Rationalization and Obligation, Part V: Differences Are Everything

By Joe Firestone

This is Part V of a six part series replying to a claim by the President at his recent White House News Conference. Part I covered the News Conference and the first two (the selective default, and the exploding option) of seven options the President might use to try save the US from defaulting in the face of continued deadlock in the Congress on raising the debt limit or repealing the law enabling it in its entirety. Part II discussed Platinum Coin Seigniorage, invoking the 14th amendment to justify continuing to issue conventional Treasury debt instruments, and consols. Part III discussed premium bonds, and Treasury sales of the Government’s material and cultural assets to the Federal Reserve. Part IV, then evaluated all seven options in light of variations among them in likely degree of legal difficulties they might face, and also the likely impact of each on confidence in the bond markets, if used.

In this part, I’ll summarize my evaluation of differences among the various options from the standpoint of how likely each is to create the feared avalanche of litigation and uncertainty. First, the option by far most likely to create the avalanche that might shake the markets is the 14th amendment option, one of the two mentioned by the President. But, as I’ve emphasized, the President would have no right to exercise that one first anyway, and, on the contrary has an obligation to try other alternatives first. And if none of the alternatives were to work, then the avalanche following use of the 14th amendment will probably be mitigated, because if the 14th is the only way to avoid disaster, then, suddenly, people will begin to feel more confidence in it.

There’s a great distance in the likelihood of an “avalanche” between the 14th amendment and any of the other options. Looking at the selective default option, that would greatly hurt the American economy which eventually would impact the markets, but in the short run, it seems clear that, as debts continued to be paid, confidence in US debt would likely be maintained.

Next, the two remaining debt issuance options, consols and premium bonds, are far less likely to precipitate any avalanche than the 14th option, and even somewhat less likely than selective default. The reason is that these options don’t have short term economic impacts that could be harmful. They don’t face serious legal challenges, in my view, and they both would lower the debt subject to the limit, while continuing to both redeem that kind of debt, and to pay it down. I think that consols are a slightly better option than premium bonds, because they seem even less legally vulnerable than premiums; but both are on the low end of the legally vulnerability scale.

Moving now to the three asset options: the exploding option, PCS and material and cultural assets sales to the Fed. I think none of them are very likely to create an avalanche of uncertainty in the markets. The reason is that whatever happens to these options in the Courts, the private sector debts that are paid using these options will remain paid and headroom will be created below the debt ceiling. So, each one is a no-loss proposition for the bond markets. The exploding and asset sales options will be seen by the markets as the Fed saving the day for the United States. That will only impress the markets with the strength of the Fed and with its backing for US debt. So there’s no confidence problem with either of these options.

Also, even if litigation were to overturn the exploding option as a transparent device for giving credit to Treasury, that would have no immediate effect on confidence since by then a good bit of debt could be paid off using it, creating considerable head room under the debt limit. The chances of assets sales being overturned, are, again, very small. But, if that happened we have the same situation as with the exploding option. Asset sales would have done their work in creating headroom.

That brings us to the platinum coin. This is really the name for a category of options with different implications, beginning with the most frequently mentioned one, the Trillion Dollar Coin (TDC). Beyond that, there are options that have much smaller face values, say 20 Billion Dollar coins and much larger face values, say $60 Trillion or $100 Trillion coins, which I’ve called High Value Platinum Coin Seigniorage (HVPCS).

It’s very doubtful that confidence in the markets would be shaken by coins in the low trillions, if the seigniorage from the Fed is used to pay down debt as it falls due, and to cover deficit spending. The effect of that would be simply to neuter the debt ceiling as a political weapon for awhile.

I have no idea what the causal channels negatively influencing market confidence might be in response to such moves. I think the world would view this as the United States Government solidifying its financial position in the face of irresponsible actions by tea party goons, and that there would be no negative impact on confidence arising from this view. But, on the contrary, the world would breathe a sigh of relief at the fever breaking, and confidence in the strength of the US financial system would soar.

The Courts are also likely to sustain PCS. They may even quickly fail to grant standing to litigants, meaning that there would be no “avalanche of uncertainty” to contend with. But even if they don’t do that, what’s the worst that can happen even if the Court rules against the Treasury?

Well the Court can require the Treasury to redeem the platinum coins from the Fed. But, meanwhile debt would have been paid, and either the debt ceiling would be raised to allow the Treasury time to pay back the Fed, or the Fed would wait for part of its payment until the Treasury can get the debt ceiling raised. So, where is anything that in all this can cause a market panic. I just don’t see it.

I know that Ezra Klein, Kevin Drum, and others in the village think there will be a problem with market confidence because the coin move is what “a banana republic” would do, and because the coin is just “weird” and “magic,” and “from outer space.” Well, I think that’s just biased BS from people who spend time with 1% financial types and who know more about the financial system than most people do, and less about what the rest of the world thinks.

From the viewpoint of the proverbial person in the street, one’s coins can be deposited in one’s bank. They are legal tender and must be credited by the bank. That’s not “weird.” That’s everyday life. And it is very familiar to people.

Sure, the face value of the coin is unprecedented in size, but look, it’s just Government, and it’s just the law that the US Mint can create such coins, and it’s also a lucky thing they can do that because it’s getting us out of the financial crisis caused by fights over the debt ceiling. So, they’ll accept it.

And, further, from the point of view of that person in the street, every other option outlined here except asset sales: selective default; the exploding option, the 14th amendment, consols, and premium bonds are all more “strange,” “weird,” “magic” or from “outer space” than high face value coins are, because only a small minority among the American public understand how these work. To them, these are the magic of the 1% that they don’t understand, are not interested in, and don’t concern themselves with.

So, in marginalizing the coin option by labeling it in various ways, I think our mainstream village commentators are betraying the biases of the 1% they bring to the table of any public debate, and that their view on the likely legitimacy of the coin option has no basis in what most people think. It may, however, reflect the attitude that the 1% and the financial markets will take to the use of the coin. So, the question then becomes will their feeling that the coin option is “from outer space” affect the confidence the bond markets will have in US Treasury debt?

I can’t see why it would. After all, the reserves from the coin will be used to repay US debt. The bond markets don’t have to deal with the coin directly. They only have to deal with the reserves and the Treasuries, which they view as the world safest investment. So, why should they care whether the Treasury is getting its repayment money from the Fed by using a “magic coin.” If used as a means to pay down debt, it has no impact on them, other than ensuring that bonds will always be paid.

However, when we move to the HVPCS options, like the $60 T coin, then I’d readily grant that using the coin would shake the confidence of the markets. In fact, it should shake them, because minting a coin with that kind of face value would mean that the Treasury of the United States was going out of the business of issuing debt and their world’s safest investment would be gone. So, yes, the bond markets would be shaking alright, right to their very boots.

But, on the other hand, if this happened, and the US turned to repaying debt and not issuing it anymore, then it would not take very long for those markets to come crawling on their hands and knees to the Treasury Department to beg the Government to issue debt instruments once again. In short, if confidence in the markets were shaken through using HVPCS, then that would not result in any harmful economic impact to the United States, because our need for the trust of those markets would be entirely gone.

Part VI will end this series by considering what the President ought to do about the debt ceiling/default threat and what he is likely to do.

13 responses to “Rationalization and Obligation, Part V: Differences Are Everything

  1. The $60 trillion coin has an impact not on the US bond market, but on the currency market. In fact any kind of PCS will have that effect on the currency market. PCS signals to the world that the US government spending is no longer constrained by anything other than the will of the politicians to restrain inflation. It is next to impossible to repose faith in the value of a currency whose volume is controlled by elected politicians with all kinds of spending compulsions. So the dollar is likely to see a heavy devaluation against other currencies. But that has both positive and negative effects as well and in the longer term the positives should outweigh the negatives.

    • The $60 trillion coin has an impact not on the US bond market, but on the currency market. In fact any kind of PCS will have that effect on the currency market.

      Not really that great an impact in the short run. The $60 T coin goes into the TGA. It’s first use is to pay back the intra-governmental and Fed debt. of $6.7 T. Then it would be used to pay back short-term bills and notes and to cover deficit spending. So, generally, its immediate impact would be comparable to quantitative easing without QE’s impact on the asset markets since Treasury won’t be buying toxic assets.

      PCS signals to the world that the US government spending is no longer constrained by anything other than the will of the politicians to restrain inflation.

      It does signal that; but that’s true right now, for anyone who understand fiat currency systems. Of course, you’ll say that people are still in the dark about that. But, I think it’s much better that people in democracies all over the world not in the dark about such an important fact of economic life. There’s no democratic justification for the idea that this knowledge should be kept a relative secret.

      In addition, I don’t think PCS will have any special and greater effects on inflation than issuing debt does, and perhaps less inflationary effect. Most of the reserves from PCS would just stay in the TGA until needed, where it can’t have any inflationary effect. But, also, even the reserves that get into the private sector as a result of deficit spending, wouldn’t be any more inflationary than the debt instruments left as a consequence of deficit spending right now. I’ve written about that here: http://amzn.to/Z7kG5q

      It is next to impossible to repose faith in the value of a currency whose volume is controlled by elected politicians with all kinds of spending compulsions.

      I’m sorry, but I just don’t agree with this. It is the case now that the very elected politicians you’re talking about control spending appropriations now, and it’s also true that they don’t deficit spend near enough or deficit spend on the right things, to create full employment. So, when these politicians have spent enough to create full employment and have gone past that to create demand-pull inflation then come back to me and talk to me about “elected politicians,” and their inability to resist “spending compulsions.”

  2. So consols are not debt simply because the principal need never be repaid? Isn’t that besides the point? Isn’t the point of debt to provide a usury stream to the lender?

    Moreover, how will those consols and the National Debt ever be retired in net if the “monetary sovereign” cannot engage in pure money creation to do so? By taxing the economy into a Depression? Or is the plan to continue having the non-rich pay usury to the rich with Uncle Sam as the usury collector?

    As long as we deny the monetary sovereign’s inherent right to create fiat then every so-called solution is just further enslavement to the usury class.

    • Consols are certainly “debt.” Hell, Dollar are “debt.” But, because of the technicalities involved in the debt limit law. Consols are not public debt subject to the limit.

      • joe bongiovanni

        Consols are ‘debt’ because they conform to the legal definition of a ‘debt’, being instruments of borrowing and lending between parties, denominated in state money units, with payment schedules and liquidation terms agreed – the transfer of a private money holding to the public sector. They are not debt subject to the limit in the debt ceiling only because the maturity date is at the option of the borrower.

        Dollars are not debts. There is no reason for them to be debts, except that we live under the bankers’ debt-based system of money, where all money must come into existence as a debt.
        Paper dollars become debts when they are issued into circulation by private banks, after their purchase as paper from Treasury by the Fed system.
        This money-as-debt is a bankers-school paradigm that drives all the problems that MMT purports to oppose, meanwhile MMT embraces this bankers–money structure due to a faulty understanding of the nature of money.

        There is no reason for the currency to be issued as a debt. Our money can, and should be issued as the permanent equity of our common wealth, spent into existence by our sovereign government, as MMT claims happens now, though obviously it does not.

        We are left with the system that Soddy warned us of in the Preface to his 1934 book on ‘The Role of Money’:
        “” To allow it(the national money system) to become a source of revenue to private issuers
        is to create, first, a secret and illicit arm of the government and, last, a rival power strong enough ultimately to overthrow all other forms of government.””

        I think we would all agree that the money power has overthrown our economic democracy. For some reason, MMTers seem incapable of making the causal connection advanced by Soddy – the issuing of our currency as debt by private bankers.

        • joe bongiovanni – dollars are debt because dollars conform to the important, human, even primate-universal concept of debt – a moral obligation. A credit, looked at the other way. Your, Huber’s, the AMI’s proposals are to issue dollars as debt. You want to issue dollars as debt, if one uses the word “debt” in the sensible, ordinary, dictionary, correct, MMT way. There is no other way to issue a dollar. The confusion is sowed by insisting on using this word in a strange way (sometime propagated by special purpose economics dictionaries and bad economics and accounting). MMT has never made any secret about inspiration from Banking School thinkers like Tooke. It is hard to see any argument against this other than “Banking School” sounds bad & pro-1%, while “Currency School” sounds friendly and pro-99%.

          Bad terminology has bad consequences, like thinking there is some enormous, magical difference between our current system and a “no-bonds” system. All “no bonds” does is that the government stops issuing, that then banks and others stop accumulating the dollar bills called “bonds”, which are just dollar bills with a date in the future stamped on them. Just as a dollar bill is a bond ( an evil debt, with a current date stamped on them.) Whoop-dee-doo. How people can get so exercised about a printed date is beyond me. It’s like calling changing the way the dead prezzes face on currency an important monetary reform.

          “No bonds” or not has nothing to do with whether evil banksters are controlling things or not. Right now they control things through corruption. You confuse this with true, structural, actual control – which they don’t have – otherwise they wouldn’t bother to corrupt the state. All that the US government has to do to exercise control – is to decide to. The bankster’s power is imaginary. Today’s basic money is emphatically created by the state, and not the banks. Otherwise bank dollars would be more valuable than state dollars. The state would run to the banks to bail it out, not vice versa. The opposite of today’s reality. We aren’t living in the Middle Ages.

          • joe bongiovanni

            No, rather we all want to be sure NOT to issue debt, but to issue ‘money’.
            Hopefully, intelligent people can see the difference.

            Sorry if I remain amused by MMT’s pervasive, erroneous dictate that “debt” means what MMT wants it to mean now and again.
            It is MMT that pretends that “debt”, when discussing the “money” system of a nation, has no meaning other than “”the important, human, even primate-universal concept of debt – a moral obligation.””
            We’re not talking about you helping me install a new starter on my boat and so I should help you repair the leaky air valve on your dinghy. That is the ‘transaction’ that fills your vacuous definition. Favors create moral obligations. Certificates of indebtedness creates ‘debt’.
            A sovereign monetary system is nothing if not a legal construct. I don’t mind that MMT leads its followers down the garden path of fallacious money views, but I know that within that legal construct of a system of national money, “debt” has a clearly defined legal construct of its own, just as I said in my comment.
            ‘Primate universal’ is a fanciful sounding curtain to hide behind, Cal, but its many variations have become standard fare on these pages, where the cadre like to pretend a specific, historical, legal, accounting, computerized knowledge of how the money system works(keystroking) , and then describe the basic element of its workings as universal among primates. (Hope they get the nuances of reserve accounting, too)
            Dollars, as paper currency, become ‘debt’ when they are collateralized by a bank newly issuing them into circulation. Dollars, as ledger-entry, bank-credit units of currency become debt, because that is what the bankers’-school money system creates upon issuance into existence – a loan that creates a deposit.
            The reason that the MMT’s bankers-school-inspired money system sounds bad is because of its nature. A privileged point-one percent get to create the nation’s money as a debt, as a vehicle for corruption and causing the nation’s debt-saturation at present. Too bad that most MMT adherents surfaced after the crash looking for an alternative and found the anti-banker-corruption rhetoric of MMT. In reality MMT proposes nothing but to preserve the status quo private privileged bankers system of money as debt.
            This, rather than to have money assume its role as the distributive mechanism of society, being issued by the sovereign government without debt.
            And this is why Soddy wrote against it in the “Preface” quote in my comment above.
            A Currency school money system does not sound like it is pro- ninety-nine percent. It is.
            Undoubtedly, we will have this discussion further on, as, indeed, “money” comes to the fore.

            • Andrew Hartman

              Dear NEP,
              I think that we are up against one of the limitations of a blog. It invites repetitious unresolved arguments. I like arguments, too, but when they are not resolving, when they reveal clear lines of conflict, it’s time to make a more permanent statement. I realize that you do this by posting, but then all you have done is make a blog post that will soon be buried… Why not have a website ($) that has, among many others, a link to the concerns raised by the sovereignmoney.eu website. That website has links to what it considers important papers raising concerns about MMT. I would prefer if it had papers raising concerns about its own theory, but that is a high bar.

  3. Andrew Hartman

    I am confused about the purpose of this discussion of alternatives. It seems to leave out the real alternative, i.e., the debt ceiling is a habit not a necessity. Entities want to have Treasury Securities (TS) for investment purposes. USGov’t can’t and shouldn’t retire all outstanding TS because they are useful and in use. They will continue to mature and be paid and roll over by changing the numbers on the reserve accounts at the Fed upwards. At any given time, the grand total of existing TS might increase or decrease, but what does it matter? Isn’t the problem that culturally/emotionally We want federal expenditures = federal tax revenue + TS? If USGov’t runs a surplus, that doesn’t mean that total dollar amount of TS should necessarily diminish, does it? My reading of MMT is that this equation is a fallacy.

    • Your reading of MMT is correct. From a purely fiscal perspective, the debt is no problem, and there is the advantage of issuing it you highlight.

      However, there are two problems with issuing debt instruments. The first, is that they are welfare for the rich and foreign nations given that they are riskless investments. The second, is that the cultural/emotional factors you talk about are creating a political problem blocking us from doing the things that are needed to create full employment, price stability, a less unequal society, and many other important goals, because people and politicians become fixated on “teh debt” and it is then used to constrain the Government from taking the actions people want and need it to take. Because the debt exists, politicians subject every policy proposal to the question: “How can we afford that?” And fail to pass legislation that would bring great benefits including financial ones to the public.

      The usefulness of issuing debt instruments to investors who need a safe place to park their money, isn’t enough to compensate for the negative effects of the debt subject to the limit on politics and through it, on the economy. The function of debt issuance for draining reserves from the economy can be carried out the Fed through its payment of Interest on Reserves (IOR).

      At the very least we ought to use PCS to fund deficits and repay the debt. The experience would then be a very extended teaching moment about the power and functions of fiat currency. When the debt subject to the limit is gone and people learn how easily it can be erased by the fiat sovereign, then we can issue debt instruments again, if we want to without entailing the serious political consequences of debt we have now. That is, if the international markets still feel that there is a function for these instruments over and above the function performed by reserves that earn interest.

  4. At base I agree with GRP – this is fundamentally about a power game.

    The $60T coin reveals that the governments ability to spend is not limited by what it can tax or borrow – and therefore most assume the politicians will go all Zimbabwean or Weimar on us (rather than what we have now with banksters and their assorted henchmen, who have a chain around our throat just so we know who says what we can or cannot afford).

    The solution: mint the coin and then bring in legislation for budgetary restraint if median wage inflation goes over 4%. Simples.

    In fact, fiat coinage of any significant denomination blows away everything. Where would we start? we might ask why was the FED so proud to make $90B profit last year? What was the point in them extracting those nett savings from the private sector at this time of faltering recovery when it makes no material difference to the currency issuer. And so it would go on. We might even consider deploying all that spare capacity and creativity to have a go at the things that desperately need to be done.

    To reiterate, coinage blows the status quo away where so many options are kept off the table because we supposedly cannot afford them. The bottom line, I seriously doubt that coinage is going to happen. An appeal to the constitution might – it involves less power disruption and the illusion of hard money can remain in place.

    • Maybe it won’t ever happen. But, it surely won’t if we stop calling for it. So, since you agree with me that it would be a very beneficial change in government financing, let’s give getting it a good fight, because it will never happen without that.

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