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Ending Austerity: Getting Free of Debt Subject To the Limit

letsgetitdone's picture

It's hard to listen to the doomsday rhetoric of Austerians like Paul Ryan and intermittently the less hysterical, but equally mythical narratives of the President when he talks about deficit/debt reduction, when you know better; when you know that both are talking about a bogeyman that doesn't exist. Here's Ryan, the Republican wunderkind:

“We face a crushing burden of debt. The debt will soon eclipse our entire economy, and grow to catastrophic levels in the years ahead.”

”The next generation will inherit a stagnant economy and a diminished country.”

Why? Because the burden of public debt payback will too heavy for the next generation to bear. This is ridiculous, of course, because we can always roll over previous debt and pay interest on it as it comes due. In fact, during the past 11 years as Ben Strubel shows, we've rolled over $437 Trillions in debt. And as Mike Norman says, we've rolled over $32 Trillions thus far in Fiscal 2012 alone.

We’ll always be able to roll over our public debt if that's what we choose to do because a debt instrument is the functional equivalent of a savings account, and frequently those who hold USD including foreign nations have the effective choice of keeping their USD in a reserve account or buying a debt instrument. They’d rather buy the debt instruments because they earn interest. However, low the rate of interest is, it’s better than the rate they’ll get if they keep their USD in their reserve account, unless the Fed decides to pay Interest-On-Reserves (IOR).

Can our national debt increase indefinitely? The short answer is: yes it can. The reason is that a Government like the United States with a fiat non-convertible currency, a floating exchange rate, and no debts in any other nation”s currency, has no solvency risk because it can always create money to pay its obligations. Its debt instruments therefore are nearly risk-free. They’re a safe harbor for investors who’d rather earn a return on the USD they hold, then content themselves with keeping it in a reserve account, that typically earns no interest.

The real problem with the debt subject to the limit is political

Even though there's no real fiscal sustainability problem with the public debt, good luck trying to persuade the public that there is none, by using an argument like the one I just offered. The view that the Federal Government is like a giant household has been drummed into people for years. Also, everyone knows that local and State governments, as well as even very large corporations have real debt constraints (so long as the Government doesn't bail them out). So, to persuade people that the Federal Government is different than other institutions isn't easy, especially when the economic mainstream still contends that the Government has fiscal sustainability problems.

Proponents of Modern Monetary Theory (MMT) like myself often point out that Congress can always allow deficit spending without issuing debt instruments if it wants to, and has always had that power. Since it doesn't do that it follows that the very existence of the “national debt” is Congress's fault in the sense that the Government has issued debt instruments to close the gap between spending and tax revenues only because of the voluntary constraints Congress has placed on the Executive Branch.

This argument is also correct. But the prescription that the problem should be solved by getting Congress to get rid of these constraints and allow “pure” deficit spending with no debt issuance requires convincing Congress to do this. In the near term that's not a practical prescription. Republicans and most Democrats have a vested interest in not recognizing that the debt is Congress's fault, because they want to claim the mantle of “fiscal responsibility” by advocating for balanced budgets or long-term debt reduction, or reduced spending on the programs they don't like.

So, neither Party will support “pure” deficit spending without a radical change in political understanding of what is possible for the Government brought about by a demonstration,within the limits of the current legal structure, that we can get free of the public debt subject to the limit any time the President wants to, without a by-your-leave from Congress.

The easiest way to get free of debt subject to the limit

The easiest way under current law to get to the point where there are no debt instruments outstanding is to persuade The President, or his successor, to use Proof Platinum Coin Seigniorage (PPCS), provided for under existing law, to generate the revenue needed to pay off the debt. Any other course to remove current constraints on “pure” deficit spending, will need Congress's approval, which probably means it will also require overcoming the filibuster. The filibuster can be overcome for certain things, but not for major changes like the moving the Fed to the Treasury, or explicitly allowing “pure” deficit spending when it appropriates. In fact, to enact such a major change, it may be easier to get rid of the filibuster itself, since that requires only 50 + 1 votes, on the way to getting the major change.

So, from a political point of view, it is much easier to do PPCS for awhile than to get other alternatives done to overcome the “political debt problem.” Also, in effect, PPCS would subordinate the Fed to the Treasury anyway, since allowing the gap between tax revenues and spending to be closed through seigniorage would dictate the Fed's actions in using IOR to hit its target interest rates.

In this post, I proposed minting a $30 Trillion proof platinum coin to accomplish getting rid of debt instruments and filling the public purse sufficiently to change the fiscal background so no one could use the argument that we don't have the funds to spend on x, or y, or z, if these fulfilled aspects of public purpose. I also argued that minting that coin wouldn't be inflationary in itself. Scott Fullwiler amplified that argument very thoroughly in a later post.

Later, I changed my proposal to minting a $60 T coin to increase the time horizon we would have to change public understanding, bring the Fed inside Treasury, and end the charade that the Government can't create as much money as it needs to solve problems. That was done in three posts here, here, and here. There were also other posts in the same time frame using the $60 T assumption.

That level of PPCS hasn't been met with great enthusiasm from my MMT compatriots. I suspect it's because most think that the $30 T and $60 T proposals makes us sound crazy. Well, maybe it does, but that part of it is about messaging, and I think an eloquent President could sell it as a stop gap to get us out of our self-imposed fiscal constraints until Congress sees the wisdom of moving the Fed inside Treasury. The President could begin selling the $60 T coin with a speech like the one envisioned here.

Many people would be heartened and persuaded by a speech like that; but the President involved would certainly get charged with insanity for using PPCS in the way I've proposed. Rush Limbaugh, Laura Ingraham, and much of the mainstream press would probably join them along with other organs echoing the outrage of Peter G. Peterson's deficit hawk/"fiscal responsibility" minions. But I think most of the firestorm would be ended within a week, if the President retires all the Intra-governmental debt, including debt held by the Fed within that time.

A news conference held immediately after that could announce that the debt subject to the limit was reduced by 40% in a week. Then at the end of every quarter the President could announce further reductions. The posts linked to above by Ben Strubel and Mike Norman suggest that over 4 quarters the President could report elimination of nearly all the debt subject to the limit other than a relatively small amount exceeding one year in duration. I haven't tried to locate the precise number involved, but say it's $2T. Then after a year, the President would be able to report that most (about 87%) of the public debt was gone, and he could also provide a schedule for fully paying the rest of it off, without either cutting spending or raising taxes.

If Scott Fullwiler and I are right and that no inflation would result from using PPCS, then no one would call he/she crazy because they used PPCS after that year of payback. It will have been demonstrated that the debt subject to the limit is a faux problem that can always be solved at will, and that the Government's capacity to deficit spend with no solvency concerns is unlimited.

Deficit hawkism justified by solvency fears would be dead by demonstration, and a new era of deficit hawkism justified by a new round of inflation hysteria would dawn. We would be swamped by Weimar and Zimbabwe cautionary, Calvinist fairy stories told by the defenders of the 1%. This, however, is an improvement over their present insolvency fairy tales, because fiscal policy could be guided by actual, observable measures of impact, rather than by indicators that have only a tenuous connection to inflation or hyper-inflation at best.


So, summing up. I think progressives, including MMT economists, ought to support use of massive PPCS by the Executive Branch to pay off the debt, and change the political situation. We must fight to persuade the White House.

We can say that “the perfect” policy to get rid of the debt is to change the law and bring the Fed under the Treasury; but failing that, a “good” policy is to end any talk of fiscal solvency problems caused by the faux debt subject to the limit, by using massive PPCS. Since the President knows that “the perfect is the enemy of the good,” perhaps he'll appreciate our practicality in being willing to accept PPCS in place of “the perfect.”

But regardless of whether he does so or not, at least we will be making the clear point to the White House and to everyone, that any “debt” problem we have from then on, will be, and for that matter is now, due only to the President's unwillingness to use his legal powers to solve it. So, if everyone is as concerned about the debt, as they purport to be -- concerned enough that they prioritize it above the social safety net for the poor, the middle class, working people who have lost their jobs and homes due to speculation by our feckless and fraud-committing financiers, the elderly, and the ill, and also prioritize it ahead of education for the young, reconstruction of the energy and infrastructure foundations of this country, and growing climate-change crisis, then why don't they direct their concerns and place their blame where they both belong -- namely at a President who will not use the powers Congress has given him to get rid of that public debt that is evidently so noxious to them? And, in the process, to take this silly faux issue, that has harmed so many people for so long, off the political table forever.

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beowulf's picture
Submitted by beowulf on

The posts linked to above by Ben Strubel and Mike Norman suggest that over 4 quarters the President could report elimination of nearly all the debt subject to the limit other than a relatively small amount exceeding one year in duration. I haven’t tried to locate the precise number involved, but say it’s $2T.

The numbers are screwy because whenever Tsy nears the debt ceiling (rather often the last couple of years), they go into a three card monte mode where they are moving money between on-budget and off-budget accounts to stay under the limit. One side effect is they end up issuing (and redeeming) a lot of one day "certificates of indebtedness".

Looking at Tsy's monthly debt statement for March, of the $10T in publicly held debt (makes percentages easy)---
17% are T-bills (one yr or less in duration)
67% are T-notes (1 yr to 10 yrs)
11% are T-bonds (10 yrs or longer)
7% are TIPS (which are typically Notes)

If you scroll down it gives you maturity date of every series.
Another way to sidestep the debt ceiling is to go the opposite extreme from one-day maturities, issue perpetual T-bonds with no maturity date (what the Brits call consols). Look at the debt ceiling law, the public debt adds up, for all outstanding debt, the face amount of the guaranteed principal. The future interest payments to be paid aren't counted. ("The face amount of obligations issued under this chapter and the face amount of obligations whose principal and interest are guaranteed by the United States Government").

I there's no maturity date, then there's no promise to repay principal and thus there's nothing to add to the public debt total. Tsy could issue an unlimited amount of consols without tripping over the debt ceiling.

letsgetitdone's picture
Submitted by letsgetitdone on

the details Carlos. You know all the ways around it.

Looks like it would take longer than I indicated above to pay it down completely. But, nevertheless using the $15.2 T figure the politicians fling around everyday, after using PPCS to fill the purse, the Treasury could retire roughly 6.2 T of intra-governmental including Fed held debt. After that the 15.2 T figure goes down to $9 T in a week. Then at the end of the first year another $1.7 T would be repaid. The point would still be made in spades, and another 6 T would be going away over ten years. So the point would still be made that the debt's not a problem and is totally going away.

On the other tricks you mentioned, they're neat, but not simple to explain or understand. If the $60T coin in minted, then everything is simple. The President made $60 T in new money. It won't be spent until Congress appropriates it or debt has to be repaid. So everything's under control, the debt's going down fast over time, and we don't have to issue any more of it. That's the kind of thing people want to hear about. Simple, easy, and no more public debt problem, so now we can get on to other issues.

beowulf's picture
Submitted by beowulf on

Think of the maturity date as the day by which Tsy must buy back its obligation. Tsy can always buy it back early, even consols could be bought back, its simply that Tsy would never be obligated to do so.

Quantitative Easement, after all, is simply the Fed buying up Treasuries in the secondary market. I've always thought the easiest way to get started with coin seigniorage is to let the Market Monetarists have their chance, the Fed should go large in buying up Treasuries... but every time the Fed collects a new tranche of debt, Tsy should walk over some newly minted jumbo coins to buy it back. I don't think market monetarism will be all that effective as stimulus policy but I say let them keep trying. $1 trillion, $2 trillion, by the time the Fed's bought up $10 trillion in debt (and the Tsy has deposited $10 trillion in coins), we'd have paid off all publicly held debt and the politicians would have to find something new to worry about (unemployment, perhaps). This could be done, of course, without having to get Congress's prior approval.

letsgetitdone's picture
Submitted by letsgetitdone on

But it requires getting the Bernanke involved and getting a by-your-leave from the banking interests and also coordination with the Executive. It's also harder for the public to understand and the President doesn't come out as such a big hero. The direct use of PPCS, on the other hand, involves only getting the President on board, and the remaining profits from the $60T coin serve as a continuing and visible attractor in the political background, pressuring Congress to spend money on programs Americans need. What makes the direct PPCS option the better one is not that its sounder from a wonky fiscal point of view. Instead, it's really the politics and messaging of it. You can message it as a response to the 99%. The alternatives you've been bringing up are good alternatives and they would work. But they would not be as dramatic and they don't portray the President as working for the 99%.

We need that now! We need a dramatic initiative, and we need the feedback loop from the growth of the 99% to break the logjam in Congress. We also need to subordinate the Fed to the Executive, not make it more essential to the financial system. Direct PPCS subordinates the Fed and undermines the justification for keeping it independent. I want that to happen badly.

mtngun's picture
Submitted by mtngun on

The MMT academics don't like coin seigniorage because they see it as an unnecessary gimmick. After all, there is no need to mint a coin to pay for deficits, we can pay using only keystrokes.

But . . . I agree with Joe that coin seigniorage could be used to make a powerful political statement. So what if it is a gimmick ? Politicians use gimmicks all the time.

If I were prez (pause for drum roll) I'd mint the coins, laugh at the debt ceiling, and say "Oh by the way, we have enough money to prefund SS and Medicare for the rest of our lives."

beowulf's picture
Submitted by beowulf on

The MMT academics don't like coin seigniorage because they see it as an unnecessary gimmick. After all, there is no need to mint a coin to pay for deficits, we can pay using only keystrokes.
You know, it reminds me of the British Army's policy of keeping above-average IQ junior officers in staff jobs instead of out in the field leading soldiers. The reason is simple, if there's too big a gap in IQ between a platoon leader and his platoon, then the men won't know what the hell he's talking about most of the time.
I think most economists are, lets just say, best suited to be staff officers.Economics (Macro in particular) is so abstract, its difficult for "'civilians" to wrap their brains around it. The govt creates and destroys money by keystroke? That sounds rather baffling and perhaps a bit fraudulent to those with better things to do with themselves than study monetary economics.

The thing that Joe figured out and the MMT academics still haven't is this: you can't win over an audience who understands a simple point ("the govt must tighten its belt so it doesn't run out of money") by arguing a complex point about, say, the magic of spreadsheet money. They won't have a clue what you're talking about. A better place to start with is the change in your pocket.

There's nothing abstract about that. Most people have never even used a spreadsheet but everyone has paid for things with coins from the US Mint. The Fed haters in particular take note when its pointed out that the govt can either borrow money with interest from the Federal Reserve System (the NY Fed runs the Tsy auctions, no?) or coin its own money debt-free at the US Mint. People grasp that the govt doesn't have to borrow something it can make on its own, nor can it ever run out.

letsgetitdone's picture
Submitted by letsgetitdone on

And it was your idea. So, take it to the limit!

Submitted by [Please enter a... (not verified) on

Beowulf@: It's not abstractness, but the use of metaphors that people use to think with. Perhaps one of the biggest metaphors people use to think about Federal finances is that Federal Finance is like household finance, or business finance, or state and local government finance. That is something concrete that most Americans are familiar with. (But the problem with it, is that it is missleading. Metaphors can do that.) There is something that the federal government has that does not exist in any of those things, and that is the power to create the money and issue and spend it. But it is hard to get them to realize that when the Fed creates money out of thin air and buys something with it, it is just making available tokens by which people can keep track of the size of the money obligations they may have toward others or others have toward them. I'm not happy with the word "token" because it reminds me of what we used to use when I was a kid getting onto the street car to go downtown. "coins" are too specific and not general enough. But I try to explain money as "tokens in units of what you owe and are owed by others" might help the word along. "debt obligations" is a bit too abstract. But a lot of people like to think of money as something intrinsically valuable, like gold or silver or platinum. And because it is external and real, it could serve as a kind of standard of value. But thinking of money like that ignores its social nature, which really gets to the heart of money. And you don't think about the possibility that the supply of gold or silver might run out sometimes, which is why we have fiat money. I know people really recoil when you tell them that the Fed creates money out of thin air and redeems debts. But it is just doing its job of putting money into circulation so that people could have a way to think about the size of their debts. That's what government does. Somebody has to make it. And when Congress has a deficit, new money needs to be injected into the economy because there is not enough there to provide the taxes to pay all that will be needed to spend. The Fed does that when it buys securities.
Finding the right metaphors to explain things with is a challenge.

letsgetitdone's picture
Submitted by letsgetitdone on

when will you run?

beowulf's picture
Submitted by beowulf on

Direct PPCS subordinates the Fed and undermines the justification for keeping it independent. I want that to happen badly.

Then your first step is blowing up Humphrey's Executor, the 1935 Supreme Court decision that stripped the President of his power to control independent agencies (prior to that, the President could hire and fire Fed governors as he wished). I get the strong impression that Justice Roberts and his crew would like to overturn it. Since that Supreme Court precedent applies to all federal agencies (Judge Kavanaugh wrote the linked opinion last year denouncing it in a Nuclear Regulatory Commission case), the bankers won't even know what the President is up to until one fine day they read in the papers that thanks to a Court ruling in an obscure NRC or SEC( or some even more obscure agency) case, the Federal Reserve Board and all its employees now work for the President.

Until that great day, I don't see Bernanke jumping without the President, nor the President without Bernanke (who's probably be more receptive to creative monetary policy than the President anyway) so you need both guys on board. As I've said before, I think easing in to the use of coin seigniorage is a better play than diving into the deep end. The entire GDP is only $15T, minting a coin that's a couple times that looks a bit... excessive. Start by buying back a $1 trillion in Fed-held debt, and when the hyperinflation fails to appear, buy back another trillion and go from there.

letsgetitdone's picture
Submitted by letsgetitdone on

Your eyes are focused on the Government mechanics, mine are focused on what will bring broader political and movement change. Diving into the deep end of the PPCS pool is a better strategy if the President wants to change the game substantially. I'm painfully aware that he may not want to do that. but I think it would be better for all of us, including himself and his family if did go for the game changer. As it is now he's risking his second term by not moving aggressively. Because every time someone tries to draw the comparison between Obama and Romney by casting O as "fighting for us" while Romney is only interested in the 1%, it makes everyone who's been watching the political situation and has no need to protect a position in Washington or in the MSM want to retch.

Any fool can see that O governs for the 1% and is preparing to make things even tougher for the rest of us. It's almost like the biblical story of the split of ancient Israel into the two kingdoms: Israel and Judea. Rehoboam, Solomon's son and heir replied to Jeroboam and his supporters, when they asked for policy changes: "my father chastised you with whips, but I will chastise you with scorpions." George W. Bush has chastised the American people with whips and Obama has not only continued that, but is now preparing the scorpions, while Romney is promising Black Widow spiders.

If Obama is going to change such perceptions he needs to reverse direction with a dramatic initiative, and that's why he has to jump into the deep end of the pool.

Submitted by lambert on

If it was a huge honkin' solid state storage device it might be percieved differently from a platinum coin.

Maybe not.

What's a "coin," anyhow? Is there a legal definition? Is coinage inherently metal?

beowulf's picture
Submitted by beowulf on

I suppose Congress can issue any sort of money it wants but under current law, coins are metal and produced by the US Mint.

In Feudal England, it was a legal requirement that a contract to sell land didn't close until there'd been "livery of seisin" (per wiki, "the physical transfer by the transferor to the transferee, in the presence of witnesses, of a piece of the ground itself, in the literal sense of a hand-to-hand passing of an amount of soil, a twig, key, or other symbol.").
That custom was more about psychology than the legal system, of course. I'd suggest that the idea of of money in a tangible, physical form (instead of having it live only in digital form, trapped inside the sequel to Tron) serves a similar purpose in terms of explaining the monetary system.

Submitted by [Please enter a... (not verified) on

If the securities have already been redeemed there is no authorization without further authorization of Congress to give Fed money equal to the value of the securities it holds. Treasury can only spend on debts authorized by Congress.
The Fed redeems the debts of the government to the banks in the securities when it buys them (gives value plus interest for them), using money it creates out of thin air and issues into their reserves. (This is where your government's power to issue unlimited amounts of fiat money whenever needed is being implemented: paying off the debt. Stop believing everyone when they say the Fed is completely independent of the government. It's only independent of political influence. The claim that the government owes the Fed the value of the securities it has bought is as invalid as a bank clerk's claim to be paid for the securities he/she buys from bank customers for the bank with bank money. The Fed is an agent of the government and the debt is between the government and the banks.
What we need to do is get Bernanke to recognize this, the President and the Secy of Treasury to recognize it, the Congress to recognize it. Begin with the President ordering the Secy of Treasury to stop rolling over the securities at the Fed. If Fed goes to court, they will lose. Challenge the debt-ceiling law as not applying to the securities held at the Fed because their debts to banks for deficit spending have already been redeemed.
Give Fed the option of recognizing this with no systemic changes otherwise or face orders to accept the $10 Trillion coins from the Secy of Treasury, and take the Fed out of the loop. Educate the American people as to how the national debt really works. It is redeemed all the time, a bit at a time. Have Secret Service step up protection of the Secy of Treasury and the President against any agents from the Fed who might show hostile behavior toward the POTUS. (I doubt if there is really a threat but I am paranoid enough to succumb to such thoughts).

letsgetitdone's picture
Submitted by letsgetitdone on

Hi aures, You left a similar or the same comment over at NEP in reply to one of my other posts. I replied there as follows.

Here are some considerations. First, while the Fed system is “Federal” in the sense that it was established by the Federal Government and is supposed to operate in the public interest according to its mandate, the system is comprised of private banks, private regional Fed banks, with stockholders, whose profits are remitted to the Treasury after a modest fee is subtracted from them for expenses, the FR Board of Governors, a Federal Agency, and Federal Open Market Committee, a committee of the BoG, comprised of 7 members of the BoG, including the Chairperson, and 5 Presidents of Fed regional banks, including the President on the NY Fed.

So, as entities the BoG, and the FOMC are Federal entities, while the regional banks are private entities. The Federal enities set the policies for the private entities to follow, and they must follow them by law. That’s why the system as a whole is referred to as the Central Bank of the United States.

Since it’s the regional banks that execute actual banking transactions, it is they to whom the authority to create money out of thin air to expand the money supply and to do QE asset swaps is delegated. They do not have the authority to create money to add to their profits or capital directly; but only to do asset swaps and to increase reserves to implement monetary policy.

Now, let’s say that as part of their QE or other activities, the Fed buys Treasury securities in the open market. Then who is it, exactly, who buys it? The answer is that it is one of the regional banks. This is not accounted for as the regional banks paying off the securities involved; but as the regional banks swapping their reserves (assets) for the securities. The securities are not destroyed, they are held by the regional banks as assets. If the banks were to view that as paying off the Federal debt, then they would have to strike those assets off their books, and in doing so reduce the wealth of their stockholders. Clearly they cannot do that, and that’s a primary reason why the debt instruments held by the Fed count against the debt subject to the limit.

Second, it’s important to note that even if the regional Feds were government agencies, it would still not necessarily be true that their buying the debt would redeem it. The reason for this is that the Treasury has about $4.7T in debt instruments issued to other Federal agencies, $2.7 T to the SS “trust fund” alone. These “debts” too count against the debt ceiling. So, even though the debt instruments of the United States say plainly that the principal of these instruments is owed by the US; the way things work, is that these instruments are the obligation of the Treasury to pay off either to other agencies or to the regional Feds as the case may be.