QE3, Treasury Style—Go Around, Not Over the Debt Ceiling Limit

By Scott Fullwiler 

Cullen Roche’s excellent post at Pragmatic Capitalism explains—via comments from frequent MMT commentator Beowulf (see here) and several previous posts by fellow MMT blogger Joe Firestone (see the links at the end of Cullen’s post and also here and here)—that the debt ceiling debate could be ended right now given that the US Constitution bestows upon the US Treasury the authority to mint coins (particularly platinum coins).  Further, this simple change would lift the veil on how current monetary operations work and thereby demonstrate clearly that a currency-issuing government under flexible exchange rates cannot be forced into default against its will and is not beholden to “vigilante” bond markets.  As Beowulf explains in a later comment, “The anomaly it addresses is that the US Govt has a debt limit yet an agency of the US Govt (the Federal Reserve) does not have a debt limit.  Clearly this is a structural defect.”

The following is a description of how the process would work and the implications for monetary operations:

1. The Treasury mints a $1 trillion coin, or whatever amount is desired.
2. The Treasury deposits the coin into the Treasury’s account at the Fed.  The Fed’s assets (coin) and liabilities (Treasury’s account) increase by the same amount.  As Beowulf notes later in a comment to the same post from Cullen, were the Fed to resist, the Federal Reserve Act clearly states that “wherever any power vested by this Act in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.”  The Fed is legally an agency operating at the pleasure of the government, not vice versa.  Regardless, the actions I describe here and below by the Treasury in no way interfere with the normal operations of monetary policy (explained in various places below).
3. The Treasury buys back bonds (thereby retiring them) until total market value purchased is equal to the dollar value of the newly minted coin.  The result is a decrease in the Treasury’s account at Fed and an increase in bank reserve balances held at the Fed.
4.  Total debt service for the Treasury falls, too, as higher interest earning bonds are replaced with reserve balances earning 0.25%.  Effective debt service on purchased bonds now is 0.25% since interest on reserve balances reduces the Fed’s profits that are returned to Treasury each year.
5.  The retirement of bonds is an asset swap, no different from QE2, except that the Treasury has purchased the bonds instead of the Fed.  But since the Treasury’s account is on the Fed’s balance sheet, there is no operational difference.  That is, this is effectively “QE3, Treasury Style.”  As with QE2, no net financial assets have been created for the non-government sector.  The net effect, like QE2, is to reduce the term structure of US debt held by private investors, as bonds have been replaced with reserve balances.
6.  The increase in reserve balances is not inflationary, as Credit Easing 1.0, QE 1.0, and QE 2.0 already have shown.  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.  Widespread belief that reserve balances add “fuel” to bank lending is flawed, as I explained here over two years ago.
7.  Non-bank sellers of the bonds purchased by the Treasury now have deposits earning essentially 0%.  Again, this is not inflationary.  There are three points to make in explaining why.
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 are 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 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 here 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 dissaving, as opposed to 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.  Further, by definition, spending more out of existing income is a re-leveraging of private sector balance sheets.  This is highly unlikely in the current balance-sheet recession and is aside from the fact that QE again does nothing to facilitate more spending or credit creation beyond what is already possible without QE.  The exception is that QE may reduce interest rates, particularly if the Fed or (in this case) the Treasury sets a fixed bid and offers to purchase all bonds offered for sale at that price—though this again may not lead to more credit creation in a balance-sheet recession and has the negative effect of reducing the net interest income of the private sector.  (As an aside, a key difficulty neoclassical economists are having at the moment is they do not recognize the difference between a balance-sheet recession and their own flawed understanding of Keynes’s liquidity trap.)
From points 5, 6, and 7, QE3, Treasury Style can only be as inflationary as QE2 (which is to say, not at all, aside from indirect, temporary effects of commodities speculators who believed QE2 would be inflationary), since operationally it’s the exact same thing in terms of the effect on the non-government sector’s financial position.  Anybody arguing that QE Treasury Style would be inflationary must explain why QE2 wasn’t inflationary.  Neoclassical economists are currently saying “interest on reserves” is why QE2 didn’t work (they’re completely wrong; see my update to the post here and also here), but QE Treasury style similarly requires interest on reserves or the Fed to drain reserve balances with time deposits offered to banks if the Fed is to hit an overnight target.  In other words, there’s no such thing as QE Fed Style or Treasury Style without interest on reserves (or, alternatively, time deposits).
8. The debt ceiling crisis is averted, as US debt outstanding has been reduced by the dollar value of the minted coin, and can continue to be reduced as desired.  This simple asset swap demonstrates that the self-imposed constraints of the debt-ceiling, counting Treasury securities held by the Fed against the debt ceiling, and forbidding the Fed from “lending” to the Treasury directly are just that—self-imposed—and are not operational constraints at all.  The only constraint is in the flawed understanding of the monetary system that is standard today among the macroeconomists writing textbooks and advising policymakers, or acting as policymakers themselves.  From points 6 and 7 above, this asset swap is not inflationary—spending without issuing bonds is not any more inflationary than spending with bond sales, as I explained here and here.
9.  Fed is the monopoly supplier of reserve balances, the Treasury is the monopoly supplier of coins.  Future deficit spending by the federal government could thereby continue to be carried out by minting coins and depositing them in the Treasury’s account at the Fed.  It then would be clear to everyone that the Treasury’s spending is not operationally constrained by revenues or its ability to sell bonds.  It would be obvious that the Treasury spends by crediting the reserve accounts of banks, who in turn credit the deposit accounts of the spending recipients.  Deficits would increase the quantity of reserve balances circulating and currently earning 0.25%.  As MMT’ers have explained for years (even decades), the operational purpose of the Treasury’s sale of a bond is merely to aid the Fed’s ability to achieve its overnight target by draining reserve balances created by a deficit.  But even selling bonds isn’t operationally necessary if the Fed pays interest on reserve balances at a rate equal to its target rate.  On the other hand, if the Fed set the rate on reserve balances below its target and the Treasury no issuing bonds, the Fed could issue its own time deposits (with Congress’ blessing) to drain reserve balances created by a deficit.  Whether the Fed’s target rate were set above the rate paid on reserve balances or equal to it, effective interest on the national debt clearly would be a monetary policy variable (as interest paid on reserve balances or on time deposits by the Fed reduces the Fed’s profits returned to the Treasury), as it at the very worst can be even under current operating procedures (see here and here).
10.  This approach to dealing with the debt ceiling is far better than the recent proposal by Ron Paul, as again it lifts the veil on current monetary operations and recognizes the currency-issuing status of the US federal government.  Instead, Paul proposes that the Fed destroy its holdings of Treasury securities.  What’s strange about the proposal is that it shows that Paul either doesn’t understand monetary operations or is trying to have it both ways.  Destroying the securities requires reducing the Fed’s capital by the same amount.  Given the Fed’s miniscule level of capital (because, again, it has virtually no retained earnings after transferring them all to the Treasury each year), its capital would be way into negative territory.  This isn’t a problem operationally, given that the Fed is the monopoly supplier of reserve balances.  But recall that Paul was one of those protesting Credit Easing and QE1 the loudest, claiming that these would surely destroy the Fed’s capital and leave it insolvent.  (Again, this is only relevant operationally under a gold standard or similar monetary arrangement—Paul and others like him want to analyze the US national debt and the Fed as if a gold standard existed, and then claim that a going on the gold standard is the solution to all of our problems, but I digress.)  So, effectively Paul’s proposal would leave the Fed in a state of (in his view) “insolvency”—perhaps he does know what he’s doing and his debt ceiling proposal is just part of his grand plan to “end the Fed.”  Otherwise, it would have been simpler to simply propose exempting the Treasury securities held by the Fed from counting toward the debt ceiling.
Lastly, giving credit where it is due, I want to again recognize the efforts of both Joe Firestone and Beowulf in researching and explaining the legal basis for and operational implications of the Treasury’s Constitutional authority to mint its own coin(s).  This post benefits significantly from their important, original work.

54 responses to “QE3, Treasury Style—Go Around, Not Over the Debt Ceiling Limit

  1. Even if the authors proposals are a short term solution it’s counterproductive because it fails to explain how the system works. What is lacking in our institutions is transparency and trust. The public will simply think this is another accounting fraud like all the others bubbles in our boom/bust economy. The existing system is an operational failure. The mainstream economists don't even know why. No one does but the Kansas City folks. MMT tells them what happen, what went wrong, how to fix it, and how to make the economy purr like a damn kitten. MMT must introduce basic concepts for both non-MMT economists and the public to grasp. For example, government debt of a currency issuer is the currency user’s savings as a matter of double entry accounting. It is a digital resource – a digital account corresponding to all the savings of currency users’ in banknotes, deposits, and treasuries.Another example, our objective isn’t to balance the budget as a currency issuer, it’s to optimize it. Fiscal optimization at any level of public spending of a currency issuer requires balancing tax revenues with spending while running deficits at a rate corresponding to users saving rate. For those of you interested I’ve outlined a laymen’s explanation here – http://www.DollarMonopoly.com Our current problems, excluding our poorly structure banking sector, have nothing to do with ideology or politics (capitalism/ socialism/ communism) but rather poor monetary management.as cullen said yesterday on his blug – the situation would be laughable if it wasn't so painful

  2. Sense i’m on a tirade. I might as well double down. If another currency issuer (china) wants to save in your currency it’s not only harmless it is desirable because then you don’t have to use up your resources on making consumer junk. Who cares who makes a toaster as long as you can buy one. Now to displace those china’ s savings our federal government needs to spend. Spend on what? R&D that can subsidize next generation technology for the private sector. Not only is the US the policeman of the world’s seas but it also needs to lead the world in technology innovation.Dude this is how you sell MMT, troubleshoot the problem, paint a big [email protected] vision, and then after they have bought into your genius MMT propositions…you tell them how the banking sector needs to be structured for transparency and stability to remove systemic risk. All the stuff warren talks about like not letting private banks sell off their loans and requiring real assets as collateral.The reason we are in mess is because mainstream economists do not grasp these basic counterintuitive concepts. Why don’t they understand? Economic speak. We have become victims of our own thinking. We have convoluted a difficult subject to the point nobody can agree on anything.Change the frame. Change the game. Wake up people!

  3. Brilliant! Send to DC!BTW, I think it would be a real value-add to include simple T-accounts in these types of technical articles, particularly for those readers less "in-paradigm." You did this in your "Helicopter Drop" article, and I found it very helpful.

  4. For example- why would reserves necessarily increase? If the Treasury buys bonds from the Fed's balance sheet, as opposed to banks', what would be the accounting statement?

  5. Craig . . . thanks. Will respond to your email asap, btw.WH10 . . . thanks, too. Treasury purchases of bonds work exactly like any other time the Treasury spends. It spends from its account at the Fed, which raises reserve balances. Balance sheet wise, it looks like this:Fed Assets: No changeFed Liabs/equity: decrease Tsy acct, raise bank reserve balancesBank Assets if purchase from non-bank: raise reserve balancesBank Liabs/equity if purchase from non-bank: raise deposits of sellerBank assets if purchase from bank: raise reserve balances and decrease Tsy's heldBank liabs/equity if purchase from bank: no changeHope that helps.Best,Scott Fullwiler

  6. Thanks Scott. Look forward to hearing from you. General feedback would be great. I am actually in the process of reorganizing the material to keep a more streamlined message. In the mean time I exchanged a few comments with Ritholtz and waiting to hear back from him. I told him how terrible we were at marketing our ideas and that i went on a tirade complaining about the doublespeak. Not sure how it will playout but we'll see. http://www.ritholtz.com/blog/2011/07/wapo-column-happy-birthday-america-time-to-grow-up/

  7. Thanks Scott-I guess what I am confused about then is how those reserves are distributed through the banking system. In other words, if the Fed buys a treasury from a bank, the bank gets reserves. Now the Fed has a treasury security. If the Treasury now purchases that treasury security from the Fed, which bank(s) get the reserves?

  8. Hi WH10,You've got the transaction a bit confused. In the proposal, the Treasury is purchasing securities from the private sector, not from the Fed. As such, it's the same thing as when the Fed purchases securities from the private sector, also known as QE.Best,Scott

  9. Thank you, Scott. I really love this one.Two points:1) the authority to issue jumbo platinum coins with arbitary face value was passed by Congress in the mid-90s. Beowulf says ( http://my.firedoglake.com/beowulf/2011/01/03/coin-seigniorage-and-the-irrelevance-of-the-debt-limit/ ):"The Secretary has rather broad authority to mint coins, Congress was apparently feeling generous when it authorized platinum coins in 31 USC 5112(k)( http://www.law.cornell.edu/uscode/31/usc_sec_31_00005112—-000-.html ) (“with such specifications, designs, varieties, quantities, denominations, and inscriptions and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe…”). If deficit spending was paid for (eliminated actually) with miscellaneous receipts revenue generated by selling the Fed jumbo denomination coins, and since the Federal Fund Rate can now be pegged with Interest on Reserve payments in lieu selling Treasuries to drain excess reserves, Tsy could fund govt operations indefinitely without ever raising the statutory debt limit."So, the authority to produce the Jumbo Platinum coins is based on legislation, and on a delegation of Congress's power to issue money.2) Lately, there's been another development in the jumbo coin seigniorage argument. Wigwam, a blogger and commenter at MyFDL and DailyKos, has refined the proposal to use it in a way that may make it more acceptable politically in the current climate. he has a number of blogs on it, but I like this one a lot: http://www.dailykos.com/story/2011/06/27/989304/-How-to-Knock-Two-Trillion-Dollars-Off-the-National-Debt,-Ending-the-Debt-Limit-Crisis?via=blog_791510 and think you should be aware of the details. Wigwam is just getting up to speed on MMT; but seems to me a pretty deep thinker who can come up with new wrinkles for us.Your treatment of the money flows involved in this proposal above and your analysis of the unlikelihood of inflation as a result of using it is crystal clear and invaluable. I think you very much for it.

  10. Joe, Thank you so much for posting those links here. I was trying to corral all of them as I was writing this and knew I had missed some.Best,Scott

  11. Scott,Someone – Warren Mosler? – should try to get publicity for this on MSNBC Rachel Maddow, Lawrence O'Donnell or Ed shows.

  12. Scott- got it! I was mixing up this proposal with the Ron Paul one. On that note, though, is there any merit to buying Fed holdings? Do you think this would have a lesser impact on inflationary concerns? I agree this proposal "lifts the veil" more deliberately, but I wonder if the jumbo coin/Paul hybrid would be more politically feasible and a less disruptive introduction of MMT to the markets…"Your treatment of the money flows involved in this proposal above and your analysis of the unlikelihood of inflation as a result of using it is crystal clear and invaluable. I think you very much for it."Yes- this was my favorite part of the article. It should be cut and pasted into any MMT blogs addressing inflationary concerns!

  13. Ah- I see wigwam's proposal was along the lines of what I was wondering (the jumbo coin/Paul hybrid)…

  14. And, yes, Joe, it can only be as inflationary as QE2 (which is to say, not at all), since operationally it's the exact same thing in terms of the effect on the non-govt sector's financial position.Anybody arguing that QE Treasury Style would be inflationary must explain why QE2 wasn't inflationary. Most will say "interest on reserves" is why QE2 didn't work, but QE Treasury style similarly requires IOR or the Fed to drain RBs with time deposits offered to banks if the Fed is to hit an overnight target. In other words, there's no such thing as QE Fed Style or Treasury Style without IOR (or time deposits).

  15. Thanks, WH10,The inflation discussion is essentially the same as in my Levy WP with Randy Wray on QE2 back in December (written in November). I linked to it somewhere in the post with "QE," I think. As I said to Joe, anyone arguing that QE Treasury Style is inflationary has to explain why QE2 wasn't, since they're the same thing.

  16. Right, Scott. The thing is, Roche and Mosler do argue QE2 was inflationary if you look at commodity speculation and long term rates (which actually increased). So it's not so much what should/will happen but what misguided markets *think* will happen. And so I wonder if the coin/Paul proposal would be less likely to mislead markets. But I could easily see people crying foul in either scenario…

  17. While we're talking about inflation….Mosler says the main reason (other than interest rate maintenance) we issue debt is because it's a law we never got rid of after ending the gold standard. He explains it as we needed people to give up their cash for bonds so that they wouldn't exchange them for gold. Doesn't that imply, though, that issuing bonds does in fact limit spending ability? Is there a difference today given institutional structures? Or am I misunderstanding?I always felt a paper/article clearly and meticulously explaining how the function and purpose of all the main fiscal and monetary operations differ between gold standard, fixed exchange rate, and floating fiat regimes would be really helpful and a necessary addition to MMT literature (at least for the purposes of convincing everyone else). Maybe there is one already? I usually only see gold standard/fixed rate regimes mentioned in passing.

  18. I posted a follow up with Ritholtz. Not sure what happen. It was awaiting moderation and now it's now showing up on the comments board. Anyway, please disregard the "egg-head professor" comment because the rest of it pretty tasty if i must say so myself:@ BarryI was told by one of the MMT folks your big criticism was … well exactly what you said "deficits dont matter”. From the way the MMT folks explain it I’d come to the same conclusion. Essentially, their approach is based on the theory of constraints where the objective is to maximize the constraining resource within a system to maximize throughput. Exceeding those real constraints, like production capacity, causes price instability and inflation. Failing to optimize deficits, for example, leads to excess capacity, reduced throughput, poor labor utilization, and opportunity costs. The root of MMT’s problem is that the concept of “savings” is inherently confusing on a macro level. For example Says law says, supply creates demand, but this presumes a managed monetary system. If a currency user exists within the system that acquires and saves a large amount of money and the issuer does not replenish the supply then there is no profits for the "Say's supplier" to take. Keynes' paradox of thrift, the idea that the more people save the less demand. Well, his model assumes an unmanaged monetary system. Both of them are losing sight of the fact that their models are presuming a monetary system in place. The question is what kind – managed or not? The confusion associated with MMT is wrapped up in these concepts. MMT is ground zero for negotiating these two extremes saying look what we need to do is optimize our monetary system based upon what currency users are doing. If they are saving we need to spend to add money. If they are not savings then we need to back off. And please don’t fear the word “managed”. Everything of value that is produced is managed at some level or another. Our modern capitalist system is no different. It's rules are not naturally ordained but simply the outcome of political arrangements. Political arrangements defined by law though property rights, the corporation, and the creation of money. Among other reasons, this is why classical economists never spoke of “economics” but always of the “political economy.” The intended purpose of these political arrangements is to benefit of society by reducing risk and driving economic development.Anyway, the point is the root of our current economic problems are operational rather than political. It has nothing to do with ideology (capitalism/ socialism/ communism) and everything to do with poor monetary management. For the last 40 years, since Nixon closed the Gold Window, the entire mainstream economic profession has failed to understanding the fundamental nature of our monetary system. Their fear of the federal deficit is a testament to their complete misunderstanding of the accounting relationship between the issuer and user. Sadly, the blind are leading the blind. Mainstream economists are using the wrong models, drawing the wrong conclusions, and giving the wrong advice to our policymakers. Barry it's only a matter of time but you, along with everybody else, is going to realize that the Kansas City folks have our problems pegged to a T. So what do you think? Worth a reconsideration?

  19. The opening paragraphs of section 5112:(a) The Secretary of the Treasury may mint and issue only the following coins:(1) a dollar coin that is 1.043 inches in diameter.(2) a half dollar coin that is 1.205 inches in diameter and weighs 11.34 grams.(3) a quarter dollar coin that is 0.955 inch in diameter and weighs 5.67 grams.(4) a dime coin that is 0.705 inch in diameter and weighs 2.268 grams.(5) a 5-cent coin that is 0.835 inch in diameter and weighs 5 grams.(6) except as provided under subsection (c) of this section, a one-cent coin that is 0.75 inch in diameter and weighs 3.11 grams.(7) A fifty dollar gold coin that is 32.7 millimeters in diameter, weighs 33.931 grams, and contains one troy ounce of fine gold.(8) A twenty-five dollar gold coin that is 27.0 millimeters in diameter, weighs 16.966 grams, and contains one-half troy ounce of fine gold.(9) A ten dollar gold coin that is 22.0 millimeters in diameter, weighs 8.483 grams, and contains one-fourth troy ounce of fine gold.(10) A five dollar gold coin that is 16.5 millimeters in diameter, weighs 3.393 grams, and contains one-tenth troy ounce of fine gold.(11) A $50 gold coin that is of an appropriate size and thickness, as determined by the Secretary, weighs 1 ounce, and contains 99.99 percent pure gold.

  20. wh10 wrote:"I always felt a paper/article clearly and meticulously explaining how the function and purpose of all the main fiscal and monetary operations differ between gold standard, fixed exchange rate, and floating fiat regimes would be really helpful and a necessary addition to MMT literature (at least for the purposes of convincing everyone else). Maybe there is one already? I usually only see gold standard/fixed rate regimes mentioned in passing."I would reiterate, double, and re-double on this. I'm rapidly coming to believe that the real difficulty MMT is having with getting traction in both academic and policy debates is the historical and contemporary prevalence in modern western culture of the "commodity money paradigm." In that paradigm, the idea of a "fiat money regime" is suspect and dangerous.I'm coming to believe it's crucial for us to allocate our rhetorical resources to a frontal attack on that fundamental misunderstanding and mischaracterization.If we can achieve a "paradigm shift" on this in the discourse, I suspect the arguments for MMT will find a much less suspicious and hostile audience.

  21. WH10,Yes, I agree that expectations that QE2 would be inflationary created a commodities and equities speculation, as you said. That's not the point I'm making. There's no direct link between QE and aggregate demand. Because of that, any indirect effect from speculation is going to be temporary. Randy and I said all that in our paper in November. We saw it all coming. You probably know all of this already.Anonymous and WH10,Here are a few. Let me know if they hit the points you are interested in:http://www.epicoalition.org/docs/exchange_rate_policy_and_full_em.htmhttp://www.cfeps.org/pubs/wp/wp26.htmlhttp://www.levyinstitute.org/publications/?docid=878Best,Scott Fullwiler

  22. Steve,Then, in (k), it says:"(k) The Secretary may mint and issue PLATINUM bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time. "Just one jumbo platinum coin will do it.

  23. This isn't exactly a new idea. I had the same thought halfway through reading 'The Lost Science of Money' years ago. What I never did think was that it would actually come to this point where we actually had to contemplate doing it.Damn, we are an ill-informed society. You would think at some point that *someone* in Congress would see the inherent conflict between them creating money through their laws and then 'limiting' how much they can spend through this stupid debt ceiling.Maybe this will finally be the conflict that brings the truth about MMT (or MMR as I call it: Modern Money Reality) to the mainstream and gets the public to finally understand the difference between a currency user and a currency issuer. Maybe, just maybe it will get through their thick skulls that we can never go broke and that inflation is the only thing that needs to be considered. Then we might be able to have a rational discussion on how to build a sustainable economy that doesn't screw the people that makes the whole democracy thing work- the middle class.As long as I'm dreaming, I may as well add to my fantasy wishlist the day we discover that concentrated wealth destroys democracies.

  24. STF:Dont' get me wrong. I love the idea. But those who do not will certainly point to (a). They will also say that a "bullion coin," by definition, has a value determined by its metal content, so cannot be issued with an arbitrary, fiat value.

  25. Formerly Anonymous. Not to be confused with Anonymous No. 2, who apparently has not yet seen the light.STF . . . thanks for the cites; I'll have a look. 🙂

  26. No worries, Steve. See the post I linked to in the first paragraph by Beowulf. I like your blog, btw!

  27. I'm with you, Robert!

  28. Steve,FYI, in the link to the discussion earlier this year on Mosler's site, Beowulf says this:"I should make a distinction between bullion and proof coins sine Congress authorized Secretary to issue both platinum bullion and and platinum proof coins. Congress does direct Secretary to price gold bullion coins at or near its metal market price, but does not do so for platinum bullion coins. Tsy doesn’t issue platinum bullion coins anyway, what it does issue are platinum “proof coins”, the coin world equivalent of a pimped out car with the (for lack of a better term) “gold package”."And then this:"Proof coins (for silver, gold and platinum coins) have always been sold marked up above metal market price without affecting underlying market prices. Of course all that matters in terms of monetary operations is the “face value” of the coin, currently issued 1 oz. platinum proof coins have a face value of $100. And the Secretary has full discretion to set face value (“denomination”) in the platinum coin statute. So call it a 2 oz. platinum proof coin (metallic value, just over $3800) with a face value of $500 billion. He also has full discretion on platinum coin design, so Geithner could make his mark by putting his iris scan on the back (fingerprints are old school)."Best,Scott

  29. Btw, I had made a similar observation more than a year back at "Marshall's Latest" Some comments can't be linked directly. Check my comment at "Ramanan Reply: May 25th, 2010 at 3:38 pm"http://moslereconomics.com/2010/05/14/marshalls-latest/The Treasury can hand out Treasury coins to the Federal Reserve. This increases the Treasury’s liabilities not the public debt. It also increases the Fed’s assets and liabilities. Cheques written by the Treasury decreases the Fed’s liabilities to the Treasury and increases the liabilities to the banks. Cheques written do not increase the Treasury’s “public debt”, and hence the debt limit doesn’t have any meaning if carried out this way.

  30. Hi Ramanan,Yes, I noticed many, many good comments from you on these issues as I was looking through past discussions at Mosler's. You clearly had it down correctly back then.Best,Scott

  31. Thanks Scott.Also in the same comment, I pointed out the definition of debt subject to ceiling, in case if one objects saying coin should also be considered debt subject to limit. http://www.treasurydirect.gov/govt/resources/faq/faq_publicdebt.htm#LimitDifferences says:What’s the difference between the Public Debt Outstanding and the Public Debt Subject to Limit?The Public Debt Outstanding represents the face amount or principal amount of marketable and non-marketable securities currently outstanding. The Public Debt Subject to Limit is the maximum amount of money the Government is allowed to borrow without receiving additional authority from Congress. Furthermore, the Public Debt Subject to Limit is the Public Debt Outstanding adjusted for Unamortized Discount on Treasury Bills and Zero Coupon Treasury Bonds, Miscellaneous debt (very old debt), Debt held by the Federal Financing Bank and Guaranteed Debt.

  32. So it looks like barry didn't post my comment and then blocked me from commenting. i asked warren to answer DeDudes comments about the velocity of money. Warren's emailed me the response below which i'll post here since no more bigpicture.com for me. [warrens comments are in brackets]http://www.ritholtz.com/blog/2011/07/wapo-column-happy-birthday-america-time-to-grow-up/DeDude Says: July 10th, 2011 at 10:08 amDollarMonopoly @ 6:37“When a currency user, like China, saves the government must spend to replace those dollars to maintain a given output”[and/or cut taxes. but not to 'replace' but to sustain aggregate demand if China's accumulation of dollar financial assets or anything else is causing a lack of demand, as evidenced by unemployment. ]Yes it is true that if a country like China saves $1 trillion it has basically taken those dollars out of our economy and our economy would slow if nothing is done. Same goes for the other trillions that are basically just parked somewhere.[right.]But the Kansas model is a little to simplistic because it is not the amount of dollars that drives the economy it is the momentum of dollars (= amount x speed). So you can fix the problem by either increasing the amount of dollars or by increasing the speed of existing (remaining) dollars.[increasing the 'speed' in this context means private sector credit expansion. Velocity per se- more transactions- can increase gdp as we measure it but not unemployment as we define it. unemployment comes from the govt, for a given level of taxation, not spending enough to provide the funds needed to pay taxes and net save. 'Speed' can't create net financial assets. But private sector 'borrowing to spend' is a drop in savings desires per se, which can reduce unemployment, as in the late 1990's.]So the problem is that China brought the speed of a trillion of our dollars down to zero, so the remaining dollars have to circulate faster in order to keep the same monetary momentum going (or else the economy will slow).[Not true, as above.][Current monetary expansion is trying to compensate for slowing of the speed of money (as people are breaking money speed by putting it into savings rather than spending it).Correct, with 'monetary expansion' meaning 'borrowing to spend' with that borrowing 'creating' bank deposits and other lender liabilities often defined as 'money.' Going into debt to spend reduces one's net savings. So willingness to go into debt to spend (house payments, car payments) means reduced savings desires. And that way the same nominal dollar savings coincides with less unemployment ]They need to also have a policy to increase the speed of money. If they want to reduce the deficit (take money out of the system) the have to have a plan for how to get the remaining money to move faster -or total money momentum (the economy) will slow further and we will be dumped into a double dip recession.[Correct, private sector borrowing is private sector deficit spending, and that can do the trick and has done the trick in the past. The problem is both that it's unsustainable as has been repeatedly demonstrated in the past and that it can't be conjured up by 'monetary policy' such as rate cuts, qe, etc. etc. It gets conjured up by fiscal adjustments such as tax cuts and/or spending increases. That's what gives the acceleration once fiscal adjustments overcome current conditions and get things going]

  33. Craig, You said:"Even if the authors proposals are a short term solution it’s counterproductive because it fails to explain how the system works. What is lacking in our institutions is transparency and trust. The public will simply think this is another accounting fraud like all the others bubbles in our boom/bust economy. . . . "I think explaining how the system works and getting people to understand is not something that's going to happen between now and August 2nd. And whether or not people did come to understand it would be too late to block any default which might otherwise occur, or a compromise that eviscerates key parts of the Social Safety net.Our solution is good in that it takes care of the short-term problem (though there will another one in 2-3 months when the budget comes up), while it demonstrates that the Government makes the money and can never run out it. In this respect, my version of the solution, i.e. stop issuing debt by always using coin seigniorage, is preferable to Wigwam's trick of just using coins to buy back the Fed-owned bonds to get them off the books. That's because his is a one-shot demo of the idea that the Government makes the money without inflationary consequences, whereas mine is a continuing demo of those two ideas.In the ling run therefore this solution contributes toward getting MMT accepted because people can see plainly that there is no solvency, and not necessarily an inflation problem. Once these things are demonstrated, MMT education will become a lot easier for people to swallow, because the solvency risk barrier and the idea that the Government doesn't need "funding" will be firmly established.

  34. Very good stuff, Ramanan! Thank you!

  35. @ Steve RothSteve – even the dictionary defines gold/silver bullion as:noun1. gold or silver considered in mass rather than in value.

  36. No offense intended, but I doubt that witty solutions are the solution. There'd been an earlier discussion over at Real World Economics Review that the Fed Res could accept whatever collateral Treasury might post (parks, oil reserves, future tax revenues… I suggested an Armored Division or two…) and credit the Fed Gov accounts. All that's on hand, don't know from where the platinum comes. Whether the Ministry of Finance can legally post collateral like that, I don't know, so maybe (and even the premise is doubted, given the comments) there being some legal ground for the One Big Coin solution makes it superior….But ya know, all of it seems obedience to superstition for the benefit of those who still need to believe that money is something essentially physical, tucked away, somewhere.

  37. "3. The Treasury buys back bonds (thereby retiring them) until total market value purchased is equal to the dollar value of the newly minted coin."And, "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%)."I might be wrong, but I thought treasury bonds were not callable.

  38. "Second, the seller of the security now holding a deposit is earning less interest can convert the deposit to an interest earning balance.""This is highly unlikely in the current balance-sheet recession and is aside from the fact that QE again does nothing to facilitate more spending or credit creation beyond what is already possible without QE."What if they start trying to saving in real assets? What if the rich entities that aren't balance sheet constrained start levering up (debt) with real assets? What if producers notice this and don't react to higher prices by increasing production? Does that lead to higher prices with little growth making the budgets of the lower and middle class even worse?

  39. "From points 6 and 7 above, this asset swap is not inflationary—spending without issuing bonds is not any more inflationary than spending with bond sales, as I explained here and here."How about … -spending without issuing bonds is not any more [price] inflationary [in the present but could be in the future] than spending with bond sales?

  40. Had Enough- what's your rationale for why it could be in the future?

  41. I've a question for Scott or any poster competent enough to answer:There is obviously a perception problem of what federal (or any monetary sovereign nation) debt and deficits mean. There is an operational and practical way to destroy or reduce the total amount of outstanding debt of the federal government? People can only see the total amount and automatically deduces "oh noes, so much debt, we can't pay" because they still are stuck in the government = household mental frame. reducing the outstanding amount of debt securities in the balance sheet of the government (FED and/or Treasury) and swapping it with other asset class (money) could be relieving for the public and prevent political utilization of this non-problem.Also it would be anti-inflationary, because of the reduction of interest payments.

  42. I know the proposal does relief the debt problem in the short term and if used frequently (as suggested by Scott in point 9/10) it would in the long term reduce all the federal debt.But I mean in the short term (for example what Ron Paul wanted to do), without compromising the FED (or Treasury) balance sheet (even if it's irrelevant). Basically what I mean is destroying these assets in the hands of the FED already without compromising its capital or creating any operational and legal problem.

  43. Hi Had Enough,"I might be wrong, but I thought treasury bonds were not callable."Actually a large number are, but it doesn't matter as they can be purchased in the open market just as was done during the late 1990s."What if they start trying to saving in real assets?"That would mean capital spending, which is the opposite of net saving. That would work, too, but who's going to do that if the household sector's trying to deleverage instead of spend on the stuff the capital goods would be used to produce? It would work, though, if it happened, at least in terms of stimulating the economy and helping out households by creating jobs and raising incomes. Rob Parenteau and Yves Smith have written on proposed policy actions that would incentivize such actions."What if the rich entities that aren't balance sheet constrained start levering up (debt) with real assets?"Yes, same as above."What if producers notice this and don't react to higher prices by increasing production? Does that lead to higher prices with little growth making the budgets of the lower and middle class even worse?"Well, capital spending is by definition an increase in production, unless there are all sorts of capital that have been produced waiting to be sold. Unlikely, aside from housing and business offices, since capital is usually so specific to the needs of the purchaser. "How about … -spending without issuing bonds is not any more [price] inflationary [in the present but could be in the future] than spending with bond sales?"Nope. With bonds its more inflationary in the future because you've added debt service that wouldn't be paid without bonds.Best,Scott Fullwiler

  44. It likely won't come down to the Treasury minting a large coin. Obama will, instead, cut trillions from Federal spending over the coming decade. he'll help cure this recession with a depression.

  45. Hi, Scott.wh10 said: "Had Enough- what's your rationale for why it could be in the future?"STF's post said: ""How about … -spending without issuing bonds is not any more [price] inflationary [in the present but could be in the future] than spending with bond sales?"Nope. With bonds its more inflationary in the future because you've added debt service that wouldn't be paid without bonds."Scenario 1: Apple saves $100 in a checking account. The gov't deficit spends with a bond attached. Apple buys the bond for 1 year.$100 of medium of exchange (Apple) was saved (velocity 0) and then destroyed. $100 of medium of exchange was created for the gov't deficit. At the end of the 1 year, $100 of medium of exchange is destroyed from gov't debt payback and $100 of medium of exchange is created for Apple. Apple then spends the $100.I set up the gov't budget to make both interest payments and principal payments. I ignored the interest payments.Scenario 2: Apple saves $100 in a checking account. The gov't deficit spends $100 with no bond attached.$100 of medium of exchange (Apple) was saved (velocity 0). $100 of medium of exchange was created for the gov't deficit. No one really notices the extra $100 of medium of exchange because of the saved $100 (velocity 0). At the end of 1 year, Apple spends the $100 of medium of exchange. Now there is $200 of medium of exchange with a velocity.

  46. STF's post said: ""I might be wrong, but I thought treasury bonds were not callable."Actually a large number are, but it doesn't matter as they can be purchased in the open market just as was done during the late 1990s."I will try to remember that. However, if they are purchased in the open market, will they need to be purchased above par price to get people to sell them? If so, would that create new medium of exchange?"What if they start trying to saving in real assets?"That would mean capital spending, which is the opposite of net saving." I don't see that as capital spending. I take the new coins and invest in oil or gold (I'm still saving in a financial asset). Their prices go up. Saudi Arabia says the price of oil is up $25 and asks are there any shortages. They get an answer of no just higher prices. They don't increase production any more than what was planned already. Gold producers say the gold price is up. We can't produce anymore. In both cases, there is little to no increased production due to the higher prices.

  47. "Future deficit spending by the federal government could thereby continue to be carried out by minting coins and depositing them in the Treasury’s account at the Fed. It then would be clear to everyone that the Treasury’s spending is not operationally constrained by revenues or its ability to sell bonds. It would be obvious that the Treasury spends by crediting the reserve accounts of banks, who in turn credit the deposit accounts of the spending recipients."I go redeem my $100 demand deposit account at the bank. Mark down my demand deposit account by $100, mark down the reserve account of my bank by $100, mark down the Treasury's account at the fed by $100. Is that correct accounting?If so, what is the difference between that, and the Treasury just mailing me the $100 coin?If so, that is one way to get more medium of exchange into circulation. I don't think it is the best way.

  48. "If so, what is the difference between that, and the Treasury just mailing me the $100 coin?"First, when you redeem your deposit for currency, your bank's reserve account isn't debited. It takes the $100 out of its vault cash.Second, you're not understanding the proposal. There's no suggestion whatsoever for the newly minted coin(s) to circulate among the public. It's deposited by the Tsy in its account at the Fed, where it stays. The Tsy then has a positive balance to purchase securities. It's no different from QE2, as I said in the post."If so, that is one way to get more medium of exchange into circulation. I don't think it is the best way. "Again, there's absolutely nothing in this post suggestive of getting more medium of exchange into circulation. And even so, that wouldn't help anything, either.

  49. "Future deficit spending by the federal government could thereby continue to be carried out by minting coins and depositing them in the Treasury’s account at the Fed. It then would be clear to everyone that the Treasury’s spending is not operationally constrained by revenues or its ability to sell bonds. It would be obvious that the Treasury spends by crediting the reserve accounts of banks, who in turn credit the deposit accounts of the spending recipients."Let me try it this way. The gov't sends me the $100 coin. I then put it in the bank. The bank ships it to the fed. Mark up the reserve account of the bank by $100 and mark up my demand deposit account by $100. Doesn't the accounting end up the same? Plus, don't I now have $100 in new medium of exchange with no bond/loan/IOU attached?"First, when you redeem your deposit for currency, your bank's reserve account isn't debited. It takes the $100 out of its vault cash."What if there isn't enough vault cash?""If so, that is one way to get more medium of exchange into circulation. I don't think it is the best way."Again, there's absolutely nothing in this post suggestive of getting more medium of exchange into circulation. And even so, that wouldn't help anything, either."Can't price deflation be thought of as a shortage of medium of exchange? I'm of the opinion that creating more of the right type of medium of exchange and distributing it more evenly would make up for the past medium of exchange mistakes.

  50. Had enough,As I explained in the post, "money" doesn't spend itself.

  51. Also, in line with what I just said, your "government sends me a coin" example is an increase in income. The policy proposed here is nothing like that. It does not increase anybody's income outside of spending already authorized by Congress. You still don't seem to grasp that very basic point.Best,Scott

  52. Under an MMT financial regime, what limits over- expenditure by government entities – hence creation of 'too many' dollars – despite efforts by interest groups to extract more wealth from the public than they produce?Thank youBernard Super

  53. One last time. If this does not work, I'll consider what you said. You consider what I said because I am reasonably certain this medium of exchange issue will return.Scenario: Apple saves $100 in a checking account.Medium of exchange supply is the same. Medium of exchange supply in circulation goes down by $100.The gov't deficit spends $100 with a bond attached. Apple buys the bond for 10 years.The $100 of medium of exchange (Apple) that was saved (velocity 0) is destroyed.Medium of exchange supply goes down by $100. Medium of exchange supply in circulation this time stays the same. Apple now has a $100 bond as its asset that serves as its "saving vehicle".Next, the medium of exchange supply goes up by $100 (spending for the gov't deficit), AND the medium of exchange supply in circulation goes up by $100.At the end of 1 year, the $100 coin is minted.The Treasury buys back the $100 bond from Apple (thereby retiring it)."Non-bank sellers of the bonds purchased by the Treasury now have deposits earning essentially 0%."OK. Apple now has $100 more in its checking account (markup), which increases the medium of exchange supply by $100. I'm thinking the reserve account of Apple's bank got a $100 reserve markup too, but I could be wrong about that."Second, the seller of the security now holding a deposit is earning less interest 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 here that holders of deposits aren’t necessarily doing so to spend. Deposits don’t spend themselves, after all."I believe here is where the disagreement is. If Apple decides to save the demand deposit for the next 9 years, then there is no problem (the medium of exchange supply in circulation stays the same). If Apple decides to spend it or "save" it in oil by raising the price $20, then there could be a price inflation problem (the medium of exchange supply in circulation goes up by $100). I assumed the oil price sticks with no big change in real GDP (oil supply and oil demand mostly inelastic).I ignored the interest payment transfer between the borrower and the lender. I assumed no principal payment in the first year. If so, the $100 coin would be less. I believe it is possible that the gov't could deficit spend $100 and then sell the bond later to Apple. Let's skip that timing issue.Here are a couple of other things. In your coin example, the bond was retired. It does not seem to me that QE2 is about retiring the bond(s).Lastly, the $100 Apple demand deposit in its checking account is "backed" by the coin, while all other medium of exchange (currency plus all the other possible demand deposits) are backed by a bond. I'm thinking there is a difference there.

  54. nice post I really like it