Thursday, July 21, 2011

The definitive solution to the debt crisis



Blogger, "Letsgetitdone," was kind enough to allow me to cross post this excellent piece that he wrote. It is the definitive solution to the debt crisis. He even prepares the speech the president would use to explain it to the public. (Too bad Obama won't use it, however.)

Congress provided the authority, in legislation passed in 1996, for the US Mint to create platinum bullion or proof platinum coins with arbitrary fiat face value having no relationship to the value of the platinum used in these coins. These coins are legal tender. So, when the Mint deposits them in its Public Enterprise Fund account at the Fed, the Fed must credit that account with the face value of these coins. This difference between the Mint's costs in producing the coins and the credit provided by the Fed is the US Mint's profit. The US code also provides for the Treasury to periodically “sweep” the Mint's account at the Federal Reserve Bank for profits earned from these coins. Coin seigniorage is just the profits from these coins, which are then booked as miscellaneous receipts (revenue) to the Treasury and go into the Treasury General Account (TGA), narrowing the revenue gap between spending and tax revenues. Platinum coins with huge face values, $1, $2, and $3 Trillion coins have been mentioned, could close the revenue gap entirely, and, if used often enough, technically end deficit spending, while still retaining the gap between tax revenues and spending.

Coin seigniorage is now being mentioned increasingly on popular blogs as a possible solution to the debt ceiling crisis. It is the only solution currently being suggested that requires no agreement in Congress and also no challenge to the debt ceiling law itself. If Congress fails to increase the debt ceiling by August 2nd, it may even become the constitutional duty of the President to use coin seigniorage to avoid default.

But the proof platinum coin seigniorage alternative comes in more than one flavor. It's actually a class of alternatives. Here are some different con seigniorage proposals.

First, mint a $1.6 Trillion coin and have Treasury use the profits from it to buy all the outstanding debt instruments held by the Fed. This would retire a substantial part of the national debt and immediately create $1.6 T in “headroom” relative to the debt ceiling. This alternative involves the least amount of change in current procedures. The coin, once deposited at the Fed, would remain in a Fed vault, and would not go into circulation. The Government would then go right back to issuing debt in order to meet its debt obligations and spend previous Congressional appropriations. With this alternative it is hard for critics to raise the inflation issue, since the new credits created by the coin are never spent into the economy, but are only used to reduce buy back the debt held by the Fed because that debt counts against the debt ceiling.

One objection made to coin seigniorage proposals is that the high face values of the coins would drive up the market price of platinum. However, the Mint is already scheduled to produce 15,000 platinum coins having relatively small arbitrary face value. There would be no conceivable need for more than enough material for 100 very high face value proof platinum coins. So there really is no supply issue.

Having said that, every time the Mint creates a high value coin for deposit at the Fed, it would have to create a duplicate coin, so that it had the means to swap with the Fed if it ever decided to redeem the coin for currency of equal value. This is not a likely event; but it is possible. So, it would be necessary to create duplicate coins and place them in a vault at the Mint.

A second proposal is to mint a $6.2 T coin to pay back all debt held by the Fed, and all Intra-governmental debt, including that owed to Social Security, Medicare, and a host of other other agencies. That would create $6.2 T in headroom, more than enough to carry us through the 2014 elections. Again, this wouldn't result in any “money” immediately going into circulation, but over time SS and Medicare payments would be adding to bank reserves without any reserves being withdrawn from the system due to debt issuance. Some might think this would be inflationary, because they believe that net reserves added to the private sector are more inflationary than debt instruments added would have been. However, there's evidence that debt instruments provide much higher leverage than added reserves, and, in addition, they lead to greater interest payments than reserves do, even if the Fed decides it wants to pay interest on reserves, which it doesn't always do.

A third proposal for applying coin seigniorage is to mint a coin with face value large enough to cover the $6.2 T intra-governmental and Fed debt repayment, plus all private debt coming to maturity, and all Congressional Appropriations expected to require deficit spending. I'll estimate, roughly, that a $15 T coin is enough for that, including about $4.5 T to close the expected gap between tax revenues and Government spending through the 2014 elections, and the rest for paying down the national debt further. Issuing a coin that large, using the profits from seigniorage, and assuming that Congressional appropriations continue the pattern of the past year or so, that would result in a remaining public debt outstanding of roughly $4.6 T, which would please the bond markets except for the fact that the Us wasn't issuing any more debt instruments.

Again would this coin seigniorage proposal be inflationary? Well, the intra-governmental and Fed debt repayments won't be, for reasons already stated. Also, there's no reason to believe that the repayment of further debt will be, unless one believes, again, that reserves swapped for bonds, and not swapped again for more bonds, is inflationary. But, other than the interest payments which certainly add to private sector assets somewhat, payback of debt instruments is just an asset swap, followed by destruction of securities. There's no addition of net financial assets to the private sector.

How about the profits of $4.5 T set aside for closing the gap between tax revenues and spending? Will that be inflationary? Actually, I don't know if Congress will appropriate a $4.5 T spending/tax revenue gap over three years, but if such a gap is needed, and if it does, then the coin will cover it without new Federal borrowing. And as long as Congress doesn't do the right kind of spending and creates a large enough gap to add sufficiently to private sector assets to support full employment, their appropriations, backed by coin seigniorage won't be inflationary.

If, on the other hand, they do the right kind of spending to bring full employment inside a year, then tax revenues will come back as they did during the Clinton Administration, and then there'll be no need for the profits from the proof platinum coin to be used completely between now and 2014. In fact, if the right jobs creating program is immediately enacted, as much as $3T could be left before the President might want the Mint to strike another proof platinum coin.

So far, I've discussed three alternative coin seigniorage proposals ranging in scale from a minimal proposal to handle the current crisis to one that would provide enough funds to both pay down debt, and support a gap between spending and taxes that might be sufficient to enable full employment. Now here's a fourth, enough to handle Congressional appropriations for a decade.

Why not mint a $30 T coin and then another one in case the Fed gets obstreperous sometime down the road and presents the 30T coin, that was deposited in the Mint PEF account, for redemption?

I favor this fourth alternative above all, because it institutionalizes the idea that there is a distinction between appropriations, the mandate to spend particular amounts on particular goods and services, and the capability to spend the mandated accounts. In a fiat currency system, the capability always exists if the legislature provides for it under the Constitution. But the value of the 30T coin, and the profits derived from it, is that it is a concrete reminder of the Government's continuing ability to buy whatever it needs to meet public purposes. It demonstrates very concretely that the Government cannot run out of money and that the claim that it can is not a valid reason for rejecting spending that is in accordance with the Public purpose.

So, in reading what follows, please keep in mind the distinction between the capability to spend more than government collects in taxes, and the appropriations that mandate such spending. The capability is what's in the public purse, and it is unlimited as long as the Government doesn't constrain itself from creating currency. With coin seigniorage its capability could be and should be publicly demonstrated by minting the $30 T coin, and getting the profits from depositing it at the Fed.

On the other hand, Congressional appropriations, not the size or contents of the purse, but whether the purse strings are open or not, determines what will be spent and what will simply sit in the purse for use at a later time. So there is a very important distinction between the purse and the purse strings. The President can legally use coin seigniorage to fill the purse, but only Congress can open the purse strings through its appropriations.

If the President decided to rise above the debt ceiling controversy, safeguard the social safety net, and do something really, really important from the perspective of history by using $30 T coin seigniorage, then he could explain the deposit of the first $30T coin to the public in a high profile TV address, this way (the second coin just stays at the Mint for safekeeping. Its existence to be kept secret):

My Fellow Americans:

1) Until now we’ve been borrowing the money the Government created back from the private sector, in order to cover our deficit spending, so the national debt has been steadily growing.

2) That’s silly! According to the Constitution, this Government, of the people, by the people, and for the people, is the ultimate source of all US money. So why should we ever borrow US money back and pay interest on it, since we can create it any time by the authority of the Constitution and Congress?

3) Congress has also imposed a debt ceiling, which, as you know, we've now reached, so we can’t borrow back our own money, anyway.

4) So, on my order, and in accordance with legislation passed by Congress in 1996, and with the US Code, the US Mint has issued $30 Trillion in a single platinum coin, and deposited it at the NY Fed. It’s legal tender, so the Fed credited the PEF with about $30 Trillion in USD credits using its unlimited authority from Congress to create US Dollars.

5) This is not inflationary because the Fed will put our coin into its vault, and keep it there permanently out of circulation, and we will use the $30 T in USD credits only to pay back debt and to spend what Congress has already approved, which is only a fraction of these credits and far from the amount needed to cause inflation.

6) My action ends the debt ceiling crisis, because we have no further need to borrow our own money back in the markets, so we don’t need the tea party or other Republicans, or even my fellow Democrats to agree to raise the debt ceiling.

7) Now the Treasury, has plenty of money, much more than we need, in fact, to pay for all appropriations Congress has already approved for 2011, and, again, we won’t have to borrow our own money back.

8) So we will pay all Government debts which will come due in 2011. Treasury securities and all other debts included. We will also pay back all debts held by other agencies of Government and the Federal Reserve. When we do this we will lower the national debt by about $7.5 T, reducing the “debt burden” by about half this year, and creating an actual Social Security trust fund with 2.6 T in cash reserves in it; and again, to do this we don’t have to borrow our own money back, and we will also reduce our interest costs on the outstanding national debt.

9) None of the $30 T in new credits created by our actions is “money” in the economy until the Treasury spends it. For now it is just capability to spend awaiting the appropriations of Congress to mandate deficit spending, should it need to compensate for the reduction in demand, probably close to 10% of GDP right now, caused by your own desire to save (which we want to do our best to facilitate), and your desire to import goods from foreign nations.

10) We have created $30 Trillion in new credits even though we needed only a fraction of that to cover anticipated deficit spending and debt repayment until 2021. The reason for this, is that I wanted to have enough capability created in the Treasury account, so that the national debt could be completely paid off (except for a small amount in very long-term Treasury debt still not mature by 2021), and all projected Federal deficits covered over the next 10 years.

11) Of course we can always make new coins if our projections turn out to be wrong; but I thought it would be best to ensure that all $14.3 T of the “debt burden” can be completely eliminated from our political concerns; and also to provide enough funds in our spending account at the Fed so that it would be very clear to Congress and all newly elected Representatives and Senators, that even though they, according to the Constitution, continue to control the purse strings, the national purse is very, very full, and that we will be able to afford whatever deficit spending for the public purpose, including for full employment and Medicare for All, that Congress, in its wisdom, chooses to appropriate now and before the election of 2012.

Good night, my fellow Americans and Sweet dreams! Rest well knowing that our beloved country won't be defaulting on any of its debts, and that I've prevented this without going over the legal debt ceiling, by providing money for spending mandated appropriations, in compliance with the laws authorizing coin seigniorage, while supporting the Constitution's prohibition against our Government ever defaulting on its debts. I hope that in the future everyone will obey the 14th Amendment's prohibition against questioning the validity of Federal Government debts, and think twice before they indulge themselves in such loose talk. America will always pay its debts in US Dollars according to the terms of the contracts it has concluded, and in line with the pension payments and other obligations that it owes. Neither you nor the rest of the world need ever doubt that again!

35 comments:

Letsgetitdone said...

Thanks, Mike and thanks for the title, Joe

Broll The American said...

While I very much believe, under current law and operational reality, this is possible, it all demonstrates how very silly this all is. The President can just deem a $100 worth of Platinum pressed into the shape of a coin to be worth $30 Trillion! Why go through the step of making the coin... why doesn't the President just say, "I'm thinking of a number..." and poof, the Fed honors that number.
What is the possibility that such action will actually be taken? Is there any evidence that this is at all on the radar of the White House?

Mike Norman said...

Broll,

You're absolutely right. This will NEVER happen because of how ABSURD it appears to people, including, I'm sure, the president. For God sakes, he even thinks invoking the 14th ammendment is out of consideration. (Bill Clinton on the other hand, said he WOULD invoke that.)

So bottom line is, millions of people will suffer, the leadership of America and our credibility in the eyes of the world will go down, down, down.

TomatoBasil said...

A few barrels of $100k or $1 million dollar coins would cause less cognitive dissonance for the politically moderate out there while also avoiding confrontation with gold bugs out there. A trillion + dollar coin forces adversaries to automatically oppose the idea on philosophy and scares away moderates that may not understand our monetary system. While the debate would be helpful in the long run, in the short run, it eliminates the possibility the proposal is taken as a serious policy matter.

Letsgetitdone said...

Perhaps you're right TB. But what happens if we're facing default on August 2nd, and he has nothing else to do. Then it's his constitutional duty to do this. See: http://www.nakedcapitalism.com/2011/07/why-matt-yglesias-and-felix-salmon-are-wrong-about-a-legal-way-to-circumvent-the-debt-ceiling-impasse.html#comment-431027

TomatoBasil said...
This comment has been removed by the author.
Tyler F said...

Mike,

I've got a question.

The profits (cost of production) of the US Mint get swept into the TGA. This would presumably represent an infinitesimal fraction of the face value.

Does the face value not get credited to the TGA? If not and if it is a credit only in the PEF account, is the PEF account a different but analogous account for the Treasury?

Thanks.

MortgageAngel said...

Letsgetitdone scores! BOOYAH! WOOT!

beowulf said...

"Does the face value not get credited to the TGA? If not and if it is a credit only in the PEF account, is the PEF account a different but analogous account for the Treasury?"

The weird accounting (the PEF being separate from TGA) is because the Mint is not funded by congressional appropriations, the Mint just rolls their own (coins, that is). However the Mint is inside Tsy, under the supervision and control of the Secretary. Just like the Federal Reserve Board itself will be someday (as the Supreme Court keeps moving down the path of "unitary executive" power).
"Marty Lederman and Jack Balkin recently took advocates of the unitary executive theory to task for downplaying the fact that their position implies that the Federal Reserve Board is unconstitutional. Michael Rappaport, a defender of the unitary executive theory, agrees that the Fed is indeed unconstitutional under his approach."
http://volokh.com/posts/1207512634.shtml

Remember, the whole point of using platinum coins is that the US Govt has a debt ceiling but an agency of the US Govt, the Federal Reserve, does not. We're simply transferring debt from the constrained whole to the unconstrained part (which doesn't make any logical sense of course, you can thank Congress for the anomaly). Personally, I think we should only mint the minimum amount necessary to reach fiscal equilibrium ($2 trillion, say). When everyone sees that the world doesn't end nor hyperinflation results, we can go back to the well.

Tyler F said...

Thanks, beowulf.

One thing I don't get is why the emphasis on seigniorage. If I as layperson am trying to explain this to another layperson, wouldn't I just say the President has the authority to order the Treasury to mint a platinum coin of any denomination and deposit it in a Treasury account (PEF) at the Fed.

Is there something vital in the seigniorage that I need to be aware of in explaining this option? It seems like the profit accrued in the TGA is fairly inconsequential. Isn't the main thing the credits in the PEF?

beowulf said...

"It seems like the profit accrued in the TGA is fairly inconsequential. Isn't the main thing the credits in the PEF?"

Right but the PEF can be swept into TGA at any time. So you could accurately simplify the point by saying Tsy sells coins at face value to the Fed (the Mint is part of Tsy after all). It does that every day with pennies, dimes and quarters. And Thomas Edison Muscle Shoals speech is excellent with some great lines (every instinct tells me Tesla would agree). :o)

"under the old way any time we wish to add to the national wealth we are compelled to add to the national debt. Now, that is what Henry Ford wants to prevent. He thinks it is stupid, and so do I... If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good..

“It is absurd to say that our country can issue $30,000,000 in bonds and not $30,000,000 in currency. Both are promises to pay; but one promise fattens the usurer, and the other helps the people...

“Look at it another way. If the Government issues bonds, the brokers will sell them. The bonds will be negotiable; they will be considered as gilt edged paper. Why? Because the government is behind them, but who is behind the Government? The people. Therefore it is the people who constitute the basis of Government credit..."
http://prosperityuk.com/2000/09/thomas-edison-on-government-created-debt-free-money/

Tyler F said...

Thanks.

Tyler F said...

beowulf - a couple of more things, if you're inclined.

"Remember, the whole point of using platinum coins is that the US Govt has a debt ceiling but an agency of the US Govt, the Federal Reserve, does not."

Can you elaborate briefly on the role or significance of the Fed in the coin seigniorage scenario. Wouldn't the coin deposit essentially mean the Treasury would now have a positive balance for appropriations? What role would the Fed play other than clearing the Treasury's payments?

Also, I've got the statute for the debt ceiling bookmarked. Where is the statute that prohibits the Treasury from running an overdraft at the Fed and, beside the coin deposit option, necessitates the Treasury to issue debt?

beowulf said...

"Wouldn't the coin deposit essentially mean the Treasury would now have a positive balance for appropriations?"

In theory yes, but Tsy accounting rules (which are variance with the Mint PEF Act, but go with it for a sec) allows profits from Mint coin sales to Fed ("seigniorage") to be used to pay down public debt but not to fund other spending. There's no need to fight that battle if coinage is simply used to buy down debt to create room under debt ceiling to allow for new T-bond sales.

A Tsy overdraft of its Fed account-- essentially a Fed loan to Tsy-- used to be legal on a temporary basis from 1942 to 1981 ("emergency draw authority") but today would trip over both public debt limit and 12 USC 355 prohibition of direct Fed loans to Tsy (vs. open market operations).

Matt Franko said...

Tyler,

"Where is the statute that prohibits the Treasury from running an overdraft at the Fed "

Does not exist imo.

Our so-called "independent" (btw try finding that word in USC!) Fed wont let them...

Resp,

Tyler F said...

Very helpful. Thank you for the education.

Shaun said...

Hi, I have a question.

Can I someone check my understanding of Platinum Coin Seigniorage.

U.S Mint creates platinum coin with arbitrary value (pc.v). The U.S Mint deposits the coin in its Enterprise Fund account at the FED. The FED then credits the U.S Mint the arbitrary value of the coin (pc.v)

The U.S mint has a 'profit' equal to the platinum coin's arbitrary value (pc.v) - cost of producing the coin. This value is deposited at the Treasury. The Treasury can then use this for public works, etc.


Is this correct ? TIA

Anonymous said...

beowulf:

"but Tsy accounting rules (which are variance with the Mint PEF Act, but go with it for a sec) allows profits from Mint coin sales to Fed ("seigniorage") to be used to pay down public debt but not to fund other spending."

where do you find that?

if the dollars are in TGA, can't they be used for anything?

Letsgetitdone said...

beowulf,

"In theory yes, but Tsy accounting rules (which are variance with the Mint PEF Act, but go with it for a sec) allows profits from Mint coin sales to Fed ("seigniorage") to be used to pay down public debt but not to fund other spending. There's no need to fight that battle if coinage is simply used to buy down debt to create room under debt ceiling to allow for new T-bond sales."

Who makes the Treasury Accounting Rules, and who has the authority to change them in order to allow Treasury to use the profits to spend Congressional Appropriations?

Based on what you said, I assume that these accounting rules are not yet another Congressional constraint on the Treasury, are they?

Crake said...

What is PEF?

Letsgetitdone said...

Crake, PEF is the US Mint Public Enterprise Fund.

beowulf said...

"Based on what you said, I assume that these accounting rules are not yet another Congressional constraint on the Treasury, are they?"

No no, internal Tsy bookkeeping rules dating to President Johnson’s 1967 Commission on Budget Concepts and currently reflected in FASAB SFFAS No. 7. The Secretary could administratively change the accounting procedures (indeed he should, a lots changed since 1967).

But as Lincoln once said, one war at a time. The way letsgetitdone and wigwam have suggested using platinum coinage (to pay back debt instead of funding new spending) is in compliance with the 14th Amendment, the debt ceiling statute and also FASAB SFFAS No. 7. :o)

I go even farther into the weeds on the accounting rules in this post.
http://www.correntewire.com/coin_seigniorage_and_irrelevance_debt_limit

beowulf said...

"The way letsgetitdone and wigwam have suggested using platinum coinage"

Sorry Joe, I thought Crake had asked the question. :o)

Tyler F said...

"A Tsy overdraft of its Fed account-- essentially a Fed loan to Tsy-- used to be legal on a temporary basis from 1942 to 1981 ("emergency draw authority") but today would trip over both public debt limit and 12 USC 355 prohibition of direct Fed loans to Tsy (vs. open market operations)."

So, for the Treasury to have overdraft status, repeal of the public debt limit and 12 USC 355 would be necessary?

What happened in 1981 to end the emergency draw authority?

The public debt limit seems so nonsensical, you would think that at least since 1971 someone in Congress would have advocated for its repeal. Is anyone aware of that having happened?

Letsgetitdone said...

In this post, I've advocated alternatives that would involve using seigniorage profits to spend Congressional Appropriations, so I think it's important that:

"The Secretary could administratively change the accounting procedures (indeed he should, a lots changed since 1967)".

I think that's not another war; but just an Administrative skirmish. If by some miracle the President were to accept alternative 4), he would have to issue an Executive Order. or have the Secretary issue a change to this rule.

beowulf said...

Right, the President could keep his hands clean, the Secretary could issue all the necessary orders. By the way, I could be taking too conservative a reading of Tsy accounting rules. Certainly current rules forbid seigniorage being counted as misc receipts that reduce budget deficit and they assert that it should be used instead to pay down debt. Its a grey area if they could be used to fund spending even without decreasing budget deficit (which is how the proceeds from T-bond sales are treated).

You could argue that coins seigniorage could fund new spending since its treated very much like T-bond sales proceeds anyway. But since we're pretty much pushing the envelope of existing law and practice, my druthers was to take the most conservative possible reading of existing Tsy accounting procedures.

DoggeyStyleMikey_AH said...

"What artificial lending standard are you talking about?"

bad credit personal loans said...

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Shnibb-Shnobb said...

Technically this is a sound solution. But it divorces spending and revenue,in a way that seems open to irresponsible abuse. There is a moral hazard issue here that no one is talking about.

With all the profits from seniorage,we could eliminate taxes entirely! No taxes, no debt, just "infinite money" and "free" infinite money at that.

MMT aims to describe and analyze modern economies in which the national currency is fiat money, established and created exclusively by the government. In MMT, money enters circulation through government spending; Taxation is employed to establish the fiat money as currency, giving it value by creating demand for it in the form of a private tax obligation that can only be met using the government's currency.[2][3] An ongoing tax obligation, in concert with private confidence and acceptance of the currency, maintains its value. Because the government can issue its own currency at will, MMT maintains that the level of taxation relative to government spending (the government's deficit spending or budget surplus) is in reality a policy tool that regulates inflation and unemployment, and not a means of funding the government's activities per se.

Take away the relationship between spending and taxing and money has no value, because the government does not need to back up its spending power with its coercive capability.

There's no such thing as a free lunch.

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