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How many times have you heard that the Government can only spend money after it raises revenue by either taxing or borrowing? Nearly every time someone talks or writes about the US's public deficit/debt problem? How come nobody asks why, since Congress has the unlimited authority to create coins and currency, it doesn't just create money when it deficit spends? The short answer is that Congress in 1913, constrained the Executive Branch from creating currency or bank reserves, delegated its power to do that to the Federal Reserve System, and never looked back when we went off the gold standard in 1971, even though this removed the danger of money-creation outrunning gold reserves, and also created a new monetary system based on fiat currency.

How It Works

But coins, it turns out are different from currency and bank reserves. They're the province of the Executive. And Congress provided the authority, in legislation passed in 1996, for the US Mint to create one oz. platinum bullion or proof platinum coins with arbitrary fiat face value, having no relationship to the market value of the platinum used in the coins. These coins are legal tender. When the Mint deposits them in its Public Enterprise Fund (PEF) account, the Fed must credit it with the face value of these coins. The difference between the Mint's costs in producing the coins, and the reserves provided by the Fed is the US Mint's “coin seigniorage” or profit from the transaction.

The US code also provides for the Treasury to periodically “sweep” the Mint's account at the Fed for profits. These then go into the Treasury General Account (TGA), the spending account of the Treasury, narrowing or eliminating the revenue gap between spending and tax revenues. So, for example, say the Secretary of the Treasury ordered the Director of the Mint to create a $60 Trillion (face value) coin; and deposit it in the PEF account at The NY Federal Reserve Bank. The Fed would credit the PEF with $60 T in reserves, and the Treasury would then “sweep” the seigniorage, nearly $60 T, into its spending account.

Benefits

Platinum coins with huge face values such as $60 T, can produce seigniorage closing the revenue gap and technically end deficit spending, while still retaining the gap between tax revenues and spending that can add to aggregate demand and produce full employment. Platinum Coin Seigniorage (PCS) is also a way for the Executive to end debt ceiling crises, since the profits could be used to repay debt instruments when they fall due, without the need to issue any more debt.

The seigniorage from a $60 T platinum coin would serve as a potent symbol of the truth that the Federal Government can never involuntarily run out of money. This is one of the central ideas of MMT that the public needs to accept routinely, to understand that the Government’s budget isn’t like their household budget. The presence of the $60 T in the public purse would be a positive enabler of progressive legislation creating benefits that people want now, but austerians say we can’t pass because “we can’t afford it.”

If all debt instruments are re-paid by using PCS, then, eventually the US would have no debt subject to the limit, or presence in the bond market, and would pay no interest to bond holders. No one would worry about the public debt, or use its size to justify blocking legislation that fulfills public purpose and promotes the general welfare.

So, PCS-based elimination of debt can end the whole austerity mind set that provides our current budgetary process with its constraining conservative cast, focused on narrow monetary cost considerations, rather than on a broader progressive framework that weighs the real costs and benefits of proposed fiscal activities of the Federal Government. Congress and the Executive would then 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. Then the issues will be about what people need, and what improvements we can make by working together through the Federal Government. That would be the fulcrum of a new, game-changing politics, not debt, deficits, and debt-to-GDP ratios.

Why we need to get it done right now!

It must be done now! If it doesn't, then people who are against the use of PCS will have time to organize against it and get it repealed by the Congress. Now that the PCS capability is widely known, the FIRE Sector will be gunning for it with all the financial, political and propaganda power it can bring to bear. It will do that because using PCS, especially the $30 T or greater coin, High Value Platinum Coin Seigniorage (HVPCS) I propose, strikes at the domination of the financial and political systems by Wall Street and the big banks. Cullen Roche explains why:

The most interesting thing about the coin idea is that the biggest threat of the coin was to the existence of private banking. I am actually surprised that a major bank hasn’t come out very publicly stating that the coin was ridiculous. Why? Because the coin exposes a potentially enormous change in the way the US monetary system functions. Instead of having a money system that is designed almost entirely around private banks (who issue most of the money) the coin threatened to expose the reality that government could self finance if it wanted to. In other words, the government could become the permanent primary issuer of money (as opposed to choosing to use private bank money).

So the Fed’s role is of particular interest here. And we must again ask ourselves. What is the Fed? Is it a public entity or private entity? It’s a bit of both. The Fed is a strange sort of hybrid public/private entity. But the coin decision has to make one wonder where they stand on this issue and whether the Fed has imposed its will on a potentially important debate. Is this merely a case of the Fed being apolitical and independent? Or is this a case of the Fed siding with its true master – the private banking oligopoly? I don’t know, but one thing we know for sure is that the Fed is not merely serving public purpose at all times. After all, its existence as a support feature for an oligopoly that serves private purpose (banks are slaves to their owners) renders the Fed compromised on public purpose to some degree.

So, HVPCS threatens the banks' domination of the Fed, and also their role in money creation, and with it some of their income. The more time that passes without using HVPCS, the more likely it is that the Executive Branch will lose this capability to Wall Street's persistent political efforts at repeal, and become the actual, rather than only the pretended (kabuki) prisoner of debt instruments and austerity once again.

Already, some bloggers in the business press who want to use the TDC to avoid the debt ceiling have proposed and expressed support for the idea that the capability to use PCS could be repealed in a swap for repeal of the debt ceiling legislation. This is a very unequal swap, because the power to use PCS, along with the willingness to use it, already makes the debt limit a dead letter.

The only swap that makes any sense is repeal for legislation giving Treasury the same right as the Fed has now, to create money out of thin air, but only for the purpose of repaying debt subject to the limit and covering deficit spending appropriated by the Congress; because this, and only this, is the equivalent of the PCS power. The only thing that would be more preferable than either of those things is to end the “independent,” really big bank and Wall Street dominated, Fed, and make it accountable by placing it under the direct authority of the Executive Branch and the Secretary of the Treasury with the Fed's current capabilities to create money intact.

Progressives need to fight for retaining the Executive's capability to use PCS, because that is the quickest road to ending austerity politics and preparing the way for Modern Money Theory-based policies to deliver sustainable economic prosperity, full employment, low inflation, and fiscal policy devoted to the public purpose. Removal of the capability would require that austerity politics be ended through change in the Congress. That sort of change, however, is years down the road, whereas the President can make HVPCS happen right now.

(Author's Note: h/t to Jack Foster for proposing a framing document for HVPCS. This is it; but divided into 6 parts for blogging convenience. The rest of the series will deal with objections made to HVPCS and answers to them.)

(Cross-posted from New Economic Perspectives.)

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Comment Preferences

  •  Words of encouragement and stuff. (0+ / 0-)

    Please persist.

    If you're taking suggestions from the circus peanut gallery, perhaps a lesson in double entry book keeping, followed with fractional reserve banking and economic multipliers speaks more clearly to the level of economic education you can expect.

    And to prove I'm not a total asshole (yes, I am an asshole, but not totally) I give you Vocational Guidance Counselor-

    Next, The Larch.

  •  The impossible dream (0+ / 0-)

    Now that science education is widespread enough that few imagine that perpetual motion is a possibility, we still have to contend with those who imagine that a perpetual printing press can create value, not just pretty pieces of paper. And, of course, this is not the first moment in history that this impossible dream has surfaced. For anyone interested in how this sort of magical thinking goes wrong, Amazon offers a free Kindle download of Andrew Dickson White's 1896 monograph, Fiat Money Inflation in France—64 very cogent pages that ought to serve as a warning to those who think that we've discovered some enchanted means of doing an end-run around economic reality.

    http://www.amazon.com/...

    http://en.wikipedia.org/...

    •  Except, of course, that money IS JUST PRETTY (1+ / 0-)
      Recommended by:
      Calgacus

      PIECES OF PAPER in any fiat currency. It has no actual value. If you new anything about fiat currency, you should know that. I think that even comes before the perpetual motion machine lesson. Here's the big news flash - an economy is not a measurement of the pretty pieces of paper, an economy is a measurement of the output of goods and services, employment, balance of trade (in goods) and the balance between our pretty pieces of paper we have and the pretty pieces of paper belonging to other nations.

      When ever I read or hear someone with your misunderstanding about the basics of economics, I immediately know that the lesson on actual value was missed somewhere along the way. The housing bubble was created because it was not value based. The tech bubble was created because it was not value based. Economies are real. They are people WORKING and providing for their families. They are the production of goods and services.

      Finally, in case you missed it, the law of supply and demand remains predominant. When unemployment is high, the demand for goods is low and there is little (relatively) little circulation of currency. When unemployment is low the opposite is true. Driving unemployment, controlling the level, is the major tool by which the US economy can be grown at this point in time. That can ONLY be done via spending. Austerity is completely counter-indicated as can be proven by every single historical case imaginable since the development of MODERN fiat currency.

      Your lack of understanding of PCS is understandable as it is a new idea but your fight to retain your ignorance is somewhat less so.

      "When in doubt, do the brave thing." - Jan Smuts

      by bunnygirl60 on Sat Feb 02, 2013 at 10:35:55 AM PST

      [ Parent ]

      •  Lack of understanding (0+ / 0-)

        You confuse the pretty pieces of paper with what they ultimately represent, which is the belief on the part of those those who accept the paper that they will be able to get stuff they really want. There is no demand, per se, for paper currency. There is a demand for goods and services, for which any currency is, variously, a stand-in, convenient tally, and  non-specific promise. You toss around the term "value" without, apparently, much of an understanding of what that means, you confuse cause and effect with regard to currency supply and employment, and you give not the slightest thought to the necessity that there be both a national and international market that finds the promises bound up in those pieces of paper to be credible.

        Putting "modern" in all caps does nothing whatever to bypass the fundamental weak point of fiat currency, which is that it only retains stable value so long as people find its promise convincing. One of the primary ways to make that persuasive is to tightly control those printing presses, to keep a reasonably fixed relationship between the unit of currency and the amount of goods it can be exchanged for. Throw that balance out of whack and very bad things happen (see the link to "hyperinflation" below).

        This thing you boast of as "MODERN" fiat currency has a very short track record, and your "every single historical case" would be a short list. It's even shorter than you imagine, as there have been reasonably successful austerity programs in Estonia, Lithuania, Latvia, Switzerland, the UK, and Canada. Right at the moment, the U.S. dollar still retains much of its desirability inside and outside of the country. But there is no natural or technical necessity which insures that as a permanent state of affairs, and there is no monetary theory of which I am aware that claims otherwise.

        Your own lack of understanding is emphatically signaled by your belief that PCS is a new idea, based on your apparently perfect ignorance of the many historical cases in which fiat currency (which surely can be successfully issued and managed) has gone disastrously haywire. As i said, anyone who imagines that all that is necessary for economic paradise is a government printing press is living in Cloud Cuckooland.

        In addition to the work I suggested earlier, here are some links to help remedy your own purblindedness.

        http://en.wikipedia.org/..._(economist)
        http://en.wikipedia.org/...
        http://en.wikipedia.org/...

        •  Thuffering Thuccotash, I'm a Purrblind Putty-tat (0+ / 0-)

          there have been reasonably successful austerity programs in Estonia, Lithuania, Latvia, Switzerland, the UK, and Canada

          Perhaps, if one takes the point of view parallel to a microbe viewing the Black Death as a "reasonably successful plague".  By any common, human standard, such austerity is a miserable failure.

          you give not the slightest thought to the necessity that there be both a national and international market that finds the promises bound up in those pieces of paper to be credible.
          There is no necessity of an international market for such promises to exist, just as there is no necessity for an intergalactic market for dollars say to exist - although I do not put it past the nonsense-pedlars of academia to start insisting we must impose austerity to satisfy the bond vigilantes of Andromeda.

          The "national market" does exist - everywhere in the developed world, particularly in the USA. The problem is that the the market for dollars is too strong. The National Debt is too low. Too few dollars out there. Uncle Sam's promises = dollars are too credible. So credible, so desirable that the desire to not be bereft of them is so strong that this desire interferes with the flow of real goods and services in the US and world economies.  In any case, as long as a "national market" exists, an "international market" exists too, a fortiori. As long as the "national market" produces any internationally desired good or service at all, the national currency is desired to procure that good.

          "Fiat" money - there is no other kind - and more generally debt, is used as means to organize the production of goods and services, through the division of labor, which is logically impossible without credit/debt relations. A decent analogue is orders in an army. Of course a general can issue too many orders. But he can also issue too few. One thing that no army has ever conceived is that it could somehow run out of orders. Of course having a "magical" money/ order printing press does not ensure prosperity or the victory of an army. But systematic sabotage of the orders, systematic prevention of enough high-powered orders from the General/ the State, enough sabotage to uselessly disemploy part of the army / labor force WILL ensure poverty and misery. Primarily for the disemployed, but also for everyone else in the economy/ army.

          That is the situation the USA and the world is in now. An incredibly easy problem to solve. All that is necessary for the government to eliminate unemployment is - for it to eliminate unemployment, through a Job Guarantee. After that, as Keynes said - "take care of the employment, and the budget will take care of itself". (And pretty much everything else, like inflation, too.)

          •  My regrets (0+ / 0-)

            but I have been unable to discover any rational point to which to respond. This is undoubtedly my own limitation, so you should probably just forget about trying to improve my understanding.

            •  I think you could discover rational points (0+ / 0-)

              Well, much of your thinking is in the right direction - thinking of money as non-specific promises. But you are repeating many of the modern "mainstream" errors of logic and rewriting of history.

              The basic error is thinking of these non-specific promises as specific ones, and then then identifying the promise with thing promised, the "theatre-ticket with the performance" as Keynes said.

              All I was trying to relay was the once (say in 1950) universal "Keynesian" understanding that  depression circumstances, like the 30s, like right now, are due to a scarcity of state money, of dollar bills. And this simple problem has a simple, common sense cure. Governments should print money and use it to hire people. Stop printing money when there is full employment. Problem solved.

              This has worked very well wherever it has been tried, and is not  inflationary, especially in the long run. The whole world understood this and applied this during the postwar full employment Keynesian era, from around 1945 - 1975, (more like 1933- for the USA) - the most prosperous period of human history.

  •  LGID - regarding the need to ACT NOW. YES!!! (0+ / 0-)

    Please check your dKos messages, I have ideas.

    "When in doubt, do the brave thing." - Jan Smuts

    by bunnygirl60 on Sat Feb 02, 2013 at 10:52:24 AM PST

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