Wednesday, May 2, 2012
John Carney drops the bomb — "It's a Debt Ceiling, Not a Spending Ceiling!"
I hear the sound of heads exploding.
Way to go John.
Read it at CNBC NetNet
It's a Debt Ceiling, Not a Spending Ceiling!
by John Carney
John summarizes Jeffrey Rosen's longer post at TRN, How Would the Supreme Court Rule on Obama Raising the Debt Ceiling Himself? It's well worth reading, too.
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20 comments:
Tom -- These are good. I see they are from last July. Are they getting new traction?
Good links.
One question, isn't there a law requiring Treasury to sell debt for any budget deficit incurred?
This law is obviously outdated given the current monetary system but would be an obstacle for the plan of just continuing to spend.
I think it is premature to know just how widespread awareness was at the time and how much the public remembers about it.
The present kerfuffle hasn't really heated up yet, but the challenge is on the table. This time it is going to be ultra-political due to the campaign.
It's very significant to me that John (and other bloggers) put this out there prominently. It's fairly arcane, and most people are not going to know about it unless it is brought to their attention. CNBC is more important venue than most blogs, however, and I hope John will pick it up again instead of letting the Santelli's of CNBC misinform and scare. Hint, hint.
I'll be citing more things like this as the situation heats up. A lot was put out there, but it needs to be be refreshed in memory.
I hope the WH will pick up on it early, too, and adopt a strategy that prevents their being boxed in by events. The president appeared very weak in the last go-around. I hope he learned a lesson.
The president needs to get out front on this this time and heeds to stay in control or the crazies stand a good chance of winning the hearts and minds, resulting it crippling austerity.
Time to resurrect some of the excellent arguments about the platinum coin, too, in order to drive the debate instead of getting swept away by it.
"This law is obviously outdated given the current monetary system but would be an obstacle for the plan of just continuing to spend."
The issue is conflicting laws. Congress first appropriated (directed the executive to spend), and then refused to pay for it due to the debt ceiling (prevented the executive from paying).
As beowulf pointed out, which law does the president follow? Seems like he has a choice and there is a good argument for following the first one, especially in light of the 14th Amendment.
Which is what Bill Clinton said he would do at the time and force the courts to decide, knowing the odds are extremely good that the president would win if standing were even granted.
But the government could also just pay all of its bills, ignoring the fact that the account at the Federal Reserve is empty. So what happens when the government writes checks on an account with no money? Nothing out of the ordinary. Those checks will all clear, with deposits made in the recipients’ bank accounts just as they would have if the account was not underfunded.
...
But if the government doesn’t have enough money in the account, the Fed just doesn’t debit anything at all. It simply creates the credit in the account without a counter-balancing debit anywhere else.
OK, maybe I don't get it. But I think this is just wrong. My understanding is that there is a "no overdraft" law governing Fed operations. If the government writes a check on a government account, and there are insufficient funds, the Fed is required by law to bounce the check.
But the the Fed also has broad emergency powers.
that they could cite. Maybe Bernanke learned his lesson when he refused Paulson's request to step in to save the system and Bernanke refused, saying it was fiscal. This is perhaps one of the biggest blunders a cb has ever committed and Bernanke soon realized his mistake and provided unlimited liquidity to the tune of 30T and rising, which Randy Wray argues is fiscal in disguise, i.e., liquidity to mask insolvency. Bill Black and Randy argue that once the crisis was resolved with liquidity provision, then the insolvency issues should have been dealt with through resolution as required by law. The Fed is still avoiding that, Black and Wray say extending emergency powers way being necessity.
This could potentially be the start of bringing down the entire house-of-cards of the false mythology that the vast majority of people subscribe too.
Imagine the discovery process -
”The govt can spend without our tax money (the deficit makes that clear) and without borrowing???!!! Wait, you mean we are not reliant on China's largest to lend us our own money???!!! Wait, you mean the federal govt can pay whatever benefits Social Security or Medicare/Medicaid demand????!!!! You mean we could afford universal health care????!!!
OMG, have I've been so stupid for so long???!!!!
Surely, there's a catch??? Interest rates to the moon???!!! Wait, people are scrambling to buy Ts because this might mean the US will stop issuing them. What, the 10-year is below 1%; the 30 below 2???!!!
Are we going to die???!!! [yes, eventually]
It's inflation!! It's hyperinflation!!! Weimer, Zimbabwe, Confederate States!!! Britney Spears’ brain!!! [yea, I'm not sure about that one either].”
I know, I know, but hey, that would still be considerable progress for our fellow countrymen to make. Get that far and then we can start working on their next (re-)discovery - "no balloon without first a boom."
No boom likely, but I’m sure that will get blamed on the confidence fairies leaving town. Hey, we’ll deal with that later – just like Mosler or Wray books, one chapter at a time
I agree with Dan, I don't think the Fed is allowed by law to lend to the Treasury. Also, as I understand it, when Treasury wants to pay a bill it does so with reference to the Treasury General Account (TGA). It marks up private sector accounts and marks down the TGA. But if the TGA is at or near zero, then it can't do that.
I agree with John Carney that the debt ceiling isn't a spending ceiling. The spending ceiling is determined by Congressional appropriations, not the debt ceiling. So the problem is: if appropriated deficit sending will go beyond the revenue in the TGA, and the Treasury can't issue any more debt without exceeding the ceiling, then how can the Treasury get more electronic credits in that account?
The answer is it has to get them from the Fed withou borrowing from it which is illegal. That's where PPCs comes in. Say the President causes a $60 T proof platinum coin to be minted and deposited in the Mint's Public Enterprise Fund (PEF) account. Then, since the coin is legal tender, the Fed is required by law, to credit the Mint's PEF account with the face value of the coin. Further the Treasury is authorized by law periodically "sweep" the PEF's profits from coin seigniorage into the TGA. This already done with frequently but not with credits from so-called "jumbo coins."
So now the TGA has $60 T in it. It can't spend all the $60T because Congress hasn't appropriated it. But it can repay debt subject to the limit, as it comes due, and it can spend out of the TGA account provided Congress has appropriated the spending involved.
So, problem solved. But Carney has missed the essential PPCS step, because the Treasury isn't its own bank, and it cannot directly spend without working through its account at the Fed.
As for Rosen, I think his analysis of the legal situation with respect to the 14th Amendment is right insofar as he claims that the case won't get to the Court because of the problem of standing. The whole Congress might have standing to sue, but not the Republican House along, or any combination of House/Senate members. Congress would have to vote in both Houses to sue for an injunction and then file a complaint on behalf of Congress as a whole to get standing.
On the other hand, let's say that the Court granted standing, a real long shot, then I don't necessarily agree with Rosen that the President would win, because he would not be able to show that the conflict between the debt ceiling and his spending obligations can only be solved by his issuing more debt. That's because he can use PPCS to fulfill his spending obligations any time he wants to.
Btw, since Aug 10 of last year I've blogged 24 posts referencing/discussing PPCS. So, I've tried hard to keep it alive as the headlines have moved on!
wow letsgetitdone, a real buzzkill
"Btw, since Aug 10 of last year I've blogged 24 posts referencing/ discussing PPCS. So, I've tried hard to keep it alive as the headlines have moved on!"
True, you've done yeoman's work by plugging away on this but you're coming in way too high with a $60 trillion coin. Its too big a number for the mind to absorb. Besides the fact there's no point stockpiling something that can be created on demand, no sane politician burns any more bridges than are necessary. Maybe you could convince a pol to endorse paying off the $10T in publicly held debt with coinage (no need to though since net interest could just be funded with seigniorage), but I can't imagine any circumstance where a politician would keep on going to stockpile an additional $50T. If people think coin seigniorage means a $60T coin, then it will never happen.
What can happen, whether to sidestep the debt ceiling or to implement NGDP targeting, is Wigwam's idea of Tsy using coinage to buy back Fed-held debt. If that occurred and the public sees the sky didn't fall, build on that precedent to use coinage to pay net interest and then go to Congress to fund specific programs like Medicare. Just remember, nobody starts out smoking a carton a day, they have to build up to it.
Beo, That's your conservative approach and won't accomplish my political ends. It really won't fundamentally change the political situation or change political attitudes, which is my interest.
Your notion that if we use a $60 T coin then using PPCs will never happen again isn't something you can possibly know about. It's just your political hunch, formed during a conservative neo-liberal period which won't be with us much longer.
Mine is that the presence of $44 T in the public purse not counting the money to be used to pay off the debt subject to the limit, will make it obvious to everyone, in a way that can't be ignored, that we are not and can never run out of money, and that there is plenty of money available to solve our present problems, and more money where that came from, if necessary.
That's what I want to accomplish. I want every citizen to know that there's no solvency problem, not just a small elite who would understand a limited role for coin seigniorage in paying down the debt or avoiding the debt ceiling, and who would not be threatened by such a limited role.
But, that limited understanding isn't what I want. I want every citizen to know that what is standing in the way of building a better education system, FE, re-building our energy foundations, bailing out the victims of the recession, combating our environmental and climatological problems, re-building our infra-structure, doubling SS benefits, and providing for automatic annual funding for SS benefits, and Medicare for All, is Congressional Appropriations for such spending, not a shortage of tax revenue, or a possibility of not being able to borrow from an irrelevant bond market. I want them to know that their shitty lives aren't due to the nature of things, or the difficulty of the problems, but only to the unwillingness of their representatives to act in their interests. I want to clearly pin the responsibility for not solving problems on the Congress and the President, and I don't want these truths to be hidden behind a welter of obscure details.
Finally, I believe that if the political situation is changed by the availability of all that money, then Congress will either do absolutely nothing to remove the capability or will place the Fed under the Treasury where it belongs so that PPCS won't be needed any longer because it won't make any difference, and it will be clear to everyone ever after that the limits on spending are Congressional Appropriations and not any shortage under the Constitution.
Btw, Beo, why would we want to implement NGDP targeting? I don't care at all about that! Why is that consistent with public purpose? You try and sell NGDP targeting, I'll go on trying to sell FE w/ PS.
My worry about all this is that the Obama administration has left itself no political room to try anything like the PPC issue. The problem is that doing something like that seems to run contrary to their own message of fiscal consolidation.
Joe, sometimes the best is the enemy of the good. The first time a jumbo coin is used, it will fundamentally change the political situation by taking the bond market's leash off of Tsy. It should look as an innocuous and risk-free (in terms of inflation) as possible to prevent Wall Street from scaring the public and Congress with fears of hyperinflation.
You have to make that first step as painless and risk-free as possible or no economist or govt official will ever put their reputation on the line to support it. if instead you offer a plan that no politician will ever endorse, you're just doing the bank lobby's work for them.
Dan, I think the President always has plenty of political room to change direction. The presidency is very powerful that way. In particular, if Obama uses the big, big coin in the context of the campaign, it will be very dramatic and he can really focus attention on the idea that the only bounds we have are determined by what Congress is willing to pass, not some danger of running out of money.
He must drive home that point, and then place the blame squarely on the Republicans for not supporting Full Employment programs, strengthening the safety net, and supporting Medicare for All. A reply that he's the one who's been talking about fiscal responsibility and cuts in entitlements while true won't work, because he can always say that events in Europe and the rest of the world have shown that austerity is not the way to go and that when his advisers uncovered the PPCS capability established by the 1996 law, he immediately realized that he could use it to take action to create the funds to completely pay off the national debt, and also to make clear to everyone that the the Government has the funds in the public purse to implement solutions to America's major problems, and that it is now up to Congress to loosen the purse strings it controls to allow the Government to enable solutions to these problems.
This puts the ball in Congress's lap, and if he starts calling for spending to end the depression and to provide Full employment, and Medicare for All, the Republicans will be reduced to stoking inflation fears. I think that with 30 million still wanting full-time jobs who can't find them he can win that argument, and be re-elected easily with a mandate to end the depression and put Medicare for All in place.
He probably won't follow this problem, but not because he lacks political space. It will be because he's a neo-liberal who really doesn't want full employment, greater equality, and Medicare for All.
Sorry, I said: "He probably won't follow this problem,. . . "
I meant to say: "He probably won't follow this program, . . . "
Sorry Beo, "the best is the enemy of the good" is just BS to me. Here's why: http://my.firedoglake.com/letsgetitdone/2009/08/13/%E2%80%9Cthe-perfect-is-the-enemy-of-the-good%E2%80%9D-and-related-platitudes/
Also, what leash does the bond market have on Treasury now? All MMTers know there is no leash. Bernanke can keep interest rates as close to zero as he wants to whether or not PPCS is used.
On Wall Street whipping up fears of hyperinflation, I'm not afraid of that at all. I welcome that debate. It will be a teachable MMT moment.
All our talking points are already out there. All their's are too. We can relegate Weimar and Zimbabwe to the dustbin of history by winning that debate and that's what I mean to do.
On this:
"You have to make that first step as painless and risk-free as possible or no economist or govt official will ever put their reputation on the line to support it."
Beo, that's your inner wonk talking. I think it depends on the official and that official's courage. I think Obama's got that kind of courage, as did people like FDR, Marriner Eccles, Rexford Guy Tugwell, other New Dealers. The real issue is whether he wants to break the neo-liberals or keep them around so he can get $400,000 a speech after he leaves the presidency. If he's willing to take them down, he can end the BS we're going through by next Spring. I also think that other people on his team will do what he asks them to do. If he asks them to support the use of PPCS, and to provide the talking points arguing that there will be no inflation from its use, then they will do that. As for Bernanke, he will play along, or he will resign, and as Obama emphasizes more and more that Congress still has the purse strings, he will realize that the President will have put in place continuing pressure to use fiscal policy to end the depression. He will like that because it will take the pressure off him. And he will be glad to point out in testimony before Congress that using the funds to pay off the debt as it comes due will not be inflationary, and also that none of the $44 T sitting in the public purse can possibly be inflationary unless and until Congress decides to spend it.
Finally,
"if instead you offer a plan that no politician will ever endorse, you're just doing the bank lobby's work for them."
I don't get this at all, beo. First, my plan isn't making any headlines. I only present it in the hopes that someone in the Administration will make the President aware of it.
Ran out of space, second comment coming up.
Continued from @ 1:42 PM
Second, if and when the President takes it up, then he has plenty of power to get other politicians to endorse it. All the progressives in Congress will endorse this. Debbie Wasserman-Schultz and Chris van Hollen will go crazy sending out e-mails informing people that the real Democratic Party is back. All the progressive groups in DC will start blowing their horns to say that the millenia has come and they will run to embrace PPCS and MMT and run as fast as they can away from deficit dovism, now that the President has taken this action and is paying down the national debt. It won't be two weeks before the whole progressive establishment is advocating for doubling SS benefits.
Lastly, if the President handles this right, it will hit the Republicans and Wall Street like a ton of bricks. It will be a fait accompli. They can't very well say that the Government shouldn't pay down its debts with the money, and once the extra $44 T is there, then it is in the TGA for good. Wall Street can grouse about it. That fool Santelli can rant and rave and Mike can go on opposite him to point that the $44 T can't be inflationary until it's spent. And then WS can launch a campaign warning everyone that sending any part of the 44T will be inflationary. But with 30 million people looking for full-time jobs who can't get them, and with 55,000 people a year now dying because reliance on the murder b y spreadsheet insurance companies, all I have to say is good luck with that!
Until there is actual hyperinflation the majority of people will just go along with the President and wait and see. if he's careful not to let Congress spend beyond the capacity of the economy to absorb the spending, and he gets vigorous in using the law to go after the banksters and the speculators, he can stop both demand-pull and cost-push inflation, and we can have both FE w/PS for as long as want it.
Joe, the problem is that Obama is not a progressive and never was one. He is a political centrist with neoliberal tendencies.
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