin seigniorage proposal be inflationary? Well, the intra-governmental and Fed debt repayments won’t be, for reasons already stated. Also, there’s no reason to believe that the repayment of further debt will be, unless one believes, again, that reserves swapped for bonds, and not swapped again for more bonds, is inflationary. But, other than the interest payments which certainly add to private sector assets somewhat, payback of debt instruments is just an asset swap, followed by destruction of securities. There’s no addition of net financial assets to the private sector.

How about the profits of $4.5 T set aside for closing the gap between tax revenues and spending? Will that be inflationary? Actually, I don’t know if Congress will appropriate a $4.5 T spending/tax revenue gap over three years, but if such a gap is needed, and if it does, then the coin will cover it without new Federal borrowing. And as long as Congress doesn’t do the right kind of spending and creates a large enough gap to add sufficiently to private sector assets to support full employment, their appropriations, backed by coin seigniorage won’t be inflationary.

If, on the other hand, they do the right kind of spending to bring full employment inside a year, then tax revenues will come back as they did during the Clinton Administration, and then there’ll be no need for the profits from the proof platinum coin to be used completely between now and 2014. In fact, if the right jobs creating program is immediately enacted, as much as $3T could be left before the President might want the Mint to strike another proof platinum coin.

So far, I’ve discussed three alternative coin seigniorage proposals ranging in scale from a minimal proposal to handle the current crisis to one that would provide enough funds to both pay down debt, and support a gap between spending and taxes that might be sufficient to enable full employment. Now here’s a fourth, enough to handle Congressional appropriations for a decade.

Why not mint a $30 T coin and then another one in case the Fed gets obstreperous sometime down the road and presents the 30T coin, that was deposited in the Mint PEF account, for redemption?

I favor this fourth alternative above all, because it institutionalizes the idea that there is a distinction between appropriations, the mandate to spend particular amounts on particular goods and services, and the capability to spend the mandated accounts. In a fiat currency system, the capability always exists if the legislature provides for it under the Constitution. But the value of the 30T coin, and the profits derived from it, is that it is a concrete reminder of the Government’s continuing ability to buy whatever it needs to meet public purposes. It demonstrates very concretely that the Government cannot run out of money and that the claim that it can is not a valid reason for rejecting spending that is in accordance with the Public purpose.

So, in reading what follows, please keep in mind the distinction between the capability to spend more than government collects in taxes, and the appropriations that mandate such spending. The capability is what’s in the public purse, and it is unlimited as long as the Government doesn’t constrain itself from creating currency. With coin seigniorage its capability could be and should be publicly demonstrated by minting the $30 T coin, and getting the profits from depositing it at the Fed.

On the other hand, Congressional appropriations, not the size or contents of the purse, but whether the purse strings are open or not, determines what will be spent and what will simply sit in the purse for use at a later time. So there is a very important distinction between the purse and the purse strings. The President can legally use coin seigniorage to fill the purse, but only Congress can open the purse strings through its appropriations.

If the President decided to rise above the debt ceiling controversy, safeguard the social safety net, and do something really, really important from the perspective of history by using $30 T coin seigniorage, then he could explain the deposit of the first $30T coin to the public in a high profile TV address, this way (the second coin just stays at the Mint for safekeeping. Its existence to be kept secret):

My Fellow Americans:

1) Until now we’ve been borrowing the money the Government created back from the private sector, in order to cover our deficit spending, so the national debt has been steadily growing.

2) That’s silly! According to the Constitution, this Government, of the people, by the people, and for the people, is the ultimate source of all US money. So why should we ever borrow US money back and pay interest on it, since we can create it any time by the authority of the Constitution and Congress?

3) Congress has also imposed a debt ceiling, which, as you know, we’ve now reached, so we can’t borrow back our own money, anyway.

4) So, on my order, and in accordance with legislation passed by Congress in 1996, and with the US Code, the US Mint has issued $30 Trillion in a single platinum coin, and deposited it at the NY Fed. It’s legal tender, so the Fed credited the PEF with about $30 Trillion in USD credits using its unlimited authority from Congress to create US Dollars.

5) This is not inflationary because the Fed will put our coin into its vault, and keep it there permanently out of circulation, and we will use the $30 T in USD credits only to pay back debt and to spend what Congress has already approved, which is only a fraction of these credits and far from the amount needed to cause inflation.

6) My action ends the debt ceiling crisis, because we have no further need to borrow our own money back in the markets, so we don’t need the tea party or other Republicans, or even my fellow Democrats to agree to raise the debt ceiling.

7) Now the Treasury, has plenty of money, much more than we need, in fact, to pay for all appropriations Congress has already approved for 2011, and, again, we won’t have to borrow our own money back.

8) So we will pay all Government debts which will come due in 2011. Treasury securities and all other debts included. We will also pay back all debts held by other agencies of Government and the Federal Reserve. When we do this we will lower the national debt by about $7.5 T, reducing the “debt burden” by about half this year, and creating an actual Social Security trust fund with 2.6 T in cash reserves in it; and again, to do this we don’t have to borrow our own money back, and we will also reduce our interest costs on the outstanding national debt.

9) None of the $30 T in new credits created by our actions is “money” in the economy until the Treasury spends it. For now it is just capability to spend awaiting the appropriations of Congress to mandate deficit spending, should it need to compensate for the reduction in demand, probably close to 10% of GDP right now, caused by your own desire to save (which we want to do our best to facilitate), and your desire to import goods from foreign nations.

10) We have created $30 Trillion in new credits even though we needed only a fraction of that to cover anticipated deficit spending and debt repayment until 2021. The reason for this, is that I wanted to have enough capability created in the Treasury account, so that the national debt could be completely paid off (except for a small amount in very long-term Treasury debt still not mature by 2021), and all projected Federal deficits covered over the next 10 years.

11) Of course we can always make new coins if our projections turn out to be wrong; but I thought it would be best to ensure that all $14.3 T of the “debt burden” can be completely eliminated from our political concerns; and also to provide enough funds in our spending account at the Fed so that it would be very clear to Congress and all newly elected Representatives and Senators, that even though they, according to the Constitution, continue to control the purse strings, the national purse is very, very full, and that we will be able to afford whatever deficit spending for the public purpose, including for full employment and Medicare for All, that Congress, in its wisdom, chooses to appropriate now and before the election of 2012.

Good night, my fellow Americans and Sweet dreams! Rest well knowing that our beloved country won’t be defaulting on any of its debts, and that I’ve prevented this without going over the legal debt ceiling, by providing money for spending mandated appropriations, in compliance with the laws authorizing coin seigniorage, while supporting the Constitution’s prohibition against our Government ever defaulting on its debts. I hope that in the future everyone will obey the 14th Amendment’s prohibition against questioning the validity of Federal Government debts, and think twice before they indulge themselves in such loose talk. America will always pay its debts in US Dollars according to the terms of the contracts it has concluded, and in line with the pension payments and other obligations that it owes. Neither you nor the rest of the world need ever doubt that again!

(Cross-posted from Correntewire.com.