Platinum Coin Seigniorage, Issuing Debt, Keystroking Deficit Spending, and Inflation

By Joe Firestone

The most frequent objections to proposals that we use Platinum Coin Seigniorage (PCS) to create reserves for debt repayment and deficit spending, frequently come back to inflation. Perhaps people can’t get over the association they learned in high school Social Studies, or perhaps in American History, or Economics 101, that when Governments create money and then just spend it without any compensating deflationary action, inflation or hyperinflation happens. Maybe they can’t forget those cartoons about people in Weimar Republic days pushing wheelbarrows full of money to the market to buy some bread. So, I’ve been promising for about a week now, to blog about the likely expected relationship between the different PCS options and inflation using the framework laid out by Scott Fullwiler!

Types of Spending, Methods of Filling the Public Purse and Inflation/Deflation

That framework is reflected in the first column of the table where all but the top row names the categories in Scott’s framework. The table also expands the framework a bit, however. Scott’s post compares using PCS to using debt instruments to add reserves to the Treasury General Account (TGA), the Treasury’s spending account, to make the case that PCS, in, and of itself, won’t add to inflation. I want to expand the perspective a bit by adding a comparison of both these alternatives with the alternative of allowing Treasury to close any gap between the tax credits it receives and the spending appropriated by Congress by creating in its own reserves in the TGA, either directly, or by sending an instruction to the Fed to credit the TGA with the particular amount of reserves necessary to do the deficit spending. So, here’s the table.

Table – Likely Inflationary or Deflationary Impact of Debt Repayment and Government Deficit Spending By Type of Method Used To Credit the Treasury’s Spending Account

Inflationary Impact of Spending

The conclusions in this table are based on very few ideas:

 1. There’s no way reserves paid by the Treasury to redeem old debt can be inflationary unless it is spent into the economy, because there’s no channel for causal impact at all.

2. So, debt repaid to other Government agencies and to the Federal Reserve Banks cannot be inflationary beyond inflation tendencies already built into the regularly scheduled spending into the economy of the agencies involved.

At the end of the 2012 fiscal year the total of Federal Reserve and Federal Agency held debt including Trust Funds was $6.4 Trillion (p. 51). So immediate redemption of that debt would reduce the debt subject to the limit by just under 40%.

3. Debt instruments in the private sector are a form of financial asset that is more inflationary than reserves in checking or savings accounts.

The classical Quantity Theory of Money (QTM) says that increasing the amount of money in circulation is inflationary. But, much empirical evidence shows that this is wrong, and that the expansionary factor in modern economies is increasing Net Financial Assets leading to increased demand beyond the productive capacity of the economy to absorb. NFAs can include income in the form money; but when money is exchanged for an asset of equal value as happens when a security is redeemed, then that’s not inflationary, and may even be deflationary because of the ending of interest payments and securities leveraging that follows if no compensating debt issuance happens.

Here’s Scott Fullwiler’s reasoning on why this is so:

As I previously explained, this is the operational equivalent of quantitative easing (QE). The purchase of Treasury securities by the Treasury would retire the securities and leave banks holding reserve balances. But, as I explained in the previous post, “Banks can’t ‘do’ anything with all the extra reserve balances. Loans create deposits—reserve balances don’t finance lending or add any ‘fuel’ to the economy. Banks don’t lend reserve balances except in the federal funds market, and in that case the Fed always provides sufficient quantities to keep the federal funds rate at its target—that’s what it means to set an interest rate target.

And on the subject of the deposits created by the debt redemptions he goes on to quote his previous post on QE3: linked just above:

“First, sellers of bonds were always able to sell their securities for deposits with or without the Treasury’s intervention given that there are around 20 dealers posting bids at all times.  Anyone holding a Treasury Security and desiring to sell it in order to spend more out of current income can do so easily; holders of Treasury Securities are never constrained in spending by the fact that they hold the security instead of a deposit. Further, dealers finance purchases of securities from both the private sector and the Treasury by borrowing in the repo market—that is, via credit creation using securities as collateral. This means there is no ‘taking money from one person to give it to another’ zero sum game when bonds are issued (banks can similarly purchase securities by taking an overdraft in reserve accounts and clearing it at the end of the day in the federal funds market), as what in fact happens is that the existence of the security actually enables more credit creation and is known to regularly facilitate credit creation in money markets that are a multiple of face value. Removing the security from circulation eliminates the ability for it to be leveraged many times over in money markets.

“Second, the seller of the security now holding a deposit is earning less interest and can convert the deposit to an interest earning balance. Just as one holding a Treasury can easily sell, one holding a deposit can easily find interest earning alternatives. Some make the argument that the security can decline in value and so this is not the same as holding a deposit, but this unwittingly supports my point that holders of deposits aren’t necessarily doing so to spend. Deposits don’t spend themselves, after all.

“Third, these operations by the Treasury create no new net financial assets for the non-government sector (and can in fact reduce its net saving by reducing interest paid on the national debt as bonds are replaced by reserve balances earning 0.25%).  Any increase in aggregate spending would thereby require the private sector to spend more out of existing income, or to dis-save, as opposed to doing additional spending out of additional income. The commonly held view that ‘more money’ necessarily creates spending confuses ‘more money’ with ‘more income.’ QE—whether ‘Fed style’ or ‘Treasury style’—creates the former via an asset swap; on the other hand, a true helicopter drop would create the latter as it raises the net financial assets of the private sector. Again, ‘money’ doesn’t spend itself. . . .

4. Demand-pull inflation cannot be caused by Government deficit spending, unless Congress appropriates and the Treasury spends, past the point of full employment. Whether inflation or hyperinflation happens generally has nothing to do with the method used to add electronic reserves to the TGA; but as one approaches full employment Federal interest payments and private leveraging of Federal securities resulting from debt instruments are more likely to initiate inflation than using either of the other two methods.

5. Using PCS to fill the TGA with reserves is very similar to the third method of giving the Treasury the authority to mandate the Fed to add reserves to the TGA upon instruction from the Treasury. In fact, functionally, depositing a high value platinum coin into the US Mint’s Public Enterprise Fund Account, and then “sweeping” the seigniorage into the TGA is virtually equivalent to instructing the Fed to add reserves to the TGA. The “big coins” are just a different form of message than a Treasury instruction would be. But the functional financial content of the different kinds of messages is virtually the same. They both mandate the Fed to create the amount reserves specified in the message.

At Bottom A Political Choice

Some readers may look at this argument and agree with everything I’ve said and still prefer to deficit spend only after issuing and selling debt, rather than using either PCS or direct Treasury instructions. They might argue that even if it is true that the other methods are less inflationary, the method of debt issuance 1) is not so inflationary as to create a problem and 2) creates a political climate among the public and in Congress, that restricts government deficit spending, and keeps it sufficiently in check, that we almost always have a good deal less than full employment, and therefore never risk serious demand-pull inflation. And that’s just the way they like it!

That, of course, is a political choice, and the people who make it, knowing that the Administration can use PCS to fill the public purse now, and also that Congress can authorize the third method of direct Treasury instruction if it wants to, are saying that they choose inflation control through using a method that fools most Americans into thinking that we are running out of nominal financial resources, even at the expense of having 28.5 million Americans who want full-time jobs not being able to get them, and even at the expense of having more than 50,000 fatalities per year due to lack of health insurance, and even at the expense of blighted futures for a generation of American young people, and the prospect of increasing poverty for many old people, and even at the expense of : and on and on.

Then I have an answer for them. And I’ll begin by quoting Bruce Springsteen and Randy Wray.

We take care of our own
We take care of our own
Wherever this flag’s flown
We take care of our own

That’s Springsteen; and here’s Wray:

. . . We don’t let old folks sleep on the street. We take care of our own. We don’t let children go hungry. We take care of our own. We don’t exclude the 47%. We take care of our own.

We’re all stakeholders in this great nation. We take care of our own. White, black, brown, yellow and red, we take care of our own. Young or old, healthy or sick, we take care of our own. . . .

We need a good government to help us take care of our own. We need good public services and infrastructure to keep our country strong so that we can take care of our own. Our government spends to keep our country strong so that we can take care of our own. . . .

Sovereign government cannot be forced into involuntary insolvency. It can always afford to make all payments as they come due. It can always afford to buy anything that is for sale for its own currency. It can always financially afford any spending that is in the public interest. It can always afford to take care of its own.

Anything that is technologically feasible is financially affordable for the sovereign issuer of the currency. It comes down to technology, resources, and political will. We’ve got the technology to take care of our own. We’ve got the resources to take care of our own. All that is missing is the political will.

And then I’d go on to say this.

Your method of filling the public purse through selling debt to accumulate credits in the TGA, may provide an extra hedge against inflation by fooling people into thinking we are running out of money and that unemployment and austerity are just the price we have to pay for insuring ourselves against inflation, but that method is anathema to me because it creates a political barrier to taking care of own, and undermines our political will to take care of our own and one another.

The 28.5 million who want full-time jobs at a living wage are our own, as much as you. And they have a right to a Federal Government that will use its full power to see to it that they have full time job offers at a living wage that they can be proud of. And that, in the final analysis is why PCS, and direct Treasury instruction of the Fed, are better methods of filling the public purse than your method of using debt instruments.

The method of direct Treasury instruction of the Fed, isn’t open to us without legislation. But PCS is available now to fill the public purse. We ought to fill it, the TGA, using PCS, with $60 T in electronic credits immediately, so no one can be fooled again by people saying that we can’t afford something for sale in our own currency.

We don’t need to have any public debt subject to the limit if we don’t want it. And we always can have enough money in the public purse to afford to take care of our own, if Congress will only represent most Americans and legislate the necessary programs, while appropriating the necessary funds to open the purse strings of that full purse the Treasury will have! At bottom, it’s a political choice; and, if we want to be real Americans, then we must choose to take care of our own!

17 Responses to Platinum Coin Seigniorage, Issuing Debt, Keystroking Deficit Spending, and Inflation

  1. Great post I realize his point, that the legal and economic barriers to doing this are not great, but the psychological and political barriers, particularly for two people as wedded to economic and financial orthodoxy as Barack Obama and Timothy Geithner does make the possibility that this strategy would be implemented to be vanishingly small.

    • That’s true. I’ve been trying to increase the likelihood that the President will use PCS by spreading the idea very vigorously. I’ve had some help; but I need a lot more.

    • It’s not just that he is wedded to orthodoxy. Bold and decisive are not personal characteristics of the man. It’s more likely the moon will explode tomorrow than that President Obama would do anything this daring.

    • Here is a modest proposal to help overcome the political and psychological barriers. Start by having the mint strike say 1000 $1,000,000 platinum coins. Make them available to the public (collectors) as well as deposit them in the Fed. I’ll bet there are at least some people who will buy them, after all the original rules of basketball, typed on two yellowing sheets of paper, sold for over $4,000,000.
      When the next debt ceiling crisis occurs early in 2013, have the mint strike 1000 billion dollar platinum coins. Just announce that we need larger denominations of the same coin already (technically) in circulation to avert the debt ceiling crises.
      When it becomes clear that the sky has not fallen in, inflation is not rampant, and the government can indeed issue fiat money in any denomination to finance its activities, then strike (say 100 trillion dollar coins).

  2. I wonder how wedded to orthodoxy Obama is. He is not an economist, banker or businessman. He has simply surrounded himself with Wall Street bankers and advisers who are wedded to orthodoxy. If someone with MMT understanding could replace Geithner and capture Obama’s imagination and enthusiasm ( admittedly a big if), I think the results would be astounding.

  3. Weimar inflation was not just because of money printing. They owed their debts in foreign currency, so printed but then had to go in FX markets to sell their currency to convert to foreign ones – driving the value of their currency down. Then you had the occupation of the Ruhr, which I believe destroyed production capacity in Germany making their problems worse.

    http://www.theatlantic.com/business/archive/2012/03/the-hyperinflation-hype-why-the-us-can-never-be-weimar/254715/

  4. Ask the mainstream economists if they are so afraid that banks will lend too much and cause inflation why are they not supporting statutory lending limits to the banks?

    This sort of ‘credit rationing’ would get rid of that problem and maybe would be a good thing given our experience of excessive private lending.

    Yes, it’s a solution to an imaginery problem. Still, it would take away fears of inflation and give us confidence in governments ability to spend.

  5. If the purpose of this sort of financing is to allow for government spending to benefit “our own”, why not create millions of $60T coins and issue them directly to the population? Cut out the middle-man, and get the cash directly into the hands of the consumer.

  6. Harry Bergeron

    Perhaps the magic coin doesn’t spend itself, but please splain how “money doesn’t spend itself”, yet it enables the unstoppable juggernaught of $11B per day in govt spending. That “money’ does indeed spend itself in a very real sense, like it or not. How is that not inflationary, since it goes directly into the economy at large?

    Then splain how robbing Peter and his descendants is “taking care of our own”. In fact it is screwing our more proficient producers to buy the votes of our least proficient producers.

    • Harry, I think you mean “explain,” unless you are trying out for “I Love Lucy” reruns.

      The platinum coin does not enter the economy. It will be deposited at the Federal Reserve Bank. So it cannot cause inflation. It merely is an accounting offset to the so-called federal “debt,” which in reality is nothing more than the total of deposits in T-security accounts at the Federal Reserve Bank.

      See the offset? T-security accounts at the FRB and coin at the FRB.

      The coin enables the government the government to pay for its PAST Congressionally mandated spending, but has noting to do with FUTURE spending. Essentially it asks the government not to pay the bills it already has.

      Imagine you have a credit card, and AFTER you have charged $1,000 on it, you decide your spending limit is $500. That is how the debt ceiling works. It is an incredibly ignorant, after-the-fact way to screw creditors and reduce the value of the dollar to $0.

      In short, the debt ceiling has the potential to cause the most massive inflation you ever saw. The coin does not.

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  8. Joe,

    I hope it is not too late to comment on this very interesting post of yours. You write: “The classical Quantity Theory of Money (QTM) says that increasing the amount of money in circulation is inflationary. But, much empirical evidence shows that this is wrong, and that the expansionary factor in modern economies is increasing Net Financial Assets leading to increased demand beyond the productive capacity of the economy to absorb. NFAs can include income in the form money; but when money is exchanged for an asset of equal value as happens when a security is redeemed, then that’s not inflationary…”

    When the Government redeems one of its own securities with new reserves, it is creating a form of money for a second time. Taking a few steps back, when the Government needed to fund the original deficit-expenditure, it did so by selling securities to the Primary Dealers (PDs). Those PDs created deposits for the Treasury (loans create deposits) and it was that “Bank Deposit Money” that was transferred to the TGA at the Fed and eventually spent. Separately, the Treasury securities could stay on the books of the private banks, or they could be purchased by the Fed with reserves.

    All this you surely know, but I wanted to kick off with a brief recap, and also state that I agree with what you say about the QTM and about capacity utilization being a key factor in inflation. However, I disagree with the notion that when a government security is redeemed with Fed reserves, it’s not inflationary. To the extent it is like switching money from a savings account to a checking account, I agree that there would be no inflation. However, I think this only holds in the short term. I further believe that it is important to compare what would have happened had the Treasury securities not been redeemed by reserves but by tax money.

    The way I see things, the US money system is set up to limit the amount of Treasury debt that ends up on the Fed’s books, because only when Treasury debt ends up on the Fed’s books, is there truly a creation of “vertical” money or NFAs. I say so because I further think that there is a bias in favor of offsetting the vertical money created in deficit-spending, with taxes down the road. This is one reason why there is private debt issuance when the Government deficit-spends. The government has to repay the banks. It is not vertical money. It seems to me that the system is on purpose set up that way to benefit the private banks.

    QTM is wrong because of the assumptions that are tied to the variables… assumptions that are unrealistic and as has been proven. However, the equation itself is a tautology. My belief is that since debt that is left in the hands of private banks will in the long run be extinguished with tax money (that is the intent of the system), it is theoretically, all other things equal, less expansionary (in terms of money creation) to deficit-spend with private debt than it is with no debt.

    If I am missing something please let me know. I am a relative newcomer to MMT but am a fan.

    Thank you.

    • Money obeys the law of supply and demand. Increase the supply, and the value goes down (inflation). Increase the demand, and the value goes up (anti-inflation or deflation). Debt-hawks focus solely on supply and forget about demand.

      Money being an exchange medium, money also is associated with the supply and demand for products, services and labor. However, in our new world economy, where products, services and labor can be obtained worldwide, this is less true than before — except for the universal product: oil.

      In the U.S., inflation has been associated with oil prices far more than with money supply. See: http://mythfighter.com/2010/04/06/more-thoughts-on-inflation/

      Rodger Malcolm Mitchell

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