Hell No! The Ultimate Pushback against the Grand Bargain

By Joe Firestone

The underlying rationale for “a Grand Bargain” and the President’s deficit reduction budget including cuts to both Social Security (SS) and Medicare and many valuable discretionary programs, apart from the pragmatic justification, that he may be able to complete such a bargain with the Republicans and blue dog Democrats in Congress, is that the fiscal health of the United States requires that we can’t keep running annual deficits of the size we’ve been running. Why? Because that results in increases to our debt-to-GDP ratio, which in turn will cause the bond markets to drive up our interest rates higher and higher and eventually make interest on the Federal debt such a large share of the Federal Debt that we won’t have money for anything else. So, we have to implement a long-term deficit reduction plan to ensure the fiscal sustainability of the Federal Budget. To do anything else would be fiscally irresponsible.

I think that’s the essence of the President’s case for long – term deficit reduction. Then if one asks, well why make the burden fall on spending cuts rather than tax increases, the answer is that “tax increases” will never happen in today’s political climate. So, really the president has no choice, if he really wants to end this period of budgetary uncertainty, and also deal with the budget in a fiscally responsible way, then he must take the self-described “courageous” step of proposing cuts to the safety net including Social Security.

For the last few years, many of us have set forth various arguments against this case, especially with respect to safety net cuts. Some arguments are about its moral aspects showing that the “Grand Bargain” is unfair because the President’s idea of “shared sacrifice” takes no account of economic concentration of wealth over the past 40 years, or culpability for the financial/economic crash, that has created the so-called “budget crisis”. Others show that Social Security doesn’t and can’t add to the deficit. Others focus on the economic damage the spending cuts will do to the economy versus the lesser, or even little, damage that would be done by reducing the deficits through tax increases on higher incomes and wealth. Still others argue against the cuts, saying that they’re too heavily focused on domestic discretionary programs and the social safety net and are not focused on defense where we have such a large budget compared to every other nation.

All of these are good arguments and help with the pushback against the Grand Bargain. But none of them really show that the so-called problem underlying long-term deficit reduction, the eventual Federal solvency problem, is a false problem. Here’s what makes it a non-existent problem.

It’s false that If we keep running large deficits then we get increases to our debt-to-GDP ratio, which in turn will cause the bond markets to drive up our interest rates higher and higher, and eventually make interest on the Federal debt such a large share of the Federal Debt that we won’t have money for anything else.

Why?

First, running a deficit and using debt issuance to run it are not the same thing. The Congress could reorganize the Fed under the Treasury, and then the Secretary could order the Fed to create the reserves needed in the Treasury General (TGA) to deficit spend. Of course, this isn’t legal now and would require action by Congress, but it’s worth pointing out that the coupling of deficit spending to debt is due to Congressional fiscal arrangements, the rules of the game they legislated. It is not due to any immutable laws of economics, finance, or politics.

The Treasury has something else it can do to both pay down all the existing national debt, cease issuing debt instruments, and decouple continuing deficit spending from increasing debt. That option is High Value Platinum Coin Seigniorage (HVPCS).

Under authority provided by Congress in 1996 the Treasury can have the US Mint issue platinum coins with face values specified by the Secretary. So, for example, the Mint could issue a $60 Trillion coin; deposit it at the Fed, where the reserves credited to the Mint’s account for this legal tender would eventually wind up in the TGA. I’ve discussed the technicalities, history, economic, legal, and political aspects of Platinum Coin Seigniorage (PCS) in my new e-book. But the main point here, is that if the President will use HVPCS, then

— debt issuance could be ended,

— all the old debt could be paid off,

— the debt–to-GDP ratio would eventually drop to zero, and

— any possible effect of the bond markets on the solvency of the United States would be gone for as long as we conducted our deficit spending with reserves created at the Fed resulting from HVPCS.

So, in short, it’s up to the President. If he really wants to remove any possible political problem related to solvency, and any possible insolvency-based justification for deficit reduction and for cutting Social Security, Medicare, Medicaid, and other necessary programs that ought to be expanded rather than cut, then all he has to do is #mintthecoin; the $60 T coin, that is, not the trivial band-aid Trillion Dollar Coin (TDC) that will only bring the same “austerity” problem back next year.

Second, even if the President weren’t able to #mintthecoin; the deficit reduction/austerity argument would still be false. That’s because the bond markets don’t control the interest rates paid by the government on debt. The central bank does. If the central bank sets the overnight rate for reserves near zero, which it can always do, and the Treasury Department issues nothing but short-term debt at 3 months and under, then the Treasury can offer securities at a rate near zero, and keep the rates there whatever the debt-to-GDP ratio is, and even if that ratio is growing faster than GDP. This isn’t just theory. Japan is the test case for it.

Its debt-to-GDP ratio is what, 220% right now? Increases in it have had no effect on interest rates, and interest costs are not eating their budget. When confronted with Japan, austerians say that it’s an exception because most of its debt is owned by Japanese. But they never say why this fact should serve to keep interest rates down. Are the bond investors in Japan immune from wanting a higher rate from the Government if they can get it? I doubt it.

The austerians also say that if the Fed keeps the rates down, then one day US foreign creditors will demand higher returns. Well, they may demand them. But their choices are to buy the bonds, accept the lower interest rate the Fed pays on reserves in reserve accounts, invest in the US, or stop trading so much with us, so that our balance of trade improves and domestic labor markets can begin to come back with returning industries. Well, as they say, it’s all good for us. The choice they will not have is to get higher returns on Treasury Securities unless the Fed and the Treasury want them too. (Btw, this raises a question about the President’s budget. They have interest rates on 90 day Treasury Bills rising from 0.1% to 3.7% over the 10 year projection period. Their interest paid and deficit projections are based on that. But that won’t happen unless the Fed and Treasury allow it.)

So, for these two reasons, there are no legitimate solvency concerns for a nation like the US that has control over its currency including an unlimited ability to issue reserves. Since the whole case for austerity and long-term deficit reduction is that there is such a problem, then it seems like messaging against sequesters, debt ceiling crises, budgetary crises, austerity, and safety net cuts should lead with attempts to educate everyone to the fact that this is a false problem, and that the damage and suffering arising from austerity efforts both here and around the world is all in vain, unnecessary, and also immoral for that reason.

The Ultimate Pushback

My own anger at the “Grand Bargain” and other austerity measures is all the more acute because I know it is all unnecessary. So, I believe that to deliver the ultimate pushback, we need to persuade the majority of Americans that the President and other austerity partisans are in the process of inflicting needless damage on most Americans — on the young, the old, the under- and unemployed, the students, the foreclosed upon, the bankrupt, the sick, the poor, the middle class, and, in fact, on most everyone who will be victimized by unnecessary economic decline and stagnation in the once proud “land of opportunity.”

I think that the best way to persuade people that this is true is to tell the story of HVPCS and its ability to allow us to pay back the public debt and stop issuing any more, and then to describe the full implications of that. I’ve outlined what those implications are in my book linked to earlier. What’s important to emphasize here is that to the extent we can broadcast the HVPCS story from the rooftops over the next few months, the case justifying the “Grand Bargain” can be undermined at its core, because people will come to understand that it is the President’s choice to do the bargain, when a much less damaging course for all concerned is his to embrace.

Also, to the extent we can spread the message about HVPCS and the non-existent solvency problem, we can also strengthen ourselves for the next round in this fight. I don’t know whether the President can get his Grand Bargain; but I do know he’s been pushing for it since January 2010, at least. So, it’s pretty clear that he will keep pushing towards it in the future as the silly austerians have done in Europe, and as they are doing in most of the world. As we begin to widen the sphere of people questioning the need for long-term deficit reduction, we will see the anger against it grow, and we will develop the political support we need to end the “Grand Bargain” and other forms of austerity.

The President’s new budget (Table S-2 in the budget) projects no savings (costs to SS recipients) during 2013 and 2014. In 2015 the bite is $3 Billion relative to the current CPI; and in 2016, it is $8 Billion. So, we can get a new Congress to repeal the chained CPI, if we can elect one in 2014, and I’m sure the same is true for the “health savings” cuts, as well. We can make these repeals important goals for 2014, along with substantial increases to SS and the safety net, including Medicare for All. With HVPCS, the Government of the United States can afford all of this and much more.

In addition, to possibly blocking the Grand Bargain before it can be passed, or also repealing it and replacing it with a much stronger safety net, we can also make more and more people recognize; that President Obama’s “Grand Bargain” is no “legacy”, for which he ought to be fondly remembered, but the beginning of a curse on the rest of us for which he should live in infamy even greater than Herbert Hoover’s. For, at least we can say of President Hoover, that he was a caring man who knew no better than what he did to try to cope with the Great Depression.

But, in Mr. Obama’s case, he had the example of FDR and the period of largely Keynesian economic policy and low unemployment until the early 1970s to instruct him. And even though we are beyond Keynes now with Modern Money Theory (MMT), we can fairly say that our early Keynesian experiences should have taught him that austerity doesn’t produce jobs and end “long depressions” (h/t Richard Eskow), and that only very major and targeted job-creating deficit spending will do that.

All of which is to say that the ultimate pushback against the Grand Bargain is to use HVPCS to ruin Mr. Obama’s “legacy” by blocking it, or repealing it, and then making it well understood that it was not a legacy inspired by courage at all; but a curse inspired by ignorance and the cowardice of a man who would not choose a course open to him that would save the 99% unnecessary pain, because he was afraid of the noise and fury it would cause among those whose plans to weaken and eventually end the safety net were thwarted.

15 responses to “Hell No! The Ultimate Pushback against the Grand Bargain

  1. Sunflowerbio

    Joe, does MMT/HVPCS have any allies in Congress who will stand up and speak the truth? Every person I see on the news, C-Span, or read in the paper is spouting the same deficit/debt drivel. Are there a few, or even one person we can target, promote, quote or shine a light on to help get the message out? I sent an email to Elizabeth Warren last night, but don’t know if she will even get to see it. Any suggestions from your end?

    • joefirestone

      Congressman Jerry Nadler (D-NY) knows about PCS and thinks it’s legal. Maybe he can be brought around. Back in January he spread the word in Congress before it was taken off the table by O. But how many people bought in in terms of understanding, I don’t know. Probably Keith Ellison (D-MN), if I recall) is a good one to try. Rush Holt (D-NJ) is smart enough to udnerstand, as is Al Franken in the Senate. Also, there’s Alan Grayson. he almost certainly knows about it from Matt Stoller.

      Bernie Sanders puzzles me. He has MMT advisers; but he never reflects the MMT perspective.

      • Yea… what’s the deal with Bernie Sanders? Has he been exposed to MMT? You said he has MMT advisors, but has there been any advising?

        Yesterday I flipped on Chris Mathews and heard him talking about the “ussual suspects on the left” opposing the Grand Bargain, and he referred to Bernie Sanders as, I think he said, “fringe” …even if that isn’t the exact word he chose, it’s what he was implying.

        Who needs enemies with friends like these?

  2. There is an interesting counterpoint here to a very recent panel discussion sponsored by INET with panelists Skidelsky, Keen ,and Haring entitled “Economics and the Powerful” (cf: http://www.youtube.com/watch?feature=player_embedded&v=Vj2E6donYOQ ). One useful insight is the corporate dominance of media and publication, which determines which economists are heard and which remain banished. Even so there is a wide wide difference between a few show piece iconoclasts challenging the received wisdom, and the storming the Congressional gates with pitchforks and such.

    Money manager capitalism is effectively “suffering” from too much stability, which in the venue of corporate media as the privatized substitution for the public discourse is assured. There is a deeper co-optation in the reduction of the definition of Gresham’s dynamic to “bad” money chasing out “good” money as if it is a phenomena of seigniorage. My point here is that due to the busy investing in disinformation, we have difficulty even keeping the prevalence of criminality in unregulated markets within the public discourse. It takes plowing through several layers of obfuscation to possibly realize that that the bad chasing out good money is only a historical of a specific type. The chasm of public fiscal illiteracy is vast, and the HVP coin will remain a minor part of the change process until we can achieve a level of critical mass.

    Appealing to those who have the power and direct responsibility for fiscal policy seems like a context which is unlikely ground currently for the issuance of HVP coinage. The culture of attorneys who have gone into politics seems to be that persuasion of those who matter most outweighs those whose boats are sinking and in fact soon to be savaged in a free market plunder lust, Krystalnacht of the grand Betrayal. Secondly and perhaps more importantly, the HVP coinage seems unlikely to persuade the majority of the population exactly because of their fundamental fiscal illiteracy. Although the HVP coinage proposal provided an educable moment it’s impact may have been on the order of .01 % of the population or less.

    There is a new version of the Bitcoin gambit which apparently has been attractive to goldbugs attempting to put their wealth beyond taxation reach. The new version is named Frei-coin, and it major claim to fame is that it is interest free and that it is initially distributed based upon a granting process. The granting process makes it kindred to debt free issuance of sovereign fiat currencies. Engaging this innovation toward a deeper integration of MMT, might prove to have a greater impact, largely because it does not rely upon the courtiers to economic royalty abandoning their self interests. Typically the economic royalty, aka INET and Haring’s reference to the “Powerful,” will be the last to change their modus, and only when the growth of their wealth slows down.

    We are well on the way to a neo-feudal culture, if we are not already there. The manoral economy existed in competition with the commoning economy and culture, and essentially won out through royal decree, by the criminalization of commoning, and by the privatization of institutions of the commons. Beseeching, the courtiers to economic royalty to consider the wisdom of democratic fiscal objectives, historically only seems to work in hindsight.

    We also need to have options which we can apply on a local basis, since conventional political leadership operates on a “mob” or lemming principle.

    Tadit

  3. Let’s do it, Joe! Where do I sign up?

  4. joefirestone

    Jerry, start writing, tell your friends, get the book circulated, and start getting involved in party politics looking for primary candidates.

  5. Like a juggler with too many balls in the air. What happens when he sneezes?

  6. Joe, I always think the government issuing bills of credit (or paper fiat currency) at any time, regardless of statute, is legal because the Constitution gives Congress the right to do it, and the constitution is superior to any statute. Just because no statute presently exists facilitating it, doesn’t mean its not legal. The power being granted by the Constitution to Congress is not being used; in fact, its being abused.

    In your last post, I was unable to respond to a question you asked me about libertarians in support of governmental fiat currency before comments were closed so since it is not too off topic to answer your question here I will. Bill Still, probably the foremost advocate of government fiat money, actually ran for President on the libertarian ticket. Bill Still is the author of the 1996 documentary, The Money Masters, which is what got me so interested in this idea. ( I have watched it in its entirety several times and parts of it many times). According to Max Keiser, who interviewed Bill Still a year or so ago, The Money Masters was the 15th most watched video on the internet ever despite its length of 3.5 hours according to Kaiser. You can see Kaiser’s interview with Bill Still here:

    https://www.youtube.com/watch?v=WAeCnfEyW1c

    The interesting thing about the video is that Bill Still says he admires Ron Paul but calls his goldbuggery ludicrous. For the interested, here is a link to The Money Masters:

    https://www.youtube.com/watch?v=H56FUHgqRNE

    Another libertarian is Michael Rivero who has a website called “What Rally Happened.” He just put out a video called “All Wars are Bankers Wars” (going viral) which advocates government fiat money as well. Here is the link to that video:

    https://www.youtube.com/watch?v=5hfEBupAeo4&playnext=1&list=PLDFA1166F7F6413C1

    For the record, I am a progressive, not a libertarian, but I find common cause with these libertarians on this point and a few others regarding the Bill of Rights.

    • Sunflowerbio

      David, I think we can all agree that the Constitution supersedes any statute and gives Congress the power to issue currency. The problem is that Congress has delegated that responsibility to the Federal Reserve, with a couple of notable exceptions. Congress could of course take that power back, and designate some other agency to issue currency (the Treasury, perhaps?). Without some act by Congress, however, issuing currency would almost certainly be illegal and the currency would be counterfeit. This is why High Value Platinum Coin Seigniorage is so important, as it is legal and can be initiated without any action by Congress.

  7. Heretical Question for All Democratic parties: On FDR Social
    Security (SS) and LBJ Medicare and SS Medicaid – Are y’all
    BiPetersonSheep or DEM?

  8. dale coberly

    joe

    i like the sound of it, but i am financially illiterate. i have a feeling that reading your book won’t help. i have talked to too many true believers in MMT to have much faith in their ability to explain what they believe. this may sound useless to you, but all i can say is work VERY hard to make what you say or write understandable to the least of these.

    for one thing, the rest of what you said above, was very believable. but it might be easier to change ideas about god than to change ideas about money.

  9. Gotta love people like Boehner sternly admonishing the rest of us to expect getting by with less in retirement. He and his colleagues will retire at full salary and benefits, courtesy of the rest of us.

  10. The problem is not the government debt to GDP ratio, because a sovereign government can never run out of money. The US Treasury redeems its bills on the due date with money it borrows by issuing new bills. This could go on forever, but there is in fact no need for the US Treasury to borrow money to fund its activities. If the Federal Reserve can create money out of thin air, then so can the US Treasury. They could just issue US Treasury notes, which would be fully exchangeable with Federal Reserve notes and no one would notice the difference. Most people already mistakenly believe that Federal Reserve notes are issued by the US government. They are not.

    Private sector debt to GDP ratios are a different matter. The amount of private debt has been increasing significantly as pointed out by Professor Steve Keen, but consumers cannot keep increasing their debt unless their incomes are rising. Consumers are have maxed out their credit cards and cannot spend significantly more than they already do into the main street economy.

    http://ineteconomics.org/people/steve-keen

    The corporate slush fund being generated by Bernanke’s qualitative easing of $40 billion per month is not being spent into the consumer economy, but is being used to pump up the stock market to another bubble eventual climax. Those cashing out of the stock market are parking their funds in US Treasury bills in anticipation of the Great Crash.

    There is up to $3o trillion stashed in offshore bank accounts, which has effectively robbed the economy of spendable money, which is why we have the Great Recession with 15% unemployment and $16 trillion of government debt. The Grand Betrayal by Obama will make matters even worse.

  11. Joe, since reading your writings about HVPC, I have been awakened to the reality that America COULD re-new it’s infrastructure, strengthen the middle class by hiring to do so, and when the middle class is is enriched, they start new business which could ultimately lead to full employment where everybody pays taxes, and where the discussions of congress are about public good rather than affordability. As an ardent Obama supported, I am saddened by his denial of this solution that would change the way America lives, and open a new age of cooperation and political good will in our congress. Thank you Joe, for explaining this wonderfully possible solution to our national guilt and resistance to spending, even on ourselves.