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On Wednesday 7/20, Mark Kleiman posted a very lucid article entitled “Phony problem, phony solution” on his blog, The Reality-Based Community:
Fortunately, the Debt Ceiling is not the only stupid law the Congress has passed. It turns out that, back in 1996, the platinum lobby managed to get the following section written into law:
The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.
Now, arguably a “bullion coin” is distinct from a “fiat coin” in that its face value is supposed to reflect its precious-metal content. But the law doesn’t say that.
So what if the Mint produces three platinum coins with face values of $1 trillion each? … The Treasury deposits the coins with the Fed; they’re legal tender, so the Fed exchanges them for $3T of Treasury bonds now in its reserves. And the coins are not debt: they’re money. … Problem solved.
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Of course … If we print too many dollars, their value compared to other currencies will fall. So eventually public services need to be supported with revenues rather than printing presses. But it can solve the imaginary problem of hitting the debt ceiling.
Is it legal? Arguably, it would be illegal not to do it. The President is bound by the Constitution and his oath of office to “take care that the laws be faithfully executed.” Appropriations bills are laws; he’s not allowed to impound appropriated funds, but must expend them. If the debt ceiling isn’t raised – won’t have the cash to do so unless he issues the trillion-dollar coins. And if that’s the only way to carry out his Constitutional duties, then he is not just allowed, but required, to do precisely that.
In practical terms, this would be identical to repealing the debt ceiling, so it’s hard to see why the financial markets would have a problem with it; after all, no one but a few gold bugs minds the fact that the government can convert a few cents’ worth of paper and ink into $100 by stamping on it “Legal Tender for All Debts, Public and Private.” (The sensible approach of printing bills is foreclosed because bill issue is also limited by law.)
Mark is a professor of public policy at UCLA, and his article links to another excellent article on coin seigniorage by Jack Balkin, a law professor at Yale.
I like Mark’s article but want to put some context around his claim that this solution is “phony.”
Per the U.S. Constitution (Article I, section 9, clause 7) states that “[n]o money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law …” Ultimately, money is drawn from the Treasury’s account at the Federal Reserve via the checks that the Treasury issues to settle the government’s accounts payable. Note, however, that an appropriation is permission to withdraw money from the Treasury’s account; it does not put money into that account. Rather, the Treasury deposits U.S. taxes into that account and makes up any shortfall by borrowing, i.e., selling bonds at auction and depositing the receipts into that account.
There is a myth among economists that the Treasury or the Fed has a (possibly virtual) printing press that can generate an unlimited number of large-denomination bills and deposit them into the Treasury’s account at the Fed. In such a case, the Treasury could avoid the printing and sale of bonds, the expense of paying interest on them, and most importantly (now) the debt limit. But, unfortunately, (1) the amount of currency in circulation is limited by law to $300B, and (2) so far as I can tell, the Fed does not have authority to gratuitously credit the Treasury’s account. .
The Treasury does, however, own the Mint and, as Mark explained, it can mint arbitrarily large coins and deposit them into its account to make up for taxation shortfalls. Yes, we need to worry about inflation but that’s a longer term and very concrete problem, not a bullshit problem like “We need to get our fiscal house in order.” It’s a measurable problem, whose consequences are very easy to predict and explain. It’s a real problem, not a phony one.
Also, the MMT folks make a very good case that in terms of inflation it makes no significant difference whether the Treasury gets credit into its account at the Fed by minting coins or by printing and selling bonds. The cash-for-bonds swap neither increases nor decreases the private wealth, and there is a highly efficient bond market that facilitates the transfer of wealth from one form to the other.
So, in short, coin seigniorage gives the Treasury a capability that most economists seem to think it already has, but doesn’t. And that capability not only makes the debt-limit crisis go away, it gets rid of the need to pay interest on unnecessary borrowing.
That said, phoniness is an asethetic judgement that I will not dispute.
11 Comments
Nice point, but these, too, should be cited, especially since Mark Kleiman’s obviously been reading my stuff and maybe yours too.
http://bit.ly/pjF3Qt
http://bit.ly/pC3tiq
http://bit.ly/odtyKv
Another piece has appeared too. This one more mainstream by Joshua Holland at Alternet:
http://bit.ly/nwJ92O
This one, unlike Kleiman’s has the grace to link to other people he read who got their first.
“back in 1996, the platinum lobby managed to get the following section written into law”; just who is the ‘platinum lobby’? From my time as a commodity broker, both the palladium and platinum futures market are VERY small and ,from what I was told, just two guys basically ‘owned’ the palladium market.
I do really wonder why the legislation was written; and as a corollary, is it possible that such isn’t being given the ‘light of day’ because of what doing so would bring to light about how such legislation occurred?
Hi letsgetitdone and ubetchaiam,
Thanks for those links, and thanks for commenting.
I posted something yesterday, “What are taxes for?”, that I’d really appereciate some feedback on when you get around to it. I intend to post a followup, “What is the national debt for”, which you’ve had a lot to say about and which the MMT community, specifically Stephanie Kelton, has changed my mind about.
The current post came about this morning, when I got a bit pissed off at David Dayen, for whom I have the highest regard, when he cited “Donkeylicious” on coin seigniorage, which linked to Mark Kleiman’s excellent but somewhat demeaning exposition. IMHO, David should have also cited your and beowulf’s works at FDL, which had priority and were less demeaning.
Okay. Okay. David writes faster than I can think and does outstanding work. I do not even want to distract him with any of this. Also, without his link to Donkeylicious, I’d not have seen this excellent post by Mark Kleiman. So, everything works out in the end.
And, I was delighted to see Mark support my suspicion about the origin of the coin seigniorage loophole, specialty coin collectors. But, were this loophole exploited, banks and the wealthy would lose a lot of money from the interest on T-bonds.
But the other point I wanted make is that Krugman, Bernanke, Galbraith and many other top economists claim that the government has a money printing press from which to pay their bills, but it does not. Well, not unless it uses the coin-seigniorage loophole.
And, as others have pointed out, that loophole allows the government to avoid the debt-ceiling limit and interest on the national debt. Duh!
The following comment was posted to Felix Salmon’s blog at Reuters on July 14:
I like it because it articulates a common concern regarding the use of coin seigniorage rather than borrowing to cover deficits.
First let’s be clear that the concern is “inflation,” which by definition is shrinkage in the value of the dollar. But, the value of the dollar, like the value of anything else, is a matter of supply and demand: government spending supplies dollars, and government taxation demands them. It’s as simple as that.
The government pays its bills from the Treasury’s account at the Fed, and somehow enough credit has to get into that account to cover the government’s spending. How it gets there should not and does not influence does not influence the amount of spending; that’s done through congressional appropriations, which grant the right to draw money from that account.
Congress could accompany each appropriate with an authorization for the Fed to credit the corresponding amount to the Treasury. That would be the simplest way to do business. Instead, however, Congress expects the Treasury to fund congressional appropriations via a combination of taxation and borrowing. Obviously, taxation has a big influence value of the dollar, since it is the demand side of the the supply v. demand function. But whether the difference between spending and taxation, i.e., the deficit if there is one, is covered by borrowing, by freshly printed (virtual or physical) money, or by freshly minted jumbo coins will have no effect at all. It’s like the difference between ice cubes and water. One can always be converted into the other.
Some say: “But bonds can’t be spent, so they don’t contribute to inflation.” (In fact, I used to say that, until the MMT folks, particularly Stephanie Kelton, Scott Fullwiler, and letsgetitdone, explained it to me enough times that I got it.)
Look at it this way, you can’t spend gold either. Would it prevent inflation if the Treasury sold gold to cover the deficit? No, gold can always be converted into money (i.e., credit in a bank account somewhere) and then spent. The same is true of Treasury bonds.
Note also that QE1 and QE2 were operations where the government exchanged money (credit in an account at the Fed) for Treasury bonds. Those operations predictably had no visible effect on inflation. Nor did they have any beneficial effect on employment.
The most convenient view is that bonds are simply another form of currency like the British pound, and there are well-defined exchange rates that apply.
“Congress could accompany each appropriate with an authorization for the Fed to credit the corresponding amount to the Treasury. That would be the simplest way to do business.”
Exactly right, I suggested about the same thing at Mosler’s board today– that Congress give Secretary discretion to issue electronic US Notes (i.e. Lincoln Greenbacks) for any appropriation warrants he signs. However under current law, its go platinum or go bust.
If Tsy doesn’t have the West Point Mint ready to go on a moment’s notice, they’re freakin’ nuts. If the Pentagon ran the Mint, they’d already have trillion dollar coins stockpiled (for no real reason) at Air Force bases all over the country. :o)
Wigwam, people who say the gov has a printing press are right, in the sense that we have one constitutionally, and that all that stops us using it is legislation which presumably could be changed easily were enough pressure brought to bear on congress.
i’ve treated inflation concerns about cs here: http://my.firedoglake.com/letsgetitdone/2011/07/18/why-matt-yglesias-and-felix-salmon-are-wrong-about-a-legal-way-to-circumvent-the-debt-ceiling-impasse/
The commenter at Salmon’s is just reflecting the usual Q theory of money concerns and not even making an attempt to trace the flow of money in alternative cs proposals. Citing Zimbabwe and Weimar is just bogeyman tactics. The commenter makes no attempt to match antecedent conditions in those nations with ours.
Your coin-seigniorage “loophole” give the Treasury a capability that most economist claim they already have, i.e., most economists think that the Fed or the Treasury has the virtual equivalent of a printing press by which to legally put money into the Treasury’s account at the Fed to pay for government operations. Most of them discourage its use for fear of inflation, but they think it is there.
Unfortunately, it isn’t. Other than bond sales, coin seigniorage the only known option.
Actually, there might be one other trick, namely a special form of reverse quantitative easing where the Fed resells its bonds through an account at another bank. Credit would build up in that account and annually accrue to the Treasury as profit of the Fed. If I understood correctly, letsgetitdone thinks it could work.
As you noted:
In almost every way, coin seigniorage is equivalent to selling debt and then monetizing it. In both case, credit wind up in the Treasury’s account and the money supply is the unaffected, since the two acts of selling debt and buying it back again cancel each other.
The only difference is that in one case the Fed winds up with trillion-dollar coins in its vault, and in the other case it winds up with a stack of bonds in its vault.
letsgetitdone,
What is the status of the effort to find that “congressional mandate”? I’d really like to know what it says.
I’ve been a big fan of Holland for a long time but do not read him as often as I should. He gets stuff right and does so in detail.
This particular piece was the best yet from the more widely read blogs. Excellent work on his part.
And, thank you for alerting me to it.