Monday, July 18, 2011

Coin Seignorage Breaks into Mainstream



The Importance of Coin Seigniorage to the President

I’ll end this post by showing how important it is through an examination of our present situation with respect to the debt ceiling and the potential obligation of the President to use coin seigniorage to cope with it.

1. Congress has appropriated Federal spending for FY 2011 which the Executive is mandated to spend.

2. These appropriations exceed the tax revenue the Government is collecting. This was expected at the time the appropriations were passed. So Congress appropriated deficit spending.

3. Congress has mandated that whenever the Government plans to deficit spend, it must first issue and sell debt instruments in an amount a least equal to the planned deficit spending. In this connection, the Treasury is prohibited from having an overdraft in its TGA at the Federal Reserve Bank.

4. Congress has mandated a debt limit such that the Administration must stop issuing debt when that limit is reached. (The limit was reached in early May). Given the Congressional requirement that deficit spending must be accompanied by debt issuance, the debt limit, in the absence of other countervailing factors puts a stop to deficit spending, until the limit is increased. There is a very important countervailing factor. But it is not recognized or used. So, for the moment, at least, the debt limit has stopped any further deficit spending.

5. The 14th Amendment, section 4, requires that the validity of the “debts” (broadly construed) of the United States never be questioned,and since the President has sworn an oath to uphold the Constitution, he is obligated to do all he can to see to it that these “debts” are paid. In fact, he’s obligated to see to it that these debts aren’t even “questioned.” His suggestion that Social Security and other key payments won’t be made on August 3, isn’t living up to his obligations. Of course, he’s not alone in this, since many law makers have been warning about the likelihood of a default for many months now.

6. If used routinely to close the revenue gap, such coin seigniorage would eventually reduce the national debt to zero, and remove it as an issue in US politics. In addition, the existence of platinum coin seigniorage as an option, removes the tension between the mandated debt ceiling and the 14th Amendment. It is the countervailing factor I mentioned earlier, because it provides a way to spend Congressional appropriations without issuing further debt.

7. The President has sworn to uphold both the Constitution, which prohibits a default, and also the laws of the United States including the mandates just mentioned.

8. These mandates, along with the platinum proof coin seigniorage authority, make using seigniorage, or another option like it that allows the Treasury to create revenue without either taxing or borrowing, the only viable options to: continue spending appropriations without violating the debt limit; fulfill all the other mandates, both legal and constitutional; and still be able to spend the money Congress has appropriated.

9. So, if no action by Congress raising the debt limit is forthcoming, it will be the President’s sworn DUTY AND OBLIGATION to either use platinum coin seigniorage, or some other revenue creating tool legislated by Congress in past years, to make the money necessary to avoid default, since his failure to use an available way of creating revenue for continuing to spend appropriations, which he is mandated to do, would be a violation of his oath of office.

So, coin seigniorage isn’t some crazy idea. Instead, it is a legal instrument that the President may, depending on how things work out,have to use in a bit more than two weeks to comply with his oath of office. It may be the only way for him to avoid breaching one of the laws which he is supposed to enforce. As such, it has to be taken seriously, and treated with more than just a few dismissive conclusions, accompanied by a lack of explanation.
Many writers on the current debt ceiling crisis have been taking the view that the 14th Amendment constitutional challenge route is the best thing for the President to do if there is no agreement on the debt ceiling. In e-mail communication yesterday, beowulf offered the following opinion on why this will not work, given the existence of coin seigniorage.

. . . No federal judge — Supreme Court justices included — will take the extraordinary step of enjoining an Act of Congress if the President who asks them to had an opportunity to sidestep the constitutional issue lawfully but neglected to do so. . . . .

. . . The moral of the story is if the Court thinks there is no alternative to breaching the debt ceiling, it probably would find it unconstitutional (or rather, it would decline to hear the case on Standing grounds, leaving the President’s decision to ignore the debt ceiling in place). On the other hand, if the Court thinks the President had a lawful alternative– like coin seigniorage– but neglected to use it, they’re not going to bail him out.

This argument is compelling to me given the history of the Court. The Court defers to the legislature if it possibly can, and prefers the President to avoid constitutional challenges if he has a means of doing so. In this case, he does, and the means is platinum coin seigniorage.

15 comments:

Anonymous said...

Any MMT comments on Ray Dalio's predictions?
http://www.zerohedge.com/article/head-worlds-biggest-hedge-fund-sees-economic-collapse-due-money-printing-early-2013

Letsgetitdone said...

Thanks, Tom. Gald you're covering it here. It's a great blog to be at.

Tom Hickey said...

It is a job well done, Joe. You have been at it for some time, and now this is getting traction thanks to you and beowulf, especially.

Tom Hickey said...

Agree with Dalio about the EZ and with Rosenberg about a general slowdown coming to a planet here, but I think that Ed Harrison (link) is more correct about the US than Ray Dalio. I don't see inflation on the horizon. Ray apparently thinks that QE is inflationary and that there will be a QE3. I see the US problem as fiscal, affecting effective demand and sectoral balances, and think that it is far more likely that there will be a depression than high inflation. But he is the billionaire. We'll see.

A lot of people are looking at the rising price of gold and thinking that gold is money, so the USD is depreciating rapidly, and currency depreciation is the same as domestic inflation in result. I think that this is mistaken. But politics and markets move based on perception, not reality. However, any disconnect from reality ends badly. I like MMT because it describes operational reality.

David said...

Do any of you really think that the
SCOTUS is cognizant of the coinage option? I tend to think the court would view 14th Amendment as the only option and they always side with big money. Big money wants the ceiling raised. I'm sure they would try to thread the needle, though, so as to make sure the sadistic cuts are included somehow as well.

Letsgetitdone said...

Anonymous, there's no theory behind this silly forecast. It's also full of a conflict of interest. What happens to his business if the major nations sovereign in their own currencies decide to "print" money while not issuing debt? Simple, he won't be bale to buy any more debt. His market will dry up. So, what would you expect him to say? That "printing money" with no debt is just fine with him?

In the coin seigniorage post I've discussed inflation issues. In addition here's a recent post on printing money:

http://www.dailykos.com/story/2011/06/15/985379/-The-%E2%80%9CPrinting-Money%E2%80%9D-Thing?via=history

Anonymous said...

Letsgetitdone, to simply dismiss this with "no theory behind this silly forecast" seems a bit arrogant to me given Dalio's record. The man is extremely introspective, thinks everything through from multiple angles and has an incredible track record and saw (and profited from) the 2008 meltdown. As Tom points out, he's the billionaire, not you.

True, he could be talking his book or perhaps even disguising his book, but only because this was from Dalio and not some obscure source did I post it.

Anonymous said...

Letsgetitdone. I did take the time to read your Daily Kos post. I find most of your reasoning somewhat weak. You seem to rest your case partially on the fact that money printing is different from crediting bank accounts. As far as I can tell, the difference is basically moot. Whether the government hands me $50,000 in currency or marks up my checking account by $50,000 has the same result. There is zero difference for me and the economy.

You may be correct that doing this may not be inflationary, but the first two points in your article don't contribute toward this conclusion IMHO.

wh10 said...

Yglesias gives in: http://thinkprogress.org/yglesias/2011/07/19/272465/breakfast-links-july-19-2011/

Good on him, and congrats again to the coin seignorage masterminds :).

Adam said...

Dalio believes that some heavily indebted countries, including the United States, will eventually opt for printing money as a way to deal with their debts, which will lead to a collapse in their currency and in their bond markets. “There hasn’t been a case in history where they haven’t eventually printed money and devalued their currency,” he said. Other developed countries, particularly those tied to the euro and thus to the European Central Bank, don’t have the option of printing money and are destined to undergo “classic depressions,” Dalio said. The recent deal to avoid an immediate debt default by Greece didn’t alter his pessimistic view. “People concentrate on the particular thing of the moment, and they forget the larger underlying forces,” he said. “That’s what got us into the debt crisis. It’s just today, today.”

Read more http://www.newyorker.com/reporting/2011/07/25/110725fa_fact_cassidy?printable=true&currentPage=all#ixzz1SZGYPoj2

Dalio also said for those countries that can't print money they will have a "classical depression."

Clonal said...

Anonymous,

Much of the confused thinking that occurs with many of the "pundits" is that they do not understand the workings of a "Fiat" currency system, and confuse it with a commodity (generally gold and/or silver. I have seen some proposals to use energy) backed system.

There were no pure fiat currencies till 1971 for over 600 years. Before that, were the British "tally sticks" that functioned for almost a thousand years, sometimes in parallel with commodity currencies.

MMT is an extremely clear exposition as to how a "fiat" currency works, and the policy implications of that operational reality. If one confuses "fiat" currency with "gold backed" currency, one quickly runs into trouble when predicting economic outcomes.

Crake said...

From this “1. Congress has appropriated Federal spending for FY 2011 which the Executive is mandated to spend.” I wonder if the ultimate goal of all this ruckus is to trap the President into an impeachment scenario.
For example, if the debt ceiling is not raised and no alternative is entertained, then doesn’t the President have to break one of two laws? Either ignore the debt ceiling law or not spend all that he is mandated to spend (which would also be breaking the law?)

Is this the ultimate goal the Republicans are seeking? I know the Senate would likely not put forth sentence even if this happened and the House impeached President Obama. So the goal would be just to tarnish the President with the impeachment headline.

Thoughts?

Tom Hickey said...

"Whether the government hands me $50,000 in currency or marks up my checking account by $50,000 has the same result."

Only the Treasury can just mark up you deposit account as a direct transfer, e.g., if there were a national lottery and you were a winner. They your net assets increase.. For the Fed to do it, you have to exchange tsys in the same value and your net assets remain the same, less the interest you would have received if you had kept the bond.

This is the difference between Treasury injection and the Fed "printing money."

Letsgetitdone said...

Anonymous,

This:

"to simply dismiss this with "no theory behind this silly forecast" seems a bit arrogant to me given Dalio's record. The man is extremely introspective, thinks everything through from multiple angles and has an incredible track record and saw (and profited from) the 2008 meltdown. As Tom points out, he's the billionaire, not you."

doesn't answer this:


". . . there's no theory behind this silly forecast. It's also full of a conflict of interest. What happens to his business if the major nations sovereign in their own currencies decide to "print" money while not issuing debt? Simple, he won't be bale to buy any more debt. His market will dry up. So, what would you expect him to say? That "printing money" with no debt is just fine with him?"

And to boot, I apologize that I'm not a billionaire. That certainly means I make more mistakes in my forecasts about the future than Dalio. Please grow up! The argument that "if you're so good why ain't you rich" went out in the stone age, and is particularly bad here, since many people who are much richer than Dalio had no inkling of the crash of 2008, and others who did forecast it and who were right are both richer than Dalio and much poorer than he is.

Letsgetitdone said...

Anonymous, I think your reply to my DailyKos post is a real distortion. First I object to the term "printing money" because it is an instance of pejorative dating from gold standard days which refers to the contrast between money backed by gold and money that is "just printed" with no backing. Today, all money in the US is fiat money. So this nonsense distinction doesn't apply.

The objection currently is not really about the idea that the money is "printed." It's about the idea that creating new money in the private sector through deficit spending is thought to be inflationary.

So, the issue is whether there would be inflation or not and to refer to "printing money" is not an argument, but a label that assumes the conclusion of the argument at issue, which is whether or not the addition of the new "printed" money to the old "printed" money will be inflationary.

As you say, I may be right about deficit spending by marking up accounts not being inflationary. But, if that's true then why use the term "money printing" to describe efforts to end unemployment through deficit spending unaccompanied by debt?