The Political Economy of the Coin and the Debt Ceiling

By Matthew Berg

A fateful Saturday in January

On Saturday afternoon, the White House ruled out using platinum coin seignorage as a way to defuse the political crisis caused by Congressional Republicans’ unwillingness to raise the debt ceiling. In the words of press secretary Jay Carney:

“There are only two options to deal with the debt limit: Congress can pay its bills or they can fail to act and put the nation into default.”

A common reaction to this dispatch was bewilderment that Obama would (yet again) unilaterally discard his bargaining chips. As Congressman Jerold Nadler put it:

“It’s really a shame that the administration is ruling out one of the very few bargaining chips it has with Republican extremists who are intent, once again, on using the debt ceiling as a means of political blackmail.”

Likewise, a Democratic aide in the Senate told Joe Weisenthal,

“It’s certainly a strange negotiating strategy to go out of your way to decrease your leverage by taking options off the table.”

It is true that we cannot rule out the possibility that Obama is in fact simply bluffing. And that would be in keeping with the president’s previous “negotiation” record.


The political context

However, if we take the Administration’s statement at face value, it makes perfect sense in terms of President Obama’s political incentives (given Obama and his advisers misunderstand what money is and how it works). The White House’s actions also fit with Obama’s other publicly stated issue positions and policy goals.

Like previous second-term presidents, Obama is concerned with establishing what he sees as his “legacy.” According to Bob Woodward, Obama often says “I’m a blue dog. I want fiscal restraint and order.” In 2008, Obama campaigned on what is euphemistically known as “entitlement reform,” and in the first presidential debate of 2012 against Mitt Romney, Obama said,

“I suspect that on Social Security, we’ve [Obama and Romney] got a somewhat similar position. Social Security is structurally sound. It’s going to have to be tweaked the way it was by Ronald Reagan and Speaker — Democratic Speaker Tip O’Neill. But it is — the basic structure is sound.”

From all of this and from much more consistently corroborating evidence, it is beyond clear that Obama would like nothing more than to strike a “grand bargain” that revives the glory days of Reagan-O’Neill, but he has been frustrated by the Tea Party congress’ just-say-no approach to negotiation. Combined with Obamacare, which aims to reduce the government’s budget deficit by “bending” the so-called health care “cost-curve,” Obama believes that a “grand bargain” of this sort would establish the sort of Clintonian legacy of “fiscal responsibility” that he’s always dreamed about.

None of this makes any sense to those who understand sectoral balances and how the monetary system works, but it is nonetheless how President Obama sees the world. The terrible irony is that the austerity of a “grand bargain” would not cement but would rather undermine his legacy by throwing the economy back into recession.


Though this be madness, yet there is method in’t

A “senior administration official” explains that method:

“This now puts all the pressure back where we believe it belongs: on the Republicans. There are no magic coins. There is no way to get out of this. We feel fine about the politics of it. We think we are in a stronger position if Republicans realize there is no out.”

By ruling out the trillion dollar coin, the 14th amendment, and any other work-arounds that might come up, the Obama administration is pursuing (for better or for worse) a deliberate strategy – the strategy known popularly as burning one’s bridges (or boats).

Obama is following in the well-worn footsteps of Cortés, who scuttled his ships upon arrival in Mexico, the ancient Chinese general Xiang Yu, who ordered his troops to destroy their boats and supplies before the battle of Julu (“break the kettles and sink the boats”!), and the ancient Romans, who routinely burned their boats or bridges as a deliberate tactic.

Cortés scuttles his ships off the coast of Vera Cruz. Painting by Miguel Gonzalez on display at the Naval History Museum in Mexico City

By burning ones bridges, ones own “troops” become committed to victory – because they know that with no way out, the only options are victory or death. Just as importantly, the enemy “troops” get the same message – with the effect of making them more likely to flee, since they know they face a determined opponent.

Here’s how Obama and his advisers may see the situation:

Obama has 3 choices. He can either:

  1. Bypass the debt ceiling.
  2. Refuse to negotiate with Boehner.
  3. Negotiate with Boehner.

There are multiple different ways to execute option A, including the 14th Amendment and Platinum coin seignorage, both of which the White House has ruled out. The question is, why did the White House rule those out? One argument in the case of the coin is that it was ruled out because its captivating shiny allure raised new and uncomfortable questions about the nature of money and threatened the interests of established institutions such as Wall Street banks and the Fed.

While there is probably some truth to that theory, it does not explain why the 14th Amendment option was also ruled out, and it does not explain why they are also implicitly ruling out any other possibility (such as issuing scrip) and insisting that “There are only two options to deal with the debt limit: Congress can pay its bills or they can fail to act and put the nation into default.”

Platinum coin seignorage is an ingenious idea that would have solved the technical problem of the debt ceiling, but the White House is not interested in solving a technical problem. The real explanation for why Obama ruled out the platinum coin (as well as all other possible alternatives) lies less in the economics and more in the politics.

The administration realizes at this point that these self-induced crises are going to keep recurring unless something is actively done to cause them to stop re-occuring. If they do not happen in the form of confrontations over the debt ceiling, that merely means that the crises will be diverted into crises over the budget process and continuing resolutions (and crises in those forms would be less politically favorable for Obama, since it would not be so easy to tar the Republicans with gross irresponsibility). So it is immaterial whether the crises are realized through the specific institutional forms of the debt ceiling, the annual budget process, or custom-made rube-goldberg traps like sequestration.

The Obama administration also realizes that, as long as these crises continue to occur, Obama will have no opportunity to accomplish anything at all in his second term other than ward off repeated crises.

Obama could also take option C, and commence negotiations with Congressional Republicans now. If he were to do this, some sort of deal raising the debt ceiling and dealing with sequestration would eventually be struck. If he were to take option C, Congressional Republicans might also be willing to strike a “grand bargain” of a sort. But although Obama wants a “grand bargain,” he doesn’t just want any old grand bargain, but rather wants one on his own terms. Continuing to take Obama at face value, he wants a “balanced” grand bargain that does not merely cut entitlements, but also raises taxes. But under scenario C, with sequestration cuts to defense as Obama’s only real leverage, Congressional Republicans would not be inclined to agree to any further tax increases. Furthermore, like option A, option C also rewards Tea Party intransigence and assures future repeated crises throughout the rest of Obama’s presidency.

Therefore, Obama has a political imperative that demands a final confrontation. And that is why Obama is choosing option B – to refuse to negotiate, and insist that the Republicans must raise the debt ceiling, or the consequences are their fault.

The GOP’s move

With Obama taking option B, that leaves the ball in the Republican’s court – and by all accounts Republicans are in no mood to simply give in:

“GOP officials said more than half of their members are prepared to allow default unless Obama agrees to dramatic cuts he has repeatedly said he opposes. Many more members, including some party leaders, are prepared to shut down the government to make their point. House Speaker John Boehner ‘may need a shutdown just to get it out of their system,’ said a top GOP leadership adviser. ‘We might need to do that for member-management purposes — so they have an endgame and can show their constituents they’re fighting.’”

With both sides intransigent and the Department of Treasury already running up to the debt limit, that takes us towards a government shutdown of one sort or another. Here, prognostications necessarily become hazier, but the shutdown will probably be a gradual process, not a single event. Treasury will get (and has already begun to get) creative to limit the damage as best as it can and to avoid a technical default (prioritizing interest payments on bonds).

As the shutdown begins, as the stock market begins to decline, and as the economic impact of reduced government spending begins to be felt by the American people, Boehner and the Republicans have 3 choices. They can either:

B1.  Cave to Obama’s demand and unilaterally raise the debt ceiling.
B2.  Agree to a “balanced grand bargain” and raise (or eliminate) the debt ceiling.
B3.  Refuse to raise the debt ceiling.

In the immediate term, as the shutdown begins, Republicans will simply refuse to raise the debt ceiling in the hope that Obama caves. During this time, there will be negotiations of a sort – but the negotiations will primarily consist of each side trying to appear reasonable for public relations purposes, rather than trying to actually reach an agreement. Obama will repeat his willingness to negotiate on sequestration (in isolation of a debt ceiling increase), and Congressional Republicans will demand spending cuts in exchange for a debt ceiling increase.

For Obama, the calculation is that the Republicans will be the ones to take the blame for any government shutdown or default, and that the political pressure will build to the point where they have to give in. Everything in his calculations depends upon that assessment being correct. Depending upon when exactly the government shutdown begins, the sequestration cuts will begin to come into effect, which will only heightens the political pressure (on both the Republicans and Obama).

And so a period of time will elapse… A day? A few days? A week? Two weeks? A month? Two months? More?

Social security recipients stop receiving their checks in the mail. National parks close. The stock market plunges. Consumer confidence plunges, businesses pull back on their already limited investment plans. According to one rough estimate, about 600,000 jobs are lost per month. Congress and the white house are both flooded with phone calls and e-mails from irate constituents.

When this parade of economic horrors has gone on long enough, Boehner & Co. are confronted with the same 3 choices.

If they choose option B1 and unilaterally raise the debt ceiling, then they have surrendered and Democrats have won. A deal will then be made on sequestration. In Obama’s eyes, this is a victory, although it may come at substantial economic costs. Austerity from the sequestration deal, even in the absence of a disastrous “grand bargain” will cause further economic pain. Obama will have routed the Tea Party Republicans, and they will be unable to continue upon the same universally obstructionist course that they have followed since 2010, which makes it possible for Obama to possibly pass a “grand bargain” a bit later, along with the possibility of other legislation on issues such as immigration. Admittedly, the causal sequence between is not strong between the Republicans caving and the Republicans. All that is for sure is that if the Republicans outright cave, then something will have to change. Obama’s assumption is that any sort of change from the current state of government-by-crisis and 100% obstructionism is an improvement.

Secondly, the Republicans could choose option B2, which is probably the most palatable to them and therefore the most likely. Under this scenario, Republicans do not outright surrender as in option B1, but instead are able to save face. The price for this is that they have to agree to a “balanced grand bargain” on Obama’s terms – including not just the spending cuts that they want, but also tax increases in one form or another. We cannot predict the precise form that this deal would take, but it might be something like a debt limit increase through the, chained CPI Social Security cuts, and the abolition of tax deductions used by the wealthy. If the government shutdown lasted only a short amount of time and if the austerity measures in the “bargain” were limited just to items such as chained CPI that come into effect slowly, then the economy could escape an outright double-dip. But in addition to the economic damage from the government shutdown itself, the Economic recovery would be unnecessarily slowed for absolutely no reason at all.

Finally, there is the unthinkable and MAD option B3, in which the Republicans simply do not agree to raise the debt ceiling, and are simply unwilling to either unilaterally raise the debt ceiling or agree to a “grand bargain” that contains further tax increases. Obama must have some breaking point, and at some point would give in, after the economic damage became sufficiently great. If this happens, then Obama’s presidency is over, he might as well not have been re-elected, the economy is dead, and it might even be the end of the Republican Party. But again, this scenario is simply unthinkable. This is the sort of unmitigated disaster that we like to think only happens in history books.

Millions of ordinary Americans are the pawns in all of this, and they are the ones who will suffer. Much like the 2009 mistake of passing a much too small American Recovery and Reinvestment Act, it all makes absolutely fantastic political sense. And absolutely no economic sense.


21 responses to “The Political Economy of the Coin and the Debt Ceiling

  1. With all the talk of by-passing Harry Reid and in a sense the majority senate in the previous episode of fiscal issues, I’d like to hear your comments on the Dems. reaction as any of these options proceed and what effect they might have on the possibilities you considered. BTW thanks for this column.

    • That’s a good question. I basically treated Reid, Pelosi, and the other Congressional Democrats as afterthoughts because ultimately Obama is “the decider” for the Democrats. I think the main differences stem from the fact that Obama will never face the voters again and has the luxury of being able to worry about his “legacy,” whereas members of the House and the Senate have to worry about re-election. There are also some underlying policy differences. Whereas Obama reportedly calls himself a blue dog, the same is not true of Reid and certainly not of Pelosi, so they do not actually want a “grand bargain” in the same way as Obama.

      As was the case with the “fiscal cliff,” Reid will work on passing something in the Senate and will at some point succeed. This will be part of the quasi-negotiations that start at the 11th hour, in which Obama and the Republicans try to appear reasonable. Would Republicans in the Senate really filibuster increasing the debt ceiling?

      So the action is in the House again. Again, as with the fiscal cliff, a scenario in which a minority of Republicans and a majority of Democrats support a debt ceiling increase seems very plausible. But if Boehner lets that get to a floor vote, I think we have to file that under option B1 – the Republicans have caved.

  2. Fascinating, and I think you’ve got it right. Thanks…

  3. “It’s certainly a strange negotiating strategy to go out of your way to decrease your leverage by taking options off the table.”

    How so? What “leverage”? When your #MintTheCoin “option” is a transparent nonstarter?

  4. A pretty good summary Matthew, and probably as accurate as anyone can guess – except – you left out one possible and likely option in the case of a shut down – the Army steps in and takes over the government!

    • I should hope not! I guess we have to categorize that one under option B3… Not to be contemplated.

  5. Not difficult to understand. Obama’s pay-masters, the Banksters, have told him to back off under-mining their right to make a nice little earner from Treasury Bonds whilst they sleep. Getting the American People used to Platinum Coins being issued to sort the Nation’s Credit out would definitely put an end to their scam.

  6. Please,
    EXPLAIN why QE could not be an option?
    Of course except for the fact it could lead We The People on to a bettering of all mankind, and because
    it would not only allow issuance of currency not only debt free but also as a means of taxation that would be equal and just.
    Please, show where it is wrong, or improve it.
    Could ” QE” and/or the “COIN” fix the errors and change our direction to that of the common bettering of all mankind?
    Read and challenge:

  7. If I were the Rs I would raise the limit by just a little and fight a continuing PR battle with the intransigent Ds and their so called “leader”. Then after the limit is reached, rinse and repeat. There is a long four years to ” get” Obama. No need to hurry! They can say they are working with the Pres and they have complied with his wishes, now it is time for Obama to give up something—- or else. After all Obama agrees the deficit must be brought under control. But he is behaving like an king. Over time the economy,would surely tank and it was, after all, just Obama being bull headed. See we raised the ceiling multiple times and each time Obama did nothing or very little. Obama is screwed, IMO, unless he changes the conversation. Enter,MMT and the magic coin. Wait maybe that’s his strategy? I wish. The point is the Rs got him without,a chamge in conversation.

    • Right, the Rs could raise the debt limit a month at a time, with great agony and drama each time, until Obama specifies what cuts he wants.

      People are starting to realize that they got a lower-middle-class tax increase, as the first paychecks of the year come out. There is talk of a middle-class tax cut being needed to offset the FICA increase, and the Rs should champion that movement.

    • If the Rs cave once to Obama’s no-negotiation stance and raise the debt ceiling for a month or two, then Obama will have every incentive to simply pursue the exact same non-negotiation strategy again. And then what are the R’s going to do? They’ll have to raise the debt ceiling for a month or two again (or else force a default/government shutdown). After a few rounds of this, eventually people will stop paying attention and eventually it wouldn’t even be covered on the news any more.

  8. Thorough analysis of the possibilities. Unfortunately, I don’t see much hope in any of the scenarios for even starting to reverse the inequality of income and wealth that has been building for the last 30 years. Should be discussing additional top tax rates to raise revenue not cuts for the folks at the bottom.

    • And each time to the brink, the economy loses more. A few six hundred thousand layoffs add up after awhile. A few months of no SS checks will have a bracing impact on the seniors of this country.

  9. Edmund Karner

    Imagine how much this entire schtick is poisoning public perception about debt and the US economy: most people probably figure we’re coming up against hard borrowing limits or some such nonsense, and losing their social security checks and seeing government services shut down may very well make them more averse to vital deficit expenditures in the future.

    Playing a game of brinksmanship under the impression that the public will helpfully blame Republicans for everything – and that there are no other lasting ramifications for the national consciousness – is remarkably small-minded and, frankly, stupid on the part of the administration.

    Why can’t we have better rulers?

    Also, could someone on staff respond to Krugman here?

  10. From afar (New Zealand) I’m surprised to hear Obama described as a person who cherishes the idea of a legacy, a ‘grand bargain’. I suppose I’m displaying the usual human failing of wanting to vindicate my own first impressions, but is this Obama?

    My feeling is that he is like a preacher (not an original observation) aloof from his congregation, necessary in his formal ministrations to people who are stuck with the consequences of their own foolishness. This is the true heartless Protestantism of capitalism. In our shared fate we are all truly equal.

    So, there is no ‘grand bargain’ – who with for god’s sake? His legacy is to have got through it, upright, unimpeachable, carrying the cross of the personal consequences of being the priest. I can literally still hear him say ‘belt tightening’ – empty of any real moral content.



  11. @ Edmund;

    I too was pretty perplexed by this Krugman post about the monetary base. Initially, I was kind of encouraged by his description of the whole money-multiplier thing as “misleading.” But it isn’t misleading – it’s just crap. It doesn’t describe the real dynamics of bank lending under any circumstances. Banks, as regulars here all know, don’t lend out reserves or deposits. Their loans create new deposits – new horizontal money that is destroyed when the loan is repaid. (Or, equally, I suppose, when there is a default).

    So, whatever P.K. is on about, and I find it hard to tell, I don’t see how his conclusion can be sound when his premises are this flawed. My understanding of those gigantic excess reserves is that they are cheap loans from the Fed that the Fed can call in whenever anything resembling normality returns. If it ever does. P.K. and another ‘mainstream’ realist (named Koo, I believe,) have put out the idea that these reserves will spike a huge inflation event whenever the so-called liquidity trap is resolved. I think the MMT position is that the C.B. is in control and can prevent that. That’s as far as I can take it.


    • Yes, agree. I’m not sure why circulating currency will change significantly as the economy improves, or what the new level of reserves has to do with circulating currency given the interest rate floor provided by IOR, or why the ratio of currency to reserves in yesteryear is actually relevant under the new paradigm.

      It’s almost like he said, “Well, I have no real response to that, so here’s something else.”

    • I posted a reply to his follow-up as well, where he lists the things he thinks the Fed can do in the face of the mighty coin.

      I am somewhat confused about this:

      “1. The Treasury redeems the coin, which it does by borrowing a trillion dollars.

      2. The coin stays at the Fed, but the Fed sterilizes any impact on the economy, either by (a) selling off assets or (b) raising the interest rate it pays on bank reserves

      3. The Fed simply expands the monetary base to match the value of the coin, an expansion that mainly ends up in the form of currency, without taking offsetting measures to sterilize the effect.”

      If the Fed leaves the coin as reserves, the monetary base expands by definition. To offset the expansionary and inflationary pressures when they come, it raises interest on reserves. So 2b and 3 have both happened – except I do not see why it would end up mainly in the form of hard currency. It would do so if the banks are desperately getting more currency from the Fed to hand out, but we have raised interest on reserves to stymie the expansionary and inflationary pressures that were at play when interest rates were at zero and I don’t know why the public will want to hold more paper money. The initial increase in reserves was matched perfectly by an increase in private sector deposits when the federal spending took place – I’m not sure what cash and coins have to do with this.

  12. What seems lost in this entire piece, and in the thinking of all parties to the actual decisions, is any concern to have the government actually reflect and serve the citizens who have created it. Are we all really so petty, so blinded by our own myopia, so sure we are right and others are wrong, so greedy and prideful, so unconcerned for the fate of our friends and neighbors to fall prey to inaction and stalemate in a game of our own creation?

    In the end, all the MMT logic about sectoral balances, bank reserves, job guarantees and so on is for naught beyond opening eyes to see that all we are talking about is the system that divvies up work and real resources among the people of the world. People need work to feel valued. People need resources to be warm and nourished. All the rest is ultimately unimportant.

  13. Great essay Mr. Berg! If we could get more young adults into the dialog with your exceptional critical thinking and writing skills then perhaps we could get the non-critical thinkers in Congress to get some skills in those areas too.

  14. Robert Bostick

    What is it about America today that allows its leaders to thrash about in a frenzy over accounting issues while tens of millions are hungry, homeless, and without health care or a decent education? Why would President Obama ushers in more economic and social dysfunction with a negotiating strategy which does not start at the all-or nothing position; repeal of the debt ceiling?

    Why is his non-negotiable goal a higher debt ceiling, rather than no debt at all? If Americans had sufficient information would they not prefer a debt free government? Why not start with that instead of simply raising the debt ceiling?

    Progressives, Liberals and proponents of MMT need to frame the debate with this higher objective. If Americans could grasp the implications of a monetary sovereign and its, operational, debt free funding prerogatives for everything this nation needs, pressure could be brought to bear, not only on the Administration but Congress where all spending initiates.

    Under fixed exchange rates, currency convertibility, and balanced budget imperatives, a debt ceiling can be justified. Having abandoned those requirements 42 years ago their continuation is monetary and fiscal policy fraud.

    America today manages monetary policy as if it were not monetarily sovereign. As if it was prone to solvency issues, as if it could not pay all of its dollar denominated obligations, as if it needed revenue from taxation and bond sales to spend. The Federal Reserve preserves these frauds, warning Congress to enact responsible legislation designed to secure fiscal sustainability supported by tax and spending policies. Never does it inform the Congress that the Treasury taxes to manage inflation and not to spend. Or that Fed/Treasury borrowing simply supports the term structure of interest rates but does not raise dollars to spend. And worse, the Treasury Secretary knows these things and maybe the President does too, but their cynical subversion of modern monetary operations, and slavish protection of bondholders locks America into gold standard beliefs from which only more suffering and economic malaise is produced.