Matt: By the way, I would like to extend an invitation for anyone here to explain to me why the ability to issue debt in the form of base money is so fiscally beneficial. I agree (as I have stated at length in the comment section of the original post) that it is theoretically possible for the government to issue all of its debt in the form of interest-paying bank reserves, but I don't see how this justifies claims that the government can act freely of any budget constraint. If it's paying interest on reserves, there's a still a cost to financing its debt! (And there will still be limits to how much investors are willing to hold, much as these limits exist for debt in the form of bonds.)
Even if the government pays a very low nominal rate of interest of reserves, this doesn't mean that the real costs are any lower. Economists almost universally agree that the real interest rate, in the long term, is pinned down by real factors like investors' preferences for intertemporal substitution and opportunities for capital investment. If you disagree with this, and you have some competing theory by which the Fed can change the long-term real interest rate through purely nominal manipulations, then I'm happy to hear your case. Otherwise, a decrease in the nominal interest rate (enacted via a decrease in interest paid on reserves) will simply manifest itself as a decline in the long-term rate of inflation, with no fiscal benefits whatsoever.