US Mint

Bernie: YOU Stop Caving to Peterson/Obama/#supercommittee

Joseph M. Firestone — Sun, 20 Nov 2011 13:00:44 -0500

Dear Bernie,

Today, you told the “Democrats stop caving in . . . ” to the interests of corporations, the tea party, wealthy individuals, and the Republicans in Congress. The only problem with your fiery statement is that you began it by “caving in” to them yourself. You did this by immediately legitimizing their frame of reference by saying:

“Here is something we all can agree on: Federal deficits are a serious problem.”

I'm sorry Bernie, we can't all agree on that, because it's just not true, and it's what the Republicans, the Blue Dogs, most Democrats and the Administration are all using to try to bully you and us into agreeing to spending cuts in key discretionary programs and programs like Social Security and Medicare, and also into not moving for more spending on jobs, better entitlement programs, including Medicare for All, and better discretionary programs we need to solve our many national problems.

The idea that Federal deficit spending is a serious problem is the idea, that along with the belief that the Federal debt is getting to be some kind of irresolvable problem, is in back of the whole anti-deficit/debt thrust of the deficit terrorists like Pete Peterson, David Walker, Alice Rivlin, and all the others in Washington including the President. In turn, this thrust has led to the Bowles-Simpson Catfood Commission, and the current so-called supercommittee that you've been fighting so hard 'lo these past months, and the constant drum beat that “There Is No Alternative” (TINA) to deficit cutting.

So, when are you going to learn that the only way for you and us to end this fight and to win it, is to deny their basic premises and particularly their foundational idea that the United States of America, the issuer of its own non-convertible floating fiat currency, with no external debt payable in anyone else's currency, and the ultimate source of all US Dollars existing in the world, can run out of the money needed to continue to deficit spend, and to pay all its bills including the principal and interest on all its debts, as well as all Congressional appropriations you and your colleagues may choose to legislate?

You say that the deficit is a serious problem. But I think it's not a real problem at all for at least three reasons that refute TINA.

-- First, because nothing bad needs to happen if we continue to run deficits, as long as we don't do so after our economy is operating at full capacity. But we are very far from that state right now with between 25 – 30 million people wanting full time employment and not being able to get it. So, we can't have demand-pull inflation now. It's impossible.

-- Second, because it's the Congress that is constraining the Government from generating money for its debt repayment, or appropriated deficit spending using means other than taxing or borrowing, because Congress prohibits the Treasury from freely issuing Treasury Notes and also requires that it issue debt before it deficit spends, while at the same time imposing debt ceilings that interfere with borrowing to spend appropriations Congress has already made. So, there is no real problem because the constraints were made by Congress and can be lifted by it in a single afternoon, if it wants to.

There Is An Alternative (TIAA). And it is for Congress to stop requiring the Treasury to issue debt when it deficit spends, and to allow it instead to "mark up" its own accounts at the Fed when it needs to spend an already legislated Congressional appropriation, or to repay past debt and interest.

You should be making the truth of TIAA clear to the American people, Bernie, so that everyone knows that any shortage of money to spend is Congress's own fault, and that there is no debt/deficit problem in the sense of an inability to pay, or a need for China, Japan, or the bankers to lend the Government back the money the Government created in the first place, or a need to cut spending, or a need to raise taxes on anyone, or both, to avoid impending or future solvency.

But instead you're reinforcing their message that there is a serious deficit problem. Now that's what I call “loser liberalism,” Bernie.

-- And Third, there is no problem because even under current law, with its constraints on the Treasury's ability to spend what's required to repay debt or spend Congressional appropriations, it has been legal since 1996 for the Executive Branch to issue 1 oz. proof platinum coins having arbitrary face value in the amount of many Trillions of Dollars, deposit those coins at the Fed, and force the Fed to use its money-creating authority to credit Mint and Treasury Accounts with electronic credits equal to the value of the coin. The money placed in Treasury's accounts as a result of this action need not be spent. In fact, if the Executive minted a $60 T coin, then it could not all be spent because the authority for spending by the Treasury would not extend further than repayment of debt subject to the ceiling as it falls due, and payment implementing Congressional appropriations approved up to now.

So, even if such a coin were issued, spending by the end of the year would be limited to repayment of all intra-governmental debt, including all debt held by the Fed itself, and the Federal spending appropriated by Congress for the remainder of this calendar year. Most of the $60 Trillion would still remain unspent to be used for future debt repayment as the securities fall due, and payment for future Congressional appropriations that would not be covered by tax revenues.

As long as those appropriations don't outrun tax revenues more than is necessary to enable a full employment, full capacity utilization economy, no one has to worry about demand-pull inflation resulting from excessive Government spending. It won't happen. And if there is any inflation from other causes, which is possible, and even probable, if we don't prevent excessive commodity speculation through appropriate laws and their faithful enforcement, any cost-push inflation, won't have anything to do with Government spending.

You can find a more detailed explanation of this coin seigniorage idea and its implications here, here, here, and here. Without going into detail in this open letter, I'll just say that if the President uses coin seigniorage in the way I've outlined, he can fill the public purse with such a large volume of USD electronic credits that no one will be able to say, ever again, that the US has a deficit/debt problem because it is running out of money. And, additionally, in a very few years, the Treasury's payment of the Government's debts as they fall due, without any further debt issuance, to spend Congressional appropriations not covered by tax revenues or other sales, will result in most of the debt subject to the ceiling, except for long-term debt, being paid. There will be very low levels of debt subject to the ceiling and eventually no debt of this kind at all.

So, to summarize, it is not true that “. . . Federal deficits are a serious problem.” And it is not true that we have to do anything to reduce deficits defined as a gap between Federal spending and Federal tax revenues. The whole exercise in deficit reduction that the president and the other deficit terrorists have put this country through has been an immensely wasteful distraction.

As you say in your HuffPo piece:

“This is a pivotal moment in American history. The rich and large corporations are doing phenomenally well while the middle class is collapsing and poverty is increasing. Now is the time to answer the question that the Woody Guthrie song poignantly asked, "Which side are you on?" The Democrats must answer boldly that they are on the side of working families and the middle class and that they will fight to protect their interests.”

And you, Bernie, must also answer boldly with the truth. People who are on the side of working families and the middle class, like yourself, cannot continue to say that “we can all agree that there is a serious deficit problem”, because that has been the continuing most important element in the case the deficit terrorists are making.

To defend our ground, and the 99%, we need to deny and defeat that false framing. We cannot reinforce it! We need an alternative framing.

And that framing is, the Federal Government needs no money from anyone to pay its debts and to spend what Congress has appropriated. We are a fully sovereign nation, and as long at we retain that full sovereignty, including its fiscal aspects, the Government can spend/create any money it needs in accordance with the authority given to it by the Constitution of the United States. It is up to the Congress and to the Executive to use that authority as necessary to create and maintain full employment AND price stability, as well as all other aspects of the Public Purpose, as that purpose is defined and specified by the people of the United States of America.

Best,

Joseph M. Firestone, Ph.D.

President Obama: Stop Breaking the Law; Use Coin Seigniorage

Joseph M. Firestone — Wed, 18 May 2011 13:57:14 -0400

Yesterday, The United States actually ran over the debt ceiling of $14.294 Trillion by $50 Billion or so, which means that the Treasury has issued $52 Billion more in debt instruments than is allowed by Congress's debt ceiling, which, in turn, means that the current Administration stands in violation of the Law. In reply to this, some will say that the debt ceiling is unconstitutional so the President doesn't need to observe it. However, in the present context, I don't think that's true. Here's my argument.

1) Congress mandates a debt ceiling that Treasury has now exceeded by $52 Billion. So Treasury is currently in violation of the law unless the law in question is unconstitutional.

2) Congress also mandates that all deficit spending must occur after bonds are issued to "make room" for the spending.

3) Congress also prohibits the Federal Reserve from letting Treasury run a negative balance in its account, which is probably just a function of 2).

4) The Constitution (14th Amendment section 4) prohibits anyone from questioning the validity of debts of the United States. In Perry v. United States (1935) the Supreme Court ruled, based on section 4, that voiding a United States government bond is beyond the power of Congress.

Yet another argument that might be applied in this case is based on the idea that the Congressional appropriations providing for Treasury's spending were passed after the current debt ceiling. Since later laws supercede earlier ones, it follows that legislation appropriating Treasury spending supercedes Congress's earlier passage of the debt ceiling.

5) If only 1-4 applied, then 1) would be either unconstitutional or supercede by later law, and the Executive could ignore 1), continue issuing debt and wait for the Courts to tell Congress that the debt ceiling is unconstitutional or superceded.

6) However, the context includes more than 1) -- 4). It also includes the authority for the Executive to employ jumbo coin seigniorage to replenish the Treasury General Account at the Fed and pay all of the obligations of the United States without issuing more debt or even, technically, any more “deficit spending.” As beowulf puts it:

The Secretary has rather broad authority to mint coins, Congress was apparently feeling generous when it authorized platinum coins in 31 USC 5112(k) (“with such specifications, designs, varieties, quantities, denominations, and inscriptions and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe…”). If deficit spending was paid for (eliminated actually) with miscellaneous receipts revenue generated by selling the Fed jumbo denomination coins, and since the Federal Fund Rate can now be pegged with Interest on Reserve payments in lieu selling Treasuries to drain excess reserves, Tsy could fund govt operations indefinitely without ever raising the statutory debt limit.

Beowulf might also have pointed out that national debt can eventually reduced to near zero with the constant use of coin seigniorage. Details of how coin seigniorage would work with citations to legal issues involved are in beowulf's post; and an outline of steps in a procedure is in my recent post.

7) So, since the Executive has a way of paying all obligations without deficit spending by using coin seigniorage and its Constitutional duty is to uphold both the Constitution and the laws of the United States, it follows that the Executive must immediately end its violation of the law, and use coin seigniorage to replenish the TGA as necessary to implement all the spending appropriations passed by Congress and all the previous obligations of the United States.

What else is there to say? The President has no choice in this matter. Congress has appropriated money for particular purposes. It has also passed a debt ceiling, and passed a law providing the Administration authority to engage in jumbo coin seigniorage to get revenue necessary to spend appropriations in the presence of the debt limit. The President is also bound to uphold the Constitutional prescription that no one may question the validity of the debts of the United States, which certainly also implies, in the context of the debt ceiling, that it is the obligation of the President to remove any basis for such questioning by using the authority granted to him to raise all revenue necessary to spend Congressional appropriations. So, what is he waiting for? He should move back into compliance with the Law by immediately using jumbo coin seigniorage, while ignoring the inevitable teeth gnashing by those holding the nation hostage!

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

Bernie Says: “. . . We're Tired of Bullying . . .”

Joseph M. Firestone — Sun, 15 May 2011 18:44:23 -0400

Visit msnbc.com for breaking news, world news, and news about the economy

An Open Letter to Bernie

Dear Bernie,

If you're really tired of the bullying then I think you need to stop believing in and start denying the basic premise the Republicans, the Blue Dogs, most Democrats and the Administration are all using to bully you and us into agreeing to spending cuts in key discretionary programs and entitlement programs, and also into not moving for more spending on jobs, better entitlement programs, including Medicare for All, and better discretionary programs we need to solve our many national problems. That premise is that the United States of America, the issuer of its own fiat currency, and the ultimate source of all US Dollars can run out of the money needed to continue to deficit spend and to pay its bills.

Of course, this can't happen Bernie, as long as the Congress doesn't constrain its own constitutional authority to spend by committing to legislation that limits its scope. Right now, Congress is doing that, however.

The requirement that Treasury issue debt before it deficit spends is mandated by Congress, and conflicts somewhat with previous Congressional appropriations creating spending authority. The debt ceiling is another mandate of Congress that conflicts with previously passed spending authority in a very direct way. Making the Federal Reserve Board of Governors an independent agency, rather than an agency under the Treasury Department, constrains the spending power of the Treasury beyond the limits provided by Congressional appropriations themselves.

These constraints, however, are political, not economic. If Congress removes even one of them, then the Federal Government can never run out of money already appropriated by Congress. Even with all three limitations, the Federal Government still cannot run out of money, if the Administration is willing to uphold the Constitution and exercise the full authority to coin money that Congress has granted to the Executive. Where the constitution comes in is that Section 4 of the 14th Amendment doesn't allow the US Government to default on any of its obligations. So, constitutionally, Congress should not be playing games with the full faith and credit of the United States.

Apart from that however, the Executive has sworn to uphold the Constitution, and the Treasury has authority, granted by Congress in the 1990s, to mint platinum jumbo coins with arbitrarily large face values. So, rather than run out of money when it reaches the debt limit the Government can mint however much it needs to implement Congressional appropriations without either taxing or borrowing. You can find a more detailed explanation of this coin seigniorage idea here and here. Without going into detail in this open letter, I'll just say that if the President uses coin seigniorage to meet the debt ceiling crisis, all the Republican's power to bully and hold the Government hostage will be gone outside of the context of the appropriations process itself. We would have “an end to bullying.”

So, if you really want to end it, please call the President's attention to this post and the links I've provided, and point out to him and anyone else who will listen, that he can make the bullying stop, anytime he wants to

Best,

Joseph M. Firestone, Ph.D.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

Gallup Scores Another for the Plutocracy

Joseph M. Firestone — Fri, 13 May 2011 15:14:29 -0400

I don't really mean to single out Gallup here. Well, I guess I do; but they're certainly not the only guilty party in the polling industry of doing what I'm about to rail against. Let's begin by stipulating that public polls cannot escape ideological and selection biases in how they frame questions and alternative closed end response choices. Nevertheless, if poll results are to be considered even minimally descriptive of public opinion, they must make a concerted effort to include multiple frames and not exclude response choices that go beyond the dominant ideology. After all what good are polls that channel opinion in pre-determined directions compared to those that allow respondents to express their own tendencies?

Gallup provides a great illustration of illegitimate channeling and ideological bias in its recent poll (April 20-23. 2011). The poll included two questions:

Which do you think is more to blame for the federal budget deficit—[ROTATED: spending too much money on federal programs that are either not needed or wasteful, (or) not raising enough money in taxes to pay for needed federal programs]?

There were three response choices associated with this question:

-- Spending too much on programs;

-- Not raising enough money on taxes

-- No opinion

Of course, the word “blame” in the question assumes that the Federal deficit is a negative and a problem that something should be “blamed” for. Not everyone feels that way. I, for example, think that the deficit is no problem at all, but simply a consequence of the Crash of 2008, and that most of it will go away when we fully recover, which we do not have a large or effective enough deficit to do (yes, I'm assuming that deficits if comprised of effective spending do cause recoveries).

How many people don't think the deficit is a problem? 5%, 20%, 40% Well, probably not 40%; but, if you began polling on the deficit by asking whether people thought it was a serious problem, compared to others that will require deficit spending to solve, you'd probably find that only a minority felt that cutting the deficit was more important than solving the problems that will require continuing or expanding the deficit. When Gallup failed to ask this question first, it destroyed much of the value of its polling results, since, for example, if only 15% of people prioritize doing something about the deficit over solving other problems, then it's not very important whether they, hypothetically, prefer to raise taxes or cut spending in order to cut that deficit?

So, the framing of Gallup's question immediately reduces the usefulness of the results and also channels the reporting in a fictitious context where everyone believes that we must cut the deficit as our highest priority. Apart from the initial framing however, the response choices of raising taxes or cutting spending, simply reinforce the conventional wisdom about the choices available to reduce the deficit, and they ignore another choice, but that Gallup and most of the public has never heard of. That choice is using coin seigniorage to either reduce or eliminate the deficit and the national debt. Coin seigniorage could have been included in the question in this way: “Not using minting of jumbo platinum coins, as authorized by Congress to create enough revenue to reduce or eliminate the deficit.” That's all it would have taken to have given the public another choice in order to find out whether people would be willing to place “the blame” on something else apart from the conventional two options.

There's still another framing issue present in Gallup's formulation of the first question. The question asks people what is more to blame for the Federal deficit. It could have asked what is more to blame for “the national debt.” Which would have been more relevant? Do people care more about the deficit or do they really just care about the national debt, or neither?

Had the question been asked about the national debt, then the alternatives would have been different. In addition to the raising taxes, cutting spending, and coin seigniorage, explanations, there's a fourth explanation: namely that Congress requires the Treasury to issue debt when it deficit spends. Perhaps, we might have had a poll that looked entirely different if the question had focused on the national debt and also included these four things for people “to blame.”

Gallup's second polling question on the deficit reads:

As you may know, Congress can reduce the federal budget deficit by cutting spending, raising taxes, or a combination of the two. Ideally, how would you prefer to see Congress attempt to reduce the federal budget deficit – [ROTATED: only with spending cuts, mostly with spending cuts, equally with spending cuts and tax increases, mostly with tax increases, (or) only with tax increases]?

and the response choices were:

-- Only with spending cuts;
-- Mostly with spending cuts;
-- Equally with spending cuts and tax increases;
-- Mostly with tax increases;
-- Only with tax increases;
-- Other (vol.)
-- No opinion

Of course analogous objections apply to this question and its associated response options as the ones I've already given for the first question. The question implies that only two things can be done about the deficit. But there are at least three. In excluding the third, coin seigniorage, Gallup has biased the results toward alternatives that fit the frames of neo-liberal economics, a paradigm that has resulted in increasing economic and political inequality over the past 40 years.

Notice that so far I've refrained from talking about the results of this poll. That's because I think the results are so biased that they provide no guide to divining the true state of American opinion on these subjects. The questions reflect only the neo-liberal elite perspectives that are rapidly marching us toward plutocracy. They don't tell us how people would feel if they were presented with a more objective framing associated with the policy choices that are possible rather than just the ones that the Congress and the MSM are talking about today.

Imagine, finally, if Gallup's poll had been focused on the national debt and had asked, first of all, if people felt that the national debt was a problem, and then offered all four of the “blame” and policy options for reducing the debt. I think the result of such a poll would have been far more illuminating and had much less ideological bias than we see in this poll. It's too bad that Gallup didn't incorporate the critical perspective and small amount of imagination necessary to take such a poll, because we badly need polling organizations like Gallup to serve us better, by not simply reflecting the frames of conventional wisdom, but also including options in its polls that reflect multiple perspectives.

This is a general problem. The MSM these days are locked into neo-liberal perspectives which provide none except painful solutions to our current problems. The polling organizations should be better than this. They should not reinforce the ideological shackles that have been forged for the American people. But should be more respectful of their founding notions about “a science of public opinion” and do what they can to reflect the true state of opinion in American.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

Use Coin Seigniorage Now!

Joseph M. Firestone — Tue, 05 Apr 2011 19:13:31 -0400

(Author's Note: Most of this diary was previously published back in January; but I've revised it slightly for these reasons. First, a Government shutdown is now upon us, even though the debt ceiling issue isn't quite at the forefront yet. Second, I'd like more comments and discussion on this proposal, because, at a minimum, it would give the Treasury the wherewithal to pay Social Security interest and benefits without relying in any way on new Congressional appropriations, or on raising the debt ceiling. And third, I'd like to get these ideas through to the Administration somehow, in hopes that, if pushed into a corner by the House, they might use them. Perhaps this is a vain hope, however, since, as wonky as the reputation of some in the Administration is, no one has been able to come up with original proposals that can get around the tea-party drive to cut the heart out of most Government social programs.)

All eyes now are on the 2011 appropriations conflicts and the continuing resolutions the Republicans are using to extract greater and greater spending cuts from the appropriations process. We're on the eve of a possible Government shutdown, as the tea-partiers in Congress insist on the cuts they favor, and the more mainstream right-wing Republicans go along “reluctantly” with them, and push the more “moderate” Democrats into a corner where they have “no choice” but to begin decimating the social safety net.

However, this round turns out, however, and whether or not the Government shuts down, there will be a new shutdown threat, now predicted for May, when the Government reaches the Federal debt ceiling, and the Republicans in the House are asked to pass an extension of that ceiling. If they don't do so, then they'll be forcing both a Government shut-down, and also a possible US default in paying its debt obligations to its creditors. Republicans see this as yet another opportunity to force spending cuts and “entitlement reform” out of the Democrats and the Obama Administration.

There is an effective response the President ought to make to the threat of a refusal to raise the debt limit, which would allow him to avoid the “forced” spending cut scenario. In fact, he ought to preempt the impending threat, right now, way before there is a Congressional vote on the debt ceiling. The basis for the preemptive move I'm referring to is given in a post by Beowulf, called “Coin Seigniorage and the Irrelevance of the Debt Limit,” and, was also discussed in a post by myself called: “Will He Say He Has No Choice or Will He Use Seigniorage?”

You should read both of these posts, if you're interested in getting into some of the details on coin seigniorage, or getting more deeply into the political context of the whole issue. But to summarize the main point on seigniorage, the Treasury, which the US Mint is part of, could order the mint to produce special very large face value Platinum coins (e.g. each coin might have a face value of 500 Billion USD or more), and to deposit those coins in the Mint's account at the Fed. The Fed could not refuse the coins or fail to credit their face value because they are legal tender. Since the Federal Reserve Banks (though not the Board of Governors and the FOMC) are legally in the private private sector, acceptance by them of a deposit in the form of the jumbo coins, resulting in their markup of the Mint's Account by the face value of the coins, from an accounting point of view, gets recorded as a sale of the coins to the private sector. The portion of the receipts from the “sale” representing the Mint's seigniorage profit, after the costs of minting the coins are subtracted, may then be periodically swept into the Treasury General Account, and would go into the category of “miscellaneous receipts” to the Treasury, lifting the Treasury's revenue total.

Enough jumbo coins could erase the annual deficit, and since part of government expenditures in any year involves paying off interest and principal on the national debt, enough of them would also erase the national debt over a decade or more. There would be no national debt to leave to our grandchildren, and also there would be a continuously declining debt-to-GDP ratio. Technically, there would also be no more deficit spending, even though in most years, Government spending would continue to exceed tax revenues.

The impact of coin seigniorage in eliminating deficits, the national debt, and bringing the debt-to-GDP ratio to zero isn't very important economically, since the size of these numbers doesn't create any solvency risk, or impair the Government's ability to sustain future fiscal activity. But that impact is very important politically and psychologically, because arguments about deficits and the national debt will end, and we'll be free to concentrate on what's really important for our grandchildren, namely leaving them more real wealth and a better life than we have.

So, coin seigniorage looks like a solution to the debt ceiling crisis and also to Congress's requirement, which is the cause of our having a national debt, that the Treasury must issue new debt when it plans to deficit spend. To meet the coming debt ceiling crisis, I think the President ought to use it to preempt the Republican House by doing the following.

-- Direct the mint to create a jumbo platinum coin with face value $500 Brillion.

-- Direct the mint to deposit the coin in its account at the New York Federal Reserve.

-- Direct the Treasury to “sweep” the mint's account to collect profits from coinage (this would result in marking up Treasury's account at the New York Fed by $500 Billion).

-- Inform Congress and the public that the previous actions were taken to head off any possibility of default or Government shutdown due to the House's possible refusal to raise the debt limit. The President should also mention that increasing the size of Treasury's account balance at the Federal Reserve will not be inflationary because Government spending will remain exactly the same as it would have been if the coin had not been minted.

-- Wait for reactions to this move. The ensuing uproar from many quarters including the business community, many economists, and the Federal Reserve, will focus on fears of inflation, and it's likely that top economists, and some Federal Reserve officials such as Ben Bernanke will claim that spending without issuing debt to absorb the new money placed into the private economy is inflationary, because the quantity of money in the economy will increase. It's likely that this view will create quite a stir in the media, and even that the value of the dollar will go down in international markets briefly, because the expectations of people will be affected by this argument.

-- Respond to this reaction by pointing out that it was forced on the Administration, which could not stand idly by while the full faith and credit of the United States was threatened by irresponsible Congressional partisans whose purpose was to take the economy hostage to force an agreement on spending cuts that are against the wishes of the American people, as indicated by every public opinion poll appearing in recent weeks. The President should also point out, that even though he doesn't believe that the minting of jumbo coins to pay for spending is inflationary, for reasons he previously stated, he is willing to work with Congresspeople who think there's a possibility of inflation enduring beyond the initial psychological reaction to minting jumbo coins, and then he can suggest two proposals that Congress may want to consider to remove the need for the Executive Branch to issue jumbo coins to meet debt ceiling crises.

First, Congress could eliminate the debt ceiling so that the US has no more crises of this sort again. Congress can still cut/control spending through the appropriations process, even in the absence of a debt ceiling, and this is the appropriate way for Congress to do it so that individual Congresspeople must go on record for any cuts in Federal programs they want to make.

Second, Congress could eliminate the requirement that Federal deficit spending must be matched by issuance of new debt dollar-for-dollar. The President could emphasize here that if this was done, not only would there be no more debt ceiling crises, but the Federal Government could pay off most of the national debt, except for very long-term instruments, within ten years, because the only thing that is maintaining that debt is Congress's requirement that new debt be issued in response to deficit spending.

He can also point out here that he doesn't think that the rollover of Federal Government debt is any problem for the long run because of the way the US's fiat currency system works. But for those who do think it is either a short or long-term problem, then this option will eliminate the problem because it will eliminate the national debt which we will not then have to hand on to our grandchildren. He can then add that he knows that many will react to this proposal by saying that it will be inflationary to try to eliminate the national debt this way. But he thinks that since the amount of Government spending won't change if we implement this proposal; he doesn't think so. But if it should turn out that inflation results from this effort to pay off the national debt; then the Treasury will simply begin to issue debt again to drain off the excess money supply.

-- The President, after making these proposals, should add that the $500 Billion in revenue from coin seigniorage will probably take the Government through August or September without its having to issue new debt, and that if Congress can't come to agreement on what to do about the debt ceiling before then, he will issue a new jumbo coin, this time one having $1.5 Trillion in face value, and that he will use the new coin for program spending and also to pay off $1 Trillion of the national debt. He can also say that he hopes he doesn't have to do that, but like institutions in the private sector, the Government can't operate well in an atmosphere of psychological uncertainty. Government workers have to know that their work and family lives will not be placed under stress by partisan conflict in Washington. In addition, private sector businesses and workers are greatly impacted by any freeze in Government spending caused by attempts at hostage-taking by Congress.

I think that Mr. Obama is a winner in the scenario I've outlined. He will be much more popular than he is now by virtue of rendering the debt ceiling threat impotent, and because he will be perceived as acting strongly and cleverly to get around the Republican House to avoid a shut-down of the Government and the possibility of default.

The Republicans will come back for another bite at the shut-down apple when they take up the Omnibus spending bill. But here they will find that they won't be able to use the ballooning deficit/national debt rationalization to justify their attempts to hold the Government hostage to get cuts in discretionary spending and the social safety net. President Obama will have, by then, demonstrated that by using seigniorage he can take the deficit and debt issues completely off the table, and that Congress can't simply force Government to shut down by hostage-taking as long as coin seigniorage is there.

This lesson won't be as clear in the case of the $500 Billion coin, even though some of that money will be used to pay off debt. But, once people see that the national debt doesn't need to rise if seigniorage is used; it will be easy to explain that if it is used more, the national debt can actually be paid down or paid off. Of course, if the President ends up having to use the $1.5 Trillion coin, then there will be a very graphic demonstration that having a national debt is a matter of a policy choice which Congress is now making, not a matter of necessity.

After that, objections to Government spending based on the idea that it will increase the deficit and the debt will be “off the table.” And then we can move on to handle the many real problems of the American people without worrying about the purely political and psychological, but non-financial and no-economic, problems of the debt, and the deficit.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

President Obama Should Use Coin Seigniorage Now!

Joseph M. Firestone — Wed, 19 Jan 2011 19:23:27 -0500

The media and much of the blogosphere are framing the coming debt ceiling decision, somewhen in the March to early May period, as one in which the Republican-majority House of Representatives may refuse to extend the Federal debt ceiling, forcing both a Government shut-down, and also a possible US default in paying its debt obligations to its creditors. Republicans, especially “tea-partiers,” saying they will not vote to extend the ceiling, see this as an opportunity to force spending cuts and “entitlement reform” out of the Democrats and the Obama Administration.

-- Direct the mint to create a jumbo platinum coin with face value $500 Brillion.

-- Direct the mint to deposit the coin in its account at the New York Federal Reserve.

-- Direct the Treasury to “sweep” the mint's account to collect profits from coinage (this would result in marking up Treasury's account at the New York Fed by $500 Billion).

The Republicans will come back for a second bite at the shut-down apple when they take up the Omnibus spending bill. But here they will find that they won't be able to use the ballooning deficit/national debt rationalization to justify their attempts to hold the Government hostage to get cuts in discretionary spending and the social safety net. President Obama will have, by then, demonstrated that by using seigniorage he can take the deficit and debt issues completely off the table, and that Congress can't simply force Government to shut down by hostage-taking as long as coin seigniorage is there.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

Will He Say He Has No Choice or Will He Use Seigniorage?

Joseph M. Firestone — Wed, 05 Jan 2011 15:38:19 -0500

The media and much of the blogosphere are framing the coming debt ceiling decision as one in which the Republican-majority House may refuse to extend the Federal debt ceiling, thus forcing both a Government shut-down, and also a possible default of the US in paying its debt obligations to its creditors. Republicans saying they will not vote to extend the ceiling see this as an opportunity to force spending cuts out of the Democrats and the Obama Administration.

This second round of hostage-taking is no surprise given that the Administration folded like a cheap suit a few weeks ago, when the Republicans got an extension of the Bush Tax Cuts and also a great deal on the Estate Tax, in return for some concessions the Administration could use to save its face, but without any deal however, on either extending the debt limit, or getting the Omnibus spending bill to fund the Government in 2011.

So, the Administration left these two hostages on the table for the Republicans to take in the new Congress. And, as a result, the Republicans are now stepping forward to say they want many more “spending” concessions in return for extending the debt limit.

The President is making a lot of noise about the dangers of default through Austan Goolsbee, the Administration's Chief Economist, and we can look forward to real shock doctrine treatment over the next few months, informing us about the evils of default and urging everyone to come together with some sort of compromise that, of course, will involve no tax increases for the wealthy, or cuts in defense, but a cutting away of programs for people, which are termed “discretionary” or “welfare” or "entitlements" by deficit hawks, including this President. There will be a big kabuki show, and Wall Street will pressure both the Republicans and the President to come together in a “compromise,” while progressives will be exhorted not to be purists, and instead to be “adults” about the necessity of dealing with the hostage takers and “cutting” or is it “gutting” Social Security and Medicare.

Now, I'm not sure the Administration wants to run through any scenario other than the one I've just outlined, because it seems to me that this President has a Hooverite pay as you go agenda; that he's planning to implement at whatever cost to the American Middle Class and the poor. This man approaches economics as if the period 1930 – 1980 never happened. Centrist Democrats and Republicans are his partners in implementing this plan. The Republicans provide the extremist shocks, and then “force” the Democratic Party "adults" to make cuts that are supposedly “distasteful” to them.

We've seen this charade a number of times now. The debt ceiling issue may just be the latest shock administered to get people to accept the austerity program outlined by the Co-Chairs of the Catfood Commission, Erskine Bowles and Alan Simpson, even though every public opinion poll, most recently the 60 Minutes/Vanity Fair poll, has shown that heavy majorities are against what they recommend.

Whether this kind of scenario is what the Administration is planning or not, however, I think it's still useful to pull off the mask and point out that President Obama does have a real choice on the debt ceiling issue. There is an effective response he can make to a failure to raise the debt limit. In fact, he can begin to respond even before there is a Congressional vote on the debt ceiling.

The response I'm referring to has just been outlined in a post by Beowulf, called “Coin Seigniorage and the Irrelevance of the Debt Limit.” Here are some the key assertions of the post:

If you think about it, it does seem odd that the US Government is the monopoly supplier of US dollars and yet our politicians go through life thinking the government will run out of money unless it can borrow more. Of course that’s not true, the coins in your pocket are legal tender and yet were not issued against debt. They’re minted by the US Government, backed only by the gilt-edged credit of the American people, no one is paid interest on it and they don’t add a penny to the statutory debt. What’s more, the use of coins as legal tender is scalable, they could replace the use of Tsy debt sales. No, you wouldn’t have to carry more coins in your pocket. Nothing would change except Tsy would be credited by the Federal Reserve for the sale of interest-free Treasury coins (presumably of large denominations) instead of interest-bearing Treasury bonds.

The two great powers of a sovereign state are the monopoly of violence and seigniorage, the profits from the creation of money. If the federal deficit (that is, expenditures in excess of tax receipts) were funded by seigniorage revenue, not only would there be no debt service owed on the money, there’d actually be no deficit. Seigniorage (whether generated by the Federal Reserve or by the US Mint) is supposed to be booked by Treasury as “miscellaneous receipts”, since the funds can appropriated for other govt uses, it actually reduces the deficit dollar for dollar. . . . The bottom line is, the Secretary of Treasury already has the authority to create money without debt so there’s no fiscal reason to raise the debt limit. What’s more, since the Federal Reserve began paying interest on reserves in 2008, there’s no longer a monetary reason to raise the debt limit either.

The point is, in section 5136, Congress characterizes the exchange of coinage produced ex nihilo by the US Mint for the face value equivalent in Federal Reserve notes (or more typically, by marking up the balance in Tsy’s reserve account) as a “sale”– “Provided further, That the Fund may retain receipts from the Federal Reserve System from the sale of circulating coins at face value for deposit into the Fund“. What’s more, the statute also says, “at such times as the Secretary of the Treasury determines appropriate, but not less than annually, any amount in the Fund that is determined to be in excess of the amount required by the Fund shall be transferred to the Treasury for deposit as miscellaneous receipts“. Unless Congress intended “receipts… from the sale” to not mean exchange revenue and for “the public”, “miscellaneous receipts” and ultimately “seigniorage” to have each have two different meanings depending on whether we’re referring to the US Mint or to the Federal Reserve System, my suspicion is that Mint seigniorage and Fed seignoirage were intended to be treated the same for budgetary purposes.

If, in fact, Mint seigniorage is legally indistinguishable from Fed seigniorage as miscellaneous receipts revenue, it does offer an escape hatch (or more like a subway tunnel really) if Congress refuses to increase the statutory debt limit this spring. The Secretary has rather broad authority to mint coins, Congress was apparently feeling generous when it authorized platinum coins in 31 USC 5112(k) (“with such specifications, designs, varieties, quantities, denominations, and inscriptions and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe…”). If deficit spending was paid for (eliminated actually) with miscellaneous receipts revenue generated by selling the Fed jumbo denomination coins, and since the Federal Fund Rate can now be pegged with Interest on Reserve payments in lieu selling Treasuries to drain excess reserves, Tsy could fund govt operations indefinitely without ever raising the statutory debt limit. . . .

There's much more in Beowulf's very important post, which “goes into the weeds” of seigniorage a good bit, and you should read it all. To put the main point a little more simply. The Treasury, which the US Mint is part of could order the mint to produce special very large face value Platinum coins (e.g. each coin might have a face value of 50 Billion USD), and to deposit those coins in the Mint's account at the Fed. The Fed could not refuse the coins or fail to credit their face value because they are legal tender. Since the Fed is technically in the private sector, acceptance by them of a deposit in the form of the jumbo coins, resulting in the markup of the Mint's Account by their face value, gets recorded technically as a sale of the coins to the private sector. The receipts from the “sale” representing the Mint's seignorage profit, may then be periodically swept into the Treasury General Account, and would go into the category of “miscellaneous receipts” to the Treasury lifting its Treasury's revenue total.

So, the bottom line here is that coin seigniorage looks like a solution to the debt ceiling crisis and also to Congress's requirement, which is the cause of our having a national debt, that the Treasury must issue new debt when it plans to deficit spend. The big question is whether President Obama will use seigniorage to answer the threats of the tea party hostage takers and defuse the present situation, or whether he will say that he has no choice but to compromise with them, even though he could use seigniorage to render their threats impotent.

Of course, things are not as simple as I've just framed them. If the President were to start using seigniorage, the Republicans would probably respond by holding the Omnibus spending bill hostage and attempting to shut down the Government that way. But if they do that, I think they're likely to find themselves in a much more difficult political position than they are in now.

First, Mr. Obama will be much more popular than he is now by virtue of rendering their debt ceiling threat impotent. He will have humiliated them, and he will be much more popular in the country because he will be perceived as acting strongly and cleverly to get around them to avoid a shut-down of the Government and the possibility of default.

Second, when they come back for their second bite at the shut-down apple, they will also find that they won't be able to use the ballooning deficit/national debt rationalization to justify their attempts to hold the Government hostage to get cuts in discretionary spending and the social safety net. President Obama will have, by then, demonstrated, that by using seigniorage he can take the deficit and debt issues completely off the table.

Once they are off the table, the way will be clear for a great debate over full employment vs. avoidance of inflation as two primary goals of responsible Federal fiscal policy. The conservatives, of course, will want to avoid any possibility of inflation by restricting Federal spending and keeping unemployment high. But they won't win that debate until there is measurable inflation to frighten people with. And we probably won't see that until full employment comes back.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).