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I think I agree that the best option would just be to let the balance sit there as a big fat surplus, and then conduct authorized spending as usual, rather than use it to make a large-scale immediate reserve injection by buying back debt. The balance is then just a long-term insurance policy against more debt ceiling shenanigans, and completely undercuts the deficit hawk argument. Deficit? Poof!!! What deficit?
But while it's fine to analyze the purely economic effects, I think a lot of people have so far failed to come to grips with the political effects which, it seems to me, would be both (i) huge and (ii) unpredictable.
What happens on the day when the US public realizes that the Treasury can unilaterally make its deficit disappear?
If the Treasury does this once then it can do it all the time.
See Michael's Sankowski's comment on JKH's post: “Instead of buying bonds, the Fed has bought the coin.”
So, if the coin is finally sold, a taboo will have been broken.
The Treasury affirms its right to sell coins that are purchased by the central bank. And then the government simply spends the proceeds of the coin sales, by crediting the private sector's bank accounts and thus adding reserves to the clearing system.
If this is a valid procedure to break the present "cliff" surely it can be legitimized for all other instances of government deficit spending.
Thus the historic moment may be approaching when neo-chartalist view of how governments finance their expenditures is vindicated.
And the MMT/MR currents of thought may also be close to re-unification.
Because, if the Treasury will spend by selling coins to the Fed there will be no further need for distinguishing between strategic/operational issuers/users of the currency; from that moment it's clear that the Treasury is in charge - right?
Ramanan The budget deficit of the government is the difference between its expenditure and income.
The coin is a way of financing the deficit.
Coin issuance do not reduce the deficit directly but reduces the public sector borrowing.
Right, the funds have already been appropriated through the political process, and legal contracts made by the executive branch that entail making payment. It's not about new spending but spending already approved.
TPC would also the Treasury to get reserves to settle when payments are made without having to issue tsys and therefore add to the cumulative debt, avoiding the debt ceiling.
But nongovt NFA would increase just the same as payment is made by crediting nongovt bank accounts.
The "coin" is simply another accounting abstraction that happens to have a physical representation in the real world.
It's silly that we have such a superstition-based understanding of our monetary system that we have to resort to tricks to fool people and get anything done.
But, whatever works. In that respect it's a good idea.
That's a good point. The coin breaks down the fed/Treasury structure we currently have in place, and pushes it closer to a central Treasury bank/MMT view.
Ramanan, fair enough. I was thinking of the Treasury's account balance, not its spending flow. The bond sales are triggered when there is an account shortfall, and by creating a large positive balance in its own account, Treasury can finance a deficit without bond issuance. My only real point here is that I think it would be best for Treasury just to let that balance sit there as a bulwark against future debt ceiling shenanigans, and to carry out its existing debts payments and spending commitments as normal and on schedule, rather then buy back debt. A massive buyback of debt might be seen as a corrupt crony cash windfall for the FIRE sector. It might also raise inflation expectations.
I'm inclined to think that the platinum coin maneuver will only be used once, if at all, and is a one-shot deal. The only reason it exists is because Congress left a platinum loophole in its coinage legislation. My guess is that majority of members of Congress in both parties will regard the minting and depositing of a $1 trillion platinum coin as a sneaky, though legal, violation of the intent of Congress, and will then move to close the loophole. I also believe that, rightly or wrongly, they will regard the sheer spectacle of the platinum coin political theater as intensely damaging to the international credibility and gravitas of the US dollar system, which serves as the world's reserve currency.
My preference would be that the Treasury simply flashes this option as a gun beneath its jacket, so to speak, to deter Congress from playing debt ceiling games, but then never has to actually exercise the option.
I think that the president knows that the GOP has handed him the gun with which to shoot them. The public is figuring out that they are being had and they are blaming the GOP for it, or so polling indicates. I don't think that this is lost on Obama. He knows that he can craft pretty much any deal he wants. And that is what I am concerned with.
As far as the GOP using the debt ceiling as leverage to dole out funds piecemeal week by week or month by month as Norquist has suggested, GOP elected representatives should recall the story of the boy that cried wolf.
I think I agree that the best option would just be to let the balance sit there as a big fat surplus, and then conduct authorized spending as usual, rather than use it to make a large-scale immediate reserve injection by buying back debt. The balance is then just a long-term insurance policy against more debt ceiling shenanigans, and completely undercuts the deficit hawk argument. Deficit? Poof!!! What deficit?
ReplyDeleteBut while it's fine to analyze the purely economic effects, I think a lot of people have so far failed to come to grips with the political effects which, it seems to me, would be both (i) huge and (ii) unpredictable.
What happens on the day when the US public realizes that the Treasury can unilaterally make its deficit disappear?
Dan,
ReplyDeleteThe budget deficit of the government is the difference between its expenditure and income.
The coin is a way of financing the deficit.
Coin issuance do not reduce the deficit directly but reduces the public sector borrowing.
If the Treasury does this once then it can do it all the time.
ReplyDeleteSee Michael's Sankowski's comment on JKH's post: “Instead of buying bonds, the Fed has bought the coin.”
So, if the coin is finally sold, a taboo will have been broken.
The Treasury affirms its right to sell coins that are purchased by the central bank. And then the government simply spends the proceeds of the coin sales, by crediting the private sector's bank accounts and thus adding reserves to the clearing system.
If this is a valid procedure to break the present "cliff" surely it can be legitimized for all other instances of government deficit spending.
Thus the historic moment may be approaching when neo-chartalist view of how governments finance their expenditures is vindicated.
And the MMT/MR currents of thought may also be close to re-unification.
Because, if the Treasury will spend by selling coins to the Fed there will be no further need for distinguishing between strategic/operational issuers/users of the currency; from that moment it's clear that the Treasury is in charge - right?
Ramanan The budget deficit of the government is the difference between its expenditure and income.
ReplyDeleteThe coin is a way of financing the deficit.
Coin issuance do not reduce the deficit directly but reduces the public sector borrowing.
Right, the funds have already been appropriated through the political process, and legal contracts made by the executive branch that entail making payment. It's not about new spending but spending already approved.
TPC would also the Treasury to get reserves to settle when payments are made without having to issue tsys and therefore add to the cumulative debt, avoiding the debt ceiling.
But nongovt NFA would increase just the same as payment is made by crediting nongovt bank accounts.
This has to be made clear to people.
"The coin is a way of financing the deficit."
ReplyDeleteThe "coin" is simply another accounting abstraction that happens to have a physical representation in the real world.
It's silly that we have such a superstition-based understanding of our monetary system that we have to resort to tricks to fool people and get anything done.
But, whatever works. In that respect it's a good idea.
Jose,
ReplyDeleteThat's a good point. The coin breaks down the fed/Treasury structure we currently have in place, and pushes it closer to a central Treasury bank/MMT view.
That's a big reason Joe has been pushing so hard, I believe.
ReplyDeleteRamanan, fair enough. I was thinking of the Treasury's account balance, not its spending flow. The bond sales are triggered when there is an account shortfall, and by creating a large positive balance in its own account, Treasury can finance a deficit without bond issuance. My only real point here is that I think it would be best for Treasury just to let that balance sit there as a bulwark against future debt ceiling shenanigans, and to carry out its existing debts payments and spending commitments as normal and on schedule, rather then buy back debt. A massive buyback of debt might be seen as a corrupt crony cash windfall for the FIRE sector. It might also raise inflation expectations.
ReplyDeleteMichael and others,
ReplyDeleteI'm inclined to think that the platinum coin maneuver will only be used once, if at all, and is a one-shot deal. The only reason it exists is because Congress left a platinum loophole in its coinage legislation. My guess is that majority of members of Congress in both parties will regard the minting and depositing of a $1 trillion platinum coin as a sneaky, though legal, violation of the intent of Congress, and will then move to close the loophole. I also believe that, rightly or wrongly, they will regard the sheer spectacle of the platinum coin political theater as intensely damaging to the international credibility and gravitas of the US dollar system, which serves as the world's reserve currency.
My preference would be that the Treasury simply flashes this option as a gun beneath its jacket, so to speak, to deter Congress from playing debt ceiling games, but then never has to actually exercise the option.
I think that the president knows that the GOP has handed him the gun with which to shoot them. The public is figuring out that they are being had and they are blaming the GOP for it, or so polling indicates. I don't think that this is lost on Obama. He knows that he can craft pretty much any deal he wants. And that is what I am concerned with.
ReplyDeleteAs far as the GOP using the debt ceiling as leverage to dole out funds piecemeal week by week or month by month as Norquist has suggested, GOP elected representatives should recall the story of the boy that cried wolf.
Dan,
ReplyDeleteHowever I saw this post in which there is a bill to be introduced which treats it differently!
New post from Beowulf:
http://monetaryrealism.com/will-congress-accidentally-double-down-on-the-coin/