Paul Goes Platinum!
Another platinum coin surge in the Second Wave rippled through the mainstream media yesterday and this time hit the Congressional Progressive Caucus. Domenico Mantanaro of MSNBC kicked things off on one of the morning shows by mentioning the Trillion Dollar Coin (TDC) as a possible solution to the debt ceiling problem. Then, in the afternoon, on MSNBC's the cycle, Krystal Ball, and Steve Kornacke, in discussing the coming debt ceiling conflict talked rather matter-of-factly, I thought, about minting some TDCs to get around the debt ceiling.
Then Paul Krugman blogged about platinum coins. In the context of answering a question about whether we can “print money,” to get around the debt ceiling, he answers no, and then says:
The peculiar exception is that clause allowing the Treasury to mint platinum coins in any denomination it chooses. Of course this was intended as a way to issue commemorative coins and stuff, not as a fiscal measure; but at least as I understand it, the letter of the law would allow Treasury to stamp out a platinum coin, say it’s worth a trillion dollars, and deposit it at the Fed — thereby avoiding the need to issue debt.
An admirably brief statement of the basic idea, but followed then by this puzzler:
In reality, to pursue the thought further, the coin really would be as much a Federal debt as the T-bills the Fed owns, since eventually Treasury would want to buy it back. So this is all a gimmick — but since the debt ceiling itself is crazy, allowing Congress to tell the president to spend money then tell him that he can’t raise the money he’s supposed to spend, there’s a pretty good case for using whatever gimmicks come to hand.
So, it's gimmicks for gimmicks to get around the debt ceiling, and no notion on Paul Krugman's part that Platinum Coin Seigniorage (PCS) might have a much broader use than simply countering a gimmick the Republicans are using to try to trash the social safety net and drown the Government in a bathtub.
Apart from that, however, this “. . . the coin really would be as much a Federal debt as the T-bills the Fed owns, since eventually Treasury would want to buy it back” is a bit strange. A very high value platinum coin deposited by the Mint in its account at the Fed would have its value credited to the Mint's account in the form of electronic credits. The Fed would then keep the coin in a vault forever, as an asset on its balance sheet, and the seigniorage profits from the deposit of the coin would be swept into the Treasury General Account (TGA) where it would be used for repaying debt or other spending appropriated by Congress. So why would the Treasury ever want or need to buy that coin back from the Fed? And why would the coin be a Federal debt that the Treasury must repay?
It's true that base money issued by the Federal Government is a Federal debt in the sense that the Government has an obligation to accept it in payment of taxes. But in this case, the Fed holds the coin and it has no taxes to pay. Also, the coin never goes into circulation, but sits in a Fed vault, so where does a debt that the Treasury must repay come into this picture and why?
Paul Krugman goes on to make a number of comments about the Fed printing money and the need for the Fed to pull that money back by selling its Treasury debt at some future time when the economy is growing rapidly to prevent inflation. But these comments aren't directly relevant to using PCS, since using it is no more, and perhaps less, inflationary than using debt financing.
The appearance of PCS in Paul Krugman's blog apparently had an immediate impact. Congressman Jerrold Nadler (D-NY), in an interview reported in Capital New York said:
"There is specific statutory authority that says that the Federal Reserve can mint any non-gold or -silver coin in any denomination, so all you do is you tell the Federal Reserve to make a platinum coin for one trillion dollars, and then you deposit it in the Treasury account, and you pay your bills,"
Well, that's a little garbled, since it's the Treasury that orders the Mint to create the coin which is then deposited in the Mint's account, which is then credited by the Fed with electronic credits because the coin is legal tender, and is then swept by the Treasury for the seigniorage profits which end up in the Treasury Account, and then you pay your bills. But, regardless, Congressman Nadler has the right idea. It is legal for Treasury to make platinum coins with arbitrary face values and to use the seigniorage to pay bills.
In the same interview, the Congressman also refers to invoking the 14th amendment as a way in which the President could justify not complying with the debt ceiling. But, I think, this is not as good a solution as using PCS. The reason why, is that the debt ceiling isn't unconstitutional as long as Congress has provided alternative ways for Treasury to meet its obligations. PCS is such an alternative, so, as long as it is legal, I think the President is obligated to use it and not the 14th amendment to defeat the debt ceiling constraint.
Mike Sankowski at Monetary Realism, also reviews Krugman's views and Nadler's interview and points out that:
I don’t think the coin will be used, but the idea of the coin has now hit critical mass. He’s a congressperson, so he only knows what his aides are telling him. If his aides are talking about it, you can be sure all of the democratic aides are talking about it over drinks. It’s just part of the everyday conversation in the support staff of congress.
Nadler is right – it’s not normally proper to consider such an extreme tactic. It is terrible it had to come to this, but here we are. It would be good if we just didn’t have a debt ceiling at all. Then, it would be so much nicer if the government had a well established, and commonsensical method to allow for the Treasury to print money directly – along with rules on how much and when this could be done.
I think Mike is right about the coin reaching critical mass and now being a topic of conversation among Congressional Staff. Even more, since the coin reference comes from Jerry Nadler, we can suppose that PCS is making the rounds within the Congressional Progressive Caucus (CPC) specifically, and may become a key element in stiffening their spines during the debt ceiling fight. The CPC is much less likely to accept a lousy deal from the Republicans and the President if they know very well that the President can rise above the whole debt ceiling crisis by minting a very high value platinum coin.
Mike Sankowski voices misgivings about the coin. Above he calls it an “extreme tactic” and later on in his post he talks about the problem of giving politicians the power to print money. On the last point, I think the Constitution has already given the politicians the power to “print money.” And it's a wonder that instead of grasping that power more firmly, they've constructed all kinds of constraints preventing them just issuing it.
Until 1971, they constrained themselves with the gold standard. And from then until the present, they've constrained themselves by insisting that deficit spending be preceded by debt issuance even though there's no reason to believe, except the discredited Quantity Theory of Money (QTM), that issuing fiat money in the act of spending is any less or more inflationary if it's preceded by issuing debt than if it's not.
Commenter Robert Rice answered Mike's misgivings about the power to print money, by pointing out that every power of Government is subject to abuse and that this is no reason not to have government and to use its powers for public purpose. And I agree, Mike Sankowki's misgivings about the “printing money” power are no more than the usual conservative disposition to always mistrust government.
It's wise to do that, since one must never cease to look gift horses in the mouth. But it's not wise to let one's mistrust cripple one's government and, as a result, arrive at the kinds of conditions we are finding ourselves in right now. After all, what is the debt ceiling legislation itself, but an expression of the same conservative impulse that Mike is voicing? Listening to it is what has caused the mess we're in. To get out of it, we have go onto a new track. That track is using Platinum Coin Seigniorage as our primary tool when deficit spending.
As for PCS being an “extreme tactic.” I'm afraid, I think that's just labeling. Wigwam, a blogger at FDL and DailyKos, had this answer for people who label PCS as “weird,” a very similar label to “extreme.” He said:
Such coins are “legal tender” and can therefore be deposited into the Treasury’s General Account at the Fed, from which the Nation’s bills are ultimately paid. Therefore, there is no need for the Treasury to borrow money to meet the obligations of the United States. But, and this is critical, none of that money can be withdrawn except for congressionally appropriated expenditures; e.g., the Treasury cannot monetize the national debt except insofar as such expenditures are appropriated by Congress.
For the past 220 years, the Treasury has been paying a portion of each year’s expenditures via the markup (seigniorage) on the minting of coins — last year coin seigniorage covered about 1% of the tax deficit — Abraham Lincoln went even further and paid for the Civil War with printed fiat money (“Greenbacks”), as did the European powers to finance WW I, and as did Germany to finance its part in WW II.
All of the above is background to keep in mind the next time you read a financial/economic pundit declare that it would be “weird” for the Secretary of the Treasury to exercise his powers under 31USC5112(k) and recommend that he instead foment a constitutional crises by directly violating 31USC3101(b), which I think would be “weird” at best.
And further, how much “weirder” or “more extreme” is it for a government with a sovereign fiat currency system to deficit spend only after it borrows back its own currency, than it would be for that same government just to forget about borrowing and paying interest to rich investors and foreign nations on what it can create in unlimited quantities itself. In short, what we're doing now is a lot more “weird” and “extreme” than just using existing legal authority fill the public purse to spend what Congress has already appropriated.
(Cross-posted from New Economic Perspectives.)