Sunday, January 20, 2013

Laurence Kotlikoff — The Treasury Has Already Minted Two Trillion Dollar Coins

...substitute a $2 trillion piece of paper called a Treasury bond for the platinum coin. Suppose the Treasury prints up such a piece of paper and hands it to the Fed and the Fed puts $2 trillion into its account. No difference right, except for the lack of platinum.
Next suppose the Treasury doesn’t hand the $2 trillion bond to the Fed directly, but hands it to John Q. Public who gives the Treasury $2 trillion and then hands the bond to the Fed in exchange for $2 trillion. What’s the result? It’s the same. The Treasury has $2 trillion to spend. John Q. Public has his original $2 trillion. And the Fed is holding the piece of paper labeled U.S. Treasury bond.
Finally, suppose the Treasury does this operation in smaller steps and over five years, specifically between 2007 and today. It sells, i.e., hands to John Q. in exchange for money, smaller denomination bonds, which Johns Q. sells to the Fed, i.e., hands to the Fed in exchange for money. Further, suppose the sum total of all these bond sales to the public and Fed purchases of the bonds from the public equals $2 trillion. Voila, you’ve got U.S. monetary policy since 2007.
In 2007, the monetary base – the amount of money our government printed in its 231 years of existence totaled $800 billion. Today it totals $2.8 trillion. And it increased by this amount via the process just described – the Treasury’s effective minting out of thin air two $1 trillion platinum coins.
Yahoo! Finance | The Exchange
The Treasury Has Already Minted Two Trillion Dollar Coins
Laurence Kotlikoff | economist at Boston University, co-author of The Clash of Generations, and President of Economic Security Planning, Inc.
(h/t Clonal Antibody in the comments at Monetary Realism)

Props to Laurence Kotlikoff for pointing out that coin issuance and bond issuance are essentially the same in outcome operationally, that is, they provide the Treasury with reserves to settle deposits it creates in non-government accounts through expenditures and transfers. Note that Treasury only "spends" what has already been approved through the appropriations process and commitments made through the various agencies. The Treasury is not authorized to add to spending itself.

Except that in issuing interest-bearing securities the Treasury is providing safe assets to the private sector, which it pays the private sector a premium to hold. Since this premium is not required operationally, it constitutes a special interest subsidy that is unnecessary. Enquiring minds wonder why it exists at all, since the high liquidity of Treasury securities does not reduce the propensity to spend, i.e., "sterlize" the bank reserves created by Treasury expenditure.

Issuing Treasury securities made sense under a convertible fixed rate monetary system such as the gold standard, but it is no longer needed under modern monetary system that uses non-convertible flexible rate sovereign currencies. It is now an obstacle that limits policy space and a subsidy with dubious justification wrt to public purpose. It should be excised with Ockham's razor and replace with direct issuance of Treasury notes in sufficient amount to offset changing saving desire of consolidated non-government in aggregate but no greater at full employment, in order to harmonize growth, employment and price stability.

Considering the growing size of the interest payments to the rest of the budget, the question arises, Is this politically mandated subsidy serving public purpose, or is it catering to interest groups that profit from it inordinately due to their privileged position in society — as landowners, generally the monarchy and aristocracy, did from land rent in the agricultural era under feudalism?

Note: After showing how the coin and bond issuance accomplish the same goal in the government's self-funding, Kotlikoff goes off the rails in claiming that this is "inflationary,"
Now what happens when the Treasury spends its freebee money? It raises prices of the goods and services we buy or keeps them from falling as much as would otherwise be the case. Either way, the money we have in our pockets or in the bank or coming to us over time as, for example, interest plus principal on bonds we’ve bought in the past – all this money loses purchasing power. So we are effectively taxed $2 trillion.
Someone needs to explain to him what inflation is defined as economically, namely, a continuous rise in the price level, and how it occurs, that is when effective demand increases faster than the economy can expand to meet it. One wonders whether a professional economist is unaware of this obvious fact, or he has a political agenda.

Reading the rests of the article, the conclusion seems to be that it is political in that it has no basis in fact, unless Kotlikoff just doesn't know what he is taking about. The proof. He even throws in Zimbabwe! ROFL. He thinks that seigniorage is a sin.


Jonf said...

Treasury bonds are a way to give interest income to the rich or to China, et al. There is no reason to do it other than, as I suppose, congress says so. Today short term bonds are nearly a perfect substitute for cash. Make them perfect and issue them no more.

John Zelnicker said...

Tom -- Props to Kotlikoff for making the point you quoted. However, the rest of his piece was so totally wrong, I'm not sure it should get any promotion. It's all QTM, debasement and hyperinflation ready to happen.

John Zelnicker said...

Tom -- I didn't read your additions to the post until after I had commented above. Off the rails is right.

Tom Hickey said...

Sorry, John, I should have waited until I had drafted the whole thing. But Blogger has been acting quirky for me and I hate to lose stuff I've written. It's done now.

Matt Franko said...

He looks at it in terms of "money" not $NFA... the key data is in the $NFA, ie how much has been issued at what rate and to whom? rsp,

Clonal said...


I should have warned you in my comment - about the inflation rantings. However, I thought that the first part of his article was very relevant to the discussion, particularly as related to the discussion on Platinum coin seigniorage on Monetary Realism.

Tom Hickey said...

Clonal, I thought that the post was excellent in that it shows that a person can understand the monetary operations and then completely misinterpret the implications. It's a lesson that understanding modern money maybe is not the panacea it is thought to be.

I have been saying this for some time. Most people basically understand fiat currency. The don't like it and either want to return to "sound money," or else they are suspicious of it and don't want it in the hands of politicians.

I trace this to the double-bind of there being a deep-seated desire for freedom and a deeper seated fear that one can't handle freedom. Freedom is like dynamite — powerfully productive in the hands of expert engineers and totally dangerous in the hands of that who do not appreciate its power. According to existentialist philosophy, Sartre especially, it's the human condition. According to Sartre, human beings are "condemned to be free." See "Condemned To Be Freel" by Rob Harle.

Money is just one of the surface expressions of this psychological tension that a whole lot of people struggle with morally. Thus, the moralizing in economics.

Anonymous said...
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Anonymous said...

Leaving aside the fact that the Fed has to buy treasuries from private sector intermediaries, and assuming for the sake of argument that Kotlikoff's hypothetical about a direct Fed purchase of a treasury, there is still a difference.

If the Treasury issues a $1 trillion platinum coin and deposits it in its account, then its account balance simply increases by $1 trillion. If the Treasury issues a $1 trillion bond that it sells to the Fed, then its account balance increases by $1 trillion, but it also incurs a $1 trillion liability to the Fed which it must extinguish at maturity.

So in the latter case, the Treasury acquires no net spending capacity. There is only a temporary shift of a trillion dollars from Fed to treasury, and then Treasury back to Fed.

Another way of looking at it is that when the Fed issues the $1 trillion to by the bond, the Treasury balance sheet now has a new $1 trillion currency asset and a new $1 trillion bond liability, while the Fed balance sheet has a new $1 trillion currency liability and a $1 trillion bond asset. When the bond is redeemed, both of these asset/liability pairs are cancelled and everything goes back to the original situation.

When Treasury swaps the coin for a Fed issued account balance, on the other hand, you get a similar situation initially. Assuming the coin is a liability of the Treasury, just as Fed Reserve notes are liabilities of the Fed, the Fed acquires a new coin asset and currency liability, while the Treasury has a new coin liability and currency asset. But the coin is not a redeemable liability with a maturity, so the Fed cannot force the dollars off of Treasury's balance sheet. Treasury has thus permanently extended its spending capacity.

Of course with bonds (and assuming direct, required central bank purchases of bonds without a debt ceiling) there is always the option of rolling the debt over indefinitely, and so the Treasury could expand its spending capacity at will by continually rolling over and increasing the quantity of intergovernmental debt.

Tom Hickey said...

"Of course with bonds (and assuming direct, required central bank purchases of bonds without a debt ceiling) there is always the option of rolling the debt over indefinitely, and so the Treasury could expand its spending capacity at will by continually rolling over and increasing the quantity of intergovernmental debt."

Which is what happens. The national debt never gets paid down other than occasionally, followed by a depression.

Remember when the fiscal conservatives wanted to let use the Clinton surplus to pay down debt, and W argued that it was extra taxpayer money that should be returned to the rightful owners, while Democrats on the other hand wanted to use it to "shore up social security"?

Unknown said...

Scott Fullwiler:

“First, sellers of bonds were always able to sell their securities for deposits with or without the Treasury’s intervention given that there are around 20 dealers posting bids at all times. Anyone holding a Treasury Security and desiring to sell it in order to spend more out of current income can do so easily; holders of Treasury Securities are never constrained in spending by the fact that they hold the security instead of a deposit. Further, dealers finance purchases of securities from both the private sector and the Treasury by borrowing in the repo market—that is, via credit creation using securities as collateral. This means there is no ‘taking money from one person to give it to another’ zero sum game when bonds are issued (banks can similarly purchase securities by taking an overdraft in reserve accounts and clearing it at the end of the day in the federal funds market), as what in fact happens is that the existence of the security actually enables more credit creation and is known to regularly facilitate credit creation in money markets that are a multiple of face value. Removing the security from circulation eliminates the ability for it to be leveraged many times over in money markets.”
“Second, the seller of the security now holding a deposit is earning less interest and can convert the deposit to an interest earning balance. Just as one holding a Treasury can easily sell, one holding a deposit can easily find interest earning alternatives. Some make the argument that the security can decline in value and so this is not the same as holding a deposit, but this unwittingly supports my point that holders of deposits aren’t necessarily doing so to spend. Deposits don’t spend themselves, after all.”