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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Joe Firestone post on sidestepping the debt ceiling issue with Coin Seigniorage

Posted by WARREN MOSLER on January 20th, 2011

Joe Firestone has a new post on Coin Seigniorage, where he gives credit to our own Beowolf’s comment on this website.

As far as I’ve been able to determine, it does work operationally. It seems the US Treasury is already legally empowered to simply mint it’s own platinum coin in any denomination it wants and effectively deposit it in its Fed account, rather than sell bonds to the public to fund its Fed account.

This process doesn’t change actual govt spending, so doing it this way doesn’t add to inflation, nor does it change the fact that govt deficit spending adds income and net financial assets to the other, non govt sectors. It’s just that the new financial assets will simply be new reserve balances at the Fed, rather than new Treasury securities (which are also simply accounts at the Fed).

What issuing these coins does do is remove the legal need for the debt ceiling to be raised, and also reduce the amount of outstanding Treasury securities, which is what is called govt debt. So while both reserves and Treasury securities are, functionally, govt liabilities and differ in name (and sometimes duration) only, the headline rhetoric does make that distinction. So technically, this process eliminates the ‘national debt’ and removes any (misguided) notion of solvency risk:

Links to the post on various websites:

Correntewire

Firedoglake

Our Future

Daily Kos

The most discussion is at Kos.


The best comments are at Correntewire.

255 Responses to “Joe Firestone post on sidestepping the debt ceiling issue with Coin Seigniorage”

  1. LetsGetItDone Says:

    Thanks Warren, Your introduction above is a very nicely put statement of the significance of the proposal. Some of the very interesting comments at Correntewire are by the estimable Beowulf.

    Reply

  2. Ramanan Says:

    The discussion was originally started by Beowulf @ Marshall’s Longest!

    Reply

  3. roger erickson Says:

    Can’t wait to see what Krugman will say, IF he deems this crowd prominent enough to respond to! :)

    Reply

    Tom Hickey Reply:

    Not on his radar yet, I’m afraid. :(

    Reply

  4. roger erickson Says:

    plus, Obama wouldn’t have to waste the time & jet fuel looking for coins seignorage in China!

    Even that might be too complictated. Just tell him a lot of new “money” had actually been discovered back in the USA. Let him ask questions – if any.

    Reply

  5. GLH Says:

    Mr. Mosler: You are to be commended for your efforts to aid the government to correct the situation in favor of the people. I only hope that some day you succeed.

    Reply

    Tom Hickey Reply:

    GLH, it’s happening. When we look at the ocean, we see only the waves on the turbulent surface, magnified by the wind. We don’t see the deep currents that are changing. This is how social change comes about and produces rather sudden reversals, which were long in building beneath the surface.

    Reply

    mike norman Reply:

    It’s happening???? Where????? If anything the neo-liberal doctrine has taken a vice grip on policy. This proposal, while commendable, doesn’t stand a chance in hell of getting anywhere.

    Reply

    Tom Hickey Reply:

    Mike, I have seen a lot more MMT appearing on the net and in the media incrementally. For example, even Krugman felt he needed to respond to Jamie Galbraith some time ago. It’s gradual process and goes mostly unnoticed until all of a sudden it breaks forth apparently in full bloom for all to see. For that reason, I think we can say that it is already happening.

    Moreover, MMT is not a some alien idea. Since Laffer surfaced his version of its basic monetary insights in the Reagan years, the dominant faction of the GOP has been using it in policy-making with their own ideological twist. They know that deficits don’t matter, in So it is not at all like this an idea out of the blue. It is just not yet recognized for what it is.

    I saw this demonstrated in the field of psychology in the late Fifties and early Sixties. Skinnerian behaviorism thoroughly dominated the field. However, through persistence Abraham Maslow was able to overcome that pervasive influence and humanistic psychology and later transpersonal psychology rivaled behaviorism, knocking B. F. Skinner off his pedestal at Harvard.

    As conservatives often point out ruefully, the historical trend has been in the direction of liberalism and continues to be so. Neoliberal capitalism is merely another economic phase in the development of liberalism, and it will be replaced by a more liberal idea. For example, under capitalism as an economic idea, workers are not free agents, as Marx noted. That is a severe limitation that will be overcome over time, and with it will come the euthanasia of the rentier class, as Keynes foresaw, not because it is “evil,” but because it is inefficient. Fairness is a component of efficiency. Social democracy is more efficient than corporatocracy, and an appropriate economics will provide the infrastructure by way of evolved economic institutions.

    See Robert Skidelsky, Life after Capitalism

    The ocean waves/currents analogy comes from Hegel’s philosophy of history, in which he demonstrated the dialectical process at work over time in terms of periods dominated by an Idea (Zeitgeist). In every age there is a Zeitgeist, which at the time seems so established as an über-institution that it is impregnable. But every idea contains internal contradictions to the degree it is relative, only the Absolute Idea being perfect (compete). Thus history is the continual motion toward the Absolute as relative ideas strive for completion, one idea replacing another sequentially in a dialectical process that is messy historically.

    It is pretty clear that the current Idea, in economics represented by Neoliberalism, with its counterpart in New Keynesianism, is cresting. It is not yet obvious what will rise to replace it. MMT is a candidate. Whether we will see MMT move immediately to the forefront is premature to say, but one day it will have its day, too.

    Social change occurs through both evolution and revolution. (This was the subject of my master’s thesis in social and political philosophy, written based on study and experience of the Sixties and early Seventies.) For example, the American, French, and Russian, and Chinese revolutionized traditional societies in ways hardly contemplated previously. Similarly, the Great Depression brought a social, political and economic revolution to the US, which influence the world, too. Vietnam may not have sparked the countercultural revolution, but it was the catalyst that spread it. No one coming after can have any idea of the changes that these events wrought other than in imagination.

    Life is also evolving all the time in ways that are so gradual as not to be noticed. There is a straight line favoring deregulation stretching from Carter to Obama, for example, which has resulted in a financialization of the economy that has culminated in Ponzi finance. This has occurred beneath the surface for most people, and apparently even Chairman Greenspan did not notice it happening. This crisis not far from over yet, and it may culminate in another revolution.

    Alongside financialization, globalization has also been rising, at first gradually, and then rather suddenly Americans noticed that the US was not only importing inexpensive goods, it was also exporting manufacturing jobs. This, too, is resulting in profound changes that bringing about social change.

    Where this is going is the effect of many interacting forces, MMT being one of them. I am putting energy and time behind MMT because I think that it is an idea whose time is overdue and I am heartened to see the work expended by people like you coming to fruition through media exposure.

    I am also convinced that the net is the wave of the future, so what is going on here may seem like a drop in the bucket, but I don’t see it that way at all or I would be spending time here instead of working on projects in my own field. I think that Marx got it right about that economic infrastructure thing being the foundation of social change. This involves changing institutions, and money is one of the key institutions as an idea. Money is an idea, and the nature of that idea at any time is foundational.

    Matt Franko Reply:

    Tom/Mike,
    It was interesting to read this posted by Stephan (European commenter) over at billyblog a while back:

    “If you visit Amazon France you will notice that a little essay titled “Indignez-vous!” (Get angry!) is the number one book for some time now…. … In his essay Hessel argues that people need to get outraged again ….… He concludes that we need a new resistance movement. ”

    With the new media/internet, this type of thing (#1 on Amazon) may be where you have to look to figure out what is going on in different parts of the society… not easy … it’s sort of “the underground” perhaps of today.

    One thing for sure, I agree w/ both here that moron policymakers will not be looking at these types of things for their cues anytime soon. Many probably still watch the evening news and “60 Minutes”.
    Resp,

    strawberry picker Reply:

    “people need to get outraged”

    http://www.slate.com/id/2268872/

    Earlier this month I published a 10-part Slate series (PDF; serial version; slide show) about the 30-year rise in income inequality that Princeton’s Paul Krugman has dubbed “The Great Divergence.” In the first installment, I noted that in 1915, when the richest 1 percent accounted for about 18 percent of the nation’s income, the prospect of class warfare was imminent. Today, the richest 1 percent account for 24 percent of the nation’s income, yet the prospect of class warfare is utterly remote. Indeed, the political question foremost in Washington’s mind is how thoroughly the political party more closely associated with the working class (that would be the Democrats) will get clobbered in the next election. Why aren’t the bottom 99 percent marching in the streets?

    One possible answer is sheer ignorance. People know we’re living in a time of growing income inequality, Krugman told me, but “the ordinary person is not really aware of how big it is.” The ignorance hypothesis gets a strong assist from a new paper for the journal Perspectives on Psychological Science: “Building a Better America—One Wealth Quintile at a Time.” The authors are Michael I. Norton, a psychologist who teaches at Harvard Business School, and Dan Ariely, a behavioral economist (and blogger) at Duke. Norton and Ariely focus on the distribution of wealth, which is even more top-heavy than the distribution of income. The richest 1 percent account for 35 percent of the nation’s net worth; subtract housing, and their share rises to 43 percent. The richest 20 percent (or “top quintile”) account for 85 percent; subtract housing and their share rises to 93 percent. But when Norton and Ariely surveyed a group whose incomes, voting patterns, and geographic distribution approximated that of the U.S. population, the respondents guessed that the top quintile accounted for only 59 percent of the nation’s wealth.

    ESM Reply:

    And one possible answer is that it is not income or wealth inequality that matter, but rather consumption inequality. And on that measure, we are far less unequal.

    But really the best answer is that Americans by their nature are not particularly jealous or envious. Envy is an irrational and dangerous human emotion. In my wide travels from the southern northeastern US to the northern northeastern US, I have found Americans to be less resentful of successful people than, say, Europeans (particularly the French).

    LetsGetItDone Reply:

    Hi Mike, That may depend on what happens with the tea party people. If they dig their heels in, and the President doesn’t “cave,” then Wall Street and the bankers will be in a panic, and on the phone to the White House. Then people will be casting about for what to do. They won’t be thinking neo-liberalism, and they won’t think through the long-term implications of coin seigniorage. They’ll just consider if they can get around the Republicans and get back to business as usual.

    Tom Hickey Reply:

    ESM, I think this is correct. by and large, ordinary americans are not resentful. On the other hand, résentiment is an important idea in their worldview. I have also noticed that the wealthier one is the more important that relative position becomes.

    But ordinary Americans are much more attuned to their relative status. The familiar political question, Are you better off than your were four years ago?, is crucial, for example. Moreover, while ordinary Americans want their taxes to down and are willing to see spending cut, it’s a different story when it is spending that affects them. They figure out pretty quickly that a tax increase and a spending cut that affects them directly that are equal are, well, equal.

    However, that said, I do think that there is a measure of resentment over the bailouts that is operative. Some of the outrage is based on the idea that in a capitalistic economy, businesses including banks should take their lumps. But at least some of it is resentment not only because the Streeter’s walked away unscathed from a situation they caused, but also they were seemingly rewarded.

    Since the system has not been reformed, the US is headed for another crash at some point. At that point, I doubt that another bailout will be possible, which could entail a massive liquidation leading to debt-deflation. That would result in a “defining moment,” as they say.

    Tom Hickey Reply:

    “I think this is correct. by and large, ordinary americans are not resentful. On the other hand, résentiment is an important idea in their worldview.”

    Hmm. That might not clear. See Ressentiment at Wikipedia. It’s basically projection of blame. For example, in the US, “government” is generally the object.

  6. jcmccutcheon Says:

    Congrats Beowolf ! When do you start the book tour?

    Reply

    Tom Hickey Reply:

    There are several books just editing the comments on the MMT and related blogs, if someone has the time and inclination to put it together.

    Reply

    beowulf Reply:

    Ramanan, you have the memory of an elephant, that’s exactly right. Something in that thread reminded me of the most interesting scam I’d ever heard of– it was legal for one, it involved taking advantage of the US Government, and happily, the more you took, the more that Uncle Sam profited, all thanks to the magic ofseigniorage.

    Enthusiasts of frequent-flier mileage have all kinds of crazy strategies for racking up credits, but few have been as quick and easy as turning coins into miles.

    At least several hundred mile-junkies discovered that a free shipping offer on presidential and Native American $1 coins, sold at face value by the U.S. Mint, amounted to printing free frequent-flier miles. Mileage lovers ordered more than $1 million in coins until the Mint started identifying them and cutting them off.

    Coin buyers charged the purchases, sold in boxes of 250 coins, to a credit card that offers frequent-flier mile awards, then took the shipments straight to the bank. They then used the coins they deposited to pay their credit-card bills. Their only cost: the car trip to make the deposit.
    http://online.wsj.com/article/SB126014168569179245.html

    It made me curious whether the process was scalable (for Tsy that is, I imagine an individual could only use a finite number of frequent flyer miles in a lifetime). :o)

    Reply

    Ramanan Reply:

    This is funny. The card companies wanted coins ?

    Reply

    ESM Reply:

    No, you misunderstood the arbitrage. Essentially, the US govt was allowing people to purchase $100 worth of currency for $100 using a credit card where the US govt absorbed the credit card fee (usually around 2%). Credit card issuing banks usually rebate some of the credit card fee back to the customer (often in the form of frequent flyer miles) as an incentive to use that credit card.

    In most credit card transactions, the merchant (i.e. the seller) absorbs the credit card fee, so the customer just sees the rebate as a bonus. When it comes to using the credit card to pay a debt, e.g. state or local taxes (which can be done), the cardholder almost always has to pay a surcharge to cover the fee paid to the bank.

    Some bonehead at the mint forgot about this and thus allowed the US govt to be arbitraged by some savvy investors.

    A similar thing happened about 12 years ago (and persisted for many years), with respect to buying US govt savings bonds. You could purchase up to $30K of savings bonds per year over the internet using a credit card and didn’t have to pay a credit card surcharge.

    Between me, my friends and colleagues, and friends of friends, etc., I think we were responsible for several million dollars of purchases of savings bonds.

    beowulf Reply:

    Actually ESM, I believe you’re missing the arbitrage play involved here. OK so Mint absorbs 2% credit card fee plus, say, shipping and handling to add another 5% or 6% in costs.

    That’s sounds like bad business except, the cost of production (literally, the cost of money) for a dollar coin is only 12 cents, adding the above expenses call it 20 cents per coin. So yes coin buyers were capturing frequent flier miles at no cost (paid for out of that 2% credit card fee) but the US Mint is capturing 80 cents at no cost on the same deal. That the Mint cried foul may be the sublimely perfect example of tripping over pennies on your way to dollars.

    So who’s bearing the loss? Those Frequent fliers whose airline accounts haven’t been inflated by printing press fiat mileage points. Clearly, only frequent flier programs backed by the gold standard are safe from this. :o)

    Ramanan Reply:

    Beowulf,

    The Treasury itself is making the loss.

    The people who order the coins pay off their credit card bills by handing over the coins to their banks.

    Banks will find themselves with so much coins and they give them to the Fed in exchange of increases in settlement balances at the Fed.

    The Fed returns the coins back to the Treasury by debiting the TGA general account.

    beowulf Reply:

    Banks will find themselves with so much coins and they give them to the Fed in exchange of increases in settlement balances at the Fed.
    The Fed returns the coins back to the Treasury by debiting the TGA general account.

    Only if it they’re “uncurrent” (worn out) coins. Otherwise, high powered money is high powered money, nothing’s gained by trading one kind for another.

  7. strawberry picker Says:

    “There would be no national debt to leave to our grandchildren, and also there would be a continuously declining debt-to-GDP ratio.”

    I don’t care about all that financial fuddy duddy stuff. How does doing any of that stuff with a 500 billion dollar coin and wasting more human time and resources doing it get me and my grandkids an MT900 car, the fuel to drive it at 200mph, a hot blonde to sit in my lap in it when she aint on the gear shifter, etc etc I like talking about REAL stuff in the REAL world coming to me and my kids, not financial trickery sillyness.

    The american people are getting tired of all this talk of finances, debt limits, yada yada, they want to talk about REAL RESOURCES for them and thier grandkids, but all those silly congressmen and people at dailyKOS think that j6p care about all that silly stuff and the way it is framed – they don’t. Where is my flying car and 2001 arthur c clarke space station? Debt limits, greenspan talking about money and failures of purchasing power, look at the time all youse guys are spending on these memes, but 500 billion dollar coin memes aint getting the starship enterprise built. Warren I feel so sorry for you, you are aware enough to know we have to get the human consciousness off of FINANCE stuff and onto more important stuff, but all these finance types can’t see that far outside da box and start learning stuff that is REALLY useful but just keep looking for new ways to re-iterate useless financial solutions. Wether it is a 500 billion dollar coin or 500 gazillion treasury note, is that gonna get an MT900 and lotsa fuel into my garage?

    Reply

    LetsGetItDone Reply:

    Well, I think it can stop all this useless palaver about the debt, deficit, and debt-to-GDP ratio, and move us past to talking about how we can talk about real issues and making everyone prosperous enough that the can afford MT900.

    Reply

    Matt Franko Reply:

    Strawb,

    ” how…get me…a hot blonde to sit in my lap in it when she aint on the gear shifter, ”

    Youre just going to have to pay for it as usual! OH!!! But now you have more NFAs to be able to do it!

    (Just kidding Strawb you set yourself up there! I would hope you would spend your share of the increased NFAs more wisely…like the original Star Trek series boxed set DVDs, etc.. hang in there bro!)

    Resp,

    Reply

    strawberry picker Reply:

    All I needed to know I learned in star trek. I don’t remember checkov worried about student loan debt after attending star fleet academy. I don’t remember spock worrying about paying medical debt back to dr. McCoy when he lost his brain. I don’t remember Kirk stressing over how much salary he was going to get and if he could afford some romulan ale. All this finance stuff is EVIL and needs to be photon torpedoed. It makes life too damn complicated. PS – there aint no deflation in green star trek mistresses either, my prices keep going up and up for the blondes but I aint payin 5000 per hour like that dummy spitzer yet.

    Reply

    strawberry picker Reply:

    “Youre just going to have to pay for it as usual!”

    I can’t afford a wife or girlfriend, this society and its current dynamics have marginalized me and my mates to less than zero. No one wants a beat down star trek geek strawberry picker that wears a green mosler economics t-shirt everywhere (not long term anyways – after the one night stands are over).

    Me and my mates just recently went to honduras hoping our western citizenship would be a carrot to some of those really beat down third worlders, nope, wasn’t enough. That was a hard slap across the face! I stopped watching star trek and I watch LEXX now – it is more realistic about our financial mess and what losers all us men have been turned into and how marginalized we all are now – security guard class 4 Stanley is a proxy for all of us.

    danw Reply:

    @ Strawb Trek

    I have a friend, a high school principal, who when she is stuck and cannot decide how to solve a dilemma, says to herself. “…what would Kirk do?…”

    RE: the American people not ‘marching in the streets’:

    I attribute some of the apparent apathy to brain-death via fast-food and multi-media-induced narcosis. I am a teacher and a soccer coach. This weekend, I took my varsity high school team to Texas for a tournament. What I saw was both fascinating and frightening. Dozens and dozens of student-athletes, all carrying their cell phones and iPhones EVERYWHERE, ALL OF THE TIME, texting each other and playing games, etc. They were mesmerized, transfixed. It was as if they were on a digital heroin drip. NOTHING mattered, or existed, beyond the words on their PDA’s.

    strawberry picker Reply:

    Digital Heroin, I went to a games developer conference last year and the games developers said they are drug dealers and the gamers are thier junkies – we all laughed – but the reality is sad in many ways :(

    At USF there are so many that have lost all real ambition for good things in the real world. I really believe mommy and daddy just send them to college to get a 4 year vacation away from them and have someone else babysit them.

    I feel sorry for you dude, look at all the things competing for your students attention – Socrates probably didn’t have so many things distracting his students.

    But look at the bright side, maybe they are reading Mosler Economics blog on thier PDA phone all the time?

    Since they are already obviously corrupted with “the matrix” why don’t you offer them some extra credit if they use thier iphone/pda to bookmark warren’s site and read his blog everyday? The seeds you sow now could grow into great big MMT forests in the future.

    beowulf Reply:

    It will make your mood stabilizing drugs more affordable.
    http://www.oup.com/us/catalog/general/subject/Medicine/PsychiatryPsychology/?view=usa&ci=9780195368741

    Reply

  8. Neil Wilson Says:

    Of course the beauty of this scheme is that it never would have to be implemented. If you even suggested it to a Republican they would raise the debt ceiling instantly.

    After all the ‘debt’ and ‘deficit’ are far too useful to the GOP as a way of whipping through their agenda. They can’t afford to have them neutralised.

    Reply

    LetsGetItDone Reply:

    I know. The thought of seigniorage causing inflation ought to be enough to get them to forget about the debt limit, maybe they’ll even agree to get rid of the debt issuance requirement if we can frighten them enough.

    Reply

    Tom Hickey Reply:

    Same with all their hot button issues. They don’t want to actually solve them because they would lose them and have to actually come up with policy instead of blowing dog whistles, like debt, deficit, taxes, guns, gays, god, etc.

    Reply

  9. zanon Says:

    Warren (anyone):

    How does the accounting work?

    So, a new $1M coin is stamped at Mint. OK. Does negative equity balance at Fed get another debit? Is reserve asset at Fed credited? Or does it just exist as real asset, with no liability?

    When this $1M coin is given by Uncle Sam to Private Citizen in return for service rendered — what happens at Fed account?

    Once Private Citizen deposit coin at local bank branch, I understand liability (deposit) credit and asset (reserve) credit.

    Reply

    JKH Reply:

    My guess:

    Coin produced by mint

    Exchanged for a deposit at the Fed

    (Seigniorage is the difference between the value of the deposit and the cost of minting)

    Fed has coin asset and deposit liability (to Mint)

    Treasury debits Mint deposit account at the Fed; credits its own account at the Fed

    Treasury now has positive balance to disburse in deficit spending

    Coin remains as Fed asset (it’s not clear why there would be demand for circulation)

    But coin should be redeemable by Fed – if the Fed is obliged to take in legal tender on deposit, it should also have the right to redeem surplus legal tender with the issuer – this is a problem as I see it and explain below

    Reply

    JKH Reply:

    although its not really “deficit spending” if the initial credit to Treasury’s account at the Fed is considered revenue from the Mint

    disbursement from Treasury’s account ends up increasing reserves as the accounting offset at the Fed, of course

    Reply

    Tom Hickey Reply:

    JKH: “But coin should be redeemable by Fed – if the Fed is obliged to take in legal tender on deposit, it should also have the right to redeem surplus legal tender with the issuer – this is a problem as I see it and explain below”

    The coin is redeemable in reserves from the Treasury account, which the Fed provided for the coin. But the Fed creates reserves and has no “need” for them. So why not just leave the coin on the Fed’s book as an asset like a long-term tsy, in this case, one that pays no interest and never matures? This is all just an accounting fiction anyway in a fiat system. The coins are just another way of keeping track. :)

    Reply

    JKH Reply:

    I agree it’s an interesting idea, but your premise is that Treasury has the right to get value for these coins from the Fed because they are legal tender, notwithstanding the real possibility of political resistance from the Fed, based on the resulting “money finance” effect and the perceived threat to their mandate. My point is that the Fed could use the the right to redeem the coins as a threat to undo the “money finance” effect of using the coins in the first place.

    beowulf Reply:

    Ties go to the Secretary…

    wherever any power vested by this chapter in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.
    12 USC 246

    …banks, when required by the Secretary of the Treasury, shall act as fiscal agents of the United States; and the revenues of the Government or any part thereof may be deposited in such banks, and disbursements may be made by checks drawn against such deposits. 12 USC 391

    JKH Reply:

    OK.

    It’s worth a shot. Let’s mint some coin.

    :)

    LetsGetItDone Reply:

    The Fed doesn’t get to say in what form the Treasury redeems the coin. The currency in non-convertible, so all the Treasury has o do is to provide other legal tender, for example another $500B coin in return for getting back the first one. Given this situation, the regional Fed Bank holding the coin has no incentive to try to redeem it.

    JKH Reply:

    Not sure I see the Fed debiting Treasury’s bank balance as “conversion”, but I cede Beowulf’s point at 9:37, I suppose.

    Ed Rombach Reply:

    Tom – If the coin is left on the Fed’s book (SOMA?) as an asset like a long-term tsy that pays no interest and never matures, could it also be used in open market operations?

    Tom Hickey Reply:

    “Tom – If the coin is left on the Fed’s book (SOMA?) as an asset like a long-term tsy that pays no interest and never matures, could it also be used in open market operations?”

    No reason too do so. This issue in OMO is exchanging reserves and tsys. The coin issuance is contemplated in very large denominations anyway.

    beowulf Reply:

    But coin should be redeemable by Fed – if the Fed is obliged to take in legal tender on deposit, it should also have the right to redeem surplus legal tender with the issuer – this is a problem as I see it and explain below.

    Don’t forget the legal tender law–
    “United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues.” 31 USC 5103

    Sure the Fed has the right redeem that coin, and they will be paid every penny of what they’re owed… in legal tender. So maybe mint more than one jumbo coin. just in case one dark day, the Federal Reserve plays rough and demands Tsy redeem that $500 billion coin, Tsy could redeem the Fed’s platinum coin by paying for it with another platinum coin.

    Reply

    JKH Reply:

    I believe the Fed has the right to redeem legal tender in exchange for debiting deposit balances of the issuer.

    JKH Reply:

    i.e. balances of Treasury/Mint in the case of coins

    Ramanan Reply:

    JKH,

    This article http://fpc.state.gov/documents/organization/105193.pdf “The Debt Limit: History and Recent Increases” talks of the US being close to defaulting in the past because the Congress failed to increase the debt ceiling on time.

    The important thing is that Tim Geithner has warned of “catastrophic economic consequences” source: http://www.economist.com/node/17906039?story_id=17906039

    Am sure Ben Bernanke knows the consequences of a default.

    Its true that the Fed redeems coins – though these are internal operations and cooperative. The US Treasury issues $1 coins based on demand forecasts and the Fed keeps them. If the forecasts are bad, the Fed may return them to the Treasury. They may also be because some coins may be old and they want them to be replaced etc.

    So there need not be any power play happening between the Fed and the Treasury. The Fed will fully understanding the devastating consequences of a silly action of the Congress. As bonds keep maturing often, and auctions cannot be conducted in this scenario we are discussing, the escape hatch will be the coin and I do not see any power play complication in this.

    JKH Reply:

    Ramanan,

    The operational point is that the Fed has the right to redeem – whatever the reason – and I that means they must debit the Treasury balance. Thanks for confirming that.

    The other point is that the “platinum caper” has been presented as something that the Fed has no right to refuse. Moreover, it’s been presented additionally here as a potential long term replacement for borrowing. The Fed might have something to say about that. And the lawyers might have something to say about any agreement not to redeem – as an infringement on Fed independence. The Fed might not want to allow itself to get boxed in by such an agreement – either temporarily (as a slippery slope) or permanently.

    So you’re right – the Fed understands the consequences of a debt default. But it may insist on a different solution.

    Ramanan Reply:

    Yes I agree – it may allow the usage of the platinum coin provided that once the debt ceiling is changed to another value, the Treasury starts issuing securities which were not possible in the intermediate period.

    On the other hand, I am still unsure if coins are counted in the debt which falls in the ceiling.

    Tom Hickey Reply:

    JKH, I think that there is an argument to be made that the Fed as no option but to accept what Treasury tenders. The coin is redeemable for reserves. If the Fed wants to redeem a coin, the Treasury can just mint another coin of the same value, give to the Fed and take the reserves it gets in exchange and redeem the first coin with them — ad infinitum.

    Ed Rombach Reply:

    I haven’t read all the links or all the posts on this thread so I probably missed something, but why platinum? Also, a $500 billion coin would be rather large or just one ounce? $500 billion is roughly 275 million ounces. If just one ounce, doesn’t that send market participants a message that they should buy platinum and/or other precious metals even if the $500 billion coin is only exchanged between Treasury and Fed?

    beowulf Reply:

    JKH, for the Fed to refuse to accept legal tender for deposit, particularly if the Secretary of Treasury directs it to as Tsy’s fiscal agent and remembering that conflict of powers between Fed and Tsy are decided in favor of the Secretary… would give the President of the United States cause to fire the Federal Reserve Board of Governors (and direct the Secretary to take over Bank operations). Arguably the President’s already got all the cause he needs thanks to an ancient (but still valid) contract called the “Constitution of the United States of America”.
    I think Balkin and Lederman are right in so far as the Federal Reserve really is unconstitutional if you believe in the unitary executive. That theory holds that all executive branch officials must be subject to the orders of the president and be removable by him.
    http://volokh.com/posts/1207512634.shtml

    Ramanan, Coins are an asset not a liability (and purchased from Mint by Fed at face value). Besides that, not all public debt included in debt limit, per Congressional Research Service, “the Total Public Debt Outstanding” excludes:
    Unamortized Discount on Treasury Bills and Zero-Coupon Treasury Bonds, old debt issued before 1917, and old currency
    called United States Notes, as well as Debt held by the Federal Financing Bank and Guaranteed Debt.”
    (p.4)
    http://fpc.state.gov/documents/organization/105193.pdf

    Ed Rombach, that’s a good point. I should make a distinction between bullion and proof coins sine Congress authorized Secretary to issue both platinum bullion and and platinum proof coins. Congress does direct Secretary to price gold bullion coins at or near its metal market price, but does not do so for platinum bullion coins. Tsy doesn’t issue platinum bullion coins anyway, what it does issue are platinum “proof coins”, the coin world equivalent of a pimped out car with the (for lack of a better term) “gold package”.
    A proof coin is a coin struck using a special, high-quality minting process, and made especially for collectors. Modern proof coins often have mirror-like fields and frosted devices.
    http://coins.about.com/od/coinsglossary/g/proofcoindef.htm

    Proof coins (for silver, gold and platinum coins) have always been sold marked up above metal market price without affecting underlying market prices. Of course all that matters in terms of monetary operations is the “face value” of the coin, currently issued 1 oz. platinum proof coins have a face value of $100. And the Secretary has full discretion to set face value (“denomination”) in the platinum coin statute. So call it a 2 oz. platinum proof coin (metallic value, just over $3800) with a face value of $500 billion. He also has full discretion on platinum coin design, so Geithner could make his mark by putting his iris scan on the back (fingerprints are old school). :o)
    http://itunes.apple.com/us/app/eye-scanner-iris-identification/id386584424?mt=8

    Min Reply:

    JKH: “My point is that the Fed could use the the right to redeem the coins as a threat to undo the “money finance” effect of using the coins in the first place.”

    What happens if I redeem a quarter? I get another quarter, or perhaps two dimes and a nickel. So what?

    Reply

  10. JKH Says:

    I didn’t follow this discussion earlier on, so I may have this wrong, but first reaction:

    They may be legal tender, and the Fed may be obligated to take them on deposit, but I don’t see how the Fed could be precluded legally and operationally from redeeming them subsequently.

    And it must be prohibited from doing so, explicitly – for this arrangement to be sustainable as an alternative to bond financing.

    Such an explicit prohibition would be an encumbrance on the Fed’s existing independence.

    You’d have to enforce an explicit loss of Fed independence for that redemption option to be withdrawn.

    I think that may be an overarching problem that trumps the effect of the Fed’s obligation to accept them in the first place.

    Declaring the Fed a unit of Treasury would be the antidote, in which case you don’t need coins to get the job done, and the coin issue is moot.

    You don’t run into this problem with normal coinage – because there is no liquidity “threat” from the Fed’s normal operational redemption of coins, to the extent that it can and does redeem them.

    This is only quick thought. If it’s wrong, I’ll be interested in how it’s wrong.

    Reply

    Min Reply:

    JKH: “Such an explicit prohibition would be an encumbrance on the Fed’s existing independence.”

    The Fed is only quasi-independent. It is an agent of Congress, the same Congress that gives the Treasury the right to coin money.

    Reply

  11. beowulf Says:

    Like the Bible says, there’s nothing new under the Sun. Macro coins would be accounted for the same as micro coins already are— just with more zeroes (so I suppose you could say its “rooted in micro foundations”).:o)

    Federal Reserve Accounting for Currency and Coin

    Federal Reserve notes are liabilities on the Federal Reserve’s balance sheet. These liabilities are collateralized by the assets of the Federal Reserve Banks.

    Coin held by the Reserve Banks is an asset on the Federal Reserve’s balance sheet and the Federal Reserve buys coin from the Mint at face value. When a depository institution orders and deposits coin from its Reserve Bank, the institution’s account balance is adjusted accordingly.
    http://www.federalreserve.gov/paymentsystems/coin_about.htm

    Reply

  12. RSJ Says:

    What is the point of this discussion? In order to spend money, Congress has to approve the spending. If it approves the spending, it will raise the debt ceiling — it’s the same political body making the same decision. Nothing is tying the legislature’s hand here — they are the ones making the rules that tie the hands of others.

    If they want spending proponents to jump through a few more hoops before the spending is approved, then they will have to jump through the hoops; this is what should happen. If Congress gets tired of the hoops and wants to remove some, then it will remove the hoops. There is no external force called “The Debt Ceiling” that is preventing Congress from spending any more money. Congress itself has decided to make the spending of money require a few more steps than some people here would like, and now they are looking for loopholes to try to “free” Congress from doing what it wants to do.

    Reply

    LetsGetItDone Reply:

    I think the point is that the Congress can and does appropriate spending without raising the debt ceiling, otherwise there would be no possibility of a crisis like this. For example, assume the Government is still running under a continuing resolution when the debt ceiling comes up for a vote, a distinct possibility in the present situation, then Congress would have appropriated spending for the continuing resolution, but not raised the debt ceiling. In fact, if appropriations for spending had not already been made, then the Government would have no authority to spend/create money and its coming up on the debt ceiling wouldn’t be relevant.

    Reply

    RSJ Reply:

    All appropriations come from Congress. It has always been this way.

    The debt ceiling is also a law passed by Congress.

    I don’t think you’re seeing the issue here. The purpose of the debt ceiling (other than political grand-standing, which might be the primary purpose) is to limit the power of the executive branch. It’s a way for Congress to prevent the Treasury from borrowing money unless Congress agrees to it. Already Treasury cannot spend money without Congress agreeing to it — but borrowing money is not spending. So Congress wants to control that, too — as it should.

    It is not something that Congress needs to bypass/avoid/get around. The debt ceiling is not some problem that needs to be overcome by trying to (fraudulently) mint coins. It is a tool that constrains the ability of the executive branch to act independently of Congress, which is exactly what Congress wants (and how it should be).

    Reply

    anon Reply:

    Where’s the problem for Congress if the executive branch can only borrow money that it is not authorized to spend? Why would they even do that? What’s the need to limit an inconsequential act?

    RSJ Reply:

    Congress has power to spend, to raise revenue, and to issue money. The executive is merely the legislature’s fiscal agent. It cannot act as its own fiscal agent.

    The executive branch is not free to collect as much revenue as it decides and to deficit spend as much as it wants, or to create as much as money as it wants.

    Borrowing money incurs an additional interest payment obligations that need to be authorized by Congress at the time the obligations are incurred, rather than when they come due. It wouldn’t be a full faith and credit obligation of the U.S. government if the spending/revenue arm of government did not authorize its creation, any more than if your broker sold a debt in your name without your authorization.

    Prior to the debt ceiling era (e.g. prior to 1917), Treasury was only authorized (by Congress) to issue short term bills to smooth cash-flows. All long term debt needed a specific act of congress prior to being issued — for example, the debt funding the panama canal.

    When the government needed to borrow for WW1, Congress ceded some control to the executive — effectively authorizing it to maintain outstanding debt of a certain amount without the need for a specific act of Congress each time the government borrowed.

    The debt ceiling is not something that Treasury needs to “get around” anymore than your broker needs to get around some instructions that you give him regarding the management of your assets. The debt ceiling already represents broad latitude given to Treasury by Congress to borrow up to a certain amount, but still the Congressional authorization needs to be there otherwise the borrowing would be fraudulent.

    Similarly, the platinum coin is not a numismatic coin and is not even circulating coinage. It is only a bullion coin, and therefore can only enter into circulation as a result of being marketed and sold to the public. The law requires that the coin be sold for production plus marketing costs, and the Treasury only books the proceeds of the sale as its revenue, not the face value (i.e. legal tender value) of the coin.

    Bullion coins have zero seignorage income. This is all a non-issue.

    anon Reply:

    good info

    I’m just not sure what motivation Treasury would have to borrow if it can’t spend

    “The law requires that the coin be sold for production plus marketing costs, and the Treasury only books the proceeds of the sale as its revenue, not the face value (i.e. legal tender value) of the coin.”

    That’s seems totally at odds with what other people are saying here, and if true voids the rationale for the idea anyway

    ESM Reply:

    Very good points RSJ. I’ve always believed that the debt ceiling was a non-issue, and there was never greater than a 0.1% probability that Congress would force a default in order to make a political point. But the way you have framed the issue is elegant.

    I don’t know if you’re correct about your last claim — certainly Beowulf has done a lot of research and doesn’t agree — but obviously, the minting strategy would be moot if you are.

    As to Anon’s question, there are certainly a lot of decisions to be made by the Treasury concerning issuance of Treasury bonds, notes, bills and currency. The debt limit authorized by Congress can actually be thought of as an authorization to issue gross debt up to the limit, which, at any given time, is well in excess of the need to match spending. For example, suppose that the Treasury sees a squeeze in one of its Treasury notes (the May 2013 10-yr note suffered one of the worst squeezes in history shortly after it was issued), and decides to ameliorate the squeeze by issuing more of that note. The Treasury would have the flexibility to do that even though it has no need to issue the note to match spending.

    Ramanan Reply:

    RSJ,

    The point is that if the Congress doesn’t act, maturing Treasury securities cannot be paid for.

    Table 1 and the doc in general here http://www.gao.gov/new.items/d04283.pdf has lots of accounting details.

    The Mint is owned by the Treasury not the Fed. The BEP (Bureau of Engraving and Printing) is owned by the Fed not the Mint.

    In case someone wants to separate the two, remember the Mint’s profits are remitted to the Treasury.

    Assume the costs for minting is 1¢.

    In case the complication arises, “where does the Treasury get the money to pay the Mint in the first place”, it can first mint a coin for $1B, then the Mint remits the profits ($1B minus 1¢), then the Treasury asks for minting a coin for $2B, and the Mint remits the profits ($2B minus 2¢)… and can continue in a geometric progression till the point the Treasury needs $1T.

    RSJ Reply:

    It’s not that Treasury wants to borrow without spending. It wants to borrow because revenues are too low to fund the spending that was already authorized. The tax rates are also set by Congress (but tax collections are done by Treasury).

    If actually spending the authorized amount would force Treasury to increase the debt level beyond what Congress has agreed to carry, then Treasury has to go back to congress and get a second authorization to increase the debt level, or to increase the tax rates, or it can’t spend.

    Treasury is just acting as the legislature’s agent.

    Ramanan Reply:

    RSJ,

    The important thing is that the debt ceiling is very close and according to Tim Geithner, it could be hit anytime between March 31st to May 16th according to Tim Geithner’s warning to the Congress.

    If the Congress raises the tax rates, it doesn’t guarantee that the ceiling won’t be hit but the public debt is endogenous and depends on the private sector income and expenditure behaviour in addition to fiscal policy.

    When the debt ceiling is hit, the Treasury will start doing all sorts of things except issuing more securities which it cannot. For example, the Treasury can sell some MBS and student loan ABSs it acquired during the crisis. It owns the agencies and can start selling some of the MBSs the agencies themselves hold and promise them to pay for their liabilities when they are due. These promises do not count in the ceiling (!). However, these things cannot go on forever and finally the Treasury may come on the verge of default.

    Changing fiscal policy won’t help because deficit is endogenous.

    The point of discussion here is what options the Treasury has if the Congress ignores Tim Geithner’s warning.

    vjk Reply:

    RSJ:

    Very nice summary.

    Except this:


    Bullion coins have zero seignorage income. This is all a non-issue.

    The mint targets about 15% profit on numismatics and about 2% on bullion coins — whatever the market bears. So, typically a numismatic coin is sold at about 26 -30% markup over the cost of metal (they assume 11% production cost). All this from memory after having read a GAO report a while in the past.

    So, essentially, the operation is no different from any jeweler’s outfit in trying to make as much profit as possible. I am not aware of any law limiting numismatic/bullion profit margin.

    I’d say that circulating seigniorage is no different from numismatic seigniorage, except there being a cap on the final price of the coin (face value of the coin).

    With numismatics or bullion coins, the profits happen when a customer buys a coin from the mint, and with the circulating coin the profit is recorded when the Feds buys it (and eventually sells it though a commercial bank to the customer).

    LetsGetItDone Reply:

    The purpose of the debt ceiling is for the legislature to limit the Executive’s power. But this raises a number of questions. First, does the Executive have to accept this limitation of power if it can use coin seigniorage to get around it?

    Second, the Congress already has the power to control spending by simply not appropriating money for it, and in that case the Executive doesn’t have the power to coin money to do that spending or to use any other spending instrumentality. Congress is completely controlling when it comes to appropriations, unless the Supreme Court has something to say. So, the question is: why do we have the current debt ceiling problem at all? The answer is that the Congress has already appropriated the authority to spend without extending the debt ceiling, and the debt ceiling is a second bite at the apple of cutting spending.

    But look at how that second bite of the apple works. Congresspeople voted in the past to appropriate money. They were responsible for those votes and are on record for or against the appropriations. Now they come back at the time of the debt ceiling crisis, without going on record about any individual spending provision, and the House says we won’t raise the debt limit unless we get some cuts. Then they start a negotiation with the President, and they make the President agree to some cuts, so that they have political cover. So that they are not solely responsible. So that the Democrats have to take part of the responsibility for unpopular spending cuts they are being blackmailed into by the Republicans. My point here is that the debt ceiling is not about Congressional control over the Executive with respect to spending. Congress already has that power. Instead it is about having a measure in place that allows individual Congresspersons, and a political party to get cover for unpopular decisions.

    Third, the Debt limit may provide less control over the Executive, than appropriations, not more. For example. what happens, if the Attorney General delivers an opinion to the President saying that 1) Congress has mandated the Executive to issue debt when it deficit spends; but 2) Congress has also mandated a debt ceiling; but 3) Congress has also appropriated money for the Executive to spend. So, it seems to me (the Attorney general) that 2) and 3) negate 1) and that as long as the debt ceiling is in place the requirement to issue debt is negated, so we can now just go on spending until Congress raises the debt limit. To stop something this, Congress would need to be more explicit about the possible conflict between the debt issuance mandate and the debt ceiling. But for Congress to do that, it would a) have to go to the Supreme Court; or b) actually pass something else that said that the debt ceiling is not to be interpreted as negating the debt issuance mandate. But the problem with either a) or b) is that it would require both Houses of Congress to do either a) or b) and the Rs only control the House right now. So, while they have the power to refuse to raise the debt ceiling, or refuse to appropriate money; they do not have the power to pass anything positive by themselves.

    Fourth, the debt ceiling may actually be unconstitutional. The reasoning here depends on the notion that the power to refuse to raise the debt ceiling is the power to force the United States into a default. But the 14th Amendment, in section 4 if I recall correctly says that it’s illegal to even question the validity of the debts of the United States, much less actually act to force the United States into default. Btw, there’s up to a 10 year jail penalty in the USC for doing that. (Thank again to Beowulf for pointing out these legalities.)

    Now in opposing the debt ceiling, the Executive could claim that it is constitutional and try to get around it initially by using seigniorage, or by just spending without issuing debt, and for the long run by going to the US Supreme Court for a ruling on the debt ceiling constitutionality.

    The Supreme Court may be unwilling to rule on such a dispute. If it is, then either seigniorage or spending without issuing debt once the debt ceiling is exceeded would remain as Executive responses to the debt ceiling. If the Court does rule, then I think that there is a good chance they would declare it unconstitutional, because the Court conservatives will be frightened out of their wits by the possible consequences of default, and the Court liberals won’t have any sympathy for Congressional arguments that it must have the debt ceiling to control spending, because it is apparent that this expedient has been a symbolic and political instrument only, and that it is not needed to control spending when the authorization and appropriation processes exist.

    Having said all this, I also should say that even if the tea party Rs are unsuccessful in forcing a Government shutdown or default over the debt ceiling, they will try again when the Omnibus spending bill comes up. And there coin seigniorage will not work to get around them.

    However, there will be a frightful amount of pressure from Wall Street about avoiding a default, and if the President follows Clinton in how he handles this, the Republican Party will split over the issue and their should be enough votes to get such a vote through with some giving way by the Ds. Of if the President continues his “caving” to the “hostage-taker” we may see more like the $100 Billion in cuts the Rs are calling for. If this happens it will put a dent in the recent inadequate stimulus and move us a step closer to that double-dip.

    vjk Reply:

    Ramanan:


    it can first mint a coin for $1B, then the Mint remits the profits ($1B minus 1¢), then the Treasury

    The profits are not realized until the coin is sold to the willing customer.

    Hope you understand that !

    So, to achieve $1B profit, the mint has to buy about $3B worth of platinum, or whatever metal *first* (assuming 33% markup), find the willing buyer second, and only then can it realize $1B profit that can be remitted to the Treasury.

    From the GAO report I mentioned earlier, it appears that numismatic/bullion coin mint profits fell due to lower demand for this kind of stuff lately — apparently, gold=platinum-bugs prefer other sources of metal. So, it will be problematic to implement the kind of financing you are talking about.

    Ramanan Reply:

    ESM,

    Not sure why the debt ceiling is not an issue.


    Resolving the Debt Limit Issue in 2002. By the middle of May 2002, debt subject to limit had again risen to within $15 million of the statutory limit. At the FY2002 average spending rate, $15 million equaled about five minutes of federal outlays. The Treasury, for the second time in 2002, used its statutory authority to avoid a default.

    he Treasury reduced federal debt held by these government accounts by replacing it with non-interest-bearing, non-debt instruments, which enabled it to issue new debt to meet the government’s obligations. The Treasury claimed these extraordinary actions would suffice, at the latest, through June 28, 2002. Without a debt limit increase by that date, the Treasury indicated it would need to take other actions available to it to avoid breaching the ceiling. By June 21, the Treasury had postponed a regular securities auction, but took no other actions. With large payments and other obligations due at the end of June and at the beginning of July, the Treasury stated it would soon exhaust all options to issue debt and fulfill government obligations, putting the government on the verge of a default.

    http://fpc.state.gov/documents/organization/105193.pdf

    Ramanan Reply:

    VJK,

    “The profits are not realized until the coin is sold to the willing customer.

    Hope you understand that !”

    Ben Bernanke understands that if the Congress acts silly and doesn’t increase the ceiling, a default will send the financial markets into a turmoil within minutes and the whole world in a depression. He will cooperate in the interesting coin option we are discussing (if it happens of course).

    The situation we are discussing (near default) has a low chance but can’t be ruled out considering the fpc doc I quoted.

    So coming back to the game between the Mint, Treasury and the Fed, assuming the Fed plays this game, its straightforward.

    Never underestimate the silliness of politicians. No wonder Tim Geithner has been pushing them to act fast.

    RSJ Reply:

    VJK,

    I am not saying that the mint does not earn a profit on the sale of bullion or numismatic coins. But this profit is not seignorage income. Seignorage income only applies to circulating coins, and is the difference between the face value of the coin and the production cost. Circulating coins are sold to banks for their face value.

    Numismatic items and bullion are not circulating coins, and are sold to the public for the bullion value (plus a some premium) which is above face value (otherwise the coins would circulate).

    Still the mint can earn a profit, but it is a profit arising from production as with any other firm, not a profit arising from currency issuance.

    And while we’re on the topic of seignorage income, the Treasury has no control over this income.

    During any period, the amount of seignorage income received is given by:

    change in stock of currency – cost of production of coins and bills + (interest cost of federal debt)*reserves – interest payments on reserves.

    If you look carefully at this formula, you see that the only way that the Treasury can affect the level of seignorage income received by the government is to run its operations at the Mint and Bureau of Engravings more efficiently.

    But even in the case of real coin seignorage, the coins must be purchased by the banks before the Treasury can book any seignorage income.

    Merely producing the circulating coinage, but failing to selling the coinage, does not result in any seignorage income being booked by the Mint or passed onto government.

    The Treasury can’t force the coins into circulation anymore than the Bureau of Engravings can force a certain amount of printed bills into circulation, as the quantity of currency is demand driven. The Mint must find a buyer in order to book income, it does not book income from the act of producing the coinage. And all the circulating coins are specified by Congress — there is no possibility of creating a circulating platinum coin for an unspecified face value. Beowulf and others are misreading S.5112 of Title 31, thinking that all the coins defined in that section are circulating coinage in the sense of S.5111 a.1. But the S.5112 is clear in that only the coins defined in a1 – a6 are circulating coinage. Everything else is either a “numismatic item” in the sense of S.5111 a.3 or it is an “other medal” in the sense of S.5111.a.2. And the latter two are not issued “for the needs of the United States”, but “to meet public demand”. These coins are not sold for face value to the banks, but to the public for “a price equal to the market value of the bullion at the time of sale, plus the cost of minting, marketing, and distributing such coins (including labor, materials, dies, use of machinery, and promotional and overhead expenses).”

    Ramanan Reply:

    The Treasury can’t force the coins into circulation anymore than the Bureau of Engravings can force a certain amount of printed bills into circulation, as the quantity of currency is demand driven.

    True. But the if the Fed exchanges it, the Treasury’s job is done. So even though its not in “circulation”, the TGA is credited. Maybe the Fed creates a fresh account (like it did for “supplementary financing”) called Treasury Platinum account.

    These coins are not sold for face value to the banks, but to the public for “a price equal to the market value of the bullion at the time of sale, plus the cost of minting, marketing, and distributing such coins (including labor, materials, dies, use of machinery, and promotional and overhead expenses).”

    That is for SILVER coins. http://www.law.cornell.edu/uscode/31/usc_sec_31_00005112—-000-.html

    Also,

    The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.

    and …

    Provided further, That the [US Mint Public Enterprise] Fund may retain receipts from the Federal Reserve System from the sale of circulating coins at face value for deposit into the Fund (retention of receipts is for the circulating operations and programs)… Provided further, That at such times as the Secretary of the Treasury determines appropriate, but not less than annually, any amount in the Fund that is determined to be in excess of the amount required by the Fund shall be transferred to the Treasury for deposit as miscellaneous receipts

    31 US 5136 (the above quote from an old Beowulf post)

    vjk Reply:

    RSJ:


    I am not saying that the mint does not earn a profit on the sale of bullion or numismatic coins. But this profit is not seignorage income.

    “numismatic seigniorage”/”circulating seigniorage” is GAO’s terminology, not mine. But, although I see certain logic in their classification, the way one classifies coinage income is unimportant and splitting hairs ;)

    What is important, as you correctly noticed, is that circulating coins production is demand driven and cannot be forced by the treasury on the Feds. In fact, all the efforts are directed at minimizing the buffer coins inventory at the Feds as can be seen from any GAO report on the subject.

    The numismatics case is not interesting because profits can be booked only *after* they are sold to a private party.

    With circulating coins, to the best of my recollection, the Feds are the buyer, that is the profit is booked when the Feds buy the required quantity of coins. So, theoretically, there is a loophole that the Treasury and the Feds can collude to exploit by minting say $1T of standard dollar coins, as specified in the respective U.S.C., at a profit to the treasury of about $800B. Practical likelihood of that happening is pretty low and the scenario is uninteresting, therefore.

    vjk Reply:

    Ramanan:

    That’s the important point RSJ has made:


    But the S.5112 is clear in that only the coins defined in a1 – a6 are circulating coinage.

    and seem my comment at 11:19 am re. circulating coins.

    Ramanan Reply:

    Vjk,

    Couldn’t catch you.

    Yes coin circulation is demand-led. Not news to me. Am quite comfortable with PKE Monetary economics where all processes are demand-led.

    We are discussion a situation here where the debt ceiling is hit and the options the US Treasury has. When its hit – and it has hit in the past – the Treasury starts doing a lot of things being forced to not issue more Treasuries. This blog post discusses another option available to it.

    RSJ on the other hand thinks that the debt ceiling is not a problem is equivalent to being austere. Well, the US Treasury Secretary Tim Geithner is having the same issue convincing the Congress that there is a problem.

    Here is the letter Tim Geithner sent the Congress

    http://www.treasury.gov/connect/blog/Documents/Letter.pdf

    One has to be extremely careful discussing these things here. Quoting Tim Geithner:


    It is important to emphasize that changing the debt limit does not alter or increase the obligations we have as a nation; it simply permits the Treasury to fund those obligations Congress has already established.

    It is critical that this matter be understood. However the politicians are confused on this issue. The debt ceiling is not about new spending it is about old commitments!

    JKH Reply:

    Ramanan,

    It’s about accommodating deficit spending under any program – old or new. If there’s a deficit, they need a higher debt ceiling.

    Ramanan Reply:

    JKH,

    Forget coins for a moment.

    The public debt is not under the control of the US government in the sense that it just sets the spending and tax rates with some objectives. Not the deficit and not the debt. The deficit numbers provided in the budget are just indicative numbers.

    If the Congress does nothing, the debt ceiling could be hit between March 31st and May 16th.

    The argument provided by some commentators (not you) is that when the Congress sets its fiscal policy in the next budget, it will automatically need to change the debt ceiling.

    I believe that logic is not right. The next budget is somewhere late in the year and the ceiling will be hit before that.

    However, if the Congress does nothing, the debt ceiling will surely be hit and the Treasury may need to work like mad with the constraint of not issuing more debt.

    For example, the Treasury will first sell the MBSs it acquired during the crisis (different from the one purchased by the Fed). It had also acquired other ABSs which needs to be sold.

    The reason Geithner is pushing the Congress is because if the Congress doesn’t act, the likelihood of a default increases because the Treasury just borrows more to pay off principal and interest.

    The Congress seems to think that this is not a problem but that logic of the Congress seems like the analogy with a household. I can say that I will not borrow in 2011, but the US government cannot say that because the public debt is decided by the private sector, not by the government.

    The reason Geithner has written a strong letter is because the Congress doesn’t seem to understand what’s going on. And to believe that the Congress may act in time is not the best belief because the debt ceiling has been hit in the past – putting the Treasury in an ultra discomforting position.

    None of what I have written in this comment has to do with the platinum coin.

    beowulf Reply:

    Bullion coins have zero seignorage income. This is all a non-issue” I’d edit that as “Bullion coins… a non-issue”, so long as the Mint simply issues platinum proof coins (proof coins are ALWAYS marked up over metal market price). :o)

    The GAO is all wet with the circulating/numismatic coin distinction. And its distinction between Fed earnings and Mint earnings is spurious. They should be treated identically on federal budget. That is if the Federal Circuit Court of Appeals has any credibility (and it does).
    GAO report
    Although the profit earned from making coins adds to the government’s cash balance, it does not involve a payment from the public, which is considered a receipt… The Federal Reserve banks’ issuance of currency is treated differently in the federal budget. The Fed is not subject to the appropriations process and aside from… transfers of Fed earnings… operations are excluded from the federal budget… Because the Fed is not included in the federal budget, these payments from the Fed to Treasury are treated as budgetary receipts, as if they were from the public… Because it is not considered a receipt, [Mint] seigniorage is not counted…” (linked 2004 GAO report p. 12)

    AINS, Inc. v. United States, 365 F.3d 1333 (Fed. Cir. 2004)
    In Denkler v. United States, 782 F.2d 1003 (Fed.Cir.1986), we concluded that the Board of Governors of the Federal Reserve System (“Fed”) was a NAFI [non-appropriated funding instrumentality]… The Treasury Department Appropriation Act for Fiscal Year 1996 consolidated the numismatic and circulating coin operations of the United States Mint into one revolving fund, the United States Mint Public Enterprise Fund. This made the Mint’s sole source of funding its revenue-generating programs rather than an annual appropriation.. The MDB court applied the GAO’s rationale to reject the government’s arguments…The MDB court’s reliance on the GAO’s rationale led it to conduct the wrong analysis and to reach the wrong conclusion… A government instrumentality is a NAFI if: (1) It does “not receive its monies by congressional appropriation.” (2) It derives its funding “primarily from [its] own activities, services, and product sales.” (3) Absent a statutory amendment, there is no situation in which appropriated funds could be used to fund the federal entity. and (4) There is “a clear expression by Congress that the agency was to be separated from general federal revenues.” (internal citations omitted)

    Every government agency that we have considered that met all four factors is a NAFI, see, e.g., Denkler ['Federal Reserve case]… the Mint meets all four factors, it is a NAFI.
    http://ftp.resource.org/courts.gov/c/F3/365/365.F3d.1333.03-5134.html

    vjk Reply:

    beowulf:


    The GAO is all wet with the circulating/numismatic coin distinction. And its distinction between Fed earnings and Mint earnings is spurious.

    It is “all wet” for a reason. Earning are booked differently. Circulating coinage is sold to the Feds, at the face value, to satisfy the Feds demand and is booked as an asset on the Feds’ balance.

    Numismatics/bullion coins/circulating coins sold as numismatics do not involve the Feds balance sheet as they are sold either directly to the willing public or to the willing authorized dealers and are booked as an asset on their balance sheets.


    Although the profit earned from making coins adds to the government’s cash balance, it does not involve a payment from the public, which is considered a receipt

    The phrase above refers only to circulating coins sold to the Feds.

    AINS, Inc. v. United States decision is grounded on the determination of whether or not the mint is a NAFI (it is).

    The determination is irrelevant to the way circulating vs. non-circulating coinage earnings are accounted for.

    beowulf Reply:

    “The profits are not realized until the coin is sold to the willing customer.”

    There are degrees of “willing”, if Tsy tries to deposit legal tender at Fed bank, I can’t imagine any scenario where Fed refuses to accept deposit that doesn’t end with a Justice Scalia opinion dropping fuel air explosives on Humphrey’s Executor* and the Court placing Federal Reserve System (all of it) under direct authority of the President.

    * case from the 1930s authorizing independent “4th branch of government” agencies like Fed, despite Constitution mysteriously stopping at only three branches.
    http://en.wikipedia.org/wiki/Humphrey%27s_Executor_v._United_States

    ESM Reply:

    Ramanan,

    The debt ceiling is not an issue for the reasons explained by RSJ. If Congress doesn’t raise the debt ceiling, then default inevitably follows. If Congress does raise the debt ceiling but directs the Treasury to not make coupon payments or principal payments when due, then default follows. So, if Congress wants to put the US govt into default, the US will go into default; if Congress doesn’t want to put the US govt into default, then the US will not default. The exact legislation (or lack thereof) to put the US into default is not particularly important (at least to me).

    It’s all just political grandstanding, and with 99.9% probability Congress will choose not to default. And in 0.09% of the other cases, the default will be quickly remedied.

    Reply

    Ramanan Reply:

    ESM,

    The Congress can act silly as it did in previous episodes. The US was just $15m away from default!! Which is five minutes.

    That doesn’t mean the Treasury Secretary will not do anything. He has powers and has to use it.

    Not sure of 99.9% see my comment at January 21st, 2011 at 2:28 pm

    Ramanan Reply:

    Beowulf,

    The difference between the face value and the costs is the seigniorage but should not be shown as income. On the other hand, it reduces the “Public Sector Borrowing Requirement”.

    This is because the Mint is treated as being part of the Treasury. The Fed’s profits are shown as income because it is treated as a different institution. (The BEP is a part of the Fed)

    If the Mint was a different institution, its profits remitted to the Treasury may then be counted as income.

    That’s the GAO story.


    The earnings resulting from issuing both coins and currency reduce the cost of government borrowing; however, how these earnings are budgeted and accounted for differs. The production costs of coins and currency are generally treated the same in the budget and accounting statements. The recognition of the government’s earnings from coins—the difference between the Mint’s production costs and face value called seigniorage—is shown in the federal budget as a reduction in needed borrowing, after the government’s deficit or surplus is calculated. However, the interest avoided from the borrowing displaced by seigniorage is neither quantified nor shown in the budget. Because the operations of the Federal Reserve banks are not subject to the federal budget process, the Federal Reserve banks’ earnings from the issuance of currency is treated differently from seigniorage in the federal budget

    I think what you are saying is that if the Fed (and the BEP) is treated as a different institution, then the Mint should also be and the Mint’s profits – through the seigniorage – should be shown in the budget. That seems right because the Mint itself releases its financial statements.

    You should write to the budget office :-)

    And yes of course, the face value of the platinum coin can be
    different from the bullion value :-0

    Reply

    beowulf Reply:

    I wrote Tsy Inspector General actually (suggesting that his office’s audit of the US Mint was amiss)… Basically what I wrote at the link.
    http://my.firedoglake.com/beowulf/2011/01/03/coin-seigniorage-and-the-irrelevance-of-the-debt-limit/

    vjk, perhaps you will sense (a twinge in your gut, say) a slight contradiction between what GAO says here…
    Because the Fed is not included in the federal budget, these payments from the Fed to Treasury are treated as budgetary receipts, as if they were from the public

    and what you just said here…
    (first quoting GAO) “Although the profit earned from making coins adds to the government’s cash balance, it does not involve a payment from the public, which is considered a receipt”
    The phrase above refers only to circulating coins sold to the Feds.

    So, should we treat payments from the Fed “as if they were from the public” or not? If the latter, the $78 billion in Fed earnings recently booked by Tsy as “miscellaneous receipts” should not have been counted on the budget. If the former, then why aren’t Fed payment to the Mint Public Enterprise Fund (“as if they were from the public”) counted in the Federal Budget? The simplest answer is (as the Court found contrary to GAO’s erroneous conclusion) the Mint PEF is itself an off-budget NAFI (“from the public to the public”, if you will). However when the Secretary sweeps Mint PEF into Treasury General Fund the proceeds should also be “treated as budgetary receipts, as if they were from the public”. Since the US Code isn’t illustrated, I can’t imagine how Congress could have possibly made the PEF statute any clearer on this point, “shall be transferred to the Treasury for deposit as miscellaneous receipts”.

    Any coin of legal tender, even a numismatic coin, may be deposited (circulated if you will) at a Fed member bank at the face value (usually a fraction of metal value), I’ve never read of a case of a Fed bank refusing to accept legal tender. Likewise, circulating coins are sometimes collected for numismatic purposes. Crazy, mixed up world we live in, I know.

    vjk Reply:

    Beowulf:


    perhaps you will sense (a twinge in your gut, say) a slight contradiction between what GAO says here

    I consider the distinction contradictory, yes. I do not see any economic rationale for treating payments from the Feds to the Treasury differently from seigniorage income. But, the classification is unimportant for funding purposes.


    Any coin of legal tender, even a numismatic coin, may be deposited (circulated if you will) at a Fed member bank at the face value

    A purely numismatic, not “dual” purpose, coin can be deposited, theoretically, since I am not aware of any actual numismatic coin of value being deposited as a circulating coin, only after it was acquired by a private party.

    Not sure how such depositing act would help with funding the budget deficit.

    beowulf Reply:

    “Not sure how such depositing act would help with funding the budget deficit.”

    Since a budget deficit is simply the shortfall between govt tax receipts and govt spending outlays, if the shortfall is covered by miscellaneous receipts, there’s no budget deficit. Bring on the balanced budget amendment! :o)

    The President’s FY 11 budget (you can find links at FDL page above) says that seigniorage from Fed sales are NOT counted in the budget because, “Unlike the payment of taxes or other receipts, it does not involve a transfer of financial assets from the public”. However if we look at federal budgetary rules defines “exchange tranactions with the public” and “public enterprise fund”:
    “’Exchange transactions with the public’: revenue 270. Sales of goods and services.–The cost of production… is defrayed in whole or in part by revenue from selling the goods or services provided. The sales may be made by a public enterprise revolving fund… ‘Public enterprise funds’– revolving funds used for programs authorized by law to conduct a cycle of business-type operations, primarily with the public, in which outlays generate collections.”

    The Mint is authorized to conduct a cycle of business-type operations selling coins to public and to the Fed (and as GAO points out, receipts from the Fed are treated as if it were from the public), the proceeds of which are placed in a revolving PEF. If the Mint were on-budget, we’d call coin sales an exchange transaction with the public (since someone receives the coins in exchange for Mint receiving federal reserve notes). However since Mint is an off-budget NAFI, it should be counted on the budget once the Secretary sweeps the PEF as a ‘nonexchange transaction with the public’ (“when one party to a transaction receives value without directly giving or promising value in return”) like taxes and refunded Fed earnings are. Remember, the PEF statute uses the term “miscellaneous receipts”–That’s not just a random collection of syllables, to quote the CBO:
    Receipts from the Federal Reserve and other receipts, consisting of fees and fines, are combined in a category called “miscellaneous receipts” in the federal budget.
    http://www.cbo.gov/ftpdocs/108xx/doc10871/Chapter4.shtml

    vjk Reply:

    Beowulf:

    The coin does not generate profit to the mint until it is sold. The dollar coin price is not $1 until it it sold to the Feds.

    The hypothetical coin of yours cannot be sold to the Feds because it is not in the list of coins the Feds is allowed to buy. The law has to be changed to include your coin in the list of circulating coins, and the Feds, as well as the legislature, have to conspire in their belief that the coin is truly circulating.

    So, “in the current operational reality”, the hypothetical coin can be sold only directly to the public.

    In any case, mint profit is created by the act of selling, not depositing. Whether or not the coin is deposited or kept under the mattress, after being sold by the mint to the first buyer, is immaterial.

    Classification peculiarities and legal decisions do not seem relevant or material to mint profit formation either.

    This statement
    ““Unlike the payment of taxes or other receipts, it [seigniorage] does not involve a transfer of financial assets from the public””

    is quiet misleading.

    The Feds buy coins on behalf of the public and eventually, and pretty quickly at that, sell the coins to the public,the Feds being nothing but a broker between the public and the mint.

    But that’s unimportant. What is important is the sell/buy transaction for the coin to generate mint profits.

    Ramanan Reply:

    The hypothetical coin of yours cannot be sold to the Feds because it is not in the list of coins the Feds is allowed to buy. The law has to be changed to include your coin in the list of circulating coins, and the Feds, as well as the legislature, have to conspire in their belief that the coin is truly circulating

    Really not sure why the circulation is important here. For simplicity assume the Mint and the Treasury are one unit. If the Treasury hands the coin to the Fed, the Fed credits the Treasury’s account. $1T.

    There is no rule saying that the coin cannot be purchased by the Fed. Can you please point out ?

    This circulation complication is funny. Does the coin carry a stamp saying it has circulated 10 places ?

    The profit is generated at the act of crediting the TGA. Waiting for the Fed to sell the coin to the public is irrelevant here.

    I understand you may want to term the whole scenario “hypothetical”, but that doesn’t mean that hypothetical rules may be provided to argue against this.

    I understand that the Treasury may not do it, but doesn’t mean it cannot.

    In any case, let us say that a bond holder needs to be paid/redeemed. The Treasury hands a coin of the denomination to the bank and asks the bank (not the Fed), to credit the bond holder’s account.

    Not that I advocate this but is possible.

    beowulf Reply:

    The hypothetical coin of yours cannot be sold to the Feds because it is not in the list of coins the Feds is allowed to buy

    The list of coins the Fed is allowed to buy is any coin that’s legal tender (1 oz platinum coins are legal tender and have a face value of $100).

    “Under the two powers, taken together, Congress is authorized to establish a national currency, either in coin or in paper, and to make that currency lawful money for all
    purposes…” Juilliard v. Greenman, 110 U.S. 421, 448 (1884)

    “United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues.” 31 USC 5103

    “Any Federal Reserve bank may receive from any of its member banks, or other depository institutions, and from the United States, deposits of current funds in lawful money, national-bank notes, Federal reserve notes, or checks…” 12 USC 342

    “wherever any power vested by this chapter in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.” 12 USC 246

    As lawful money, coins may be deposited at any Federal Reserve bank and if the bank refuses… the Secretary, sensing conflict, can order it to take the deposit.

    vjk Reply:

    Beowulf:


    The hypothetical coin of yours cannot be sold to the Feds because it is not in the list of coins the Feds is allowed to buy

    “Allowed” is probably too a weak word. The feds are *required* by various Coin Acts, and therefore allowed, to ensure distribution of circulating coins to the public. There is no similar requirement with regard to non-circulating coins regardless of their being legal tender.


    As lawful money, coins may be deposited at any Federal Reserve bank and if the bank refuses… the Secretary, sensing conflict, can order it to take the deposit.

    Depositing is not a problem, selling the mighty coin is. Operationally and legally, there is no way for the coin to get deposited before it is bought by a willing party, be it the feds or a private buyer. Produced, sold, deposited, this is the sequence. You cannot skip the “sold” step.


    The list of coins the Fed is allowed to buy is any coin that’s legal tender

    I am not sure that is the case. As you know, the feds are legally prohibited from buying a treasury bond directly from the treasury. The hypothetical non-circulating coin purchase is no different, in substance, from buying a treasury bond directly from the treasury. I do not know whether or not the current interpretation of the FRA is such that the feds are prohibited from buying any asset directly from the treasury with an implicit or explicit purpose of funding government activity.

    On the other hand, maybe they are allowed to buy anything, who knows, law is a human institution after all. Maybe the the feds can buy any asset except a piece of paper that is called a government security. Perhaps, Timmy can sell his old pair of socks for $1T to Benny since, in substance, such a transaction is no different from selling a $1T coin whose market value may, perhaps, be a couple hundred bucks.

    In any case, a transaction like that would imply an almost immediate loss of the feds’ financial and political independence. Not sure Benny would play along.

    Ramanan:

    “There is no rule saying that the coin cannot be purchased by the Fed. Can you please point out ?

    There is no direct prohibition it seems, but see above ;)

    beowulf Reply:

    Actually, depositing a coin is the sale. Fed can just book it as an asset and put it in a vault. Doesn’t ever have to sell it.

    So you’re arguing that since the Fed cannot buy Treasuries directly, it stands to reason it can’t buy coins directly? I’m fairly sure the Fed doesn’t buy its coins through primary dealers.

    Old socks are not legal tender, coinage is. Since legal tender can be used to pay taxes and other debts, its market value is its face value. That’s why $100 FRNs are worth more than the 15 cents of paper they’re printed on.

    “a transaction like that would imply an almost immediate loss of the feds’ financial and political independence.”
    Yes, that is a pretty strong selling point. :o)

    Tom Hickey Reply:

    Seems right to me.

    But what is emerging from this discussion is that there is not clear answer, and it would have to be decided by some authority. SCOTUS? Who has standing to bring it?

    vjk Reply:

    “Actually, depositing a coin is the sale. Fed can just book it as an asset and put it in a vault.”

    Nope. You are missing the allowable by law sequences of events:

    1. with circulating coinage: Mint makes a coin; Mint sells the coin to Fed; Fed buys the coin from Mint and books as an asset; Bank buys the coin from Fed and books as an asset; Person buys the coin and deposits wherever he wants including, but not limited to, under his mattress.
    2. with non-circulating coinage: Mint makes a coin; Mint sells the coin to Person; Person buys the coin and deposits wherever he wants including, but not limited to, under his mattress.

    There is no skipping the “sell” stage, legally and operationally.

    Unless Timmy steals the coin from the mint and deposits it wherever he wishes.

    But, that’s not legal.

    “So you’re arguing that since the Fed cannot buy Treasuries directly, it stands to reason it can’t buy coins directly?”
    The feds cannot buy, most likely, non-circulating coins by the same logic they cannot buy Treasuries directly from the treasury for the purpose of funding government operations, yes.
    They *must* buy circulating coins to provide the coinage to the public. Dealers needn’t be involved with circulating coinage.

    “Old socks are not legal tender, coinage is.”
    Ah, but your mighty coin is on the same legal footing as socks are until the legislature passes a law approving your coin as legal tender.
    However, the legal tender status is immaterial, with the feds, most likely, being prohibited from buying an asset directly from the treasury.

    beowulf Reply:

    “Who has standing” is the second question, the first question is whether the Fed Board of Governors are on board or not. Option A: If they see the President has no choice but to take this path to avoid default and they’re reassured that they’d still control short-term interest rates (by adjusting IOR rate), they’d probably go along with it. In which case, I don’t think anybody would have standing to sue.

    Option B: If the Fed objects, the BOG would have standing to challenge Secretary’s assertion of authority under FRA and to defend against the President throwing down the gauntlet with a unitary executive constitutional challenge (separat. of powers, appoint. clause) to Fed’s independence. If it at possible, the President’s lawsuit would be styled United States of America v. United States of America. Of course, just having two different litigation strategies on the table would probably induce the Fed to go along with Option A, in which case… no one has standing and no one can sue (if it came down to it, my money is on the United States of America, just kidding, Tsy and President hold the commanding heights on FRA and constitutional issues).

    beowulf Reply:

    which banks, when required by the Secretary of the Treasury, shall act as fiscal agents of the United States; and the revenues of the Government or any part thereof may be deposited in such banks…
    Not only is the Fed not prohibited under FRAfrom buying Tsy assets directly, it can be required to. The Mint (as a part of the Government) always has the right to directly deposit its legal tender with Fed banks required to act as fiscal agent of the United States. In contrast, FRA says of Treasuries:
    any bonds, notes, or other obligations which are direct obligations of the United States or which are fully guaranteed by the United States as to principal and interest may be bought and sold without regard to maturities but only in the open market.
    A coin is lawful money and not debt (and thus has neither principal nor interest nor term of maturity), only its face value as legal tender.

    but your mighty coin is on the same legal footing as socks are until the legislature passes a law approving your coin as legal tender
    Like the cheerleader says in the movie, “Oh, its already been brought-en!”:
    All American Eagles are legal tender coins, with their face value imprinted in U.S. dollars. Although their face value is largely symbolic, it provides proof of their authenticity as official U.S. coinage. The one-ounce platinum coin displays the highest face value ($100) ever to appear on a U.S. coin.
    http://www.usmint.gov/mint_programs/american_eagles/?action=american_eagle_platinum

    vjk Reply:

    “and the revenues of the Government or any part thereof may be deposited in such banks”

    Government revenues arise from either taxation or sales of something. So, in order to deposit revenues a sale has to happen, for example coins have to be sold to the feds.

    “Not only is the Fed not prohibited under FRA from buying Tsy assets directly, it can be required to. The Mint (as a part of the Government) always has the right to directly deposit its legal tender”

    I see your point. In effect, you are speculating that the legal tender status creates an implicit contract requiring the feds to buy any designated legal tender and in any quantity the treasury chooses to dump on the feds and, therefore, in normal times, the treasury merely chooses to cooperate with the feds in planning coinage supply rather than boost its seigniorage revenues by minting unlimited coinage that the public does not need.

    Arguing in substance, one may object to your legal tender theory by saying that the legal tender status simply does not exist at the moment the coin is made. The moment the coin is minted we have a piece of metal of uncertain value without any special properties until it is sold to someone, similarly to the Treasury bond being a mere piece of paper (or a computer record) until it is sold to the public. So, no one can force the piece of metal on the feds because until the the coin is sold to the public and acquires its special status of legal tender as a result of the first sale, similarly to the bond becoming a bond, as a result of a sale, and not staying a mere piece of paper.

    Whether or not the coin has its legal tender status as soon as it is manufactured, and therefore, by the implied contract forces the feds to buy it no matter what, is something the courts will have to answer — it’s a gray area ;)

    An additional complication with your mighty coin is that it is not an American Eagle coin and has to be elevated to the legal tender status by the legislature, just as Timmy old socks would.

    beowulf Reply:

    Unless Timmy steals the coin from the mint and deposits it wherever he wishes.
    But, that’s not legal.

    Well if he’s acting in his role of First Lord of the Admiralty (sorry, always that was a cool job title)– Secretary of the Treasury, its his mint and his coin and as long as it doesn’t lose track of it, he’s cool.
    (a) The Secretary of the Treasury shall—
    (4) mint coins, engrave and print currency and security documents
    31 USC 321
    (a) The Secretary of the Treasury shall—
    (1) receive and keep public money;
    (2) take receipts for money paid out by the Secretary
    31 USC 3301

    An additional complication with your mighty coin is that it is not an American Eagle coin and has to be elevated to the legal tender status by the legislature, just as Timmy old socks would.

    The mighty coin crushes your complication like a Stone Cold Steve Austin pile driver. The point is Congress has already given the Secretary a blank check for platinum coins (but NOT old socks)… “in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time”.

    Its because of this grant of seigniorage authority that the platinum “American Eagles are legal tender coins, with their face value imprinted in U.S. dollars”.

    No additional legislation is required to mint as many coins in whatever denomination as the Secretary wishes. And since federal budgetary rules treat receipts from the Federal Reserve as “if it were from the public”, by depositing a coin at a Fed bank, the money credited to Mint PEF is “exchange transaction revenue from the public”. The Fed can hardly complain about marking up a Tsy account when its been given an equal amount of lawful money in exchange.

    Min Reply:

    RSJ: “If {Congress} approves the spending, it will raise the debt ceiling”

    Not necessarily. (Although in practice, that is what happens.)

    Reply

  13. Robert Owens Says:

    A recent program on “What is Money?” is found at:

    http://www.thisamericanlife.org/radio-archives/episode/423/the-invention-of-money

    I’m not sure if this fits exactly with the discussion. There are a few misstatements about inflation/deflation to over look, but the stories were kind of interesting.

    How do coin seigniorage and MMT go together?

    Reply

    LetsGetItDone Reply:

    Coin seigniorage and MMT go together in this way. CS allows the Treasury to deficit spend without issuing debt. This creates bank reserves in the non-Government sector. It is pretty much the same as it would be if the Treasury could deficit spend without issuing debt instruments.

    Reply

    beowulf Reply:

    Operationally, MMT ideally works by Tsy overdrafting its Fed account. Since as a legal matter that’s a dry hole (from 1942 to 1979, Tsy was allowed to overdraft, but only for limited times and amounts).

    The use of jumbo coins is simply fighting fire with fire, the roadblock to effective use of fiat money is the metal-based monetary system that still exists only in people’s heads. But if we used metal coinage (whose value is declared by fiat), everybody wins. Added bonus, Austrians who insist that Congress is allowed to “coin money” but not “print money” can declare victory and go home. :o)

    Reply

    WARREN MOSLER Reply:

    yes, and, as Joe also pointed out, not to be confused with the govt. paying of interest of its deficit spending, which remains in either case with a risk free rate higher than 0%

    Reply

  14. Ralph Musgrave Says:

    I love the passage that Beowolf quotes from Thomas Edison here:

    http://www.correntewire.com/coin_seigniorage_and_irrelevance_debt_limit

    Essentially Edison says that new money created by a central bank is the property of the people, not of commercial banks or anyone else.

    I’d put it more strongly: all new money should go straight into the pockets of the people (e.g. via a payroll tax reduction). And if any commercial bank goes bust as a result, it can go to hell along with its shareholders.

    Reply

  15. Ralph Musgrave Says:

    Strawberry Picker, You are doubtless right to say that it is not possible to control where money “ultimately ends up”. But that is an argument against ANY method of money creation, not specifically against the payroll tax reduction.

    If ALL forms of money creation are stymied by the “ultimately ends up” point, do we conclude that the money supply should never be increased? I.e. should the US have had NO money supply increase in the last 200 years?

    Reply

  16. LetsGetItDone Says:

    You’re kidding, right?

    Reply

  17. Alex Says:

    Trying to understand this in simplified points that us non-finance industry Americans can understand?

    1. We Americans lend our own money to ourselves and then are forced to pay billions of dollars of interest each year to banks.

    Like if I take a gold coin into the bank and rather then dollars they lend me $1,300 on which I need to pay them interest.

    2. America has no real debt because the debt is denominated in American dollars. We can pay off American bonds simply by “printing” money at anytime.

    The only economic issue is the inflation this could cause.

    The wealthiest 1% would be hurt the most by this inflation which is why they dislike inflation. A large inflation would be the fastest broad brush stroke to return wealth to America’s middle class stolen by bankers and captured politicians

    The fewer Americans that built thier wealth through actually hard work and productive contribution would also be hurt but I’m guessing most of them have the skils to re-capture thier wealth to productive work and not drive by their net worth as much as they are by thier accomplishments.

    Perhaps the inflation can be managed in such a way as to target the financial speculator’s weatlh far above productive business and average Americans.

    Reply

    WARREN MOSLER Reply:

    The coin thing doesn’t add to aggregate demand/inflation

    Reply

  18. JKH Says:

    The debt ceiling is obviously an (operational) issue, and because of that the platinum idea is relevant.

    Two conditions must be satisfied in order for the Executive to spend:

    - Congressional spending authorization
    - A debt ceiling constraint that is non-binding at the prevailing level of debt

    In essence, there are two sequential constraints on spending – authorization, and capacity.

    Congress can use the second to hold up the Executive from acting on the first.

    That’s the game.

    The platinum idea is a creative Treasury work around to this constraint.

    The Fed might be fundamentally opposed to it to the degree that it represents an open ended “risk” (to the Fed’s existing mandate, as presented in discussion here) for indefinite “money financed” deficits (i.e. deficits offset by reserves rather than debt). If so, the Fed might resist it at the operational level by threatening to redeem the coin as soon as it is deposited – by debiting the Treasury’s account. At that point, it starts to get a bit silly – infinite operational counterattack and regression could ensue as pointed out by Tom. H. But it would gum up the works.

    A potential way around this concern would be for the Fed to insist on a forward reversing transaction at some point. But to do so would presume that the debt ceiling will be increased, which is a legally and logically untenable position, given Congressional power not to authorize an increase, and its demonstrated potential to act accordingly. The Fed is probably in a non-viable box in terms of risk to its existing mandate, if it doesn’t resist the platinum solution at the outset.

    Reply

    JKH Reply:

    MMT might instead focus its energy more uniformly and intensively and productively on the bondless government “finance” idea – as a standard MMT “must have” proposal, rather than a policy “option”.

    Reply

    Tom Hickey Reply:

    My argument, too. Tsy issuance is operationally unnecessary, and therefore continuing it constitutes a subsidy that must be justified as being iaw public purpose instead of special interest. Even if it be admitted that there is some public purpose in tsy issuance, a $-4-$ is not operationally necessary and the link between deficits and tsy issuance could and should be broken. E.g., when the government is running a surplus the financial sector still wants tsy issuance to keep the game going. If they can justify it based on public purpose, OK.

    IMHO, it is not so much tsy issuance per se that is the issue, but the $-4-$ required offset that presumes the necessity to “finance” deficit expenditure, which is operationally untrue, does not impose financial discipline as supposed (vide the record), and supports the false analogy between government and household finance.

    Reply

    Mario Reply:

    what about the fact that bonds are very important in the public and private sector (mortgage rates, savings rates, inflation expectations, etc.)? How would bonds be backed “by the full faith of the US gov.” if the Fed and Treasury weren’t involved in them? I realize that bonds are fundamentally different than what they were in the past, but none the less they still represent a nation’s economic stature and I think it is safe and smart for the government to highly invested in bonds. I could see a sort of nonviolent economic coup occur if one nation/entity purchases more than 50% of a nation’s bonds kind of a like an OPEC scenario in the sovereign bond world eh? That could get interesting indeed eh? I think it’s good as it is and they should keep trading bonds as they are. I mean there does need to be some type of material reality that they are trading and exchanging at the Fed and Tsy. I think bonds are a perfect instrument for that purpose…it’s fitting as the bonds are now “funding” our economy in some sense of the word. And like they say..don’t fix something that ain’t broken. Seriously right!

    I think MMT needs to focus its attention more on just sharing and educating people about how things work and explain that China doesn’t pay for our spending, etc. That’s the $-4-$ issue that I highly agree needs to understood clearly. However I also realize that taxes and government spending initiatives are HIGHLY POLEMIC issues in the US. It seems to be in the politicians’ and rich’s best interest for the American people to NOT understand how government spending works that way more fake “objections” can be thrown in the way of good public works ideas (health care, social security, etc.) as well as more money to people through less taxation (keep the rich richer and the poor poorer, etc.). So it’s a long road to hoe I think either way, but I think that’s the real way to go with MMT. I think our USA economic system is probably one of the best and most bulletproof that’s ever existed based upon the history books we know of. I really do. It’s just awesome and need not change but rather be understood and used more fully. :D

    I also liked Edison’s point about CB new money as the people’s money as well as the idea that it be given to us in a tax reduction…yeah!!! So true!!

    I don’t think the big coin idea will work for the reasons RSJ describes, but I do think it’s great creative thinking and way cool in that regard. I also think that it’s a nice little handy elementary way to start explaining how the Fed works with reserve accounts, etc. It’s also really cool the exposure Beowulf got for the idea, etc. Great job!!!

    WARREN MOSLER Reply:

    got bonds are functionally govt ‘annuities’ which, presumably if Congress finds public purpose in govt. annuities, can be issued accordingly.

    that’s a completely separate issue, but a good point that I’ve written about from time to time, thanks

    LetsGetItDone Reply:

    There’s a lot of money involved here. Some time ago, using and extension of CBO projections I calculated that $11.8T in spending could be avoided if we ceased to issue debt. That’s the same amount of money that Medicare for All would cost the Government, if it were passed right now. Of course, Medicare for All would also cut total health care expenditures to between 1.7 and 1.8T annually form the present level of 2.6T. An econometric study done by the California Nurses Association a few years back prejected 2.5 million new jobs if Medicare for All were implemented.

    WARREN MOSLER Reply:

    don’t forget to either replace the spending with other spending or tax cuts

    :)

    ESM Reply:

    Money is irrelevant. Resources and demand for resources are what matter. The problem is that our system is set up to subsidize demand for medical resources and to discourage supply of medical resources.

    Medicare for all would just exacerbate the problem, which is that the consumers of medical resources have been made price-insensitive by intermediating a 3rd party in the payment process. At the same time, doctors, hospitals and other suppliers are being squeezed by government regulation and monopsony.

    WARREN MOSLER Reply:

    Hence my health care proposal

    Tom Hickey Reply:

    ESM: Do you really think that consumers price shop for medical care?

    ESM Reply:

    Are you kidding? Of course they do (or would — to be more accurate). I find it fascinating that people on the left seem to think that medical care is different from any other good or service.

    Costs for cosmetic surgery and laser eye correction have been dropping for two decades. Why do you think that is?

    Tom Hickey Reply:

    Cosmetic surgery is optional, therefore a more competitive market relative to other forms of health care.

    Eye surgery has come down due to innovation and the spread of technology. Laser surgery was cutting edge a while ago, and the technology was not widespread. Now it is standard.

    I know of no one who shops around for health care services in the US based on price differential/quality of care, although I do know a number of people who plan on non-emergency care when they are traveling outside the US, and some travel specifically for that reason.

    You actually call around to different doctors asking their prices for different procedures and checking their outcomes? Any one else doing that here?

    ESM Reply:

    “I know of no one who shops around for health care services in the US based on price differential/quality of care…”

    Oh sure you do. Ever decide to forgo a procedure because your insurance didn’t cover it? Ever decide not to use a doctor that wasn’t in your covered network? Ever decide to pay the extra dough to use an out-of-network doctor? Ever decide to use a generic medication over a brand name, or even one drug over another similar but non-identical one because of the insurance coverage? Those are all examples of shopping around and balancing price vs convenience vs quality.

    “You actually call around to different doctors asking their prices for different procedures and checking their outcomes? Any one else doing that here?

    I wish I could. Unfortunately, they won’t tell me the prices a priori, and in any case, the prices are pretty much fictitious.

    I still don’t see why you think medical services are any different from, say, auto repair services. Do you shop around when you need a brake job for your car?

    Tom Hickey Reply:

    “Oh sure you do. Ever decide to forgo a procedure because your insurance didn’t cover it? Ever decide not to use a doctor that wasn’t in your covered network? Ever decide to pay the extra dough to use an out-of-network doctor? Ever decide to use a generic medication over a brand name, or even one drug over another similar but non-identical one because of the insurance coverage? Those are all examples of shopping around and balancing price vs convenience vs quality.”

    Not really. I’ve been fortunate and not had many problems to deal with like that before going on Medicare. When I had a problem or two, price was the last thing on my mind. In my book, I want a physician I have a good relationship with and have confidence in. That has zip to do with cost. It’s called “bedside manner.”

    “I wish I could. Unfortunately, they won’t tell me the prices a priori, and in any case, the prices are pretty much fictitious.”

    That’s what I mean. There is no price sheet for competitive shopping.

    “I still don’t see why you think medical services are any different from, say, auto repair services. Do you shop around when you need a brake job for your car?”

    There is a big difference in my mind. I do ask for extimates for auto repair but not for medical services. As with medical care, I am not concerned about the price of auto repair as much as the quality of the service and the parts they use. What most people don’t realize is that cost saving in auto repair is largely due to using less expensive, poorer quality parts.

    Saving on price over quality is not worthwhile in the long run in most things anyway. But when I shop, do I shop the sales? You bet. I generally keep a wish list of quality items and pick them up when I see them on sale.

    Oliver Reply:

    problem, which is that the consumers of medical resources have been made price-insensitive by intermediating a 3rd party in the payment process.

    The more quality sensitive, the less price sensitive. That obviously depends a lot on the the illness we’re talking about and the time one has to shop around. I am partial to good food and a fan of good medicine as well.

    Chances are, I’ll survive the occasional chips and beer binge and I usually have enough time and money to decide what to eat so i’m not going to need either alimentary insurance or a food intermediary. (The case is different for those who can’t decide or have no money – children or the homeless for example. Should we feed them trash because of it?)

    Things look rather different when I find blood squirting out from an orifice or there’s a lump under my skin which google tells could well be lethal and I should see a specialist immediately. There are very different kinds of decisions in life and for those that are a: unforseeable, b: of vital importance and c: time sensitive we should, as a civilised society, have some system that guarantees high quality, speed and some sort of pooling to feather financial risk in my (morally guided) opinion. Shoppin’ just ain’t shoppin’.

    ESM Reply:

    “Not really.”

    You’ve never even split a pill in half? Or delayed going to the doctor in the hope that your cold really was viral and would go away on its own (not going to doctor saves time = money)? I think you’ve made hundreds of cost-benefit decisions in your consumption of health care without realizing it.

    “As with medical care, I am not concerned about the price of auto repair as much as the quality of the service and the parts they use.”

    So I guess you’ve never bought a Toyota Tercel or Corolla, huh? Always gone top shelf to get a nice safe Volvo or a four wheel drive Subaru? And you always got the highest end safety package with the ABS and traction control? And tires? At even the slightest evidence of tread wear, you must get all of your tires replaced with the best that money can buy, right?

    My point is that people make tradeoffs between money and health/safety every day. There is nothing special about medical care (which, by the way, includes a lot of mundane things that are almost indistinguishable from other kinds of goods and services).

    Going back to your previous post:

    “Cosmetic surgery is optional, therefore a more competitive market relative to other forms of health care.”

    Almost all health care is optional. The only time health care is not optional is when you are unconscious and other people are making health care consumption decisions for you.

    The reason why cosmetic surgery and corrective eye surgery (and dental care for the most part) is competitive is because the consumer pays directly for services in those areas. Dental care is reasonably competitive because dental insurance doesn’t cover nearly as high a percentage of costs as medical insurance.

    ESM Reply:

    @Oliver:

    “There are very different kinds of decisions in life and for those that are a: unforseeable, b: of vital importance and c: time sensitive we should, as a civilised society, have some system that guarantees high quality, speed and some sort of pooling to feather financial risk in my (morally guided) opinion.”

    Well, I believe that’s what insurance is for, and it can be provided by the private sector. We have it for homes and for cars, and even for utilities (e.g. furnace, air conditioning). Unfortunately, no true insurance market developed for health care in the US because of government intervention, starting with the wage and price control incentive (later a tax incentive) to provide health benefits (i.e. not insurance) as an employment benefit.

    I’m not against the government providing catastrophic health care insurance (as in Warren’s proposal), but it is something that in principle the private sector can provide. The very fact that most people think with their hearts rather than their brains when it comes to life-saving health care means that it is very difficult for a private insurer to create unbreakable contracts as to caps on costs and eligibility.

    But don’t think that just because the government is paying, it won’t be necessary to “pull the plug on grandma” at some point. It’s just that the government will be deciding how and when to do that, rather than grandma and her family.

    Tom Hickey Reply:

    ESM, how did you guess I drive and Outback? :)

    ESM Reply:

    LOL. I drive one too. It’s a pleasure to drive when you’ve had 60″ of snow in the last month. But it’s awfully expensive for such a small car. I certainly wouldn’t have been driving one (or whatever the equivalent was) 15 years ago.

    Tom Hickey Reply:

    ESM, the reason that private health insurance does not work is due to the dynamics of coverage. It is just not profitable for private insurers to provide universal coverage affordably, or it would have been done already. Since significant price rationing is required for the level of profitability acceptable to the industry, and as a society, we have decided that everyone is due emergency care and the poor should also be covered, we have a problem. The only ways to resolve this problem as it stands is either a government program that either mandates universal private coverage and oversees it, or we have a public/private solution that includes Medicaid, or we go to single-payer. The old system was broken, which is why the public demanded a fix.

    Reply

    ESM Reply:

    I agree that health care is slightly different because of the free rider problem. As a society, we are always going to provide emergency room care, even for somebody who made a conscious decision to forego insurance to save money. But emergency care for the poor or for the con-artists could easily be borne by society within a free market system. The tax on resources is not that great.

    We actually feel that tax much more keenly because of the crazy system we have where hospitals and doctors absorb the cost of uncompensated care directly and then come up with creative ways to minimize that cost and to reimburse themselves from other consumers.

    So, instead we have intentionally capacity constrained emergency rooms with ridiculously long waits, and we get charged $20 for a Tylenol or $5K for an MRI (which only the unlucky and clueless ever pay).

    But single-payer goes in the wrong direction. The problem is too much government intervention creating all the wrong incentives. Having more government control exacerbates the 3rd-party payer problem (stoking demand) and the government price control problem (discouraging supply). Ultimately, medical resources will be rationed. Do we want them rationed by government bureaucrats, or by wait times, or by price? I prefer price, and not just because I am relatively affluent. It’s because when you ration by price, you actually optimize the use of resources, as well as optimize consumer utility.

    “The old system was broken, which is why the public demanded a fix.”

    This is the crazy part. 85% of people had health insurance, and 80% of those people were happy with it (not surprisingly because they felt like kids in a candy store where Santa Claus was paying for everything). I don’t think these people demanded a fix. I think they were happy with the system as it was. And to tell you the truth, many of the uninsured (young people who saw no need for insurance) were happy too. I think the system was suboptimal, but I would be willing to bet that most people are going to very, very unhappy with Obamacare 5 years from now (far more so than if nothing had changed, although obviously it is impossible to prove a counterfactual).

    Reply

    Tom Hickey Reply:

    We should probably have a discussion of health care under Warren’s proposal here.

    It is admittedly a complex issue and there are many factors involved, including powerful interests that bias not only influence the debate but also determine the limits of what is achievable practically.

    The debate boils down the fundamental divide in US politics over the role of government relative to the private sector. There are essentially three— all private, all government, and a mix. Each has its pros and cons, champions and opponents.

    Obamacare was only the beginning of a serous national debate on the subject that I expect will be going on for some time.

    LetsGetItDone Reply:

    ESM,

    I think your discussion is largely theoretical and ignores the experience of other nations.

    Nations like Canada, Australia, France, and Taiwan, have single-payer systems, and their health outcomes on key indicators like life expectancy and mortality are better than ours in the United States. The cost increases are also much slower than they are here. In addition, total medical expenditures as a percent of GDP are far less in these nations than in the United States. Canada has the highest medical spending as a percent of GDP of single-payer nations. Its spending is 2/3 that of the US as a percent of GDP. Taiwan’s is about 1/3.

    Single-payer isn’t Utopia. Each nation has problems and spending as a percent of GDP is increasing everywhere. But compared to our developed nation reference group the United States has the worst outcomes and also spends the most by far.

    There are other systems beside single-payer systems that work well for their populations. Two leading systems are those of Switzerland and The Netherlands. Both nations have extremely tight regulation of private sector providers, and are religious in enforcement of their regulations. It’s doubtful that such a system could be implemented in the United States, because of our aversion to regulation. There’s every reason to believe that Medicare for All would work better for us than arrangements similar to either of those systems.

    That nation in the world that is closest to us culturally is Canada, and the next closest is probably Australia. It makes sense to look carefully at their systems and then implement a system similar to theirs. The Conyers-Kucinich HR 676 bill proposes a system similar to Canada’s, and also to an enhanced Medicare system extended to the whole population. Based on some calculations I’ve done, I think the chances are good that if we passed HR 676 we could lower our health care expenditures by about a third of what we spend now, and also lower the rate of increasing costs in the system.

    Btw, Taiwan’s spectacularly successful single-payer system implemented in 1995 increased coverage from 60% of the population to nearly 100% in the 15 years of its operation. There’s completely free choice of provider in that system, and it is based on our own Medicare system.

    Finally, in the light of other nations’ experience, changing to Medicare for All seems like a no-brainer to me. We are currently enduring 58,000 fatalities per year, a high percentage of our foreclosures, and a high percentage of our bankruptcies, all directly related to the burden of Medical Bills. What could possibly justify this enormous annual social cost, when we could virtually eliminate all these effects with Medicare for All?

    Certainly not the continued existence of the private insurance companies which tyrannize over all of us, and commit “murder by spreadsheet”. If any companies deserve to be put out of business, it’s these companies. Certainly not vague appeals to a supposed free market in Medical Care when we haven’t had anything resembling that in many, many years. Certainly not charges of “socialized medicine” which are inaccurate anyway, since what we’re talking about is “socialized insurance.”

    The only reason why we don’t have Medicare for All today is because of the power of the health insurers and Wall Street. The issue isn’t a complex one. These interests have bought our legislators. the historical record is clear. Life expectancy in Canada and the United States was about the same in the 1960s when Medicare passed here and Canadian Medicare (yes named after our own program) started to spread in Canada. Today life expectancy in Canada is three years higher than it is in the US. The citizens of the United States have given up an average of three years of their lives for the sake of the stupid ideological belief, belied all over the world and even in our own country by the VA and Medicare systems, that privately owned insurance companies are superior to a Government-run system. We have to do what works, not what looks best in theory.

    Btw, a useful beginning reference on single payer is phhp’s FAQ here: http://www.pnhp.org/facts/single-payer-faq

    ESM Reply:

    “I think your discussion is largely theoretical and ignores the experience of other nations.”

    Well, first of all, our current system is not a good test for the “theory” because we don’t have a free market system in the slightest. Perhaps we can find a better test in the UK where you have a private system in parallel with a public system.

    Second, life expectancy is about the most misleading metric that you can use to judge country-wide medical outcomes (which, not coincidentally, is why supporters of single-payer quote it so much).

    Besides the fact that longevity is not the only goal of medical care (quality of life and comfort count for something too), life expectancy depends upon many things besides medical care (e.g. diet, culture, and even racial composition), but, crucially, life expectancy depends sensitively on the deaths of young people. In the US, violent deaths among young people are far more common than in other developed countries due to the heavy reliance on cars and the prevalence of guns. Surely such deaths cannot be blamed on the ineffectiveness of a health care system. And I have seen one study which found that when violent deaths are excluded from the statistics, the US has the highest life expectancy in the world.

    I think the best you can do is compare outcomes for specific diseases across similar populations. From what I’ve seen, the US system does better than any other country for almost all cancers and for heart disease. But of course, even these comparisons must be taken with a grain of salt.

    As for cost, please keep in mind two things:

    1) money is not fundamentally the issue; if I trade you a $1MM cow (labor) for a $1MM pig (health benefits), that doesn’t mean we’re both rich; it just means that prices are arbitrary; doctors make much more in the US than they do in European countries, but perhaps we expect more from our doctors in terms of accessibility and friendliness and competence; also, do the subsidies that other nations provide for educating doctors count towards those nations’ medical expenditures or do they count towards their education expenditures?

    2) the US is essentially subsidizing the world by bearing the lion’s share of the cost of medical innovation; if it wasn’t for the US market, where US consumers (through their 3rd party intermediaries) pay top dollar for new drugs, new drug research would grind to a halt.

    “Btw, a useful beginning reference on single payer is phhp’s FAQ here:”

    I’m aware of PNHP. They want to make providing private medical care – outside of a national insurance system – illegal. I think that puts them way out on the political fringe.

    Oliver Reply:

    I can give you accounts from two different systems, the Swiss one and the UK’s.

    Joe writes regarding the Swiss / Dutch model:

    It’s doubtful that such a system could be implemented in the United States, because of our aversion to regulation.

    I believe this gets to the bottom of any meaningful comparison between systems and nations. From across the Atlantic, it seems like in the US, being the vast and diverse country that it is, there is little trust among its citizens – a fact that makes market discipline seem like the only workable solution to any given problem, including medical insurance.

    The Swiss system is a typical Swiss compromise whose specifics are a hold-over from a time not long ago (up until ca. 1990, I believe) where there was no socialized insurance either. Private insurers have since been given a dual charter that says they must take anyone on for general insurance, which is a very strictly defined set of services, on a non-profit basis in order to be allowed to profit from selling private schemes to whomever they wish.

    So basically, I end up paying the high overhead costs for a myriad of private insurers for government defined health care.

    On the other hand, even government health care is of quite high quality, because the Swiss, being the Swiss, would never settle for anything less. Personally, I’m sure this would be true even with a single-payer system. Of course the local insurance lobby thinks otherwise.

    In the UK, on the other hand, the English being the sloppy neo-liberals they are, the National Health, although technically well equipped and with well educated medical professionals, has been squeezed to the extent that waiting times have taken on 3rd world proportions. Funnily, even with private insurance, as my parents just experienced first hand, waiting times are longer and services less transparent than with general insurance here in Switzerland. The English haven’t got a clue how to organise themselves and the language of their national discourse tells me the chance that this will change any time soon is rather slim. That’s true for health care, public transport and most anything else over there. 3rd world, if you ask me.

    So, in conclusion, I think Joe is right that the US will have to find a system that suits the mentality of its citizens, or else work on changing that mentality, which is a very very slow process. Start with language that focusses on quality, I’d say. One thing the Swiss, and many other small countries are good at, is learning from others. The UK and the US seem to live in their own respective bubbles, and are quite oblivious of what goes on around them.

    ESM Reply:

    “Start with language that focusses on quality, I’d say.”

    I think that few people outside of policy advocates are complaining about quality in the US. Like I said, satisfaction is actually quite high among the insured population. And many of the uninsured are uninsured by choice (and they still get decent medical care). The problem was perceived as a cost issue, but as we are all aware of here, cost is not really a problem.

    I think that progressives sort of put one over on the American people. They framed the issue as one of reforming health care to bring down costs, but the real reason for reform from their point of view was a moral one (i.e. give more health care to the poor). Although their policy goal was perfectly reasonable, and I’m certainly sympathetic to it, the politics was very dishonest.

    Also, the results are going to make people less satisfied with their health care. I am already feeling it here in Massachusetts, which has been beset by Obamacare’s predecessor – Romneycare.

    Oliver Reply:

    They framed the issue as one of reforming health care to bring down costs.

    My take is they’ve been forced to frame it that way because bleeding heart arguments don’t get any votes in a world that has embraced the neo-liberal efficiency and deficit hawk doctrine. Getting past that doctrine is the great task at hand, imo. We’ve been led to believe that we, as society, can’t afford the quality we, as individuals, would want and would demand. That’s hardly something that was brought up by the left.

    beowulf Reply:

    Regulation is insufficient because of ping pong federalism. States rights arguments are used to weaken federal regulation and supremacy clause arguments are used to to weaken state regulation.

    The two sure ways for government to regulate anything are by tax code and by direct provision of services. Medicare (with its payroll tax) uses both.

    Reply

    beowulf Reply:

    Regulation by tax–
    An agreement, the Berne Convention, was reached… in 1906 to prohibit the use of white phosphorus in matches This required each country to pass laws prohibiting the use of white phosphorus in matches. The United States did not pass a law, but instead placed a “punitive tax” on white phosphorus-based matches, one so high as to render their manufacture financially impractical, in 1913.
    http://en.wikipedia.org/wiki/Match#Re-formulation_to_remove_white_phosphorus

    regulation by direct provision–
    Public regulation of private monopoly would seem to be, at best, an anomalous arrangement, tolerable only as a temporary expedient… We may endure regulation for a time, on the dubious assumption that governments are more nearly competent to regulate than to operate… In general, however, the state should face the necessity of actually taking over, owning, and managing directly, both the railroads and the utilities, and all other industries in which it is impossible to maintain effectively competitive conditions.
    Henry C. Simons, A Positive Program for Laissez Faire (1934)
    http://billtotten.blogspot.com/2009/12/positive-program-for-laissez-faire.html

    LetsGetItDone Reply:

    Yes, also as I said somewhere the two countries most similar to the US are Canada and Australia. Both have single-payer and both are performing well studies indicate that waiting time in Canada is lower than it is here in the US for routine care. My own experience with Kaiser Permanente in the DC area, a pretty good HMO is that my wait times for care are usually much longer than those reported for Canada. They’re not overly long. But it’s interesting that the Canadian single-payer system which supposedly had a wait time problem now improves on my own experience.

    beowulf Reply:

    Australia is an interesting place. Its per capita income is roughly the same as ours (AUS $ currently at par with US $). However the US minimum wage ($7.25/hr) is less than half the AUS minimum wage ($15.00/hr). As you can imagine their unemployment rate is catastrophic, errr, or not (This is will be explained in my article “Coriolis Effect on Neoclassical Economics”). :o)
    The national unemployment rate in Australia now sits at 5.2, close to full employment, after more than 400,000 full-time jobs were created in the past year.
    http://www.theaustralian.com.au/business/markets/stressed-labour-market-forced-to-adapt-as-mining-boom-goes-on-and-on/story-e6frg926-1225981248757

  19. LetsGetItDone Says:

    Ramanan,

    It is important to emphasize that changing the debt limit does not alter or increase the obligations we have as a nation; it simply permits the Treasury to fund those obligations Congress has already established.

    It permits the Treasury to comply with the Congressional Requirement to issue debt when it deficit spends. An important question is whether, if they do not raise the debt ceiling, the Treasury is still obligated to issue debt when it spends in accordance with previous appropriations.

    Reply

    Ramanan Reply:

    Yes but the Treasury cannot take a draft at the Fed.

    Reply

    Tom Hickey Reply:

    Right, that’s what The Coin is for, if it is within the rules, or the rules can be bent to include it. :)

    Reply

  20. Letsgetitdone Says:

    Treasury doesnt have to do a an overdraft at the Fed. If doesn’t have to issue debt, itmshould be able just to directly mark up accounts in the private sector.

    Reply

    Mario Reply:

    it seems like the issue with the debt is more about the people’s PERCEPTION of how this all works and less about the actual functionality of the Fed and Tsy.

    The debt ceiling is NOT the issue it seems to me b/c when the output gap is closed and we are really running full steam then we will need to talk about a debt ceiling, etc. It’s also just smart to be reviewing and monitoring the debt and the money and the Tsy at the level of Congress for just merely practical and logical reasons…even if chinese bonds don’t effect our spending.

    The issue now is not the debt ceiling itself but more the total lack of UNDERSTANDING about how our modern economic system actually works. People are having a good discussion about the economy right now but for all the wrong reasons and under false knowledge and misunderstandings. THAT’S THE ISSUE!! Educating the people and the politicians (mainly the people though, b/c politicians are just puppets to the appetite of the people imho). Now is the wrong time to be having a discussion about the debt ceiling and not only that but they fail to under the actual ramifications in the first place!! Education is in order asap…go for it Warren!!!

    At least that’s how I see it.

    Reply

    LetsGetItDone Reply:

    Mario, As I explained in the post, the debt ceiling is an issue now, if: 1) the Congress cannot raise it because the Republicans dig their heels in; 2) the President also decides not to give way to the Rs because they are asking too much, and 3) the President interprets the situation as one in which the Executive can do nothing but shut the Government down and fail to pay its obligations.

    As far as needing a debt ceiling at sometime in the future, since the United States is a Government sovereign in its own currency, it can incur as much debt as it wants to in that currency without increasing its solvency risk. That’s basic MMT. See Warren’s book, or nearly every post of Bill Mitchell’s. Debt isn’t really a solvency issue, or even, by itself, an inflation issue. It may, however, be a political issue as it is now and also a psychological issue because they look at the Government using the household analogy.

    The best way to defuse the political and psychological issues with the debt would be to illustrate how easily we could pay it off. Using coin seigniorage would do that for us.

    Reply

    Mario Reply:

    I understand the issue at hand with the possibility of the debt ceiling not being raised in the points you clearly elucidate. And I also understand that the US is sovereign in its own currency and therefore cannot go “bankrupt” or “insolvent.” I am not debating or disagreeing with any of that at all.

    I do disagree with you that debt is not an inflation issue by itself…b/c I think it is (or at least can be when compared to the output gap). If the government were to follow Warren’s policies at this time and start spending more and giving anyone a job who can work that’s great FOR NOW b/c the economic atmosphere REQUIRES THAT NOW…but what about when the private sector picks up again and is really running again? Surely you don’t think it would be wise to keep going with Warren’s policies do you? I mean that would be inflationary in the economic aggregate (actual GDP growth, etc.) and not just cost push inflation as I’ve heard Warren call it (supply/demand of food/energy, seasonality, etc.). MMT recognizes in fact that the whole purpose of having taxes as well as government spending is b/c they are TOOLS to offset inflation and deflation in the economic aggregate…but certain tools are better used in certain economic conditions over other tools. It’s just like when it’s wise and when it’s NOT wise to raise the Fed Funds Rate…I see government spending and taxes as no different than the proper function and application of the FFR. They’re all just levers to pull at different times for different reasons. Period. I think MMT clearly supports that. Wouldn’t you agree? And for that reason the debt ceiling vote itself is really no different than the Fed meeting once a year or whenever they meet to decide if they will raise the FFR. It’s just the same. The only thing difference today is that we have idiots in congress and some pretty smart dudes at the Fed and it bothers us who actually understand what is going on to see this happen. But that is not a good enough reason to end the debt ceiling vote, just as much as it’s not a good enough reason to end the Fed’s vote to raise/lower the FFR. Do you see what I’m saying here?

    I definitely agree with you that our taxes and government spending are NOT being used appropriately at this time…that’s for darn sure!!! I also agree with you that this debt ceiling issue is a serious one (if it were to come to that, which I frankly doubt will happen btw) and that the people and politicians are just being so stupid about all this and it could really harm us all if they got what they are asking for…BUT that is not an issue with the EXISTENCE of the debt ceiling but rather with people’s UNDERSTANDING of how our economy works.

    If there was no Congressional review or check on government spending and the debt ceiling than how would spending be regulated and at least monitored? Who would do that? Is the Fed supposed to “counteract” continual government spending that no one is even aware of or tracking since Congress is not even dealing with spending anymore? I mean that’s just as insane as the issue we find ourselves in now in my humble opinion. No government…particularly when dealing with spending…can exist in “auto-pilot” for the sole reason that they cannot become insolvent. That math just doesn’t add up. Just b/c we cannot become insolvent does NOT mean that we are immune to any negative effects to government spending. Surely you agree with that right?

    I do agree with you that its VERY FRUSTRATING and somewhat frightening that dumbassess in congress are at the helm here with these important issues and they just have no clue about it, don’t want to get a clue about it, or they do have a clue and want to destroy the nation and all of us in it. Either of those scenarios are not good and suck imo. But really the issue is EDUCATION and a lack of understanding. If Congress understood MMT and said, “hell yes we’re going to raise the debt ceiling b/c of x, y, and z!” Then I guarantee you that you’d be quite fine with the process of Congress convening to discuss the debt ceiling issue b/c then they’d be dealing with it appropriately and intelligently. It’s not the process that’s the issue here, it’s the people and their brains (or lack thereof).

    No comment on the coin thing you suggest, I’ve spoken my two cents on that one (no pun intended!! haha!!). But I do think that once people understand how MMT works then they won’t be concerned with how our spending will be “paid off,” b/c that’s not really an issue for the Tsy…the real issue with government spending is aggregate inflation and global perception of the nation and its sovereign currency as far as I can see. The Fed can easily provide whatever spending the Tsy wants to do…the issue is inflation (which effects global perception of the US $ and, etc., etc., etc.).

    Just my thoughts on it all anyway! Cheers! :D

    Robert Owens Reply:

    I’m seconding what Mario said. And, the federal gov’t is constitutionally prohibited from defaulting on any of its obligations.
    So wouldn’t the hold-outs refusing to raise the debt limit be violating their oath of office, swearing to uphold the Constitution?

    It appears the coin thing is a tactical thing, being considered because we are having problems getting people to let go of deeply entrenched wrong ideas about the government’s finances.

    In reply to one of Ramanan’s posts, I’m find it odd that Congress must have authorized Treasury to purchase MBS and ABS, assuming as part of toxic asset mop-up, rather than having the Federal Reserve handle that chore with spreadsheet money. Shoring up banks seemingly is more important than maintaining faith in the government’s finances.

    Reply

    anon Reply:

    can only happen that way if the Fed is legally part of Treasury; otherwise there’s an overdraft

    Reply

    LetsGetItDone Reply:

    Warren, please mediate this. Can’t the Treasury mark up privates sector accounts directly without going through the Treasury General Account at the New York or any other regional Fed banks? If so, there would not have to be an overdraft at the Fed, would there?

    Reply

    anon Reply:

    I’ll let Warren respond, but Treasury can only spend from its (positive) Fed deposit balance – or possibly from its TTL balances, although I think that is unusual. In any event, it must have positive deposit balances to spend from, or it would go overdraft, which is not currently permissable.

    This is the essential issue not only behind the platinum caper, but behind MMT’s “no bond” idea, which requires either a lifting of the overdraft prohibition or a legal restructuring in order to implement.

    WARREN MOSLER Reply:

    my understanding is that only the fed changes the numbers on its spread sheet.

    the tsy, and others, give the fed ‘instructions’ to make changes, such as, ‘debit my account and credit the account of so and so’ which are commonly called ‘wire instructions.

    anon Reply:

    Basic distinction, yes.

    Worth repeating how fundamental this is. One of the core observations of MMT as I interpret it is that the overdraft prohibition is both operationally unnecessary and inappropriate. In that sense, the overdraft rule is critically important while it exists. MMT wouldn’t be the same without it – i.e. a lot of what MMT objects to, from an operational standpoint at least, would fall away without it.

    Matt Franko Reply:

    Federal Reserve Act
    Section 15. Government Deposits

    1. Federal Reserve Banks as Depositaries and Fiscal Agents of United States

    The moneys held in the general fund of the Treasury, except the five per centum fund for the redemption of outstanding national-bank notes may, upon the direction of the Secretary of the Treasury, be deposited in Federal reserve banks, which banks, when required by the Secretary of the Treasury, shall act as fiscal agents of the United States; and the revenues of the Government or any part thereof may be deposited in such banks, and disbursements may be made by checks drawn against such deposits.

    The key word here is “may”, this language in the FRA seems to allow the current arrangements but not dictate them. Does not the use of the word “may” imply that Treasury can facilitate other arrangements to run a fiscal depository system? This does not dictate that the FRS must be the govts depositary.

    Matt Franko Reply:

    Furthermore, in reference to the first sentence, where are “The moneys held in the general fund of the Treasury”? Where is this “general fund”? Could this be coins in a vault in the Treasury building?

    anon Reply:

    “General fund” is a broad accounting classification.

    It is not a specific bank deposit account or vault account. Specific accounts may be included in the “general fund” classification, depending on intended allocation.

    Ramanan Reply:

    “no-overdraft” is like a mirage of an oasis.

    anon Reply:

    the promised land

    anon Reply:

    “Does not the use of the word “may” imply that Treasury can facilitate other arrangements to run a fiscal depository system?”

    No. “May” does not mean anything else goes.

    “May” is an option according to existing rules. Some rules cover Treasury’s use of the Fed account. Other rules cover other things.

    “May” implies exactly what Warren said – its up to the Treasury to instruct funds transfers according to rules in place – e.g. from TTL to Fed is allowed.

    “May” is not an option to credit bank accounts without borrowing, or to go overdraft, or anything else that breaks existing rules.

    Reply

    Matt Franko Reply:

    Right I read it as if the Treasury uses the Fed, then Treasury has to do it the Feds way (no overdrafts, dual entries, etc). If Treasury no longer wanted to use the FRS, Treasury would have to create an entirely new fiscal depository system, that is their other option, and would be a lot of work.

    Really it would be a lot easier to educate policymakers and the sheeple that they are not borrowing from their grandchildren, but we first would need a Treasury Secretary that understood that….

    anon Reply:

    Right.

    Congress must authorize Treasury to take away the Fed’s independence to get these things done. Like a corporate acquisition.

    Deficit spending without borrowing will never happen without changing the system from the top down in this way – i.e. changing the functional mandates of the various entities.

    Treasury has to absorb the Fed functionally to get it done.

    Otherwise its just academic.

  21. Ramanan Says:

    Letsgetitdone,

    LOL! 10 year jail for defaulting. I also recently read about some law which says that defaulting is not allowed while reading some literature on the debt ceiling. Can you point to the source on this jail thing ?

    I agree that the debt ceiling is contradictory to the “no default” law.

    I look at the debt ceiling as a psychological and behavioral tactic. The Congress is forced to take stock of the situation and be more optimal in its spending etc, evaluate its fiscal policy etc. Unfortunately this usually comes through austerity and austerity and optimality are different things.

    However, when the debt ceiling is hit – and it has been hit in the past – the Treasury is put in a very uncomfortable situation. They – the people at the Treasury – act under uncertainty and are not aware of all the laws. They are in the “damned if I do, damned if I don’t” situation.

    Here is a nice article “In Defense of the Debt Limit Statute” .. I know it doesn’t say “debt is not debt” ! but I think its written well in a few places. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=983145 Good history of the public debt.

    Reply

    anon Reply:

    The debt ceiling is in effect a second check or constraint on spending authorization. The fact is that Treasury must satisfy both constraint requirements in order to deficit spend. It’s like going through two doors to get to freedom.

    Reply

    anon Reply:

    P.S.

    For any new tranche of spending authorization, the second door is usually open – but sometimes its sealed shut and needs to be re-opened.

    Ramanan, this is a definitely an operational issue, as you have correctly pointed out. Some others here are mistaken about that.

    Reply

    anon Reply:

    What isn’t an issue here is this whole debate about coin classification, and what is feasible or not on that basis.

    The whole idea of deficit spending from platinum coin issuance is so outrageous – in terms of both the usual mode of coin issuance as well as the spirit of the current system of deficit financing – that any debate about feasibility on the basis of coin classification is at the level of amusement only. It’s like watching a fantasy movie – do you want 2D or 3D?

    Reply

    Ramanan Reply:

    Agree with you. Good analogy with doors.

    Even if Geithner comes to know of the coin trick, he is likely not going to use it.

    Yes I can’t follow what the debate about coin classification is and also its circulation.

    anon Reply:

    the doors were a good band

    and they should have been playing in Marshall’s longest

    LetsGetItDone Reply:

    You may be right. But let’s wait and see what kind of pressure the President gets from the crazies in Congress and from Wall Street on the other side urging him to do something, and let’s see if we can get this idea out. If it’s out there, even if they find the idea very foreign, it’s wonkiness is something that may appeal to somebody like Obama and to the Clintonites he relies on. Geithner may not like it; but if it gets to the President and they’re pressed hard and for a long time and are running out of other expedients, then they may have the choice between this and losing the 2012 election, if they give in to extremist demands. In that kind of situation they may try coin seigniorage.

  22. LetsGetItDone Says:

    Thanks Ramanan.

    First, there is Sect. 4 of the 14th Amendment. It reads in part:

    ”. . . .the validity of the public debt of the United States, authorized by law… shall not be questioned”

    I think that threatening to create conditions that may cause the US to default certainly questions the validity of that debt.

    And second, there is this Criminal Mischief statute

    18 US 1361. Government property or contracts

    “Whoever willfully injures or commits any depredation against any property of the United States, or of any department or agency thereof, or any property which has been or is being manufactured or constructed for the United States, or any department or agency thereof, or attempts to commit any of the foregoing offenses, shall be punished as follows:

    If the damage or attempted damage to such property exceeds the sum of $1,000, by a fine under this title or imprisonment for not more than ten years, or both; if the damage or attempted damage to such property does not exceed the sum of $1,000, by a fine under this title or by imprisonment for not more than one year, or both.”

    Tom Hickey pointed out this provision of the 14th Amendment to me in a comment he made at ND20, if I recall correctly. And beowulf provided the reference to the US Code and also the juxtaposition of the provision of the amendment and the code here:

    http://fdlaction.firedoglake.com/2010/12/13/moodys-swings/#comment-133775

    Reply

    Tom Hickey Reply:

    As I recall Beowulf provided the court decisions relevant to the amendment somewhere. Beowulf?

    Reply

    beowulf Reply:

    You rang? :o)
    While Congress can block the issuance of new debt, it is powerless to force a default on the on existing debt. No debt ceiling statute can override the Government’s constitutional duty to make timely debt service payments.

    The Constitution gives to the Congress the power to borrow money on the credit of the United States, an unqualified power, a power vital to the government, upon which in an extremity its very life may depend. The binding quality of the promise of the United States is of the essence of the credit which is so pledged. Having this power to authorize the issue of definite obligations for the payment of money borrowed, the Congress has not been vested with authority to alter or destroy those obligations… The Fourteenth Amendment, in its fourth section, explicitly declares: “The validity of the public debt of the United States, authorized by law, . . . shall not be questioned”… We regard it as confirmatory of a fundamental principle which applies as well to the government bonds in question, and to others duly authorized by the Congress, as to those issued before the Amendment was adopted. Nor can we perceive any reason for not considering the expression “the validity of the public debt” as embracing whatever concerns the integrity of the public obligations.
    Perry v. United States, 294 U.S. 330 (1935)

    Reply

    Tom Hickey Reply:

    Thanks. :)

  23. LetsGetItDone Says:

    There seems to be something of a consensus here that the seigniorage idea could work as a tactical measure to avoid the debt ceiling crisis, but that it can’t work long-term since it goes against the way Government financing has worked. I agree with the first part of this, but not the second part.

    My problem with the second part is that a legal framework is in place for using seigniorage now. For that to change, Congress has to make a change and the President has to sign the bill. But the Senate is still Democratic and so is the Presidency; so if the President does decide to use seigniorage as a weapon against Republicans trying to shut down the Government, and if it’s realized as this is happening that it is resulting in a reduction of the national debt, and creating space relative to the debt limit, then why should the Democrats want to remove this weapon against hostage-taking Republicans.

    The use of seigniorage may upset Ben Bernanke, but Obama can negotiate with him a plan for starting to issue debt again if the move proves inflationary, as Bernanke may fear.

    Moving on to the Treasury’s ability to mark up its own accounts at the Fed, there seems to be general agreement that Treasury doesn’t have that power. But, let’s move back a minute to the question of what happens if the debt limit is reached and the debt issuance requirement is still in place. Earlier I posited a situation where the Executive decides to interpret this situation as a conflict between two aspects and as the debt limit superceding the debt issuance requirement.

    Some commenters think that the correct interpretation here is that there are two doors both of which the Executive must get through. Perhaps so, but I dare say that the legislation is not constructed to make that explicit. Rather the debt limit is just a prohibition against issuing debt beyond that limit. I don’t believe Congress says anything about the requirement for debt issuance remaining in place as in the two doors interpretation. So, my point is that in the absence of an explicit specification by Congress, the Executive is free to offer the interpretation I’ve given and to commence spending without debt to fulfill its obligations under the Constitution including the obligation not to allow a default.

    If Congress objects to this interpretation, it will have to file suit in the Supreme Court, and, again, such a suit may be problematic if the House and Senate do not agree, as they may not in the present political situation.

    Assuming the Executive went trough with such an interpretation, then how would it actually get money into the Treasury General Account to be able to prevent overdrafts. Well, I wonder if it can simply have The Bureau of Engraving and Printing create US Notes again that would be deposited in the Treasury General Account.

    I understand that such notes have not been printed since 1971, and that today we completely rely on Federal Reserve Notes for currency. But does Congress prohibit the Executive printing notes for its own use? I don’t think so?

    If not, would the Treasury still be prohibited from “printing money” on the interpretation that US Notes are debt, and so do not get around the problem of the debt limit?

    Finally, if the seigniorage idea makes sense as a tactical move to many of you, then I urge that everyone who has a blog or who comments on a blog, find a way to blog or comment about this proposal and link to our rather deep discussion of it here. I think it would be good if we could do all we can to get people in the Administration to think about coin seigniorage to counter the moves the Republican House is making. Even if our ultimate goal is to allow the Treasury to run unlimited overdrafts at the Fed, I think the discussion of coin seigniorage can perhaps open the way to a broader discussion of MMT, and to the very unwise policy of placing spending limits on the Treasury other than those resulting from the Congressional appropriations process itself.

    Reply

    beowulf Reply:

    If Congress objects to this interpretation, it will have to file suit in the Supreme Court, and, again, such a suit may be problematic if the House and Senate do not agree, as they may not in the present political situation.

    Frankly, I don’t know who’d have standing to stop Tsy from doing whatever it wants. Thirty years ago, Congressman Henry Reuss and Senator Don Riegle both filed lawsuits challenging the constitutionality of the Fed’s Federal Open Market Committee (a group exercising federal executive power that has members– Fed bank presidents– not appointed by POTUS). Both lawsuits were bounced on the standing issue.
    http://books.google.com/books?id=WFU6U-FtjyIC&pg=PA228&lpg=PA228

    Reply

    LetsGetItDone Reply:

    I tend to agree. But taking that a step further, what happens if Geithner orders Bernanke, on the basis of treasury’s constitutional power to create currency to markup the TGA at the Fed by $1 Trillion, so there’s no overdraft, and the Fed says no. Where do we sit then?

    Alternatively, what happens if Bernanke says yes?

    And another alternative, what if Treasury creates a depository at the BEP, has the Bureau create $1 Trillion in currency, and then wires the money so created into the TGA account at the Fed?

    Reply

    Ramanan Reply:

    Yes the Fed can say no by redeeming the coins, as JKH correctly pointed out. So if the Treasury creates a coin, the Fed redeems them and we have a deadlock.

    The operations of the Fed and the Treasury are cooperative.

    The general statement which can be made is that the Treasury and the Fed together restrain from currency creation.

    In An Essay On Principles Of Debt Management 1963, in Fiscal and Debt Management Policies, James Tobin said

    There is no neat way to distinguish monetary policy from debt management, the province of the Federal Reserve from that of the Treasury. Both agencies are engaged in debt management in the broadest sense, and both have powers to influence the whole spectrum of debt.

    beowulf Reply:

    Tsy no authority to overdraft its Fed account, so a $1 trillion overdraft would not be honored. Tsy’s authority to print currency (“United States currency notes”) is limited to $300 million and may not be used as bank reserves. If only Tsy had some way to create money that is the equivalent of cash! :O)
    The core of Crummey’s appeal rests on Crummey’s argument that the legal monetary value of fifty dollars in United States American Eagle gold coin is different than (and worth more than) the legal monetary value of fifty dollars in
    Federal Reserve Notes, or as it is sometimes affectionately called, cash. Regardless of any currency confusion that may have arisen in bygone eras, our present standard is clear: As legal tender, a dollar is a dollar.

    http://webcache.googleusercontent.com/search?q=cache:dcfqZDcS1XgJ:www.ca5.uscourts.gov/opinions/unpub/08/08-20133.0.wpd.pdf

    Ramanan, your definition of “correctly” is rather liberal.
    Will the Mint buy back my old coins?
    No, the United States Mint does not repurchase any issue coins. It will redeem mutilated coins for their scrap metal value and will replace uncurrent coins with new coins of the same denomination
    .
    http://treas.tpaq.treasury.gov/education/faq/coins/sales.shtml
    If the Fed wishes to redeem coins, best case scenario, Tsy will exchange for new coins of the same denomination; worst case scenario, for new coins equal to their scrap metal value.

    Reply

    Ramanan Reply:

    “http://treas.tpaq.treasury.gov/education/faq/coins/sales.shtml”

    “Will the Mint buy back my old coins?”

    Thats a nice thing to know.

    beowulf Reply:

    Of course, even without open market operations, the Fed BOG (but not FOMC) would still have control of short-term interest rates with its authority to set the interest on reserves rate.

    JKH Reply:

    Regarding my liberal tendencies, where’s your source for bulk redemption of CURRENT coins by the Fed or commercial banks?

    I seek authoritative deliberalization as a form of personal redemption here.

    :)

    Ramanan Reply:

    JKH,

    Yes the argument depends on the Fed accepting to play the game. Deliberalization below ?

    “However, no federal law mandates that a person or an organization must accept currency or coins as payment for goods or services not yet provided. For example, a bus line may prohibit payment of fares in pennies or dollar bills.
    Some movie theaters, convenience stores and gas stations as a matter of policy may refuse to accept currency of a large denomination, such as notes above $20, and as long as notice is posted and a transaction giving rise to a debt has not already been completed, these organizations have not violated the legal tender law.”

    http://www.federalreserve.gov/generalinfo/faq/faqcur.htm

    beowulf Reply:

    “Uncurrent” simply means the coins are worn. But I think this covers what you’re looking for
    The official agencies of the Department of the Treasury will continue to exchange lawfully held coins and currencies of the United States, dollar for dollar, for other coins and currencies which may be lawfully acquired and are legal tender for public and private debts.
    http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr;sid=c08b60404211489246ecc1f8d898c830;rgn=div6;view=text;node=31%3A1.2.1.1.5.1;idno=31;cc=ecfr

    WARREN MOSLER Reply:

    and i’m not overly worried about counterfeit $1 trillion coins popping up, or about there not being the right amount of platinum in them, or about them getting lost or stolen…

    JKH Reply:

    But if Bernanke reacts like this:

    http://www.youtube.com/watch?v=kMimygVTgbU

    Ramanan Reply:

    … yep so much less worry that .. as Beowulf puts it, the Treasury Secretary can hand deliver the coin.

  24. LetsGetItDone Says:

    Mario @1/23, 9:54 PM

    Warren’s proposals are: 1) payroll tax holiday for employers and employees; 2) One -time $500 per person revenue sharing grant to the States; and 3) an FJG program @ $8.00 per hour plus fringes including health insurance for everyone in the program. The payroll tax holiday stops when recovery occurs. the State revenue sharing grants are a one-time stimulus to save State jobs. The FJG is structured so as not to compete with the private sector in wages and as the private sector recovers, Government spending declines in proportion to the increase in private sector spending on jobs. So, where’s the inflation if we follow his policies.

    I do agree with a lot of the rest of your comment. But have two reservations. First, I think you’re still in the head of managing Government spending with a concern for deficits and their size. This is not the MMT mind set. It is the deficit hawk/dove mind set; though you, yourself are certainly on the deficit dove side of the continuum. But the MMT outlook is to judge each aspect of fiscal policy by its anticipated consequences. Look out for inflationary policies, sure. Inflation is a bad possible effect of fiscal policy. But there are a whole host of effects possible, and the standard isn’t deficits and how high they are, it is whether or not fiscal policies fulfill public purpose. So we need to find ways to measure public purpose and structure fiscal policy accordingly. Also, MMT is very skeptical about monetary policy, considering it a blunt instrument. The MMT leaders are all advocates of the idea that the natural rate on interest of Tsys is zero, and if you need rates higher than those you pay them on reserves.

    My second concern is about imposing Congressional rules for “discipline.” I think that fiscal rules targeted on debt are a bad thing, because when they exist Congress and the Executive are not focused on whether fiscal policies are fulfilling public purposes but on questions of debt and deficit levels, when these have no necessary connection with appropriate fiscal policies. Congress’s control over the Executive should be exerted through the spending authorization and appropriation processes. That is plenty of control if Congresspeople are willing to take political responsibility for what they favor and what they don’t. The rules about debt ceilings, debt issuance, and no overdrafts at the Fed are, in my view constraints that dilute the currency sovereignty of the United States and raise a possibility of politically induced default that does not need to exist.

    Reply

    WARREN MOSLER Reply:

    not to mention that payroll tax suspension may prove to be permanent as right now the ‘full employment budget’ looks way to restrictive to me, and this may be just the right adjustment

    Reply

    Tom Hickey Reply:

    Joe: “The rules about debt ceilings, debt issuance, and no overdrafts at the Fed are, in my view constraints that dilute the currency sovereignty of the United States and raise a possibility of politically induced default that does not need to exist.”

    Good strategy to frame it in terms of limiting sovereignty. Sovereignty is a very big deal on the right, and they are the ones pushing the rules to limit it in order to advance a political agenda.

    Reply

  25. JKH Says:

    “then why should the Democrats want to remove this weapon against hostage-taking Republicans”

    From a practical perspective, because it will increase bank reserves, and everybody is freaked out about bank reserves, even if they’re wrong about it. To be clear, at one point, you were talking about simply marking up private sector accounts – deficit spending without borrowing or other means. That requires a Treasury overdraft at the Fed. Separately, you’re considering marking up the TGA at the Fed. That’s very different. It avoids borrowing, but also avoids Treasury overdraft. This is perhaps more doable operationally than overdraft. The biggest issue would be whether Bernanke resisted due to slippery slope “money financing” risk (i.e. unlimited reserve expansion). Notwithstanding the reserve effects of QE (which have been targeted as opposed to open ended), he’s been adamant that money financing the deficit is not his main gig. Somewhere, this is a principle line in the sand for him – hence the potential for resistance – a difficult political situation for him. No question I think that Treasury could rule the day if it wanted to, but this could also result in Bernanke’s resignation, simply due to the de facto takeover of the Fed by Treasury.

    Reply

    LetsGetItDone Reply:

    Thanks. If Wall Street becomes really afraid of a default, and the right’s demands are too unreasonable for Obama to accommodate or compromise, why wouldn’t Obama just accept Bernanke’s resignation and move on? Seems to me Wall Street’s comfort is more important to him than continuing on with Bernanke. The right hates Bernanke. If he resigned, Ron Paul would celebrate.

    Reply

    Tom Hickey Reply:

    I think that the trick turns on Ben. He either gets cold feet and refuses, accepting default, or he is brave enough to put his butt on the line and accepts the coin in order to avoid default. Considering that the whole financial industry would be adamantly opposed to default, I think that Ben might be persuaded to pocket the coin if anything like a plausible justification could be mounted.

    Remember, Ben balked on providing liquidity when Hank asked him to, saying that it was really a solvency issue that was properly addressed by fiscal. Somehow, I think that if a redo were possible, he might now choose differently in light of further reflection. Might that influence his thinking about new possibilities?

    Reply

    Ramanan Reply:

    Good point Tom,

    In the situation we are discussing, if TheBenBernank refuses, the blame for default will be on him and he will be sent to prison for 10 years!

    Reply

    LetsGetItDone Reply:

    I agree. I also think that Ben will not turn down the President of the United States the way he did Hank Greenberg. And, in addition, Ben doesn’t want the US economy to collapse again on his watch. It’s not good for his legacy.

    Reply

    JKH Reply:

    Yeah, thinking about it, he already has a more intertwined relationship with Treasury due to the crisis, zero bound, etc. Still, from his perspective, he’d like to receive the same kind of unwind commitment from Treasury for the coin that he’s given to the market for QE exit. It’s catch 22 though, because that kind of commitment contradicts the political rationale for the shut down in the first place. He’s in a box. I guess he’d cave.

    Reply

    JKH Reply:

    meant bond shut down, not gov shut down

    Reply

    LetsGetItDone Reply:

    I think so too. But I also think that he should just observe what happens when the coin works to allow the Government to begin to pay off that national debt. If there’s no inflation, then he an the President can try another $trillion coin and so on. For unknown reasons, Bernanke is really upset about deficits and debts. So, maybe a process like this would be educational for him.

    Reply

  26. Paystub Says:

    Thanks Warren for sharing such an informative post with others. It is a must read…

    Reply

  27. LetsGetItDone Says:

    Ramanaan and others emphasize the Fed’s possible move of asking for redemption of coins Treasury might use for deposits. However, treasury would only be obligated to redeem those coins with other legal tender. So, in the example of a $Trillion coin, it would only have to another such coin available to exchange for the first. At that point the Fed is unlikely to continue to ask for redemption.

    Furthermore, it cannot ask for redemption first. It has to accept the coin, credit the deposit, and then ask for redemption, because you can’t ask for redemption of money you don’t own.

    What concerns me, however, is the claim that the Treasury can’t just instruct the Fed to mark up the TGA. My understanding is that the Executive’s Constitutional Authority to create currency is unlimited. It’s authority to spend that currency is up to Congress. That is, Congress needs to appropriate all spending. I understand Beowulf’s point that printing of US Notes is limited to $300 Million. But I wonder if this is Constitutional, or whether it is something the Executive Branch could challenge? It seems very weird to me that the FRB can create unlimited quantities of money and that the Constitutionally authorized Executive Branch with its mandate to implement Congressional appropriations, and its accountability to the people cannot. Also, didn’t the Treasury have the power to freely create currency before the creation of the Fed? And, if so, doesn’t the Fed legislation say that nothing in it limits the Treasury’s previous powers?

    Also, this raises an entirely different point related to MMT. MMT distinguishes nations sovereign in their own currency, and other nations. That’s well and good. But what about distinguishing among nations that are sovereign in their own currency, according to whether that sovereignty is clearly under control of the Executive Branch of Government or not?

    Clearly, if the Treasury cannot mark up its TGA account at the Fed, then it is not the repository of currency sovereignty, and it must raise money through taxing or borrowing to avoid overdrafts to its TGA account, and to continue to spend, and also, since the Government of the United States operates this way, then it does have a greater solvency risk than other nations whose Central banks and currency creators are squarely within the Executive function.

    Of course, coin seigniorage introduces an exception to the above, which makes it not just a tactic, or a wonky instrument for getting around a bunch of nuts; but, perhaps, the one thing ensuring that currency sovereignty still resides in the Executive Branch of Government, if it proves true that the Treasury cannot just mark up its Fed TGA account.

    To use a term of Rachel Maddow’s, can anyone talk me down from this position? Warren? Anyone else?

    Reply

    JKH Reply:

    Marking up the account alone puts the Fed into a negative capital position, which probably breaks a bunch of rules.

    “Clearly, if the Treasury cannot mark up its TGA account at the Fed, then it is not the repository of currency sovereignty, and it must raise money through taxing or borrowing to avoid overdrafts to its TGA account …”

    The idea of currency sovereignty suggests the potential for the government to subsume central bank independence, at its option. That in turn implies full operational consolidation of Treasury and the Fed, with Treasury spending by crediting bank accounts, without borrowing. In that case, neither the overdraft nor the mark up are issues, because the Treasury account at the Fed effectively disappears on operational consolidation – or at least it becomes an internal record keeping thing rather than an external operational constraint.

    It’s reasonable for MMT to assume such an arrangement as an ever present operational option, and define currency sovereignty on that basis.

    Short of that, the de-consolidated, separate arrangement is subject to the usual “self-imposed constraints” as noted by MMT, with the central bank “independent” from Treasury.

    The coin idea, if successful, does an end run around those self-imposed constraints, without doing the full Monty on Fed independence.

    Reply

    Matt Franko Reply:

    Remember Tom linked to this last week:

    http://www.economicpolicyjournal.com/2011/01/hot-fed-hides-major-accounting-change.html

    “The change essentially allows the Fed to denote losses by the various regional reserve banks that make up the Fed system as a liability to the Treasury rather than a hit to its capital. It would then simply direct future profits from Fed operations toward that liability…

    “Any future losses the Fed may incur will now show up as a negative liability as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible,” said Brian Smedley, a rates strategist at Bank of America-Merrill Lynch and a former New York Fed staffer. ”

    Here they have changed their rules to now allow a negative number on the right side of their balance sheet (but under liabilities, not equity)… so they now have the capability to show a negative number on the right side, could this help position “The Coin”?

    Resp,

    Reply

    strawberry picker Reply:

    WoW! Matt, I just read this in the comments at that link:

    The Fed pays itself a 6 percent dividend for mismanaging the nation’s money supply. “Residual earnings” is what it takes in over and above that 6%; residual earnings are the surplus which the Fed forks over to the Treasury.

    Do they have to pay any taxes on that 6%? My CD rates are nowhere NEAR 6%, why can’t I get in on that action? Also what do the equivalent entities in the china banking system pay themselves? Is it higher or lower than 6%? Thanks for this EYE opener MATT and TOM!

    WARREN MOSLER Reply:

    The fed pays it’s investors (the member banks, and their investment is limited to maybe 3% of their capital) a 6% fixed rate which is taxable.

    don’t know china’s arrangements.

    Tom Hickey Reply:

    Matt, there’s an interesting thread on this initiated by Michael Hudson at gang of 8 here. Randy Wray clears it up.

    Tom Hickey Reply:

    Mish also weighs in on it here.

    Tom Hickey Reply:

    Matt: “Here they have changed their rules to now allow a negative number on the right side of their balance sheet (but under liabilities, not equity)… so they now have the capability to show a negative number on the right side, could this help position “The Coin”?”

    This shows that they are willing to change the rule to get the result they desire. They know the operational reality and will change rules that stand in the way if necessary. Just like the FASB changing the rules to permit mark to fantasy to keep the banks apparently solvent.

    We should know by now that taxes, laws and rules are only for the little people.

    Matt Franko Reply:

    Right Tom, maybe here they could book “The Coin” as a negative liability and then credit the Treasury FR account as a positive liablilty (as normal) to offset it. Resp,

    JKH Reply:

    This accounting change facilitates the absorption of interest margin volatility over longer time periods, given the built in long term trend of positive seigniorage earnings. It effectively recognizes that when dealing with debt securities, accrual accounting dominates marked to market accounting in the long run. It means potential losses and negative equity can be represented instead as an equivalent asset (negative liability) in the form of a contingent commitment by Treasury to provide future capital as necessary. As the Fed reverts to making profit in the future, the need for that contingency is gradually eliminated, and this “asset” is written down. In the long run, future positive accruals will dominate any short term loss, and there will be no need for an actual capital injection.

    Conversely, simply marking up Treasury’s account at the Fed creates negative capital for the Fed at the instigation of Treasury itself – not because of the Fed’s securities portfolio. Given the fact that it is Treasury itself that has created the negative capital position, there is little logic to the expectation that it will be Treasury that will restore the capital position in the future. Marking up the Treasury account alone is the nuclear option. It represents the likely permanent destruction of the debt financed paradigm, as well as of the Fed as a separate institution.

    On the other hand, the coin is a possible way of circumventing debt financing, without impairing Fed capital or impairing the Fed as an institution (although there are risks of that). And the negative liability issue doesn’t come into it because of the coin alone.

    Tom Hickey Reply:

    BTW, under what legal pretext did Lincoln issue the greenbacks to get around exorbitant bank financing during the Civil War, and how did it work operationally? I understand that JFK was contemplating something similar before he was assassinated. (Many conspiracy theorists claim that both were offed by bankers).

    vjk Reply:

    “Negative liability”, huh ?

    Never heard about it except from those making data entry errors in QuickBooks.

    Admittedly, my bookkeeping skills are rusty, so I turned to my trusty copy of Kieso’s book. Nope, not there either, not on any of 1.5K pages.

    Apparently, another of those financial innovation Greenspan used to be so proud of.

    Seriously, if there is a “negative liability” on the feds sheet, there must be a canceling positive liability on the treasury sheet (or a “negative asset” if you will). Presumably, the treasury will have to recapitalize the feds to keep its capital position from becoming negative so that possible feds’ losses are canceled by a money injection from the treasury.

    If so, it means the beginning of the end of the feds financial and political independence.

    But why pretend and not call a spade a spade ?

    Interesting times, what with Ireland printing its own euros and the feds creating “negative liability”.

    Tom Hickey Reply:

    Government is not a business. Non-profit accounting a somewhat different from for-profit, for example.

    LetsGetItDone Reply:

    This is a good way to put it. But I think it glosses over my point, which is that within the category of Governments that are sovereign in their own currency, some Governments place that sovereignty in the hands of the Executive; others divide that sovereignty, forcing a number of entities to come to agreement, creating the possibility of solvency crises and also greater solvency risk.

    Reply

    beowulf Reply:

    Congress has the Power… To coin Money, regulate the Value thereof”, its just they’ve delegated seigniorage power to both the Secretary of Treasury (coin money) and to the Federal Reserve (paper money). Until Tsy figures out how to mint an electronic coin, the platinum coin is one tool the Secretary has right now to avoid the debt ceiling indefinitely, of course Congress always has a backup plan to blow up the world, they can simply refuse to appropriate any money once the current “continuing resolution” expires.

    If Congress wants to get the economy moving without adding a penny to the debt, they should look at the second part of the Constitution’s money clause– ‘regulate the Value therof’. Everyone knows the penny is worthless (less than worthless, costs more than 2 cents to mint each one). Congress could vote to re-value the penny tomorrow.

    There are 200 billion pennies in circulation, so declare its new value to be $5. It’d be like Ben’s helicopter had a large vacuum attachment pulling pennies out from the bottom of fountains, sofa cushions and piggy banks across the country, generating $1 trillion in stimulus without distracting Congress for too long from worrying about the deficit.

    strawberry picker Reply:

    “since the Government of the United States operates this way, then it does have a greater solvency risk than other nations ”

    Everything I buy is made in china already, while all you USA boyz talk about trigazillion dollar coins, why isn’t it prudent for me to go to the chinese bank and get yuan loans? Who here thinks china has less solvency risk than USA?

    Reply

    JKH Reply:

    Yuan loans have no effect on US deficit/debt issues at origin, but may you have interesting negotiations with the Chinese!

    Reply

    LetsGetItDone Reply:

    As long as the Yuan is pegged to the USD, then wnat’s the difference.

    Reply

  28. LetsGetItDone Says:

    One more thing. The discussion we’ve been having generally looks at current ways of doing things as supported by rules that rule out new practices that make it hard for the Executive to counter insolvency. However, I believe that whether the Executive is successful in countering Republican hostage-taking depends more on the attitude and determination of the President than it does on any such rule.

    Imagine that someone like FDR were the President right now, rather than someone who seems to idolize Ronald Reagan and Herbert Hoover. Then wouldn’t that someone, now have had staff working on various counters to the debt ceiling problem.? And wouldn’t that someone be ready to use any expedient, including very vigorous legal action to ensure that no default could possibly take place? And wouldn’t that someone have had Bernanke over for Dinner giving him marching orders about what would have to happen if the Treasury instructed the Fed to mark up its account at the Fed? And that if Bernanke did not agree with whatever scenario that FDR-like President wanted to see, then Bernanke might want to tender his resignation before the coming crisis, so that the President could appoint someone who was willing to cooperate in saving the country?

    My point is that the informal power of the Presidency is enormous, when someone has guts enough to use that power. We saw that with the two Roosevelts and LBJ. Unfortunately we are unlikely to see it with this particular occupant of the White House, whose preference as President seems to be to whine a lot about is having no choice except to do X, or Y, or Z.

    Reply

    Tom Hickey Reply:

    “whose preference as President seems to be to whine a lot about is having no choice except to do X, or Y, or Z.”

    And to bitch about his base.

    The simple fact is that the president is not a Democrat. He ran as a Purple rather than a Blue, and that makes him a man without defining principles. That was evident at his keynote speech at the 2004 Democratic Convention and it’s been his trademark since. Sitting the middle, he can’t go either way. He has no vision for America to communicate, and no direction in which he wants to lead. “Hope and change” don’t cut it when you are in the hot seat. Sad.

    Reply

    Kim Yuu Reply:

    “My point is that the informal power of the Presidency is enormous, when someone has guts enough to use that power.”

    lincoln and jfk had the guts, but they got their brains blown out (and they weren’t the only ones)!!

    even the most naive of presidents nowadays finds out sometime within their 1st year of office how “powerful” they truly are. do you honestly believe that obama doesn’t know by now??

    otherwise, this has been a very enlightening discussion–many thanks to all the participants!

    Reply

    LetsGetItDone Reply:

    Kim, Sorry. I’m not that much of a conspiracy theorist to think that there’s a praetorian Guard in the Secret Service waiting to assassinate Presidents of the US who get out of line. Obama runs things. He’s responsible.

    Reply

  29. LetsGetItDone Says:

    ESM @ 1/25/2011 @3:30 PM

    Sorry ESM, I find your replies much less than compelling. First, your comment on cost differences ignores my point about spending as a percent of GDP. Medicare spending here is too great a percentage of our economy, and the reason why that’s true is that it’s an extractive system that redistributes wealth upward insurance, both to insurance companies and providers.

    Second, it’s not just life expectancy at birth that’s relevant to outcomes, it’s infant mortality also. It’s life expectancy over 65, it’s the quality of Medical care, which when measured by international organizations indicates that the US is way down the list of industrial nations. The point is that insofar as we can measure the quality of health care, rather than just offer talking points or theories about it, the US does very poorly as low as 37th overall in one of the recent studies done by WHO or OECD (forget which)

    Third, I agree with you that we don’t have a free market in either health insurance or health care. But there’s a reason for that. Free markets are inherently unstable because the providers in free markets will always seek to subvert, manipulate, and control them. So, permanently unregulated free markets are an impossibility. To maintain free markets you have to have very vigorous regulation, which arguably makes them unfree. Further, in health insurance and health care we’ve had continuous concentration since the 1940s and perhaps even before that. An attempt now to create a free , market in medical care would mean really radical change in our health care system. Much more radical change than an implementation of Medicare for All. And if we attempted it, there’s no reason to believe that concentration wouldn’t re-occur in a few years.

    Finally, you said:

    “I’m aware of PNHP. They want to make providing private medical care – outside of a national insurance system – illegal. I think that puts them way out on the political fringe”.

    I don’t think labeling pnhp as way out on the political fringe is an argument against what they advocate. Their FAQ provides many facts about health care that are relevant to any serious discussion.

    Also, what’s fringe and what’s not isn’t a matter of labeling, when there’s empirical evidence to the contrary. Kip Sullivan’s analysis of numerous polls over a number of years at pnhp shows that 2/3 of polling respondents prefer Medicare for All to other health care reform preferences. This evidence was masked by the MSM in the recent debate, because the Press followed the President in taking Medicare for All off the table.

    Also, Medicare for All would work much better than our present system, whereas the alternative proposals on hcr, including the public option, are very likely to fail (see Kip Sullivan’s analysis of Jacob Hacker’s strongest PO proposal which was far, far stronger than the very weak PO proposals that came out of the Congress). My point here is that “fringe” can have more than one meaning. One is relative to what people think as measured in polling. By this measure, Medicare for All, isn’t fringe. In addition, “fringe” can refer to proposals that don’t have a chance of solving a problem, in this case the problem of universal health care. In this meaning of the word both the recently passed hcr bill, and all versions of hcr to the right of and including the Hacker’s PO option were “fringe,” proposals destined to fail.

    Reply

    ESM Reply:

    “First, your comment on cost differences ignores my point about spending as a percent of GDP.”

    No, it doesn’t. The $5K price for an MRI is inflated. An additional $5K MRI adds $5K to medical expenditures and $5K to GDP. This increases the fraction of GDP spent on medical care over what it would be if the real price of an MRI (say $800) was used in the calculation instead.

    “Medicare spending here is too great a percentage of our economy, and the reason why that’s true is that it’s an extractive system that redistributes wealth upward insurance, both to insurance companies and providers.”

    Ok, well, here’s where you go off the rails because Medicare is in essence subsidized by the private sector. Monopsony pricing power by the government forces doctors and hospitals to extract more money from the private sector to compensate. And insurance companies are hardly making money hand over fist. It’s not a particularly profitable business in terms of either profit per employee or profit per $ of revenue. Nor are insurance company executives compensated well relative to other industries.

    “… it’s infant mortality also.”

    I could go on at great length about how the infant mortality statistics are skewed. There’s good evidence that the US is the best in the world at medical care for newborns.

    “It’s life expectancy over 65…”

    I thought that life expectancy over 65 in the US was close to the top. Don’t single payer advocates use this as a selling point for expanding Medicare?

    “the US does very poorly as low as 37th overall in one of the recent studies done by WHO or OECD (forget which)”

    Well, not only does WHO use bad statistics, it uses bad metrics. Several of the metrics WHO uses for measuring the quality of a health care system involve the “affordability” and the “equality” of care. Those are metrics obviously chosen to improve the scores of socialized systems versus more market-based systems.

    “I don’t think labeling pnhp as way out on the political fringe is an argument against what they advocate. Their FAQ provides many facts about health care that are relevant to any serious discussion.”

    It wasn’t intended as an argument against what they advocate. It was intended to undermine the credibility of any “facts” that they might marshal in support of what they advocate.

    Their advocacy to outlaw private medical practice is refreshingly frank, and even logical (as PNHP understand that a parallel private system will draw resources from a public system), but it is an extreme position and therefore will not gain any traction with the public unless they make unjustified claims about the efficacy and superiority of a single-payer system.

    Reply

    LetsGetItDone Reply:

    I’m content to leave our exchange where it is now, and let other people evaluate our respective arguments and decide for themselves which makes more sense, except for commenting on this:

    “It wasn’t intended as an argument against what they advocate. It was intended to undermine the credibility of any “facts” that they might marshal in support of what they advocate.”

    The term ad hominem applies to anything they say whether it’s a policy policy position or their statements about the facts. If you disagree with various things they say it’s perfectly valid to provide your counter-narrative. But trying to undermine their credibility by saying they are a fringe group is ad hominem in either instance, and btw, their presentation of the facts during the recent health care debate was far more objective that what we saw from either the insurance companies, the present Administration, or the opposition to reform. All of these sources presented us with nothing but fairy tales.

    Furthermore, “fringe” doesn’t describe them either in terms of popular support or the likely success of their solution. If anything it describes you because you’re among the 34% or so of the population who doesn’t prefer single-payer. So the point is we can call names all day but that doesn’t prove anything and it’s also not persuasive for anyone who has a critical mind set.

    Reply

    ESM Reply:

    Ok, but I deny I made an ad hominem argument. It wasn’t really an argument actually, but a caution to those who might follow your advertised link. It is appropriate to be skeptical of all “facts” that are posted on a website, but particularly so if the group behind the website is advocating a policy that the vast majority of people would currently reject. I gave my reason in the sentence following your excerpt.

    And it is their proposal to outlaw private medical practice that is extreme, not their advocacy of single-payer per se. So in this sense you made a straw man argument.

  30. LetsGetItDone Says:

    WARREN @ January 24th, 9:47 pm. I didn’t. I suggested that Government spending on Medicare for All might replace it. -:)

    Reply

    WARREN MOSLER Reply:

    And thanks for coming on the website!

    Reply

    LetsGetItDone Reply:

    You’re welcome. I’ve really enjoyed it.

    Reply

  31. LetsGetItDone Says:

    Further reply to ESM

    So you’re acknowledging that it’s not single-payer that’s extreme, but rather:

    “their proposal to outlaw private medical practice that is extreme”

    OK. Then just for the sake of information, here’s Kip Sullivan’s analysis of survey showing that 2/3 of Americans support single payer.

    http://www.pnhp.org/sites/default/files/docs/2010/Kip%20Sullivan%20-%20Two%20thirds%20of%20americans%20support%20medicare%20for%20all.pdf

    As for your view that pnhp wants to outlaw private medical practice, I haven’t seen anything like that on the pnhp site. Do you have a link to that. Single-payer systems are socialized insurance systems; not socialized medicine systems. So, people in private practice remain in private practice. Those who are operating on a fee for service will still do so. Certainly this applies to the HR 676 single-payer bill, which pnhp strongly favors.

    So, Kip shows that 2/3 of Americans support Medicare for All and Medicare for All retains private practice in HR 676 and as far as I know in all pnhp proposals.

    Finally, I don’t want to debate the semantics of whether you offered an ad hominem “argument” or not. If it wasn’t an argument, then it was certainly an ad hominem remark that wasn’t directed at the content of any assertion of fact or argument that pnhp was making. It was just: pnhp is an extreme organization so be skeptical of what they say. Now, I believe we should be skeptical about what anyone including me and thee say; but I have never seen any reason to be more skeptical of what pnhp has to say than what any other organization or individual involved in the health care debate has to say.

    Everyone in this debate has a value position. It’s impossible to avoid one. pnhp is quite frank about theirs, and from what I’ve seen the content on their site, both factual and argumentative is a damned sight better than the content one gets from CBO, or other Washington think tanks that have been bought off by one or another component of the oligarchy that runs the US these days. So, I feel quite comfortable in telling people that I think you’re flat out mistaken about pnhp being a fringe group that we should be especially wary of. And that, on the contrary, pnhp deserves the respect of skeptical evaluation of their content as much or more than any other participant in this very political field.

    Reply

    beowulf Reply:

    Right, to analogize to education, public schools are an example of socialized education system. A school voucher system would be an example of single payer education delivery.

    The Veterans Health Administration is an example of socialized medicine and while Veterans seems happy with it, a voucher system that uses existing private medical practices and hospitals would be a better model for healthcare reform (after all only teacher unions are against vouchers). :o)
    I take ESM’s point that the PNHP does argue for the govt buying out by eminent domain all private hospitals. I don’t think that’s necessary and to his credit, when Anthony Weiner offered his Medicare for All bill, he had dropped that component.
    http://www.scribd.com/doc/23949370/f-Pll-Nhi-Floor-Weiner-Olb-xml

    Reply

    ESM Reply:

    Beowulf, I think you’ve made a distinction without a difference. A government paid for system ultimately becomes a government run system.

    Vouchers are actually different because they amount to a cash subsidy that still retains the important free market elements of consumer choice, competition, and aligned incentives.

    Warren’s health care proposal is a modified voucher system, and I think it’s a really good idea.

    Reply

    beowulf Reply:

    I have indeed made a distinction without a difference… between education vouchers and healthcare vouchers. :o)
    As long as we’re talking consumer choice, competition and aligned incentives for healthcare PROVIDERS (vs. insurers), I say right on. As it happens, I like Warren’s plan too, Its quite similar to the Mega proposal HEW Secretary Elliot Richardson proposed (but Nixon rejected) in 1972.

    healthcare section of Mega on pdf p. 23 (the guaranteed job section is p. 88)
    http://www.eric.ed.gov/ERICWebPortal/recordDetail?accno=ED080148
    CBO analysis (1977) of healthcare section on pdf p. 40
    http://www.cbo.gov/doc.cfm?index=9171

    Tom Hickey Reply:

    The difference always has to come to rationing scarce resources. Markets is one way, vouchers/market is another, public option is another, single payer is another, nationalization is another.

    The question is what the advantages and disadvantages of the different types of rationing are. Anyone have a table?

    ESM Reply:

    From their FAQ:

    Why shouldn’t we let people buy better health care if they can afford it?

    Whenever we allow the wealthy to buy better care or jump the queue, health care for the rest of us suffers. If the wealthy are forced to rely on the same health system as the poor, they will use their political power to assure that the health system is well funded. Conversely, programs for the poor become poor programs. For instance, because Medicaid doesn’t serve the wealthy, the payment rates are low and many physicians refuse to see Medicaid patients. Calls to improve Medicaid fall on deaf ears because the beneficiaries are not considered politically important. Moreover, when the wealthy jump the queue, it results in longer waits for others. Studies in New Zealand and Canada show that the growth of private care in parallel to the public system results in lengthening waits. Additionally, allowing the development of a parallel, private system for the wealthy means the creation of a permanent lobby for underfunding public care. Such underfunding increases the demand for private care.

    Reply

    Tom Hickey Reply:

    Pretty much the same for education. The strength f the US system of public education lies in its being, well, public, and it works moderately well in comparison with third world. Of course, the US elite are still privately educated for the most part. In fact, that is largely what people like Palin are talking about when they use the term “elite.”

    Reply

    LetsGetItDone Reply:

    Right. But there would still be private practice. HR 676 provides a package of essential health care. It’s pretty comprehensive, but it doesn’t cover all Medical procedures. So, even if Physicians had, by law, to serve people who had Medicare for All at the public system rates of compensation, there would still other Medical services not provided under Medicare for All that would be provided by Doctors and private institutional providers.

    As far as the easy assumption you make that a Government paid for system becomes “a Government-run” system, that’s just a vague industry talking point. The Doctors in Canada and Australia and France still work for themselves or private institutions, and don’t work for the Government. Nor is there any reason to believe that Government influence over their practices would be any greater than insurance company influence is today.

    Doctors are not happy with the private insurance companies, and polling indicates that a majority of them favor single-payer.

    Warren’s proposal provides people over 18 with a $5,000 annual bank account, they can use for health care. They pocket what they don’t use. If they need to spend more than $5,000 they would have “a form of Medicare.” People could also still buy private insurance. I think this proposal has merit, and would like to see it evaluated in detail against HR 676. I don’t think Warren’s done that evaluation, so until that happens I’d stick with something I know will work, because similar programs have worked well elsewhere.

    Reply

    WARREN MOSLER Reply:

    Haven’t done it yet. Waiting for a govt. grant to pay for it…

    Mario Reply:

    I sure like Warren’s idea and would LOVE to see the research on it. I hope you get the grant Warren!!! Good luck with that and keep on thinking!!! :)

  32. Mario Says:

    LetsGetItDone @ 1/24, 1:48 am

    thanks for responding LGID…sorry I didn’t realize you responded until now!! haha!!

    I really think we are on the same page mostly too to be sure. When you talk about implementing Warren’s plan you state:

    “as the private sector recovers, Government spending declines in proportion to the increase in private sector spending on jobs. So, where’s the inflation if we follow his policies.”

    This is exactly what I’m saying too! As the private sector recovers (aka the output gap is closed) THEN we need to back off on government spending a bit…nothing crazy just a bit of the excess that we implemented earlier when there was more of a gap. We completely agree here as far as I can see it. If we did NOT slow down government spending as the private sector recovers then yes we would have inflation in the aggregate by definition. That’s what I’ve been saying all along. My next question to you is, “If we don’t have a debt ceiling, or at least a regular congressional discussion of government spending, then HOW WILL GOVERNMENT SPENDING EVER DECLINE?” The answer is it will not. It’s insane to suggest no debt ceiling, or again at least no congressional discussion of government spending…stop calling it debt ceiling as that term is not accurate at all that’s fine with me but you get the idea of what I’m saying. I really like your points about sovereignty and agree with that as well as the division of power between executive and legislative to fit our new economic model (new as of Nixon that is) which our constitution doesn’t exact account for. Great points indeed!

    I am not a deficit hawk/dove…I agree with you and understand that government spending and fiscal policy is all about how it effects the public and that’s what we need to watch (aka inflation/deflation, etc.) and so really we are on the exact same page as far as I can see!! Thanks again for sharing.

    One thing I am still a little confused on is why MMT feels monetary policy is a blunt instrument. I guess well, b/c it is not directly related to the public and is also not a guarantee of anything in relation to banks’ interest rates (as we see now with such a floored FFR). Good points to be sure, but also Warren admits in his book that without interest rates on currency bankers would just take out loans ad nauseum with no problem at all and cause huge inflation. Interest rates and managing them are necessary in my view, but yes I do agree that manipulating taxes and government spending is definitely a more effective means to curb inflation/deflation in the aggregate. :)

    Also I do not understand what you mean when you state:

    “The MMT leaders are all advocates of the idea that the natural rate on interest of Tsys is zero, and if you need rates higher than those you pay them on reserves.”

    can you or someone please explain this in an example or something for me? I don’t know if you are talking about banks buying T bonds at auction/open market (aka free money when the FFR is lower than bond rates) or what.

    Thanks again and be well!!

    Reply

    WARREN MOSLER Reply:

    i don’t recall that in my book? please direct me to that part, thanks!

    Reply

    Mario Reply:

    Hey Warren,

    I assume you are referring to my comment on monetary policy and banks taking loans out ad nauseum. I could be reading it wrong but on 113 of the pdf version I downloaded, you state this:

    “Bottom line, the currency itself is a public monopoly, which
    means the price level is necessarily a function of prices paid by the government when it spends, and/or collateral demanded when it lends. The last part means that if the Fed simply lent without limit and without demanding collateral we would all borrow like crazy and drive prices to the moon. Hence, bank assets need to be regulated because otherwise, with FDIC-insured deposits, bankers could and probably would borrow like crazy to pay themselves unlimited salaries at taxpayer expense. And that’s pretty much what happened in the S & L crisis of the 1980’s, which also helped drive the Reagan boom until it was discovered. Much like the sub prime boom drove the Bush expansion until it was discovered. So it now goes without saying that bank assets and capital ratios need to be regulated.”

    Upon a more careful reading, I see you are talking about banks giving loans out to the public without discretion and that process needs to be regulated.

    However doesn’t the Fed also charge interest on the money given to the banks just like the Fed does with the Treasury (except the Fed doesn’t pay back the banks that interest money like they do with the Treasury)? In this way it forces banks to “grow” that money in some way and also helps to set retail interest rates as well no? Otherwise couldn’t banks just take out loans from the Fed and get free money that way too without having to pay back anymore than they received. It would create the easiest carry trade no? Or am I just all wrong here?

    sorry for misquoting you and thank you for correcting me!!!

    Reply

    WARREN MOSLER Reply:

    “The last part means that if the Fed simply lent without limit and without demanding collateral we would all borrow like crazy and drive prices to the moon.”

    The key part is the ‘without limit and without demanding collateral” meaning totally unsecured etc.

    the rate the fed charges the banks becomes the minimum lending rate in the economy and banks charge a spread over that rate.

    so, for example, if bank’s cost of funds is 0, they might lend at 3%. If their cost of funds is 2%, they might lend at 5%.

    what matters for banks is the spread, not the absolute rate

  33. Mario Says:

    yup I see what you mean…in this way then banks really do participate in the easiest carry trade around…lending money…of course that isn’t always the easiest thing to do I guess when you have shaky borrowers to lend to…however things always do seem to work out in the end for the banks eh. Kind of weird I guess but oh well.

    So does MMT say that Fed interest rates as monetary policy are essentially unnecessary then since they are so “blunt”? And I suppose proper manipulation of taxes and government spending would suffice as monetary policy according to MMT?

    Reply

    WARREN MOSLER Reply:

    note that mmt doesn’t actually ‘say’ anything about which policy option to select. It just helps you recognize what the options actually are.

    and banks compete with each other driving margins down. and lots of them fold every year, or get ‘reorganized’ which is much the same thing.

    mmt recognizes changing rates shifts income between ‘savers’ and ‘borrowers’, changes asset pricing, and changes the amount of interest the govt pays us.

    and mmt recognizes that for a given size govt there is a level of taxation that corresponds to full employment

    Reply

    Mario Reply:

    I like all of what you say. I can really work with that. And good point on many banks folding year over year.

    Thank you Warren. you rock. MMT rocks. :D

    Reply

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