Massive unfilled need alongside under-utilized resources implies a dysfunctional economy. And, the economies of the United States and the European Union are now in that state. The problem was triggered by the sudden 2008 collapse of credit and of consumer wealth (down 40%), but much of the subsequent dysfunction is due to the failure of those in charge to take corrective action and their deliberate imposition of austerity, which the economic version of “Salvation Through Suffering” and is rationalized via scolding, e.g., “Our spending is out of control,” fatalistic sighs, e.g., “We’re out of money,” and analogies to family finance, which are appropriate if and only if the family runs a protection racket and issues its own money.
The point is that we have no shortage of resources, so there’s no real need for austerity. And, the fact of the matter is that we can always coin more money. Below, I cover the ways that can be done within our current laws and look at the misinformation and disinformation that seem to be blocking that obvious solution.
Article 1 Section 8 of the U.S. Constitution empowers Congress to raise money to pay the government’s bills in exactly three ways:
The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States; [Clause 1]
To borrow money on the credit of the United States; [Clause 2]
To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures; [Clause 5]
Here the verb “coin” is being used in the same sense as it is in “To coin a phrase …,” i.e., to invent, fabricate, or construct.
To the Treasury, Congress has delegated authority to coin money through the minting of coins. To all banks, Congress has delegated authority to coin money through the crediting of accounts in exchange for securities (e.g., IOUs including newly created loans). And to the Federal Reserve Bank, Congress has also delegated authority to coin money through the printing and issuance of “federal-reserve notes,” the only paper money now in circulation in the U.S.
Credit in a bank account is commonly called “money in the bank.” Credit in the Federal Reserve Bank should therefore be called “money in the banks’ bank,” but instead is called “reserve.” The Fed currently pays a modest (.25%) interest on reserves.
Since 1971, none of this money has been backed by gold or any other commodity; it is all fiat money, i.e., “money created from thin air.” Bank credit is, however, backed by the securities (mostly IOUs) purchased with it. The Treasury accepts all three forms of money (dollars) in payment of taxes, but vastly prefers checks against credit in bank accounts, which ultimately gets converted into credit in the Treasury’s General Account (TGA) at the Federal Reserve (Fed). And, the fact that the U.S. government accepts dollars and only dollars in payment of U.S. taxes is the key intrinsic feature that gives value to the dollar. In the words of Warren Mosler, “A dollar is simply a (transferable) tax credit.”
Money that’s coined by the Treasury gets deposited into the TGA, just like taxes. And the TGA is the account from which the Treasury writes checks to pay the government’s bills. Money also comes into the TGA from borrowing (i.e., the sale of Treasury bills and bonds), which incidentally increases the nation’s public debt bringing it closer to the limit.
Money that’s coined by the Fed results from the purchase of securities, mostly IOUs either pre-existing or newly created — the Fed simply credits the seller/borrower’s account or that of their bank. But, the Fed is not allowed to loan money directly to the Treasury, i.e., it cannot buy Treasury bonds or Treasury bills at the weekly auction. Rather, it must buy them on the “open market.” But, of course, it can and often does prearrange for one of the sixteen “primary dealers” to purchase on its behalf. And, with that minor bit of indirection, the Fed can and does loan money to the Treasury, but those T-bills and T-bonds that the Fed purchases still count toward the nation’s public debt, which is subject to the debt limit. Note that when the Fed goes on a campaign of buying up bonds of a particular type, that campaign is sometimes called “quantitative easing.” And, the Fed is now on the third of three programs of quantitative easing: QE1, QE2, and QE3.
The amount of money coined by banks is limited to ten times their reserves, including cash on hand. The amount of money issued by the Fed is not limited, and neither is the amount issued by the Treasury. But, until `1996, the denominations of the Treasury’s coins was limited to very small amounts, which imposed a de facto logistical limit on the amount they could issue. Since then, the denominations of platinum coins has been (perhaps inadvertently) left to “the Secretary’s discretion,” thus removing any logistical limit.
The issuance of fiat money by entities other than banks is often viewed as a sign of “fiscal irresponsibility” and disparagingly referred to as “printing money.” For example, per Ezra Klein:
[T]here’s nothing benign about the platinum coin. It is a breakdown in the American system of governance, a symbol that we have become a banana republic. And perhaps we have. But the platinum coin is not the first cousin of cleanly raising the debt ceiling. It is the first cousin of defaulting on our debts.
As with true default, it proves to the financial markets that we no longer can be trusted to manage our economic affairs predictably and rationally. It’s evidence that American politics has transitioned from dysfunctional to broken and that all manner of once-ludicrous outcomes have muscled their way into the realm of possibility. As with default, it will mean our borrowing costs rise and financial markets gradually lose trust in our system, though perhaps not with the disruptive panic that default would bring.
Sadly, none of that actually is a reasonable argument against the platinum coin. The fact that we wish we were not a banana republic witnessing a full-blown meltdown of our treasured system of governance does not mean we are not, in fact, a banana republic witnessing a full-blown meltdown of our treasured system of governance.
The argument against minting the platinum coin simply is this: It makes it harder to solve the actual problem facing our country.
Per Business Insider, the deficit for 2013 is projected to be $845 billion, i.e., roughly $70 billion per month. Under QE2, the Fed was coining $110 billion per month in 2010 and is now, under QE3, coining $40 billion per month. So, exactly how could coining an average of $71 billion per month to cover that $845 billion 2013 deficit be “a breakdown in the American system of governance, a symbol that we have become a banana republic,” as the driven-to-hysteria Ezra Klein claims?
Some have even denounced quantitative easing as “printing money.” But, the Wikipedia tries to make this distinction:
Quantitative easing has been nicknamed “printing money” by some members of the media, central bankers, and financial analysts. However, central banks state that the use of the newly created money is different in QE. With QE, the newly created money is used for buying government bonds or other financial assets, whereas the term printing money usually implies that the newly minted money is used to directly finance government deficits or pay off government debt (also known as monetizing the government debt).
But, money coined by the Fed and indirectly loaned to the Treasury through quantitative easing gets spent by the Fed to defray government expenses, including the principal and interested on the national debt. So the Wikipedia is making a distinction that lacks a difference.
[*] “A lot can go wrong with a platinum coin,” Ezra Klein (1/11/13)