Some Platinum Coin Objections from the Mainstream: Part I

As I was working my way through the series of posts beginning with this one, news was announced that Republican and Democratic Party leaders in Congress, along with the President had come to agreement on the terms of ending the debt ceiling standoff in the context of a new budget deal. Their agreement provides for suspension of the debt ceiling until March of 2017; so the immediate need to turn to unusual solutions to a pending debt ceiling crisis is now gone, and, along with it, crisis-driven discussions about the platinum coin option.

Nevertheless, even though the immediate reason motivating renewed discussions of the platinum coin option is now gone, I still have some unfinished business dealing with the issues surrounding it. Late last week I replied to a paper from Philip Wallach of The Brookings Institution with a post at Naked Capitalism, as well as a number of other sites in the blogosphere. Now, Wallach has replied to my post, which mostly presents new arguments not in his original paper.

These are important to answer for the record, since platinum coin options and debt ceiling issues are likely to return again in the future, especially if we still have divided government in 2017, a very good possibility, I think. Answering them is also important, however, because they are the kinds of arguments that will be offered by the mainstream neoliberals against using the $100 T platinum coin, as well as the trillion dollar version. This series, of which this post is Part I, will present a detailed reply to Wallach’s new paper.

Preliminaries

Wallach’s reply begins by mischaracterizing my reply to his article as “. . . a lengthy, dyspeptic reply from Joe Firestone, a noted champion of the platinum coin plan to make the debt ceiling irrelevant.” Lengthy yes; but “dyspeptic”? I doubt it and ask readers to see for themselves by reading my critique, which, is a model of gentleness and civility considering that it is critical.

What can I say? I’m afraid that mainstream neoliberals who write appreciatively about “The Conservative Governing Disposition” are sensitive souls, who dislike expressions of anger. No matter the consequences of the policies they support, the most important thing is maintaining genteel convivial conversation (pp.387 – 398) with an occasional sharp edge, but without any angry rants.

Going further, the characterization that I favor the platinum coin plan to make the debt ceiling irrelevant is seriously incomplete. It is correct as far as it goes, but it does not mention that my views include another goal as well. That is demonstrating by example that the Federal Government has no limits on its authority to create money if it needs or wants to, so that it also can never run out of money (become insolvent) except by its own choice.

This second goal is as important in my thinking as is the first. I want to discredit for good the claim that the Federal Government can be forced into insolvency by any human force external to it; such as the bond markets. That claim is a dangerous fiscal myth that has seriously damaged the United States over at least the last 40 years.

Wallach next says:

Though Firestone and I agree that our country’s recent debt ceiling showdowns are both fruitless and potentially destructive, a yawning chasm separates our views of America’s contemporary fiscal and monetary system. I am a fiscal conservative who thinks it is imperative that the federal government find a way to match its spending and its revenues in coming decades; Firestone, as he makes clear in a short e-book, believes that this whole way of thinking is deeply misguided and even sadistic.

My “Fixing the Debt” e-book uses the word “misguided” twice, and sadistic not at all, according to a search in my Word ms of the book. Nor do I use either of those words in my original reply to Wallach. However, I will stipulate that I believe that those who think that federal revenues ought to match spending in coming decades are either deeply misguided, or worse, and I will explain why shortly.

As far as my claiming that those who advocate for that policy are being “sadistic” I don’t apply that term either so hastily or in such general terms. Those who advocate for such a balance over the coming decades include very far right people, most of the mainstream whose views about degree of austerity and deficit spending from year to year vary widely, and even people normally considered quite progressive, such as Paul Krugman, Robert Reich, and many progressive political figures, probably even including people like Sherrod Brown, Barbara Lee, John Lewis, and Ed Markey, all believe that. However, the constellation of views among all these people is very different when it comes to the period of time over which they seek balance, the mix and targets of spending and taxing they seek, and the goals and objectives of the fiscal policies they favor.

So, given these differences, it is inappropriate to conclude that the fiscal policies of all of them are “sadistic.” That said, however, there are some people within this constellation whose policies seeking destruction or severe cutting back of the safety net, along with federal budget surpluses for years on end are sadistic and cruel, and we ought to recognize that when it is true, and to make moral judgments accordingly.

Ought Revenues to Match Spending Even Over Decades?

Going back to the notion that “. . . federal revenues ought to match spending in coming decades. . . “ here is why I think that notion is very misguided. There is an accounting identity in macroeconomics, which is very simple but most often is ignored. The Sectoral Financial Balances (SFB) model is an accounting identity, and these are always true by definition alone. So, if you look at accurate data describing some past time period, you will, and must, always find that the SFB model fits the data within the limits of measurement error.

But the identity can also be used to generate hypotheses about what will happen to the economy as a whole, and even parts of it, under certain assumed initial conditions, and that use is very important in anticipating what may happen in the future. We’ll see how this works presently; but, first, the SFB model says:

Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0.

The terms refer to balances of flows of net financial assets among the three sectors of the economy in any specified period of time. Why must there be financial flows? Because each sector sends and receives financial assets such as tax payments, fees, revenue in return for goods and services sold, securities bought and sold, loan proceeds, loan re-payments, transfer payments, and other payments, to other sectors.

So, the equation says that the sum of all the balances of financial flows for the three sectors of the economy is zero, because, since there’s only so much in assets traded in any time period, the positive balance(s) of one or more sectors relative to the others must be matched by the negative balance(s) of the combination of the other two sectors.

To amplify a bit, when the annual Domestic Private Sector Balance is positive, then more financial assets are flowing to that sector, taken as a whole, than it is sending to the other two sectors. Since it is likely that people and organizations within the private sector would like to save money or add to their securities holdings every year, and, in this way add to their net financial assets; and since it is also likely that if the private sector as a whole saves net financial assets, then, other things being equal, it will be easier for them to add to their individual or corporate savings as well. And we can also reasonably expect that people will want the Government to adopt an accommodative fiscal stance, ensuring that the Domestic Private Sector will be able to add to its net financial assets (have a positive sector balance) each year.

Similarly, when the annual Foreign Sector Balance is positive, more financial assets are being sent to that sector from the other two sectors combined than it is sending to them. So, if that happens, then either the Government sector, or the Domestic Private Sector, or both, will be losing net financial assets to the Foreign Sector.

That is what happens when we have a trade deficit. Our first reaction is that we don’t like that loss of net financial assets to the foreign sector.

On the other hand, we do like the gains in real non-financial assets that we get from the foreign sector when we have a trade deficit. So, on the personal level, as long as such a fiscal stance is sustainable, most people will prefer a government fiscal stance and policy that both facilitates their ability to save, and also to acquire real products and wealth at prices lower than they would otherwise have had to pay.

When the annual Government Sector Balance is positive (when it runs a surplus), then it is getting more in financial assets from the other two sectors combined than it is sending to them. So, while we can say, superficially, that it is adding to its net financial assets, it is also subtracting from net dollar-denominated financial assets in at least one, and perhaps both of the other two sectors.

Also, however, before we conclude that when Government has a positive balance it is adding to its net financial assets, we have to keep in mind the following line of reasoning. The US and quite a few other Governments around the world are monetarily sovereign governments. As I’ve explained my e-book and in many other places, such governments have the capability to generate unlimited net financial assets at will; though not without consequences; since if they generate too much, and then spend it into the economy, it will cause demand-pull inflation and price stability will be lost.

However, that possibility doesn’t affect the question of whether the Government adds to its net financial assets when it runs a positive sector balance, commonly called a budget surplus. That’s because the government’s capability to generate new financial assets at will has to be viewed as a financial asset itself. So, what is that capability worth?

Obviously, it has an infinite domestic financial value because it can be used to pay for whatever is for sale in the United States that the Federal Government has to or wants to pay for. But if an entity already has an infinite capacity to create more net financial assets, then how can it add to its already infinite net financial assets by adding payments to those net financial assets? The answer, in my view, is that it can’t, except in a very pickwickian sense, since how can you add financial value to an already infinitely valuable set of net financial assets?

So, the important thing about a US Government budget surplus isn’t that it adds to the Government’s stock of net financial assets, and therefore makes the Government wealthier, or more prosperous, or financially stronger. It is, instead, that it destroys net dollar-denominated assets in either one or both of the other sectors within a particular time period, since it reduces their net financial assets through taxation, tariffs, or export transactions.

Next, when the Domestic Private Sector Balance is negative, that implies that it is sending more to the other two sectors combined, than it is getting from them. And, the same applies, of course when one of the other two sectors runs a negative balance.

So, with that as background, let’s now look again at the notion that tax revenues and spending should be matched by Government policy over the coming decades. Let’s be really permissive about this and suppose that the Government has three decades to match spending and tax revenue, and let’s also suppose that we continue to run trade deficits over the next 30 years averaging 3.5% of US GDP over that period, and let’s also that households and businesses desire to accumulate wealth averaging 5% of GDP over that period. Then what would happen?

Well, the trade deficits of 3.5% would mean that even if we did nothing to accommodate the private sector’s desire for savings, then we would still need to match the demand leakage of 3.5% of the with 3.5% of Government deficit spending even to avoid the demand leakgage to the foreign sector of the economy. But according to Wallach’s rule, which btw, is also a rule advocated by strict Keynesian economists, and one that is considered quite “liberal” by balanced budget conservatives, this a deficit spending average that is 3.5% more than is consistent with their 30 year average rule.

This means that if we apply Wallach’s rule in policy then we would be facing an accumulation of 3.5% of GDP losses each year for 30 years for 30 years. Can the economy sustain such losses with out total collapse, or reversion to deficit spending caused by the automatic stabilizers in the social safety net and other federal programs? The answer, of course is no!

So, Philip Wallach’s rule, which sounds perfectly reasonable on its face, simply will not work, because it is not fiscally sustainable. It is also, fiscally irresponsible because it condemns the economy to periods of cyclic boom and bust that spell long-term economic stagnation, and the exacerbation of inequality.

I’ll continue my analysis of Wallach’s reply in my next post. As we move through the various posts in the series, a pattern will begin to reveal itself, and that pattern is that Wallach’s opposition to the $100 T platinum coin option is less due to the specific content of the option, than it is to the Conservative disposition to criticize new policy proposals that may have ramifications for broader political and social change, while exhibiting a tendency to live with and ignore the sufferings and negative impacts caused by current policies, while limiting critical attention to those, because they have, already, made the decision to live with them, and to privilege the sufferings of the present as less undesirable than the possible negative impacts of new policy proposals on the future.

10 Responses to Some Platinum Coin Objections from the Mainstream: Part I

  1. Robert Bostick

    Joe, excellent response. Please add “to” between “decision” and “live” in the last sentence.

    Wallach may also be diverting the critique in an attempt to shield the financial mavens who would suffer enormously in a ‘platinum’ coin paradigm. Wouldn’t need them. Jus’ sayin’.

    • Thanks, Robert. I’ve corrected the error you picked up.

      I agree that Wallach may have been trying to divert. But, I think he’s just part of the Brookings Institution line on fiscal responsibility. Alice Rivlin, the first Director of the CBO has put her stamp on that place for more than 40 years now, and she has forged a strong alliance with Peter G. Peterson over that period of time. This isn’t our father’s Brookings, Robert! It’s now a Conservative organization in liberal clothing.

  2. I rarely respond these days because I don’t have all that much time and suspect nobody reads the responses. But since Jeremy Corbyn (the new uk labour party leader) nicked my ‘Peoples QE’ idea I wonder if replying is not such a wastes of time after all. I called it ‘Alternative QE’ in a post on this site in 2012.

    On the subject of waste. Waste is the route of all evil. Waste is the arch enemy. If you would like to know exactly why this is true from a scientific point of view then read my e-book ‘The Populist Manifesto’.

    The problem with creating unlimited amounts of money is it could so easily lead to public sector waste. This is a legitimate objection. Only tackling the protestation that the main stream economists are capable of raising is insufficient. We need to address the two reasonable concerns that lie behind the bluster and nonsense of the mainstream. These are waste leading to inflation.

    They can’t understand A + B + C = zero not because they are stupid but because they don’t want to understand it. They don’t want to understand it because they are afraid of something. That fear is of waste leading to inflation and ultimately population decline and hardship.

    Address the real fear and not so much the hot air and maybe, just maybe, we can save ourselves …

    • Thanks, Ashley. I do read these comments, and often even reply. Anyway, I am opposed to unlimited spending also. I don’t call for unlimited spending in these posts. I know spending has limits. The limit, however, isn’t a solvency limit. Rather the constraint on spending should be public purpose. Since one dimension of public purpose is inflation, that is one constraint on government spending. Spending on the rich and powerful are other other no nos because they not in accord with public purpose. Spending to save too big to to fail banks should also not be done. That’s another constraint. I can go on and on. But you get the general point. Deficit spending past the onset of controllable inflation should not occue because price stability is one of our goals, and all other spending either deficit or otherwise should be the right spending in the sense that it provides net benefit for public purpose, not the wrong spending in the sense that it creates net costs relative to public purpose.

  3. If we run a budget surplus or a balanced budget then in most scenarios, for the economy to grow, the private sector needs to take on credit and/or there needs to be a trade surplus.

    A trade deficit + No Private Credit Growth + balanced budget (or surplus) = sluggish or contracting economy. No?

    • Yes, but even trade surpluses have their limits. These would get US dollars back to the US and recapture the demand that was lost in the past, at least to some degree. But eventually, the dollars help by foreign nations will run out, and then we won’t want them buying our goods using their own nation’s money. So, at that point, in order to have the necessary additional demand we’d have to create the necessary net financial assets in US bank accounts.

  4. I’m not certain the sectoral balances model, a flow equation, accurately captures the effect of asset price inflation, which impacts the valuation of existing stocks of real and financial assets. A domestic private sector with a negative flow of financial assets may actually find itself with greater wealth if the valuation of the remaining stock increases more rapidly than the outflow. The FIRE sector has also shown itself to be highly “innovative” when coming up with ways to make liquid or to use as collateral assets that never really change hands, thereby generating new financial assets and allowing valuations on such assets to be bid up.

    • I agree the SFB model doesn’t capture asset price inflation. But, on the other hand, asset price inflation creates new net financial assets for a seller only when asset whose price has been inflated gets sold. But when that happens the payment for the inflated asset comes from a private sector buyer who things the inflated asset is worth the price. So, looking at the private sector in the aggregate, no new net financial asset is created. All that has happened is that perhaps a private sector buyer has payed an inflated price for a private sector asset.

      Now, there is one case in which new net financial assets will be created out of an inflated private sector asset. That will happen if the Federal Reserve buys the inflated private sector asset with newly created reserves at greater than the market price of those assets. One can argue that this has happened a lot in recent years when the Fed was bailing out insolvent banks with QE. However, if it did happen then this was illegal behavior on the part of the Fed because it is authorized to perform fiscal policy, which involves creating new net financial assets for the private sector.

      Instead, the Fed is supposed to pay reserves in return for other assets in a one-for-one swap. As long as that doesn’t happen, then asset inflation would not trouble the SFB model. And even then, as long as one properly accounted for a Fed expenditure that paid more than market value for a private sector asset as government spending, then I still don’t see any problem that would make the SFB inapplicable.

  5. Re: “They can’t understand A + B + C = zero not because they are stupid but because they don’t want to understand it. They don’t want to understand it because they are afraid of something.”

    Upton Sinclair:

    “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

    ― Upton Sinclair, “I, Candidate for Governor: And How I Got Licked”

  6. William Wilson

    Great explanation/discussion of sectoral financial balances (SFB) concepts, however, do you think that P Wallach is familiar with MMT concepts? By the way I inserted the word: ASSUME (in caps) in the following paragraph.

    “So, with that as background, let’s now look again at the notion that tax revenues and spending should be matched by Government policy over the coming decades. Let’s be really permissive about this and suppose that the Government has three decades to match spending and tax revenue, and let’s also suppose that we continue to run trade deficits over the next 30 years averaging 3.5% of US GDP over that period, and let’s also ASSUME that households and businesses desire to accumulate wealth averaging 5% of GDP over that period. Then what would happen?”
    You als0 wrote a typo in your above reply to ENTREPOSTOL: “things” should read “thinks”.