By Scott Fullwiler
Solving the debt-ceiling issue via proof platinum coin seigniorage—an idea that began and was nurtured within the MMT ranks, mostly by Joe Firestone and Beowulf (see Joe’s post here and the numerous links therein)—has gone viral in the blogs and news sources as a viable option to end the debt ceiling crisis. The one thing that naysayers, and even some supporters, instinctively claim, however, is that coin seigniorage would be inflationary or even hyperinflationary. But this is not true!
Let’s begin by noting the most basic point in the proposal (see link above for more details)—a platinum coin or coins would be minted and deposited in the US Mint’s Public Enterprise Fund (PEF) at the Fed, where it would be credited for its (their) full legal tender face value by the Fed. The Treasury would then “sweep” the profits (the difference between the cost to the Mint of producing the coin (s) and face value of the coin(s)) into the Treasury general Account (TGA) at the Federal Reserve. The face value of the coin(s) can be whatever the Mint chooses to stamp on it (them); there is no requirement that the coin(s) weight be related to the face value. So, the coin(s) could be $1 trillion or more, or less if preferred. This is all perfectly legal, as, again, several blogs and news articles have explained. It’s highly unlikely that one would have to worry about the coin(s) being stolen—they would be nothing more than a collector’s item as the extraordinarily high dollar value could never actually be cashed anywhere (who’s going to give you change for $1 trillion?).
So, why won’t coin seigniorage, using very large face value coins, be inflationary? Here are the reasons:
The coin(s) would never circulate among the public. It (they) would always remain on the asset side of the Fed’s balance sheet, and would always rest in a vault at the Fed. Since the platinum coin(s) never circulate(s), minting and depositing the coins at the Fed cannot possibly be inflationary.
Depositing the coin into the Treasury’s account at the Fed will provide the Treasury with an account balance nearly equal to the stamped value of the coin(s), but this is not inflationary, either, for the following reasons.
Coin Seigniorage and Government Spending
1. The Treasury can never legally spend any more than what has been appropriated by Congress. Congress still retains the “power of the purse,” actually the “power of the purse strings.” So, the coin(s) will never add to the government’s spending beyond what has been passed by both houses and signed by the President. There will be no inflation resulting from additional spending, due to coin seigniorage itself, since there won’t be any spending on goods and services not appropriated by Congress. So, as long as Congress doesn’t appropriate spending great enough to be inflationary, there’s no inflation problem, regardless of whether we use coin seigniorage to make the debt ceiling irrelevant.
Coin Seigniorage to Retire Debt Held by the Federal Reserve
2. The balances in the Treasury’s account could simply be used to retire the debt owed to the Fed. As of July 28, this is $1.635 trillion. So, the Mint stamps a coin or coins worth $1.635 trillion, the profits (the difference between the cost of minting and the face value of the coin) end up in the Treasury’s account, and the Treasury then pays down the debt held by the Fed, and then both the balance in the Treasury’s account and the Treasury securities owned by the Fed are debited. The coin replaces the securities on the Fed’s asset side of its balance sheet. The Treasury is now $1.635 trillion under the debt ceiling, but to spend again must receive revenue or issue more Treasury securities to the public (given that the Fed is not legally authorized to provide overdrafts to the Treasury—though some are now questioning this, it’s a separate issue and it’s not clear to me (at least yet) that it could work). Clearly, coin seigniorage has not been inflationary to this point, as there hasn’t even been one penny of new money put into circulation. This option is much like Ron Paul’s proposal—actually identical in terms of the effect on the debt ceiling and the Treasury—except that his proposal would destroy all of the Fed’s capital (and then some), which is a potential problem politically (not the least of which being that Paul himself has previously worried about the Fed being “bankrupt”), though not operationally, and which the Fed is therefore very unlikely to agree to.
Coin Seigniorage to Retire Debt Held by Agencies of the Federal Government
3. In addition to retiring debt held by the Fed, a coin or coins could be minted to retire the more than $4.5 trillion held by trust funds and government agencies. (I will here deal only with the debt held by the trust funds, as this is far and away the largest portion of the national debt held by agencies of the federal government.) Retiring this debt also demonstrates both how silly it is to count the trust funds against the debt ceiling and how the trust funds themselves are simply accounting gimmicks that do not actually “fund” anything in an operational sense. The trust funds are not altogether unlike if I were to promise today to pay for my daughter’s college expenses after she graduates from high school 14 years from now and having this promise show up in my credit reports as actual debt owed. (Some will say that the “promise” to the trust funds has the force of law while mine to my daughter doesn’t; however, the government—since it makes the laws—can choose to renege on this “promise” at any time, or water it down, as the President is currently attempting to do, just as I could tell my daughter next year that I’ll only pay, say, 85% of her college expenses, not 100%.) At any rate, since larger trust funds signal improved prospects for both Social Security and Medicare under current law, it is counterintuitive to count the improved “health” of these programs against the debt ceiling; that is, the larger the trust funds, the “healthier” the programs, the larger the debt counted against the debt ceiling. Go figure.
At any rate, the Treasury could simply mint another $4.5 trillion coin, or just one coin for a bit over $6.1 trillion to cover debt owed to both the Fed and the trust funds. Just as with paying off debt held by the Fed, the coin(s) would not circulate but instead would remain an asset on the Fed’s balance sheet while the Treasury’s account would be credited with the profits. To pay off the trust funds, the Treasury would simply create a special fund or balance separate from its “general” account from which it normally spends—sort of like it did beginning in fall 2008 with the supplemental financing account—that would be balances available for the trust funds to spend from. As such, these balances would replace the debt currently held by the trust funds and others as non-marketable bonds. These balances would not be spent for some time given that current payroll taxes are sufficient to cover spending by Social Security and Medicare for the time being. (Point 6 below explains what happens when the balances are eventually spent.)
The only difference between holding the trust funds as non-marketable securities and holding them as special balances in the Treasury’s account is that the latter would not earn interest. Some might therefore be against using the coin(s) to retire these debts as a result. However, because these debts are simply accounting gimmicks that do not really finance anything, any lost interest due to seigniorage could be more than replaced at any time the Congress wanted to by (a) simply appropriating more balances (which could be paid via coin seigniorage), (b) considering the special account at the Treasury to be a “savings” account that earns interest for the trust funds (which also could be paid via additional coin seigniorage), or (c) simply guaranteeing that the expenses would be covered by general revenues as it already does for parts of Medicare.
As with retiring debt owned by the Fed, retiring debt owned by the trust funds would similarly not be inflationary. The bonds as assets would simply be replaced with one or more coins that would never circulate. Nothing about the actual spending operations or outlays for the programs would change.
So, now we’re up to more than $6 trillion of debt retired via coin seigniorage, and not a chance of inflation yet.
Coin Seigniorage to Retire Debt Held by Private Investors
4. As with retiring debt owned by the Fed, the Treasury could mint coins, deposit the profits in its account at the Fed, and use balances thereby credited to its account to buy back bonds held by private investors. As I previously explained, this is the operational equivalent of quantitative easing (QE). This is not inflationary. The purchase of Treasury securities by the Treasury would retire the securities and leave banks holding reserve balances. But, as I explained in the previous post, “Banks can’t ‘do’ anything with all the extra reserve balances. Loans create deposits—reserve balances don’t finance lending or add any ‘fuel’ to the economy. Banks don’t lend reserve balances except in the federal funds market, and in that case the Fed always provides sufficient quantities to keep the federal funds rate at its target—that’s what it means to set an interest rate target. Widespread belief that reserve balances add ‘fuel’ to bank lending is flawed, as I explained here over two years ago.”
One should also recognize that all the reserve balances created will necessarily earn the Fed’s target rate unless the Fed desired a 0% overnight rate (since that’s what it would get if it didn’t pay interest). Neoclassical economists almost uniformly believe (from Krugman to Sumner to the Fed’s own economists) that interest on reserve balances makes “base money” and Treasury bills equivalent, which then makes whatever quantity of reserve balances circulates non-inflationary. MMT’ers disagree that interest on reserve balances has this effect, but given most everyone who thinks coin seigniorage would be inflationary subscribes to the (incorrect) neoclassical understanding of the monetary system, this is a necessary point to make—anyone thinking coin seigniorage would be inflationary because it amounts to “printing money” must also disagree with (again, incorrect) standard economics descriptions of the monetary system found in any textbook to be internally consistent.
Furthermore, while non-bank sellers of the Treasury securities would now be holding deposits instead of securities, this is also not inflationary. Again, from my previous post:
“First, sellers of bonds were always able to sell their securities for deposits with or without the Treasury’s intervention given that there are around 20 dealers posting bids at all times. Anyone holding a Treasury Security and desiring to sell it in order to spend more out of current income can do so easily; holders of Treasury Securities are never constrained in spending by the fact that they hold the security instead of a deposit. Further, dealers finance purchases of securities from both the private sector and the Treasury by borrowing in the repo market—that is, via credit creation using securities as collateral. This means there is no ‘taking money from one person to give it to another’ zero sum game when bonds are issued (banks can similarly purchase securities by taking an overdraft in reserve accounts and clearing it at the end of the day in the federal funds market), as what in fact happens is that the existence of the security actually enables more credit creation and is known to regularly facilitate credit creation in money markets that are a multiple of face value. Removing the security from circulation eliminates the ability for it to be leveraged many times over in money markets.”
“Second, the seller of the security now holding a deposit is earning less interest and can convert the deposit to an interest earning balance. Just as one holding a Treasury can easily sell, one holding a deposit can easily find interest earning alternatives. Some make the argument that the security can decline in value and so this is not the same as holding a deposit, but this unwittingly supports my point that holders of deposits aren’t necessarily doing so to spend. Deposits don’t spend themselves, after all.”
“Third, these operations by the Treasury create no new net financial assets for the non-government sector (and can in fact reduce its net saving by reducing interest paid on the national debt as bonds are replaced by reserve balances earning 0.25%). Any increase in aggregate spending would thereby require the private sector to spend more out of existing income, or to dis-save, as opposed to doing additional spending out of additional income. The commonly held view that ‘more money’ necessarily creates spending confuses ‘more money’ with ‘more income.’ QE—whether ‘Fed style’ or ‘Treasury style’—creates the former via an asset swap; on the other hand, a true helicopter drop would create the latter as it raises the net financial assets of the private sector. Again, ‘money’ doesn’t spend itself. 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, 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.)”
It is important to remember that using coin seigniorage to retire Treasury securities held by the private sector—because it is the operational equivalent of QE—can only be as inflationary as QE is, and we already know it has not been both in the US and in Japan earlier.
And if the public or policy makers end up unwilling to accept that this would not be inflationary, the Fed could take the additional step of either selling securities from its own balance sheet or issuing its own time deposits to banks, both of which would drain the reserve balances from circulation. The former would effectively be reversing the QE; the latter would also do this while effectively transfer debt from the Treasury’s books to the Fed’s. A combination of the two would be possible, too, if desired. These would not reduce the real inflationary effects of coin seigniorage, in fact, because there are none, but within the neoclassical understanding of the monetary system they would do so. So, again, anyone believing that coin seigniorage would be inflationary if the Treasury uses it to retire debt held by private investors is reasoning in a manner that is either inconsistent with actual monetary operations or inconsistent with the neoclassical textbook understanding of monetary operations.
And now, the entire national debt has been “paid off,” without any inflationary impact whatsoever.
But we don’t need to stop there.
Coin Seigniorage to Precede All Government Spending
5. Coin seigniorage could be used to add balances to the Treasury’s account before it spends. Would this be inflationary? Only in as much as the deficit that might be incurred would be inflationary. This is because, whether or not the Treasury spends via coin seigniorage, either the Treasury or the Fed must issue debt in order for the Fed to achieve its target rate, or the Fed must pay interest on reserve balances. In other words, without coin seigniorage, the Treasury issues securities for every dollar of deficit incurred; with coin seigniorage, the Treasury issues securities, the Fed issues time deposits, or the Fed pays interest on reserve balances for every dollar of deficit incurred. There is no difference, while the alternative, as above, is to allow the federal funds rate to fall to zero. Again, then, using coin seigniorage to go beyond retiring debt and in addition (or instead) use it to finance spending does not add to inflationary pressures besides those already in place as a result of the deficit the government would have incurred anyway.
Note what I did not say here—I did not say that coin seigniorage enables the federal government to increase spending or reduce taxes willy nilly and “just print” its way (or “mint its way,” as the case would be) to larger deficits. Any rise in inflation would be due to Congressional appropriations relative to revenues becoming inflationary rather than the effect of the “full purse” resulting from coin seigniorage. The inflation issue concerns whether “the purse strings” will be monitored and managed by Congress, not whether the purse is full in the first place.
In other words, larger deficits absolutely can be inflationary, just as they can be now—indeed, there’s absolutely no difference, as above—but not because of coin seigniorage; and because of coin seigniorage, even future deficits do not need to count against the debt ceiling.
Coin Seigniorage and Entitlement Spending After Trust Funds Have Been Retired
Finally, regarding the special balances held on behalf of the trust funds in the Treasury’s account . . . what happens when those are spent? Won’t that be inflationary?
6. Again, there is no difference. With a trust fund, the relevant agency presents the Treasury with a non-marketable security and is given legal authority to spend beyond revenues earned by that program; balances are withdrawn from the Treasury’s account to pay beneficiaries.
With balances held in a special fund in the Treasury’s account, the relevant agency informs the Treasury that it desires to draw down its balances and is thereby given legal authority to spend beyond revenues earned by that program; balances are withdrawn from the Treasury’s account to pay beneficiaries.
In either case, whether or not inflation rises depends on the total deficit incurred by the program relative to the deficit incurred by the rest of the government’s spending versus its revenues—the deficit incurred by spending more on entitlements than revenues could conceivably be offset by a surplus for the rest of the government’s budget. Whether there has been coin seigniorage to move the balances held by trust funds in non-marketable securities into a special account within the Treasury’s account at the Fed has nothing to do with the inflationary impact of future spending on entitlements. (Note also, as in point 5, that any deficits incurred via seigniorage will still require the Treasury to issue bonds, the Fed to issue its own debt, or the Fed to pay interest on reserve balances in order to achieve a non-zero federal funds rate target.)
Coin Seigniorage and Lifting the Veil on Real-World Monetary Operations
As I wrote earlier, using coin seigniorage to finance spending lifts the veil on monetary operations to expose their true nature. As MMT’ers have always argued:
“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. . . . 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.”
Similarly, coin seigniorage to pay off the trust funds and “fund” future entitlement spending demonstrates that the government’s ability to finance these expenditures is never at issue. Instead, it would be clear that the fundamental purpose of taxation is to constrain aggregate spending, not to finance government spending, another fundamental tenet of MMT.
Analytical Mistakes Made by Those Claiming Coin Seigniorage Would Be Inflationary
All in all, those claiming that proof-platinum coin seigniorage would be inflationary are in fact guilty of one or more of the following:
(a) misunderstanding the very basics of the proposal;
(b) misunderstanding how the monetary system actually works;
(c) misunderstanding the standard textbook explanation of the monetary system; and/or
(d) misunderstanding the options available to policy makers for dealing with concerns related to the standard textbook understanding of the monetary system.
(b) misunderstanding how the monetary system actually works;
(c) misunderstanding the standard textbook explanation of the monetary system; and/or
(d) misunderstanding the options available to policy makers for dealing with concerns related to the standard textbook understanding of the monetary system.
Consequently, there is simply no reason for anyone who has carefully thought through the proposal and how it would actually work to argue that coin seigniorage would be inflationary (aside from the possible temporary reactions by those in markets that might similarly have a poor understanding of both of these—which itself assumes that policy makers in conflict with their own interests do a poor job of explaining the proposal and its effects).
Conclusion
We need to be on guard against inflation all the time; indeed, MMT’ers have always argued that inflation is the true constraint that the government should concern itself with, not traditional notions of “sound finance” or “bankruptcy.” Even so, we shouldn’t be paralyzed in adopting new financial arrangements for the federal government by people invoking the bogeyman hiding under the bed. That, only means that we will never cope with our financial problems and always remain in the present silly deadlocks, or worse (as in, sometimes the solutions to the deadlocks make one wonder if the deadlock was all that bad). What I’ve shown above is that there’s no reason to believe that using proof-platinum coin seigniorage will cause either significant demand-pull or cost-push inflation, regardless of the denomination, whether it be $ 1 trillion or $60 trillion, of the coin used to fill the federal purse. So, the coin seigniorage option for coping with the debt ceiling—whether now or in the future—is both a legal option, and also one that will not have any inflationary side effects.
The amount of coin seigniorage employed is highly significant for several issues, including the following: whether we will have any federal debt in the future as measured by the debt ceiling or the ratings agencies; whether wealthy individuals or foreign nations will continue to receive risk-free “welfare” payments in the form of interest from the federal government; whether we will perform reserve drains via debt issuance or paying interest on reserve balances; whether arguing over the national debt and deficits will have a place in our politics anymore; whether we will ever suffer the fate of Greece. However, one issue that it is not relevant to is whether coin seigniorage itself causes inflation. It just doesn’t.
(Special thanks to Joe Firestone for helpful comments and suggestions. For those interested, there is further discussion of the issues raised above here)
Looks like we're picking off the stragglers on the 'base is not inflationary' line.The main army appears to have retreated to the 'currency crisis' line. And using that as the argument for direct spending causing inflation."If we don't pay interest everybody will sell our currency… yada yada … economy collapses, world ends."How do we tackle the 'Fear of Devaluation'?
Looking forward to reading.Assuming treasuries held by the Fed and private sector were extinguished with the coin, will the Fed ever be able to drain away excess reserves with tsys? Have we passed the point of no return, and only IOR will work to maintain the FFR? Can the Treasury sell tsys for the purpose of reserve drains, without them being attached to deficit spending?
The other name of US fiat monetary system with flexible exchange rate is platinum (coins) standard monetary system. :-)It only makes the office of the President of the USA more valuable for MMT people.Go Warren!
Go Warren, indeed! Scott, this is a wonderful job. We can really hit the loose talkers on the web with it again and again.
Very interesting post, Scott – I have too many thoughts for immediate coherent comment – other than the econ-blogosphere needs much more of this kind of very high quality analysis of monetary operations and possibilities for them. Minor problem could be you’re probably the only one that can do it so effectively 🙂
Ah, I see the Fed is considering using "term deposits" to mop up the excess reserves, and you mention this. Is there a functional difference between this and issuing new treasuries? Does issuing treasuries even work? I'm thinking banks would give reserves and receive treasuries on the asset side, and the Treasury would receive reserves on the asset side and place a treasury on the liability side. I realize this is essentially lending out reserves, which is not how we traditionally think about treasury auctions, but why doesn't work?JKH- please post at some point!
great post Scott. Super high quality and caliber. Love it! 😉 "How do we tackle the 'Fear of Devaluation'?"I am doing it by explaining what would actually need to occur for hyper-inflation to result. #1. People lose all faith in the government b/c of the shitheads in DC (lost faith in government NOT the currency) and refuse to pay taxes at all. Possible but unlikely and before that happened you'd probably be thinking you'd like to leave the USA (thankfully I can get over to AU). 😉 #2. The private sector completely stops working and producing anything and the US government issues monies to the people for free to pay any/all of their obligations. #3. The government continuously and possibly exponentially raises the prices it will pay for goods and services as well as for wages far and away beyond all private sector valuations and for essentially no reason whatsoever. Large deficits don't actually matter for these scenarios to play out. There is no "ceiling" that can be hit which is the "point of no return" for deficits. As far as I can see, unless any of these things happen hyper-inflation is not an issue. End of story. Now back to non-fiction and the reality of what's going on with high UE, major deleveraging, and now apparently spending cuts, etc., etc.
Love the tails side of the coin opposite Ronny.Planet of the Apes. How fitting.After the past few weeks, it IS bedtime for bonzo.
Great Post.Problem is (b) & (c) conflict: It is not possible to (b) understand "how the monetary system actually works" & (c) "understand" (i.e. brainwash yourself into thinking you understand) "the standard textbook explanation of the monetary system". So circuits burn out in everyone's brains, saying it does not compute, it does not compute, and they just go along with the usual hyperinflation story from inertia, no matter how little sense it makes. 🙂
Also, as per Ellen Brown, in her 2008 book The Web of Debt pg 372quote:In the 1980s, a chairman of the Coinage Subcommittee of the U.S. House of Representatives pointed out that the national debt could be paid with a single coin. The Constitution gives Congress the power to coin money and regulate its value, and no limitation is put on the value of the coins it creates.8 The entire national debt could be extinguished with a single coin minted by the U.S. Mint, stamped with the appropriate face value. Today this official might have suggested nine coins, each with a face value of one trillion dollars.I am therefore led to believe that the 1996 law was put in deliberately for just this kind of eventuality.
Thanks for the comments. A few replies:Neil . . . regarding devaluation, I'm always curious why someone thinks that putting the economy to full employment without any fundamental inflationary pressure is going to lead to devaluation in the first place. Nonetheless, seems to me the Administration would secretly like a weaker dollar, though trading partners like China probably wouldn't allow it to happen.WH10 . . . yes, the Fed and/or the Tsy can always issue debt to drain reserve balances if the Fed doesn't want all those reserve balances circulating. Several nations already do have central banks that issue debt. That's the operational purpose of such issuance in the first place. With coin seigniorage it would be obvious this is the case.Calgacus . . . the point of putting in b and c was to give nobody an out. That is, even if you disagree with MMT and instead take the more textbook neoclassical view, you still can't argue coin seigniorage would lead to inflation and be consistent with that perspective.Best,Scott Fullwiler
I present to you, the Ronald Reagan trillion dollar coin: http://www.luxetveritas.nl/images/coin.jpg
"Neoclassical economists almost uniformly believe (from Krugman to Sumner to the Fed’s own economists) that interest on reserve balances makes “base money” and Treasury bills equivalent, which then makes whatever quantity of reserve balances circulates non-inflationary."Right, but they think also that the money multiplier model is correct, so they thought that QE was inflationary. contradictions, no?
Luigi,The neoclassical argument is that when reserve balances and tbills are perfect substitutes–which they are whenever the target rate and the rate paid on reserves are equal–then the money multiplier doesn't work. It's been repeated over and over the past few years and is showing up a lot in the Fed's own research.With coin seigniorage, tbills and reserve balances would be perfect substitutes unless the reserve balances were drained some other way, so within their own paradigm coin seigniorage itself cannot be inflationary.Best,Scott Fullwiler
ok thanks a lot Scott. a question that is off topic: document by Ulrich Bindseil about EMU are good to understand EU monetary system? I mean, technical differences between sovereign and not. I understand general differences.thanks, luigi
Scott,Another clear exposition of the implications, or rather, the non-implications. Thanks.I was a little bleary eyed and more than a little exercised when I put together my 'Weekend with Geithner' parable for Krugman's column comments last Friday, and I apologize for misspelling your name there.I chose "2,000 new one billion dollar coins " for the parable to use a face value that would suggest the point that the seigniorage methodology could stand routinely available to the Treasury's "cash desk" in smaller increments to (1) retire bonds when presented for redemption (as you describe here) and/or (2)as a tool to be applied when managing toward a long term riskless policy rate (to serve as a foundation/reference for private sector capital markets). The two-coin narrative fostered a lot of apocalyptic or sarcastically dismissive impressions in the heat of the event, so the reasoning never got a fair chance. Unfortunate, but not surprising that it played out that way when a lot of people thought their heads were about to explode due to the "crisis".
This is very comprehensive, thanks. Hopefully enough to tie up most of the loose ends in my thinking.the larger the trust funds, the “healthier” the programs, the larger the debt counted against the debt ceiling. Go figure.My favourite line and very useful in discussions, I would say.
Lee . . . no worries at all on the name misspelling. I have in-laws that still do that. Do you have links to your pieces? I didn't see them yet, but would like to.Luigi . . . haven't seen Bindseil's most recent stuff, but he is one of the best among neoclassicals on monetary operations. His 2003 (2004?) book is excellent, even as it's getting a bit older.
(1)Scott,I think you’ve fully developed the case that because platinum coins might have been an effective legal means for bypassing debt issuance in an unresolved debt ceiling impasse, they could similarly be a legal means for bypassing debt issuance more permanently and comprehensively. The coin is a mechanism whereby the Fed can acquire an asset from Treasury/Mint directly, thereby creating Treasury balances on the Fed’s balance sheet directly. That’s not currently legally permissible using Treasury debt.Your inflation argument is effectively two-step: First, the various stages of platinum coin usage you describe are, in effect, elements of a larger set of what might be described as “QE” strategies. We might not like the term “QE”, but in substance it represents the creation of reserves (or precursor Treasury balances) on the Fed’s balance sheet, in place of Treasury liabilities (bonds) issued to the market. To the degree that such “QE” strategies are not inflationary in general, then the coin specifically can’t be inflationary, as you say. Then, it’s a matter of demonstrating that such “QE” strategies more generally indeed are not inflationary, as you do for reasons you’ve noted here and previously.So the coin is a means for achieving financial intermediation directly between the Fed and Treasury, whether in the marginal debt ceiling bypass mode, or as an integral approach for deficit spending operations and accounting.Now, a rather messy detour on Trust and Fed accounting:Your comment regarding the artificiality of Trust asset accounting could apply (almost) equally to the Fed, particularly when viewed from an MMT perspective. The fact that the Trusts hold non-marketable Treasury debt and the Fed holds marketable debt obscures the common thread. The point is that both units serve as effective internal conduits for unified budget “financing” by Trust and Fed units respectively. In the case of the trust, the off-market bonds are created as surplus funds are sourced through taxes, relative to equivalent “pay as you go” benefit payments. In the case of the Fed, the funding conduit (i.e. marketable bonds) is purchased after the fact from the market. Juxtaposed against their respective internal funding conduits, the type of ultimate “financing” is payroll taxes in the case of the Trusts, and reserves/currency issuance in the case of the Fed. Both of these conduits and their associated external funding instruments constitute or at least represent cumulative deficit financing for the unified budget.Trust bond assets represent compartmentalized Trust revenue surpluses. Using bonds for internal accounting in the case of the Trusts implicitly recognizes that the entitlement programs will have a call on a unified budget deficit at such point when current payroll taxes do not cover current outlays. When such a call is exercised, it will represent a marginal deficit for the unified budget, which will be manifested by the requirement for the government to roll the associated debt externally rather than internally. In that sense, the use of bonds for internal Trust accounting represents a contingent call on the unified budget deficit as well as external bond financing. Internal Trust bond assets would start to decline as that call was exercised…. cont’d
(2)… Analogously, Fed bond assets typically represent a compartmentalized “funding surplus”, in the basic sense that the Fed’s assets normally consist of the liabilities of another government department – Treasury – and are a record of funds that were originally transferred to Treasury when the bonds were issued. (The term “surplus” looks to the non-internal use of funds, rather than the nature of the source. The source in the case of the Fed is technically a liability, as opposed to taxes in the case of the Trusts. Taxes are technically closer to equity. Also, I recognize that describing such a flow of funds as a “funding surplus” is somewhat orthogonal to central bank asset-liability causality, but the fact remains as to what remains on the balance sheet as the cumulative deficit financing record.)In both cases, the compartmentalized “surplus” reflects an effective historic routing of funds into Treasury, for unified budget purposes, subject to the usual MMT caveats about the effective causality of such flows at the macro level. In the case of the Fed, this is also qualified by the fact that the Fed purchases this funding conduit after the fact from the market. It is analogous to a “securitization” purchase by the Fed of a historic funding conduit from the market to Treasury.MMT tends to view government spending in a unified budget sense, setting aside the details of the internal government accounting. And in that sense, the debt that is issued externally to the public on a unified budget basis is the thing that matters for the overarching issues of deficit spending and taxation.At the compartmentalized level, Trust fund revenues have to date produced a surplus in excess of current outlays for those specific programs. That cash has been used for other government outlays within the unified budget. The question is how to represent that state of affairs on an internal accounting basis. The government still needs internal accounting, quite apart from the unified view.One can view the bonds currently held by the Trust funds as a contingent call on the unified budget deficit – i.e. the bonds effectively represent a future contingent unified deficit component. This means that at such point when the Trust funds no longer produce a surplus at the compartmental level, they will begin to draw on the unified budget, generating a deficit at the margin. Operationally, they represent a contingent call on cash that will be raised by external bond financing at that point.The Trust funds in your platinum version also have a contingent call on the unified deficit and on cash. The cash call is on the use of the cash created by the platinum sale, cash already held on deposit at the Fed, pending utilization. The fact that cash is held in temporary abeyance at the Fed, instead of being sourced by future bond financing, doesn’t change the nature of the underlying contingent call on a unified deficit…. cont’d
(3)… Extending the comparison of the Trust Funds and the Fed, one might consider the case of bonds currently held by the Fed, as representative of “cash calls” that could be exercised by the Fed in the event it chose to shrink its balance sheet. These calls are exercised indirectly by selling bonds into the market, thereby transferring the associated cash calls to non-government. There is no net cash or deficit effect from doing that, consistent with the non-NFA nature of Fed market operations. Your platinum version includes a variation of this, in which the Fed’s bond call is exercised by redeeming the bonds for the Treasury deposits created with platinum. These are non-NFA / non-deficit Fed transactions, consistent with the non-NFA nature of such asset-liability offsets.The compartmentalized view of the Trust Funds parallels the compartmentalized view of the Fed. In both cases, the bonds are representative of what is effectively an internal transfer of funds from the unit to the Treasury and to the unified budget. In the case of the Fed, to grow its portfolio it has created that internal transfer after the fact by acquiring bonds previously held by others. In the case of the Trust Funds, the internal transfer and bond entry has been originated by the Trust surplus.Commercial banks adopt similar compartmentalized views for internal funds management. While a particular deposit does not “fund anything” on a unified view, it does result in a specific internal routing of funds according to funds transfer pricing systems. It is also the case that banks use actual bond and interest rate swap prices to formulate the accounting representation of this compartmentalized view – as if the entire institution were internally linked via a web of actual internal counterparty bonds and swaps. Internal units do have debts to each other, according to very specific maturity and pricing terms. Considering this more general institutional approach, what you’ve done with the platinum option is design an alternative internal funds transfer paradigm for the compartmentalized operation of Treasury, the Trust Funds, and the Fed. And in doing so, you’ve used the legal hurdle advantage of platinum over debt. Along these lines, you say:“In either case, whether or not inflation rises depends on the total deficit incurred by the program relative to the deficit incurred by the rest of the government’s spending versus its revenues—the deficit incurred by spending more on entitlements than revenues could conceivably be offset by a surplus for the rest of the government’s budget.”This is a consolidated vantage point over compartmentalized operations. In the most general sense, and in the context of the primary MMT variable of deficit spending, it is an institutional risk management view, taking into account the “portfolio effect” of separate compartmentalized operations…. cont’d
(4)… I find it interesting that MMT has so aggressively seized on the platinum coin opportunity in large part because of its ostensible legality. This suggests that MMT might be interested in general legal solutions; i.e. those that can formally displace the “noose” of “self-imposed constraints”. Perhaps this begs the question as to whether formal Treasury/central bank consolidation should be a standard MMT objective. I know that this idea is pretty much inherent in Warren Mosler’s proposals, but I consider the legal platinum caper as a cautionary tale or positive indicator as to why MMT might want to “insist” on it more generally.The coin as an internal funds transfer price is one step closer to legal consolidation of Treasury and the Fed. The coin is effectively a liability of Treasury/Mint and an asset of the Fed. On consolidation, it simply becomes a $ 1 trillion (or whatever) transfer price. Who knows what internal transfer funding arrangements might exist with a legal consolidated Treasury/Fed. Certainly, there are reasons to keep track of the accounting liability of the Trust Fund – not only the liability for the temporary funding of the unified deficit by the Trust Fund, but the end liability of the Trust Fund to social security recipients. Still, it requires a good risk manager (that’s an understatement) to look through these internal accounting arrangements and grasp the associated MMT overview on deficit spending.The issue of bank reserves and inflation is critical to a cause that I believe MMT should be waging fiercely at this stage – which is a take-no-prisoners battle against the monetarists. In the post you’ve offered comprehensive explanation on the inflation issue, even topped off with the “just desert” of hoisting the monetarists on the petard of their own misunderstanding of the monetary system. My own instinct on what I see as the core of the monetarist analytic dilemma is that I think somehow they make a fundamental error in conflating the dynamics of two very different components of the monetary base – central bank reserves and currency. This conflation tendency becomes central to the way in which they view the monetary system and the nature of inflation. This confusion is compounded in context by the fact that MMT has a virtual monopoly amongst the economics profession on the correct understanding of the bank reserve component of the monetary base and its pricing and quantity effects. The mix of a misunderstood reserve component and a bizarrely generalized currency component is the recipe for the toxic monetarist brew. This distinction needs to be properly and fully clarified – in conjunction with the MMT theme that inflation is an income-sensitive phenomenon (as opposed to an asset sensitive one, where something called “money” is the asset).
Scott,It was in the comments (13) here: http://community.nytimes.com/comments/www.nytimes.com/2011/07/29/opinion/krugman-the-centrist-cop-out.html?sort=oldestI didn't do a very good job of proofreading, there at the end where I saw 'Senator' and read 'Speaker'. I have no plans to send him an apology though.Also, Neil's comment at the top of this thread about picking off stragglers reminded me of this one (89): http://community.nytimes.com/comments/krugman.blogs.nytimes.com/2011/07/29/lawyers-coins-and-money/?sort=oldest&offset=4I guess if you're a straggling Ivy League lawyer, it's not theft.
Scott, do you know something that I can read? A document like your Treasury Debt Operation for the EMU.ThanksLuigi
Um, hello.Can anyone explain what all these genuinely fascinating goings-on would mean for the ordinary little Joe American on the street?The coin mockup is grotesquely funny.
I do not agree with you because seigniorage is the important cause of inflation
irene, welcome to NEP. I think you have come into the middle of this novel and would find it helpful to go back and start at page one. I suggest Randall Wray’s excellent MMT primer on this website.
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You write this:
” So, the Mint stamps a coin or coins worth $1.635 trillion, the profits (the difference between the cost of minting and the face value of the coin) end up in the Treasury’s account, and the Treasury then pays down the debt held by the Fed, and then both the balance in the Treasury’s account and the Treasury securities owned by the Fed are debited. ”
I’m wondering, how would that not be “government spending”? I.E. What statute authorizes the secretary of the treasury to “pay down debt held by the fed” with the profits from the Platinum coin?
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