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Now that a debt ceiling deal has ended the immediate crisis, the attention being given to the President's options, in case there was no deal on the debt, will fade into the background, and most of the options offered to get past the debt ceiling won't be discussed again, until the next time there's a “debt ceiling crisis.” In highlighting, in previous posts, the President's option of using Proof Platinum Coin Seigniorage (PPCS) to pay back part or all of the national debt, other bloggers and myself writing about PPCS, have raised broader questions of whether the President should use it to:

-- 1) pay back the national debt entirely,

-- 2)  spend more than the United States collects in tax revenue whenever Congress appropriates such spending, and

-- 3) replace the current method of creating the credits necessary to spend Congressional appropriations through issuing and selling debt instruments with PPCS as the basis for creating those credits.

The answers to these questions suggest that PPCS should not be forgotten until next time, because if it were implemented right now, it would be a political game changer for the economy and also for progressives almost immediately.

Now that a debt ceiling deal has ended the immediate crisis, the attention being given to the President's options, in case there was no deal on the debt, will fade into the background, and most of the options offered to get past the debt ceiling won't be discussed again, until the next time there's a “debt ceiling crisis.” In highlighting, in previous posts, the President's option of using Proof Platinum Coin Seigniorage (PPCS) to pay back part or all of the national debt, other bloggers and myself writing about PPCS, have raised broader questions of whether the President should use it to:

-- 1) pay back the national debt entirely,

-- 2)  spend more than the United States collects in tax revenue whenever Congress appropriates such spending, and

-- 3) replace the current method of creating the credits necessary to spend Congressional appropriations through issuing and selling debt instruments with PPCS as the basis for creating those credits.

The answers to these questions suggest that PPCS should not be forgotten until next time, because if it were implemented right now, it would be a political game changer for the economy and also for progressives almost immediately.

Using PPCS to Pay Back the National Debt

Minting proof platinum coins with arbitrarily high face values, depositing them at the Fed,  receiving electronic credits equal to the face value of the coins from the Fed, and then having the Treasury sweep the profits into the Treasury General Account (TGA) can fill the Treasury's purse to an arbitrary level selected by the President. The profits can then be used to redeem debt held by the Fed, debt held by the Trust funds (including Social Security) and Government agencies, and debt held by the non-Government Sector, including domestic investors and foreign Governments and investors.

The importance of using PPCS to pay back the debt isn't economic. Modern Monetary Theory (MMT) tells us that Governments like the US with free floating, non-convertible fiat currencies, and no external debt, cannot be forced into insolvency by economic conditions or factors. So, the government spending capacity of those nations isn't affected at all by the size of the national debt, or the debt-to-GDP ratio. Nor does the level of the deficit reduce spending capability; even though if it is too great, inflation may be the result. However, nations and governments are not purely economic and financial systems. They are also political systems. So, the issue of paying off the national debt has to be viewed from a political point of view, whether paying it off is necessary economically or not.

From a political point of view, deficits, the national debt, and very high debt-to-GDP ratios are a serious political and messaging problem for those who want to spend more than the Government can collect in tax revenues. People simply don't understand the fiat currency system, and they view the Government as they would their own household. They know that their debt is bad for them, and they also think that public debt is very bad for their country and must eventually be paid back through taxes.

We could try to educate people in the MMT point of view that Government “debt is not debt,” and could also eventually get them to accept that Government debt in the aggregate can be continuously rolled over and never paid off, and that its absolute level and even the debt-to-GDP ratio are of no consequence. But success in this kind of educational project would not come for years and years. It's a slow process, and we need to free up Government fiscal policy to handle our various problems by spending more than it taxes in the short run; not the long run.

So, how can we get people to support us in doing that? I think we need to remove the worries people have about public debts and deficits by removing them from the fiscal picture of the Government, i.e. by paying the debt off and by never running any technical deficits where Government spending exceeds Government revenue.

Until PPCS was legislated in 1996, the Executive didn't have the ability to do that without gathering enough revenue from taxation to generate sufficiently high surpluses for as long as it took to pay back the national debt. And that course was unacceptable, because paying back all the debt subject to the limit using surpluses would have been equivalent to draining the economy of all liquidity and destroying all economic activity.

Now, however, the PPCS capability allows the US Government to fill the Federal purse with financial assets sufficient to re-pay the national debt without removing and destroying existing private savings. PPCS could be used to pay back debt held by the Fed and debt held by the trust funds and other Federal Agencies, a total of $6.2 Trillion, almost overnight. The remaining national debt of $8.1 Trillion, would be repaid as it matured, along with interest due on the securities. Since most of the outstanding debt will mature within 3 years, in that period of time the US would be nearly debt-free, and its debt-to-GDP ratio would be among the lowest in the world.

It's important to emphasize that the capability to use PPCS, and to pay off the national debt, lies with the Executive Branch, alone. President Obama could see to it that the process is begun and that the repayment of the first $6.2 Trillion was completed this very week. By election time next year, close to $9 Trillion in debt would have been paid off, and the US debt-to-GDP ratio would be less than 40%. Mr. Obama could claim to be the President who placed the nation on the road to debt freedom, all without causing additional pain or the economy to deteriorate further. Here are some of the political implications of using PPCS this way, and minting a platinum coin with a large enough face value (say $30 to $60 Trillion) to pay off the national debt and do other things as well.

-- Lots of political slogans supporting doing nothing about our problems, due to “financial constraints” instantly are swept away. Imagine, if you can, American politics without having to argue about, or cope with, slogans or sound bites like these.

-- “The Government is running out of money.” (Not with a $60 T coin in the bank.)

-- “The Government can only raise money to spend by taxing and borrowing” (Not with PPCS)

-- “We can't keep adding debt to our national credit card.” (We won't be using any of the money on the credit card.)

-- “We need to cut Government spending and make do with no more money.” (Only if more spending would definitely cause inflation.)

-- “if the Government borrows more money, then the bond markets will raise our interest rates.” (The Government won't be borrowing anymore.)

-- “If we continue to issue more debt, our main creditors: the Chinese, the Japanese, and our oil suppliers, may cease to buy our debt, making it impossible for us to raise money through borrowing which, in turn, would force us into radical austerity, or perhaps even into insolvency, which would then be followed by radical austerity and repudiation of our national obligations." (Again, the Government won't be borrowing anymore, so who cares if they no longer want to buy our debt)

-- "Our grandchildren must have the burden of repaying our national debt." (There won't be any debt or any burden.)

-- “Now, the final step – a critical step – in winning the future is to make sure we aren’t buried under a mountain of debt.” (Again, no debt; either mountain or molehill.)

-- “Our government spends more than it takes in. That is not sustainable. Every day, families sacrifice to live within their means. They deserve a government that does the same.”  (But it is sustainable. If we use PPCS, then we can have gaps between taxes and spending every year.)

-- “We need to cut entitlements like Social Security and Medicare, because we are running out of money and they are not fiscally sustainable.” (But they are with PPCS, because we won't be running out of money!)

-- “If we make the hard choices now to rein in our deficits, we can make the investments we need to win the future.” (Given PPCS, what we do now about deficits has nothing to do with our capability to make the investments we will need)

-- “We need to reduce our deficits to be fiscally sustainable.” (Deficits have nothing to do with fiscal sustainability in the sense of continued capability to spend, which will be very plain to people if $60 Trillion is sitting in the TGA.)

-- “We face a crushing burden of debt. The debt will soon eclipse our entire economy, and grow to catastrophic levels in the years ahead.“ (Can't say that if most of the debt is about to be paid off.)

-- “Our debt is out of control. What was a fiscal challenge is now a fiscal crisis. We cannot deny it; instead we must, as Americans, confront it responsibly.” (PPCS can confront it responsibly, but the bipartisan horror just enacted can't.)

-- “We believe the days of business as usual must come to an end. We hold to a couple of simple convictions: Endless borrowing is not a strategy; spending cuts have to come first.” (Right! So let's stop borrowing and use PPCS.)

-- “Everyone knows that the U.S. budget is being devoured by entitlements. Everyone also knows that of the Big Three - Medicare, Medicaid and Social Security - Social Security is the most solvable. . . . “  (The budget can be  be as big as we need it to be with PPCS.)

-- “The Social Security Trust fund is a fiction, a mere bookkeeping device.. . . There is no free lunch. There is nothing in the lockbox.” (There will be if we pay back the trust fund through PPCS.)

-- “There is a deficit/debt reduction problem for the Federal Government that is not self-imposed.” (What's the problem? We can't run out of money with PPCS!)

-- “The Federal Government is like a household and that since households sacrifice to live within their means, Government ought to do that too.” (What nonsense! As PPCS shows very well; the Government is not like a household. Households can't create unlimited funds through PPCS; but the Federal Government can.)

-- “The only way to tackle our deficit is to cut excessive spending wherever we find it.” (It's always good to cut spending that's not in the public interest. But if spending is having good results, and we're using PPCS, then there's no reason to cut it, whether taxes cover the spending or not.)

-- “We should also find a bipartisan solution to strengthen Social Security for future generations.” (With PPCS, we can easily strengthen SS by extending benefits, and we don't need to do it through a bipartisan Rube Goldberg contraption.

-- “The United States is in danger of becoming the next Greece or Ireland.” (Even without PPCS it can't become Greece or Ireland, only the next Japan. But with PPCS it can become the United States again.)

-- “Fiscal Responsibility means stabilizing and then reducing the debt-to-GDP ratio and achieving a Federal Government surplus” (With PPCS, the debt-to-GDP ratio will be stabilized and reduced, but no "surplus," in the sense of more tax revenue than spending, will ever be necessary for revenue purposes.)

With the debt paid off, sound bites like the above won't be around anymore. When progressives bring up Medicare for All, or Federal Job Guarantees, or State revenue sharing to save jobs, a payroll tax holiday, or an infrastructure rehabilitation program, or education programs; or large scale programs to create a new energy foundation for our economy, conservatives will have to debate the merits of the proposals. They won't be able to say that we can't afford it because we're running out of money. When progressives propose funding for food stamps, or extending unemployment to 156 weeks, or even propose that all limits on the number of weeks for collecting unemployment be removed, conservatives won't be able to reply that we have a deficit problem, or that our national debt is too high, or that we have to be concerned about our poor grandchildren. They'd just have to admit that they don't care about the unemployed, and that insofar as they do care, they only care about making more of them so that wages stay low.  

-- The neoliberal economic paradigm of response to policy proposals is constraining our politics in a very tight strait jacket, choking the life out of progressive initiatives. The first response to all proposals for change is to ask whether a proposal is fiscally responsible, where fiscal responsibility means, government spending that, whatever else it does, leads to a declining debt-to-GDP ratio over time. If CBO projections show that a program will increase deficits and add to the debt-to-GDP ratio, they are opposed, and, most often, rejected on grounds of “fiscal unsustainability.”

PPCS can change all that. It can change the paradigm governing political games in Washington. The deficit hawk ideas of fiscal sustainability and fiscal responsibility will no longer be relevant, once $60 Trillion in electronic credits are in the Treasury General Account (TGA). Then the important questions will be whether the proposed programs are likely to achieve public purposes or not, and whether if they are, our representatives will appropriate for "deficit" spending, if necessary, the already existing financial resources. A political game organized around messaging about the public purpose, is much preferable to one focused on whether we can meet a set of long-range targets in some deficit reduction austerity plan that, over time will destroy the real wealth, capabilities, and employability of most  Americans.

-- If PPCS is used, messaging around the public purpose can't be opposed by austerity; but, instead, it will be opposed by claims and fears that PPCS will result in inflation. The argument of PPCS vs. inflation, however, is a much easier argument for progressives to win than the current argument of austerity vs. need. The reason is that in dealing with this last argument, progressives have granted and continue to grant the idea that deficit reduction is necessary for fiscal responsibility in the long run. This is a myth. But it is powerful. On the other hand, if PPCS gets rid of the need for austerity we can then consider whether PPCS will be inflationary.

Scott Fullwiler has recently donea comprehensive analysis of inflation possibilities with PPCS. It turns out that it is very unlikely to cause inflation because there appears to be no transmission mechanisms from the mere presence of PPCS profits in the TGA to inflationary outcomes. As always, Congressional appropriations followed by spending can produce inflation, if that spending exhausts the productive capacity of the economy. But that kind of inflation would result whether or not PPCS is used as the basis for spending.

Using PPCS to Spend More than the United States Collects in Taxes

Having revenue generated by PPCS, and using it to pay off debt, doesn't guarantee that Congress will want to appropriate spending in excess of tax revenues, and have PPCS revenue close the tax/spend gap. Congress may want a budget in which spending doesn't exceed tax revenues anyway, even with $60 Trillion sitting in the TGA. Or if it wants to appropriate spending in excess of tax revenues, it may still insist that the uncovered spending be preceded by selling new debt instruments in dollar-for-dollar correspondence to the new debt.

Or, perhaps the President may wish to close the tax/spend gap by issuing debt, rather than using PPCS revenue, because he wants to continue subsidizing investors in the bond markets. Projections based on CBO's say that over the next 15 years interest costs on the national debt would approach $12 Trillion. Paying off the national debt will eventually reduce these interest payments to zero. Investors in the bond markets will be angry at this development, so the Treasury continuing to issue debt, to be paid off on an annual basis, to provide them at least a fraction of the projected income (about 10%) expected under the old debt-based regime, is a possible outcome of the political conflict that is likely to occur when the Government tries to use PPCS to pay off the national debt.

This would result in continuing the existence of the national debt, though not in growing it, since the $14.3 Trillion we have now would be paid off, and any new debt incurred could be  paid off quickly using PPCS, especially if Treasury issues only securities with terms of a year or less. If this were done, a decision to keep issuing debt, and using PPCS only to pay it off wouldn't materially effect the political background of budget debates. There would still be very low debt levels, with the debt being paid off every year and very low debt-to-GDP ratios. So, the very damaging austerity rhetoric and proposals we see today would still disappear and would no longer paralyze progressive politics.

Using  PPCS to replace borrowing as the Basis for Creating the Credits Needed to Spend Congressional Appropriations

What if the President decided to use PPCS to create that TGA balance of $60 Trillion, and and also decided to replace all debt issuance as the basis for spending Congressional appropriations, and relied instead on taxes and PPCS revenue, alone? Then, there would be no more Federal debt, and there would be no further interest subsidies to the bond markets and foreign nations for placing their USD reserves in what is essentially a risk-free interest-bearing savings account at the Fed. The Government would “save” nearly $12 Trillion in projected interest costs over the next 15 years.

Considering that PPCS profits are considered “revenue” and not “debt,” the Federal budget would always be in balance, and so, the Government would never technically have a “deficit,” defined as the gap between spending and revenues. The gap between tax revenues and spending would continue to exist, however, and that gap is very important, because when Government spending exceeds tax revenue, the gap adds to non-government (including private) sector net financial assets, dollar for dollar. On the other hand, when tax revenues exceed spending, the gap subtracts from non-Government net financial assets. Of course, in the case of such a “surplus,” no PPCS credits would be subtracted from the TGA.

Possible Political Implications This Fall

I said earlier that having that $60 Trillion in the TGA, would change the background of political discourse and the paradigm governing political debate. With PPCS it could focus on public purpose and its relationship to policy proposals, rather than on issues of austerity and whether or not a particular proposal was “fiscally responsible” or “fiscally sustainable.” This change in focus will make a great difference in American politics, because it will expose the real motives of politicians very quickly, since they won't be able to hide behind the austerity slogans and rationalizations.

It's very important to see that this change in background and the terms of discourse doesn't have to wait for any new election results. If President Obama were to implement PPCS in the right way, this week, the transformation of discourse could start immediately. The $60 Trillion in the TGA account would sit there, a huge elephant in a small room. An overnight payment of debt immediately reducing the Fed and Intragovernmental debt to zero, and paying off $6.2 Trillion of the debt counted against the limit, would hit Washington like the proverbial ton of bricks, making it clear that the extension of the debt limit just passed was meaningless compared to the impact of PPCS. Progressives in Congress could immediately apply pressure to void the recent agreement on hurtful spending cuts this year. How could the leadership in Congress oppose voiding it? By saying that the agreement is more important than the fact, evidenced by the $60 Trillion in the TGA, that there was never a need for any spending cuts at all?

Good luck with that! A refusal to restore the cuts would make the people doing the refusing a laughing stock! Even if they got away with that first step, what would happen when Thanksgiving rolls around and the “super Congress” is deciding on further cuts and then presents these for an up or down vote. Will a majority in either House vote for cuts on the grounds that deficit reduction demands it, with $52 - $54 Trillion still sitting in the bank and Trillions in debt scheduled to be repaid over the next year? How would they spin that? How would they paper it over?

How will they act if and when progressives move to restore food stamp cuts and extensions of unemployment insurance, and State Revenue sharing, and payroll tax holidays? How will they act when the public realizes there's a huge amount of money in the TGA and no reason for Congress to go around cutting programs that benefit them? And when hundreds of thousands of outraged citizens, perhaps even millions, demonstrate across the country against the austerity kabuki and the tea party that was about to condemn working America to a decade of stagnation and suffering, when there was absolutely no reason for it; what will Congress do then?

I gotta say, I think they'd cave. The change in the material background resulting from the PPCS $60 Trillion application would be a very powerful catalyst, powerful enough to overcome habitual patterns of thought, and delivering a shock to the neoliberal system that would free up progressivism to be militant and moral again.

(Cross-posted from Correntewire.

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Comment Preferences

  •  Really, Shiny Metal? (1+ / 1-)
    Recommended by:
    Letsgetitdone
    Hidden by:
    psyched

    You are a moron, if you believe the global economy in the information age can be based on shiny metal.

    This isn't the 18th century.  Precious metals exist in an inflated market due only to the relatively small volume of trading.  A barrel of oil is a far more valuable market.

    Hell, bandwidth is worth more than metals in the modern age.

    •  Quit with the name-calling (4+ / 0-)

      Utterly unecessary.

      Sunday mornings are more beautiful without Meet the Press.

      by deben on Wed Aug 03, 2011 at 08:01:57 AM PDT

      [ Parent ]

    •  I think you are misunderstanding (3+ / 0-)
      Recommended by:
      psyched, deben, Calgacus

      What this diary is about. It is not about bring back the gold standard, or a precious metal based standard. In fact quite the opposite.

      This offers a way to set straight the nomenclature that is a leftover of the gold standard days in a way that is legal. Yes you are quite correct on the limitations of commodity based currencies!

    •  Moron? (2+ / 0-)
      Recommended by:
      psyched, Calgacus

      You're the one who doesn't get it! The global economy would not be based on shiny metal. It would be based on fiat currencies, including USD.

      Look, here's the problem. Nixon put us on a non-convertible fiat currency system with a floating exchange rate in 1971; but Congress didn't adapt to the change by modernizing its legislation. In particular, it still retained rules that prevent the Treasury from freely spending/creating money in accordance with mandated congressional Appropriations. By rights, Congress should have ended debt issuance then and just let Treasury spend without issuing debt. Instead it retained constraints on Treasury including limiting its ability to print money, retained the unconstitutional independence of the Fed, and kept the debt ceiling legislation.

      In 1996, probably without many in Congress realizing it; they created a way for Treasury to generate as much fiat currency as it might need to implement appropriations and repay debt. That way was PPCS.

      PPCS is an exercise in implementing a fiat currency; it does not base the value of that currency on the metallic value of the platinum coin(s). On the contrary, the face value of the coin has no relation at all to the value of the metal. The coin's function is not to serve as a commodity basis for the value of US currency. It's function, instead, is to serve as legal tender Treasury can use to FORCE the Fed to provide Treasury with the coin's arbitrary fiat face value in the form of electronic credits.

      You see, the Fed doesn't have the money-creating constraints Congress has laid on the Treasury. It can conjure out of thin air whatever amount of money is needed to perform its functions. Among those functions is to credit deposits of legal tender to the accounts of its clients. The Mint Public Enterprise Fund  is such an account; so the Mint can use its powers, combined with the Fed's power and duty to create as much in electronic credits as Secretary of the Treasury orders it to create. But, again, that money isn't based on the value of the shiny metal, it is based on nothing more than than the constitutional authority of the United States to create its own fiat currency.

      Finally, please note that the Mint's use of one or a few platinum coins to generate the credits it needs from the Fed, will have no measurable effect on the platinum market. The Mint is already scheduled to print 15,000 proof platinum coins. It's diverting less than 10, and perhaps as few as 2 coins to implementing PPCS, will have no impact on the market price of platinum.

  •  gone from reasonable to silly (5+ / 0-)
    Recommended by:
    Surly Cracker, FG, JeffW, nextstep, trumpeter

    Look, I kinda liked the idea of minting a pair of $1T coins in order to screw the GOP hostage takers. It's creative, causes less damage than default, and backs the hostage takers into a corner.

    The thing is: it would only work once. Congress would almost immediately pass a law keeping it from ever happening again.  And in fact, it would be desperately important that they do so.

    Second, if you printed much more than a couple trillion, we'd have a massive devaluation of our currency. Instant inflation on a massive scale. Now I agree that we could use a little bit of inflation, perhaps something in the 2% range, but if you just printed $60T, our currency would become nearly worthless overnight.

    •  actually (1+ / 0-)
      Recommended by:
      FG

      the whole debt ceiling business is a redundant anachronism that should be done away with since congress already appropriates the money to begin with.  but I agree that pushing the seigniorage issue is silly.

      Scientific Materialism debunked here

      by wilderness voice on Wed Aug 03, 2011 at 08:06:15 AM PDT

      [ Parent ]

    •  What is the National Debt? (4+ / 0-)
      Recommended by:
      psyched, heyday, Nellebracht, Calgacus

      To understand what the National Debt really is, please watch Pete Stark. Pete Stark is correct, and Jan Helfeld is wrong! Way wrong! The problem springs from the nomenclature used. The question is how do you legally transition out of using this nomenclature. The current use of the term "National Debt" allows it to be used as a hot button issue, and conflates personal and business debt with "Government issued debt" and allows the common person to manipulated to act against his/her best interest.

      Pete Stark's video below

      Using a coin to retire the national debt is not new. That idea has been floating around the halls of congress for a while.

      The 1996 statute I believe was written specifically to be able to retire the National Debt. The law was deliberately worded the way it was.

      Ellen Brown on page 372 in the 2008 edition of her book "the Web of Debt" says


      In the 1980s, a chairman of the Coinage Subcommittee of the U.S. House of Representatives pointed out that the national debt could be paid with a single coin. The Constitution gives Congress the power to coin money and regulate its value, and no limitation is put on the value of the coins it creates.8 The entire national debt could be extinguished with a single coin minted by the U.S. Mint, stamped with the appropriate face value. Today this official might have suggested nine coins, each with a face value of one trillion dollars.

      Tracing back the references, the book "You be the judge," in Chap 3 "Ponzi Scheme" quotes extensively from 1990 correspondence with the US Mint, corroborating the whole trillion dollar coin paradigm. Thus I believe, that when the opportunity arose in 1996, this strategy was deliberately written into the playbook.

      I think it is high time that the "National Debt" be "retired," and that it be renamed to what it really is - namely "government issued money held by the non-government sector." This can be quite easily accomplished using the PPCS option.

      Much of today's problems come from a deep misunderstanding of what money is, and in particular the nature of fiat currencies, on the part not only of common people, but also on the part of many economists and policy makers.

      •  I dislike that video (1+ / 0-)
        Recommended by:
        psyched

        Stark comes off as a complete dick.  First he derides the interviewer for not having a post-graduate degree in economics, and implies that he won't be able to understand.  Then he browbeats the guy about not letting him talk, then refuses to answer the question.

        Stark could have diffused that interviewer very simply.  Instead of asserting that more government debt makes us wealthier (it doesn't, it just increases our financial surplus), he should have said that increased government debt increases liquidity and decreases debt pressure in the private sector.  And he should have repeated over and over again that all accounts net to zero, so if the government is negative, everybody else is positive (on average).

        And regarding interest payments on the debt, he should have noted that paying interest on that debt is not a burden for the budget (which is what the interviewer was after), because the government can always borrow money from itself to pay that interest.  Growing interest payments on the debt is only an indication that either the size of the domestic financial surplus is growing or that interest rates are rising, which means we're either stuck in a liquidity trap that can only feasibly be gotten out of with increased taxes or the economy's growing, in which case, lagging increased tax revenues will eventually eat away at the size of the debt and thus the interest payments.

        From such crooked wood as that which man is made of, nothing straight can be fashioned. -Immanuel Kant

        by Nellebracht on Wed Aug 03, 2011 at 12:33:20 PM PDT

        [ Parent ]

        •  You have to know Pete (1+ / 0-)
          Recommended by:
          Nellebracht

          to appreciate him. He is 80 years old, one of the last legislators who grew up in the depression. He does not "suffer fools easily." He has a engineering degree from MIT, an MBA from Berkeley, and then he became a banker, starting the Security National Bank in California, and was its President. But at heart he was always a social worker. He has been a congressman since 1973.

          So, in a way I saw Jan Helfeld's demeanor towards Pete as being quite insulting. If it had been instead of Pete, Jan would have been thrown out of my office much earlier.

          •  Should read (0+ / 0-)

            Me instead of Pete. Sorry for the typo

          •  He has also been (0+ / 0-)

            a ranking member of the Banking and Currency Committee and is currently a senior member of the Ways and Means Committee.

            Please see the wiki on Pete Stark

          •  I don't doubt his qualifications (1+ / 0-)
            Recommended by:
            psyched

            From what I can see, when he actually gets to make a claim about the government debt, he's got it right.  And I agree that Jan was being pretty condescending when asking why we don't just borrow another trillion dollars to make ourselves even richer.  But Stark left the door open to that when he implied that growing government debt means growing private sector wealth.  It doesn't because wealth=/=money.  There's a very good chance that a deficit or growing governmental debt will lead to the private sector becoming wealthier, but only if there's spare productive capacity that is actually activated by government spending.  If that spare capacity isn't engaged either directly or indirectly through economic effects, then government deficit spending doesn't lead to greater private sector wealth, just greater liquidity and a greater capacity to become wealthy due to a lower overall private debt burden.

            In short, Jan's a moron while Pete's pretty smart, but Pete lets Jan manipulate him into not only looking like an ivory-tower intellectualist with no familiarity with "regular folks" but gets him to get mad enough at him to throw him out.  Pete gets frustrated at being unable to explain himself to an idiot, then gets mad at the idiot instead of regaining control of the terms of the discussion and explaining himself simply and properly.  I hate it when smart people let dumb people outsmart them that way.  I would much rather see an interview where an incredulous reporter like Jan is brought around to the right point of view by simple explanations from a smart economist.  

            From such crooked wood as that which man is made of, nothing straight can be fashioned. -Immanuel Kant

            by Nellebracht on Thu Aug 04, 2011 at 08:41:39 AM PDT

            [ Parent ]

    •  That's just wrong! (1+ / 0-)
      Recommended by:
      psyched

      Read Scott Fullwiler's piece linked to above. There will be no inflation, and no greater debasement of our fiat currency  than we normally see.

  •  I love innovative thinking (0+ / 0-)

    We know wealth has concentrated to fewer holders, and this is getting worse.  Any deconcentration will be painful to some and vigorously opposed.  The haves and the have mores like holding all the money.

    It would seem that an outcome would be no more investing in the federal government, or am I misreading?  Money would flow to other (mostly corporate) entities.

    Sunday mornings are more beautiful without Meet the Press.

    by deben on Wed Aug 03, 2011 at 08:07:37 AM PDT

    •  We agree on have-nots and have-mores (1+ / 0-)
      Recommended by:
      psyched

      There would be no more investing, if what you mean is buying Treasury Securities, since there would be no more Securities issued. However, the Federal Government doesn't have to borrow back its own currency. So why would it need investors?

      A word on foreign trade. Right now exporters to the US have the following choices about what to do with their USD:

      1. Buy our bonds and their USD can earn some interest;

      2. Buy goods, services, or other assets available in USD (this will improve our balance of payments, produce income for US exporters, and produce increased tax revenues for the Government, lowering the deficit);

      3. Trade USD for other currencies (this will lower the value of USD on the currency markets, reduce our imports and our creditors' exports, and our leakage of aggregate demand leading to increased stimulus in this country and higher tax revenues. If too much of our currency is dumped by our creditors, then they will suffer heavy losses in the value of their own USD holdings, so they are are very likely to divest themselves of USD only very incrementally over a period of years);

      4. Leave their dollars in their reserve accounts (this alternative is very unlikely because it does our creditors no good)

      So, basically, I'm proposing to take away their first option. Is that good for us, or bad for us? I think that's good for us, since they're much more likely to exercise choices 2 and 4, rather than choice 3,, and incur losses.

      However, if we see too much of choice 3. then the Fed can always choose to pay interest on reserves, so that they do get a return on their dollar holdings. Btw, since the Fed would pay that interest; it would not be "on-budget."

  •  Yeah, let's increase M2 10 times and (2+ / 0-)
    Recommended by:
    JeffW, nextstep

    see what happens to the value of the dollar. If the government wants to devalue currency in order to decrease the debt, it can do it without platinum coins.

    •  You have to make the case (2+ / 0-)
      Recommended by:
      psyched, Calgacus

      that simply filling the Federal purse will cause devaluation. Scott Fullwiler, linked to above, has made the case that there will be no inflation due to PPCS. Please critique his arguments and show why they are flawed and your notion that the currency will be devalued if $60T is added to the TGA and the US pays off its national debt.

      You may want to keep in mind that paying off the non-Government sector debt, is an asset swap of debt instruments for reserves. There is no addition of net financial assets to the system. So your claim is going to reduce to the idea that reserves are more inflationary than securities. Scott addresses that argument in his post.

      •  I could be off on this as I'm (2+ / 0-)
        Recommended by:
        psyched, Calgacus

        not an economist. I looked at Joe Firestone's proposal on his blog. I understand using the coins to pay the debt held by Fed. That won't do anything to money supply. But if government will continue to issue currency in the future without borrowing, it will be no different from printing money to cover debt. It may not be very inflationary if only small quantities are printed every year. I misunderstood the proposal as asking to redeem 60 trillion immediately.

        •  I meant I looked at your blog where you have (0+ / 0-)

          a detailed explanation of it.

          •  issuing money & not "borrowing" ISN'T inflationary (0+ / 0-)

            FG: That you are not an economist is a plus for understanding economics.

            But if government will continue to issue currency in the future without borrowing, it will be no different from printing money to cover debt.  

            Sort of right - true, it would be the oh-so-evil "printing money".  But it contains some crucial confusions. There is nothing inflationary about spending by issuing currency instead of spending "by 'borrowing'".  Money, currency IS government debt.  And government debt, bonds are just another kind of money that the government issues.  If the government printed two kinds of bills, one with purple ink=bonds and the other with green ink=dollars, why would the green ink bills be more inflationary?

            The USA does not borrow dollars from the private sector. It cannot.  What it does is "print currency" and spends it. That is what sending out a Social Security check  amounts to. It also "prints bonds".  And then it sells the bonds to the private sector in return for the currency the private sector holds.  The bonds the USA sells are bought by banks with the cash the USA spends. Government "Borrowing" DOES NOT remove money from the private sector.

            Government "Borrowing" IS NOT BORROWING - because both the bond AND the dollar bill, currency are government debt. Real lending/borrowing is when you get money from a bank - a bank check, a debt of the bank, in return for a mortgage note, your debt.

            What matters for inflation is how the total amount of money: (government debt=bonds) & (government debt= currency) & (private debt=bank credit money) moves through the economy, how it is spent.  Bonds are just money that inflates itself.  Yes, there are some paradoxical effects that can make this self-inflating government money have a slight deflationary effect.  But the natural effect is for inflating money = bonds = "borrowing" to inflate, and that is what the long-term statistical evidence seems to indicate.

  •  Hmm (2+ / 0-)
    Recommended by:
    JeffW, trumpeter

    Did you by any chance happen to work for Enron formerly? Something about this scheme sounds suspiciously familar....

  •  At least three kinds will resist this idea (0+ / 0-)

    Billionaires (not well-represented on DKos, but extremely so in DC).

    Others who consider themselves wealthy.

    Those who naturally resist new paradigms.

    As for those who disparage this paradigm shift, I'd like to hear what their plan is to wrest wealth back from those who have been crushing it out of the poor and the middle class.

    Sunday mornings are more beautiful without Meet the Press.

    by deben on Wed Aug 03, 2011 at 08:34:47 AM PDT

  •  Sell it to Obama, not us. n/t (0+ / 0-)

    Float like a manhole cover, sting like a sash weight! Clean Coal Is A Clinker!

    by JeffW on Wed Aug 03, 2011 at 08:53:46 AM PDT

  •  Further consequences (1+ / 0-)
    Recommended by:
    psyched

    According to MMT, you're gonna have further consequences than what you note if you pursue this sort of strategy.  Since government deficit spending creates a private domestic financial surplus, it brings down interest rates.  Government borrows as a way of mopping up the domestic financial surplus in an attempt to establish an interest rate floor.  Without being able to borrow, the only option the Fed would have to control the interest rate would be to offer a return on overnight surplus reserves.  Otherwise, ongoing deficit spending will cause interest rates to fall to near zero.  What would be better for wealthier people/banks as opposed to poor people, offering a return on overnight surplus reserves or selling bonds on the open market?  I'm not certain, but my gut tells me that bonds are better for the poor and middle classes than overnight returns on surplus reserves would be.

    This is important because the Fed can only control the overall money supply by influencing interest rates.  Very low interest rates increase the money supply while very high ones restrict it, because lots of people qualify for and take out loans at very low or zero rates of interest, and every loan adds to the money supply by that amount.  That the new money is offset by an equally large debt is irrelevant to the overall money supply and its effect on prices.  So the Fed needs to be able to establish a floor for interest rates to prevent excess private creation of money (and debt) that would lead to rapid inflation and then a subsequent crash.  Getting away from borrowing money in the private market prevents them from being able to do that.

    On the other hand, the rate of interest has no effect whatever on the government's ability to borrow and create money, in part because it is not financially constrained and so no rate of interest can be a financial burden for it, and in part because even if they didn't want to pay the rate of interest prevailing in the private market for whatever reason, they can always borrow from themselves at their preferred rates.  Fiscal policy is the control of money creation by the government, interest rate policy is the control of money creation by the private sector.  

    By tying fiscal policy to interest rate policy through the requirement to borrow on open markets for any deficits (and the stupid debt limit), the government loses a little control over it's own money creation in order to gain control over private money creation.  By changing the government's money creation activities from borrowing on the open market with Fed interest rate targets to coin seigniorage, the government would essentially gain complete control over its own ability to create money through fiscal policy, but at the cost of losing control of private money creation.  

    And while it would have control of its ability to create new money in principle, it would in the end depend on its ability to control fiscal policy, which, given the countercyclical nature of expenses like unemployment payments and the nature of other non-discretionary expenses, it's unreasonable to think that fiscal policy can or ought to be controlled with the money supply in mind.  Better to let fiscal policy expand or shrink as needed or politically expedient, while interest rate policy controls the overall rate of money creation.

    From such crooked wood as that which man is made of, nothing straight can be fashioned. -Immanuel Kant

    by Nellebracht on Wed Aug 03, 2011 at 10:00:10 AM PDT

    •  Sorry (2+ / 0-)
      Recommended by:
      psyched, Calgacus

      the point of this elaborate argument is to contend that it is worthwhile to maintain monetary policy as an important way of influencing private sector money creation. I don't agree, and I don't think MMT agrees. We are believers in fiscal policy and think that the less monetary policy there is the better off everyone is, since monetary policy is in itself biased against people with relatively little money.

      In any event overnight interest rate targets can be maintained by the Fed if it pays interest on reserves -- IOR. So if what you're saying becomes problem, we can just raise rates that way. If poorer people are getting victimized because IOR only benefits big players, there are other ways to adjust for that loss to their balance sheets. We could go back to the kinds of savings bonds we issued in WWII to help them out. Or they could be compensated with subsidies of various kinds. All kinds of possibilities are open to us when we accept that the US has no solvency limits.

      •  You can't do away with monetary policy (1+ / 0-)
        Recommended by:
        psyched

        While I certainly agree that without a sound fiscal policy, no monetary policy in the world is going to be able to make any bit of good in the economy, nowhere does MMT declare that the government shouldn't manage the overall money supply known as M2.  I also agree that one option the Fed has to manage that supply is to offer a return on overnight surplus reserves, as I mention that in my original post.  Many other central banks around the world do so.  Our central bank does it by offering bonds on the open market.  In terms of monetary policy, it's six of one, half dozen of the other.  But in terms of the fiscal impact of these varying different monetary policies, I'd need a better argument that overnight interest on surplus reserves is a greater economic equalizer than open market bond trading.  But your diary is not about the differences between bond trading and interest on overnight surplus reserves, but about using coin seigniorage as monetary policy.  My point is that doing so makes targeting interest rates by the central bank very difficult if not impossible, and that targeting interest rates is one of the vital functions of a central bank.

        I also agree that among the upshots of MMT is that no sovereign nation that uses its own fiat currency can ever have any solvency limits.  But that just means that government debt doesn't have the same meaning as private debt.  A private individual can't carry an arbitrarily high and growing level of debt for an arbitrarily long length of time, while a government can.  It means that while there are downsides to a private individual or the private sector as a whole carrying debt, there aren't the same downsides to the government carrying debt.  The point of MMT is not to find creative ways to eliminate government debt, but to get us over worrying about such debt as if it had the same implications as household debt.  

        From such crooked wood as that which man is made of, nothing straight can be fashioned. -Immanuel Kant

        by Nellebracht on Thu Aug 04, 2011 at 08:23:44 AM PDT

        [ Parent ]

      •  Let me put it another way (1+ / 0-)
        Recommended by:
        psyched

        There is no functional or economic difference between coining a $1 trillion coin, depositing that coin in a vault at the Fed, borrowing $1 trillion from the Fed against the value of that coin, and then just letting the Fed have that coin to dissolve the debt (which is what would functionally happen to create these dollars for circulation), and directing the Treasury to sell $1 trillion worth of bonds to the Fed and directing the Fed to keep those $1 trillion worth of bonds in a vault and off the open market.  Thus, in essence what you are proposing is to do away with the Fed's open market trading of bonds.  But according to MMT, open market operations are vital to that government in order to maintain and direct the value of the currency it issues.  It is only through open market operations that the government can have any influence at all on private money creation, without just nationalizing all banks.

        From such crooked wood as that which man is made of, nothing straight can be fashioned. -Immanuel Kant

        by Nellebracht on Thu Aug 04, 2011 at 08:55:40 AM PDT

        [ Parent ]

        •  "Monetary policy" maybe not so vital or powerful (1+ / 0-)
          Recommended by:
          psyched

          But according to MMT, open market operations are vital to that government in order to maintain and direct the value of the currency it issues.  No, this is idea comes from the mainstream, not MMT = non-insane economics.  MMT is a theory, not a policy prescription in any case.  Usual MMT-guided recommendations include fixing interest rates at a low level, for all time, as monkeying with them appears to do nothing but cause financial instability, and some recommend a ZIRP, zero interest rate policy. The upshot of these recommendations IS to "declare that the government shouldn't manage the overall money supply known as M2" - at least by what is usually called monetary policy.

          It is only through open market operations that the government can have any influence at all on private money creation, without just nationalizing all banks. Modern banking already is a "nationalization of banks" in all but name - where the state influences private money creation by saying that bank money is as good as tax-driven state money.   The problem is that this is literally a license to print money, and when not closely regulated, a license to steal.

          There are ways to influence credit besides the extremely blunt instrument of monetary policy.  Since lending is capital-constrained, not reserve-constrained, countercyclical capital requirements are one recommendation.  Of course real financial regulation of banks, basically a return to the New Deal regulations - maybe even complete nationalization of these not-private entities - is a more important way of influencing credit creation

          So the Fed needs to be able to establish a floor for interest rates to prevent excess private creation of money (and debt) that would lead to rapid inflation and then a subsequent crash.  This is the mainstream story.  Reality is more complicated, and probably somewhat the reverse.  Low interest rates do not stimulate borrowing all that much (except when they are reduced from a previous excessive, unemployment - producing level).  And therefore they do not cause that much inflation nor are really such a great tool for controllling credit creation. The actual evidence is that low long-term rates tend to disinflate, rather than inflate.

      •  Yup, they got it amazingly right in WWII. (1+ / 0-)
        Recommended by:
        psyched

        Yes, I think they had monetary policy exactly right then.  Capped, stable, low interest rates on treasuries for financiers.  OOh- evil money printing!! Higher rates on less-liquid-by-design savings bonds for consumers - who had jobs & could save, that did therefore reduce consumption and inflation, and equalized income to boot.  

        Probably 1941-2? is the year we want to turn the clock back to: New Deal regulation. good monetary (non)policy, jobs for everyone from government spending/investment + the WPA ( =JG) still in place. (And not yet enormous fighting for the USA).

  •  Thank you, Letsgetitdone (0+ / 0-)

    for all your good work in continuing to pursue in such a thorough and energetic fashion this important aspect of our economic system. The debt ceiling "crisis" may be behind us for now, but we must continue to press this line of thinking, for we cannot allow the system to remain permanently out of whack.


    For the first time in human history, we possess both the means for destroying all life on Earth or realizing a paradise on the planet--Michio Kaku.

    by psyched on Wed Aug 03, 2011 at 09:44:46 PM PDT

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