A less anti-coin version of this is Greg Sargent's dismissal of it:
1) The White House will never mint the platinum coin. 2) That won't matter, because GOP won't allow default. That is all.
Well...I don't know. If you follow Greg's analysis, then I think so: if you believe that House Republicans, when push comes to shove, will wind up passing a debt limit extension (perhaps with mostly, or even all, Democratic votes; they've talked about voting "present" before), then I think there's no reason for the White House to signal that they would use the coin or other desperation measures.
On the other hand, perhaps Republicans really are willing to sink the economy if they don't get their way. What then? Klein thinks that allowing the nation to suffer in order to teach Republicans a lesson would be a good idea. I'm...skeptical. Very skeptical. Skeptical that it's worth the cost; skeptical that Republicans would actually learn the correct lesson from it.
Part of that is that Klein thinks the coin isn't much better than default, since it would be a "banana republic" solution to the crisis (Philip Klein calls it a "massive power grab"). I don't buy it. We create money all the time, so there's nothing special about that. It has to be legal -- but Ezra Klein believes that it would be legal. That something about it sounds silly? Well, that's perhaps a public relations issue, but that's all.
Or perhaps -- it's not quite clear -- what he objects to isn't the coin itself, but that using the coin would disguise that the US has become a "banana republic witnessing a full-blown meltdown of our treasured system of governance." I guess I just don't see that. As long as the law provides for a perfectly legal, legitimate, solution to the situation, then it's not really a "meltdown" of the "system of governance." It's just a dodge, or a kludge, or relying on the redundancy of that system. You can't get more in keeping with the US Madisonian system than that.
Which is not to say that it's ideal in any sense. It's a big, serious problem that the Republican Party is broken, and it's going to have negative consequences. But the responsible thing to do is to attempt to minimize the consequences, not embrace them.
Now, all that said, when and how to deploy extraordinary measures to beat the debt limit depends on one's read of the negotiating situation. If Greg is right and Republicans are bluffing, then I agree it would be foolish to give them anything, even cover for a retreat. Wait until they really do blast through to do anything, and even then perhaps wait a bit to see if they'll fold. On the other hand, if you think they're really that crazy, then embracing the coin early is a way of undermining the threat. Is the cost worth it? Sure -- the president is at 56% approval and John Boehner, well, isn't; under that circumstance, it shouldn't be hard for the White House to spin the coin as a fairly normal, ordinary, legal, procedure, and to put the blame squarely on House Republicans. Or maybe not -- but surely it would still be better than sacrificing the economy to "prove" that it's the Republicans who are nuts. And after all, that could backfire, too.
So I'm not saying how it should be played, but the case against using the coin (or other measures) as needed just doesn't seem very strong to me.
Posts
The Platinum Coin Option is legal - period.
ReplyDeleteMinting the Coin is problematic only in terms of optics, or public relations, as you say. I have yet to read a single plausible legal argument against it. (And no, Kevin Drum's pearl-clutching doesn't count - it has nothing to do with the law.)
For that reason, Obama, being far more popular than the GOP Congress, is pretty well positioned to do something like this. Yes, Tea Party types call him a dictator, and claim this is the End of the Republic and All That Is Good And Holy... but what else is new? At the end of the day, the debt ceiling crisis will have been averted, and the economy
Whether that "rewards" the GOP for bad behavior is another issue. But note that, time and time again, Obama has shown that he is unwilling to let ordinary Americans suffer just to teach the other party a lesson. I see no reason for that to change now.
*economy will continue to hum along.
DeleteIs there anyone who thinks that the current Congress will do a better job or have an easier time of negotiating a deal than the previous Congress? Though we still have Boehner/Reid/Obama at the forefront, might it just be easier for Congress to canvas the votes they need to pass the necessary legislation through? Fewer hostage takers?
ReplyDeleteIn any case, here's to hoping that the 113th Congress is far more amicable to finding solutions to the nation's problems than the 112th.
If we're hoping, I'm going to hope for a pony.
DeleteHow is your skepticism on a third aspect of letting the ceiling be hit? Namely, that hitting the ceiling would teach AMERICANS that the GOP is crazy.
ReplyDeletePersonally, I'm only slightly less skeptical of this than of Republicans learning the correct lesson. However, to me, it's a more legitimate argument, because it uses the debt ceiling as a case study to the American public.
That said, it's unlikely to work, and the cost is too high. But, if voters are never going to wake up to the insanity that is the modern GOP, is there really ANY way to justify democracy?
Americans think that all members (except their own) are all children, that Obama's really not much better and that it all doesn't really matter. So, in the end, convincing them the Republicans are just that worse is going to be difficult.
DeleteIf Obama were to mint the coin, I would like to see it done almost offhandedly -- do it some Friday, have Geithner issue a press release at 4:45 pm and send Boehner a letter saying that a vote on the debt ceiling is no longer a pressing concern.
ReplyDeleteI think you can't stress the whole popularity argument enough. Even though the coin option is bizarre it likely to be relatively popular simply because it's associated with a relativley popular president. The polling that I've seen said that Nixon's wage and price controls were relatively popular, and his speech announcing them was hugely popular, not because Americans like wage and price controls, but because they associated them with a then relatively popular president. Any "hit" Obama is likely to take will probably be small and temporary at best. Personally I see the unknown reality of how the GOP in the house might react to any bill raising the debt ceiling as being one of the biggest arguments for the coin or some other end run around Congress. Ed Kilgore had a good post about one House member who seems to actively want a default: http://www.washingtonmonthly.com/political-animal-a/2013_01/shine_on_brightly042315.php
ReplyDeleteThe crazy is so unpredictable I don't think anyone can figure out what the House might or might not go for, I could even see a solution where Obama caves by agreeing to entitlement cuts just for a debt ceiling increase and the result is that the GOP demands more, like a "Cut Cap and Balance" constitutional amendment and we default anyway.
If Obama really was that popular, he'd have the political capital to negotiate the abolishment of the debt ceiling, and he'd be better off with proceeding with that option than with issuing the trillion dollar coin.
DeleteOne way to think about it is that from Obama's perspective, he doesn't have anything to gain by engaging the Republicans in any way, even by considering the coin or some other escape hatch. For the fiscal cliff deal, Obama really wanted the revenues from tax rates, UI, extending the refundables etc.
ReplyDeleteEven in 2011, Obama (making a terrible mistake) really wanted a "grand bargain" and saw the debt ceiling standoff as an opportunity to get that done.
This time Obama can let the Republicans out to dry because he doesn't need anything from them. The sequester cuts are bad, but they are just as bad or if not more for the Republicans If he thinks they won't blow up the economy in the end, Obama has really no incentive to strategically "cave" this time around.
I agree with you. Remember how in 2011, the Republicans started getting antsy when the Administration said they wouldn't be sending out Social Security checks?
DeleteThe best thing about minting the coin would be it undermines the argument, put forth by many Democrats (including President Obama), Republicans, and media elites, that the federal government is "spending constrained" much like your average household.
ReplyDeleteWhile state and local governments must rely on bond markets for extra funds beyond their revenues, the federal government is capable of creating money, right out of thin air. Some individuals opposed to minting the coin claim it would create inflation, or hyper inflation. That is impossible unless there are legal loopholes for the executive branch to spend the money created without upper bound. As we understand US law today, the Congress still must pass laws to permit spending. The Treasury Secretary can only create money (through minting a platinum coin and depositing it with the FED) and add it to the government's bank account. This is like if you could make your bank balance state whatever you wanted, but were unable to withdraw any funds.
Moreover, as regards inflation, one credible estimate is the FED, between 2007 and 2010, created $29 trillion. These funds were used to bailout financial institutions, specifically by purchasing financial assets and loaning $ against them. If the FED can expand the money supply by several factors over 4 years without ANY increase in inflation, then reason follows Treasury expanding the money supply by a small fraction will not result in any inflation. Source:
http://www.cnbc.com/id/45674390/The_Size_of_the_Bank_Bailout_29_Trillion
If I were knowingly to permit the economy to collapse in order to prove that someone else was crazy, I think that might actually prove that I'm the crazy one.
ReplyDeletelike
DeleteIn March 2006, Congress was debating raising the debt ceiling (to $9 T, the accumulated debt was $8.2 T at that point). A certain outparty senator voted against raising the ceiling to $9 T, justifying his vote to sink the economy as follows:
ReplyDelete"America has a debt problem and a failure of leadership. Americans deserve better. I therefore intend to oppose the effort to increase America's debt limit."
Yeah, Obama.
I think its safe to assume that Obama knew, in March 2006, he was going to make a serious push for the WH in 2 years. While its true the Republican senators had the votes to pass the raise in the ceiling, its also true (per the terminology in this thread) that Senator Obama, with an eye obviously on the WH, voted with the "crazy" to default the country. Obviously, the $8.2 T debt in 2006 was sufficiently alarming that a vote with "The Crazy" was seen as a feature, not a bug, for Obama's ultimate goal of the WH.
7 years hence, the debt has doubled. That's a CAGR of roughly 10%, shocking in normal times, beyond words now. If an $8.2 T debt justifies a Presidential aspirant voting to sink the economy rather than grow the debt, what's the right move for the loyal opposition at $16.4 T+ 7 years later? Play footsie with the former senator? Otherwise acquiesce?
There's a separate conversation about who's responsible for our inability to deal with $16.4 T. Maybe the Republican Congress is guilty as suspected.
But the notion that brinksmanship in response to a $16.4 T debt in 2012 is something newly cooked up in Tea Party Laboratories of Crazy...sometimes the crazy you see is a function of where you look.
@CSH, you should be able to see the difference between a bit of political theatre during a vote that's a done deal and a real threat to default. There was no brinksmanship in 2006, or did we have a huge national uproar that I slept through?
DeleteI don't really have a problem with grandstanding on this issue. Obama's vote against raising the ceiling wasn't going to stop passage, unless he decided to filibuster it, which he didn't. The fact that the measure passed has to be taken into account.
DeleteBefore you say what the House GOP is doing is equivalent, it isn't. They are threatening to not pass it at all unless its matched by cuts. That's very different. If they want to grandstand on the issue, vote present and force the democrats to vote for the passage of the debt limit. That would be entirely fair, in my opinion.
@MP - I do see that difference. Indeed, Obama was using weasel language ("intend to vote") that was clearly designed to give him an out in case a couple of Republican senators broke with their party.
DeleteSimply, though, if $8.2 T makes such theater marketable in 2006, then $16.4 T in 2012 (a staggering increase) calls for...something else. To the extent that political theater may indeed characterize current Republican behavior, my pushback is whether what we see is out of proportion to Obama's stance against an $8.2 T debt in 2006.
From reading this thread, you would think that political posturing against the raising of the debt ceiling was something the Republicans in Congress invented yesterday.
One other: I'm okay with calling the Republicans crazy, I just want to be sure that its definitively crazy at $16.4 T in 2012 relative to Obama's posturing at $8.2 T in 2006.
CSH:
DeleteI would argue that there's a world of difference between pre- and post-2011.
Pre-2011, votes on the debt ceiling were treated as silly things. They HAD to pass. So, the opposition party (whether in the majority or minority in Congress) would use the opportunity for political theater. In the end, however, all those debt ceilings were increased, and the outcome was never seriously in doubt. See, for example here: http://www.opencongress.org/articles/view/2295-A-Brief-History-of-Debt-Limit-Votes-in-the-House
The world is very different after 2011. Honestly, I don't believe Obama or anybody else who opposed the debt ceiling in 2006 (except maybe a Ron Paul or a couple of fellow travelers) actually MEANT their vote, and if Obama's vote was somehow necessary to pass the debt ceiling, he would have. Prior to 2011, these votes were like votes for congressional pay raises: everyone wanted them to pass, but nobody wanted to vote for them.
I get that Republicans have primaries to win, so they have incentives to vote against this. If Romney had won, Democrats would oppose voting for it. The difference is: they aren't the majority party, and if they were, I'm pretty sure they'd pass it with most of their own votes. Passing debt ceiling increases is the "burden of the majority" as the linked article quotes Michael Simpson (R-ID).
Now, they actually passed a deal in 2011 (though after the Administration had to engage in some heroic efforts to pay bills). And the GOP supplied the bulk of the votes for it. So, we don't have any concrete evidence that Republican talk is anything but just that.
The real difference? I BELIEVE the Republicans when they say "burn it all to the ground!" Is it my partisan blinders? Could be. Are we making a mountain out of a molehill? Maybe. But, I don't remember anywhere near this much ink or angst being spilt over debt ceiling increases prior to 2011. The deficit was its own issue, treated more or less separately from the debt ceiling in the deficit fights of the 1980s and 1990s.
So, I hope we're all overreacting to this kabuki theater. The more I've been writing this, the more hopeful I've gotten, actually.
That said, the Tea Party Laboratories are nucking futs. I really can't put ANYTHING past them. So, my hope ("most people may act somewhat weird, but they're basically good") is tempered ("yes, but I think that particular crazy-looking guy on the bus actually WOULD rape my corpse if I make eye contact with him")
As I said: partisan blinders? Maybe. But I don't think so.
Yikes, talk about false equivalence.
DeleteAs Moderate Poli points out, politicians in the out party have sometimes taken a vote against raising the debt ceiling as a symbolic vote. That's what Obama did in 2006. There was zero chance that the debt ceiling was not going to be lifted.
The Democratic Congress during Reagan's presidency never failed to raise the debt ceiling, even while battling over the federal budget. The Republican Congress during Clinton's presidency never failed to raise the debt ceiling, even while battling over the federal budget (and a couple of government shutdowns when budgets and temporary stopgaps expired). The Democratic Congress during the last two years of GWB's term also raised the debt ceiling, without a fuss, during a time when the two sides agreed on little else.
The idea of intentionally defaulting on the national debt, or threatening to do so in order to extort political concessions, is indeed something that was cooked up in the Tea Party Laboratory of Crazy.
Finally, a simple request. If you want to compare the size of the national debt now versus a few years ago, please acknowledge that there was a calamitous event in between called the Great Recession. The current size of the national debt is the unavoidable result of that event, plus the debt-creating policies of the Bush years.
Thanks for taking up my argument, everyone, a very interesting discussion ensued and I probably agree with a lot of what you say. Want to start with Matt Jarvis' observation that the Republican posturing is kabuki theater; no doubt that's true, arguably every previous iteration of raising the ceiling was also kabuki theater, only much less entertaining. The point is that we don't know what the Republican Congress will do, what they say for our consumption is not the actual negotiation; its framing to test the waters or make their case.
DeleteYaramah accurately points out that Obama didn't threaten to filibuster the debt ceiling increase in 2006; the Republicans in the House are threatening to hold up the increase today (how seriously can't be known from here in the cheap seats). Imagine ourselves watching the floor debate in 2006, listening to the young senator inveighing mightily against the sacrificing of the future, etc, and then doing nothing beyond the symbolism of his words.
A person shows up from the future and informs our 2006 selves that we'll be back here again in 7 years, only the debt will have doubled. This will prompt an urgent conversation: if its good and right (and Presidential) for young senator Obama to speak so harshly against an $8.2 T debt in 2006, what should the outparty do in response to a $16.4 T debt in 2013? Well, we'll conclude, "something more urgent".
All we can say for sure, right now, is that it appears the House Republicans are attempting "something more urgent". Disagree with their tactics, but if that automagically renders them crazy, what does that say about the perspective of Obama at $8.2 T in early 2006? Are words really that meaningless?
Finally, cgw, I readily concede the whole Great Recession, etc. But here we sit at Debt=1.0+XGDP, where we've only been once before (immediately post-WWII), with two huge disadvantages relative to the mid-40s:
1) No obvious avenue of economic expansion to compare with the vastly increased industrial base arising from the war,
2) Inevitably vastly underfunded liabilities arising from the entitlement state.
It doesn't really matter how we got on this track if that thing just up ahead, speeding toward us, is a locomotive.
CSH:
DeleteTo push back on your analogy: I would argue that it does matter how we got on the track. I was going to type up something long with engineers and such, but the overall point is that if we don't know how the problem was caused, we don't know what the best solutions are.
Now, the rub comes in when our views of how we got here, where we should end up, and what economic effects are of various actions are all intertwined. This part is natural, and has always been the case, but we were able to muddle through and find compromise. We seem increasingly unable to do this any more.
Maybe it's both sides. Maybe it's the left. Maybe it's the right.
(Now is the point where I would delve into a diatribe about crazy Republicans, etc. But what's the point?)
If there is no national debt at the Fed that won't be paid off by the Fed, then the debt ceiling is meaningless.
Delete@CSH - thanks for a great discussion. I disagree with your premise that we are facing a locomotive coming toward us in the form of debt and deficit. The deficits we have experienced the last few years are attributable to (a) the effects of the Great Recession (lower tax revenues and higher social safety net spending) and (b) a structural deficit created by the policies of the Bush administration (large unpaid for tax cuts, unfunded wars, etc). Deficits of this size are only temporary. The annual deficit has already come down from $1.4T in FY09 to a little over $1T this past year. It will come down further still (and so will debt to GDP) as the economy continues to recover. As reported in various outlets the last couple of days, the structural deficit has been partially addressed by various measures in the last couple of years - e.g., the legislation in the wake of the 2011 debt ceiling debacle, the fiscal cliff deal, etc. We haven't noticed because the measures have been piecemeal and the legislative process has been unattractive, but these measures total about $2.4T over 10 years. The budget experts said we needed about $4T in savings over 10 years. We've already gotten most of structural deficit reduction we need for the medium term. In the longer term, we will also need to better control health care costs. As Obamacare gets implemented and the political environment surrounding health care reform (hopefully) changes, we can see what further reforms to our health care system might bring down Medicare costs. There is enormous potential for budget savings here given that we currently spend 18% of GDP on health care and no other country spends more than 12%. I contend that we have a few years to deal with this. The bond market is giving us plenty of space in the form of historically low interest rates. In fact, they are signalling, as clearly as a market can signal, please spend (and borrow) more federal money. Debt and deficits are a problem, but not a particularly urgent one under the circumstances, by comparison to our other problems.
DeleteLike our deteriorating infrastructure, and our failure to invest in research that could open up new areas of manufacturing and employment.
DeleteAs a card-carrying deficit alarmist, there's something else interesting about the urgency of Obama's rhetoric in 2006 vs. the "You Can't Do Anything NOW!" deficit camp in 2013: it has an eerie similarity to the progression of a hopeless drug addiction.
DeleteIn the drug addiction context, Obama's 2006 speech would be like the checkup that finds something kind of iffy, maybe a precursor to cancer, with a warning that the habit has to stop. Like Obama on the senate floor, the user issues a stern warning to himself that this has got to stop!
This doesn't stop. The drug use continues at unprecedented levels for seven more years, at which point the doctor says now you really really have to stop and the user cries "Yes! Definitely! Soon! But NOT NOW".
That user never stops, do they. In a similar fashion, I'm not sold that the deficit doves are ever gonna give the green light that the time is okay to undertake serious budget reform.
1. What about the deficit reduction that has already been enacted? By the numbers, we have put into place about 60% of the deficit reduction that experts said we needed in 2010 (not in the way I would have done it, but so be it). Are you and other deficit alarmists unable to recognize that you are getting what you say you want?
Delete2. If we are going to focus on budget deficits and debt as a problem, we should focus on the portion that is structural. The scope of structural budget deficit was about the same in 2010 as 2006 - caused by the Bush policies, which were still in effect. (The raw deficit was much higher in 2010 than in 2006 because of the state of the economy, but I would not worry about that number because the cyclical portion of the budget deficit will reduce as the economy improves). In 2006, in a relatively good economy, the structural budget deficit ranked higher on the list of problems that we faced. In 2010, having just gone through the greatest financial crisis in 75 years and the resulting Great Recession, the structural budget deficit ranked much lower on my list of priorities (though obviously, not on yours). I would accept measures that would help correct remaining 40% of the 2010 structural budget deficit problem over time, just not if it requires ignoring or worsening higher priority concerns (like unemployment and economic growth).
cgw, that's a fair point...the CBO has the going deficit (if memory serves) somewhere in the $600 B or so range - that's still more than 4% of GDP, which is way too high vs. historic norms (and especially so when Debt > 1.0XGDP), but it is certainly better than what we have seen.
DeleteI confess to a bit of hyperbole, $600 B is not quite the full-on panic of $1.4 T, but it is also not, in any realistic sense, a solution.
Stretching the analogy, its arguably the 20-year, 2-pack-a-day smoker cutting back to 1. Right direction, not enough.
This report says we need $1.4T in more deficit reduction over 10 years ($1.2T in policy savings, the rest in reduced interest costs) to get on a sustainable path: http://www.cbpp.org/cms/index.cfm?fa=view&id=3885
DeleteSince nobody seems particularly confident predicting exactly how things work if we hit the ceiling--especially the dangers that the government's computers won't actually be able to prioritize payments, or that we could still miss interest payments (clearly violating the 14th) because revenue is "lumpy"--then I find it absolutely infuriating that people are ruling out options that might be necessary in a desperate situation on basically aesthetic grounds. If the only alternative to missing interest payments is minting the coin, how could we possibly choose to do anything else? If worst comes to worst, then all these pundits screaming about how terrible the coin would be could be a self-fulfilling prophecy.
ReplyDeleteI don't know how the GOP will behave. I don't know how well the Treasury is capable of prioritizing payments in an unprecedented situation.
Hello
ReplyDeleteIntelligent comments, and Jonathan's post is refreshingly calm.
ReplyDeleteThe more the coin is discussed as a sane option, the more it becomes a sane option. I think we may have hit critical mass. Enough sane people now consider it a sane option that it would be widely reported and accepted as a sane act.
Still, it is not very Obama-like. It is more Clintonian or Bidenish.
Remember, the coin would only be used if the House Republicans do not fold. That virtually guarantees impeachment proceedings,with a pretty decent probably of impeachment. A House willing to push the economy off a cliff is a House willing to impeach. Obama is popular and would stay popular but hey, so was Clinton.
Of course the Senate would not convict, but it would use up all the political oxygen for a long time, and no one wants an impeachment in their legacy.
I do like the point made above that it would be a huge object lesson that money is fiction,
We first must determine whether there really is a debt at the Fed to pay.
ReplyDeleteIf there is no debt, then trying to buy all the securities at the Fed that constitute the debt with the megacoins ($1 Trillion, $10 Trillion) would not be authorized. Treasury can only pay debts of the U.S. authorized by Congress. If the debt has already been redeemed for the United States, then paying for them a second time would not be authorized.
How could there be no debt at the Fed? Go by what we see done and by whom and not by what people say: Fed (government entity) [See FAQ at the Fed on who owns Fed) buys securities (which constitute debt) with money it creates out of thin air with no constraints (government power, given Fed by Congress, given Congress by Constitution, to create (coin) money. That is government paying back government debt to redeem securities. There is no debt.
It also would be a bad idea to take away from Fed all those securities it uses to manage the money supply: sell securities it has to banks to drain money out of banking system during inflation; buy securities from banks to introduce new money into banking system. With Treasury issuing securities, banks buying them at public auction (creating debt of US to banks), then Fed buying securities from banks and thus redeeming the debt, Treasury gets effectively debt-free money from banks, while banks get new money entering economy. This would be the same result if Treasury issued U.S. Treasury Notes, debt-free. Treasury would work with debt free money and the money would be new money created out of thin air. But the equivalent result depends on whether we concede that the Fed is a government agency using government powers and thus is not owed by Treasury for the money the Fed creates out of thin air to buy securities.
(One thing to also know: The law specifies that the Fed is paid 6% of the interest on any security it buys from banks. Treasury owes this. It is a transaction fee to pay for Fed operations, in lieu of a Congressional appropriation paying the Fed for its operations. This keeps Fed independent of political control.
If this doesn't work, then MMT is wrong in assuming we have a sovereign government with absolute and final power over the money supply. If we
indeed have a national debt and we cannot pay it off without bankrupting the country, then we are not sovereign over our money supply.a
Some talk about the national debt includes in the debt all those securities held by depositors who have bought the securities with their dollars. A large number of these are Chinese depositors, giving rise to the assertion that the Chinese are underwriting our government spending. Nothing could be farther from the truth. Technically there is a liability, but it is like a bank's liability when it issues CD's to depositors wanting to earn interest on their money. This money does not go into funding Congressional deficits. Why would Treasury borrow money this way when it has a counterparty at the Fed that can create money out of thin air in unlimited amounts and redeem any debt the Treasury has to the banks when it borrows money. So, a big chunk of the debt is not for government spending. Another big chunk are the several trillions of dollars in securities at the Trust Funds for Social Security and other agencies of our government. These were left as IOU's by Congress when it borrowed from the Trust Funds to conduct deficit spending without looking like deficit spending. It seems to me the administrators of the Trust Funds could just put these securities up for auction and get dollars back. The Fed would likely buy them and redeem them for government.
ReplyDeleteAgain, these do not fund current deficit spending. So, the only part of the so-called national debt that concerns deficit spending are those securities issued by Treasury to cover the deficit and now possessed by the Fed. But the Fed may have itself automatically and implicitly redeemed the debts on the securities by buying them with money it created out of thin air, which is a governmental power. Government (the Fed) buys securities with money created out of nothing (government power), so this is redeeming the government's debts to the banks. And it goes on all the time. Government doesn't owe itself for repaying its debts. (One exception: Law says government owes Fed 6% of the interest on each security it buys as a transaction fee to cover fed operatons, so that Fed is independent of any Congressional appropriations for its operations.
We may be getting to a point in the national dialogue on the debt, to seeing that we need an explicit statement by Congress that the Fed redeems the debt obligations of the securities it buys for the government. This would be a minimal change just to clear the air, because it is obvious that this is already the case, just by observation. This achieves the same thing as having the Treasury issue all the money with US Treasury Notes. This money is debt free; so is Treasury's borrowed money when the Fed buys itself securities (for the government) from the banks. US Treasury Notes also enter as newly created
ReplyDeletemoney in government spending. The money the banks get in their reserves when the Fed buys them is also newly created added to money supply.
S Mulaik
Please tell me that the Trillion Dollar Coin will get minted.
ReplyDeleteI don't care who gets the blame, it's just such a perfect metaphor for our screwed up monetary policy.
If push comes to shove, Obama doesn't have to mint coins to thwart the House's unwillingness to raise the debt ceiling, he can simply invoke the 14th Amendment and increase it without Congress' approval. Even if it expedited the case, the Supreme Court would not make a decision for months or longer. By that time, everyone would have adjusted to the new, de facto ceiling limit.
ReplyDelete