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Michael Maiello's picture

No Gimmicks

I've always been skeptical of the two alternatives floated that Obama could use to avoid a debt ceiling standoff, but I've also liked them both and I continue to like them both far more than the option of the U.S. voluntarily defaulting on its debt, which is a silly thing considering that the U.S. controls its currency supply.

The first option was to invoke the fourteenth amendment to the Constitution, as it requires the federal government to respect the validity of federal debt.  With this reasoning, Obama could just ignore a Republican refusal to raise the debt ceiling, citing higher Constitutional authority.  It's neat.  It'll wreck the credit markets, though.  Every Treasury bond sold after the failure to raise the debt ceiling will have some legal risk attached to it and, at such low interest rates, you don't buy Treasurys (the technical plural, by the way is to add an "s" rather than write "treasuries") to take on legal risk, you buy them because you know your money is safe.  Nobody is going to use Treasurys as a safe haven if Anton Scalia ultimately decides whether or not you get paid.

The other idea is to hve the Treasury mint a trillion dollar platinum coin and put it in the U.S. government account at the New York Federal Reserve.  You do not need a trillion dollars worth of platinum to do this, any more than you need a nickel's worth of nickel to make a nickel (sorry, Fox News).

There's nothing wrong with this idea.  Money, as we use it, is simply created by either the Treasury or the Federal Reserve.  Sadly, I think that most people don't think of money that way.  Every dollar is just a share of trust in the U.S. government.  But people think it equates to something tangible.  For historical reasons, people usually translate it into gold, silver or another precious metal like platinum.  This metal fixation is just a fetish but, whatever.  Obama's not going for it.  Today, the Treasury said it will not seek to mint a trillion dollar coin, in what Business Insider has dubbed a "Cointrastrophe."

Minting the coin is as legal and routine as minting a nickel, but I get why Obama wouldn't do it.  There is a point, in economic matters, where sentiment is important.  People have to believe in the whole capitalist endeavor for it to work and the trillion dollar coin, while legal and even ordinary, might spook people.  Well, it definitely would.  As ubiquitous as money is, we don't often discuss what it means.  The idea of "printing money" is widely accepted but not so widely examined.  Obama knows that a trillion dollar coin will scare Americans, even though the Fed could easily "sterilize" its existence by selling Treasury bonds from its own balance sheets.

I've rambled here, but I wanted to explore both ideas.  They are novel notions.  They are less absurd than default, which is what Republicans are proposing.  They are less absurd, in fact, than the existence of the debt ceiling law in the first place.  Congress creates and passes the budget.  It directs the executive to spend.  If the budget is in deficit, it adds to the debt.  If it is in surplus, it subtracts from it.  Congress doesn't need a debt ceiling.  Congress has total control of annual deficits and the debt, through its budgeting authority.  Further, the debt ceiling actually contravenes the Constitutional authority of Congress. If Congress tells the executive to spend $800 billion on a nuclear submarine, the executive must spend.  A debt ceiling doesn't constrain the executive branch so much as it contravenes spending orders given by Congress.  That's silly.

In a way, taking the 14 amendment and the trillion dollar coin off the table is just bad, Obama-style negotiation.  He should keep these threats, even though he won't use them.  I don't believe Obama wants to attack Iran, but he always leaves it "on the table."  The platinum coin should always be "on the table."

It's off because Obama hates gimmicks.  I do respect that.  We have two good gimmicks that we could use to dodge a debt ceiling fight, but Obama's not having it.  He's going to make the Republicans go to the edge.  That could be dangerous.  They're extremists.  But Obama isn't playing games.  He has, as he said he had long ago, put away the toys.

Maybe it'll work!

It better.

True dat.

But excellent post.

This brinksmanship bulls%&* is sad to watch. I can hear Benny Hill music in the background and it might even be entertaining if there weren't actual families caught in the battle for power, which is all it is. Republicans don't have as much as they want, so they're throwing one tantrum after another. Jesus, it makes me so sick.

Money, as we use it, is simply created by either the Treasury or the Federal Reserve.  Sadly, I think that most people don't think of money that way.  Every dollar is just a share of trust in the U.S. government.  But people think it equates to something tangible.

Sigh.  So MMT and so wrong.  

Even without the Fed, the Treasury or the whole US government, people would work out some other medium of exchange.  For example, Island Money (pdf), an FRB staff paper about giant stone coins and what happened to their value after very early MMTer, Kind David O'Keefe 'minted' many, many more of them.  

If the platinum coin does end up being minted, it should be called The O'Keefe and have his face on it   That way when it devalues our currency its lesson is reinforced with an historic parallel.

 

I think minting a trillion bucks would, under ordinary circumstances, be inflationary.  But, the Fed has Treasurys on its balance sheet that it can sell to keep things in balance, sterilizing the inflationary effects of the coin.  Really what the coin does is it moves bond issuance from the Treasury, which is constrained by Congress, to the Fed, which isn't.

The inflationary effect was not my point.  As you pointed out, people have to have confidence in money, to believe in it and trust it or it does not work.  

Sure O'Keefe inflated the Yap money supply but what he did eventually destroyed an entire economic system built around the production and transportation of Rai coins.  It is easy to read about the Yap and their giant Rai coins and see how illusionary their value was but, hey, it worked quite well for them until O'Keefe disspelled the illusion.  

Do you have any idea much of our economy is just as illusionary as the Yaps'?  Want to find out?  I don't.

 

 

Gotta be honest... I don't know anything about O'Keeffe or Rai coins.  I need to do some homework.  But, no... I don't want to find out what happens when belief fades, either.

 

 

Gotta be honest

Me, too.  What happened to to Yap would have happened eventually anyway like it did with all the other south seas economies.  What makes them most interesting and even unique is how they traded money itself giving their economy a finance sector of sorts.

You should research it, maybe write a new book or screenplay of the story.  The old one is almost 60 years old.

His Majesty O'Keefe (1954) - IMDb

 

 

And maybe it won't work. Then we will have a disastrous situation on our hands, and the jerk who looks like he f--ed up will be President Barack Obama.

There is simply no reason to go there. If the Republicans want to play this game, let them bear full responsibility for the consequences. The probability of them surrendering when the Chamber of Commerce cracks the whip is higher than the probability of Justice Kennedy sanctioning a trillion dollar coin.

PS The Treasury has never had the authority to coin unlimited currency. I suppose you could make a constitutional argument for it, but that was certainly not the framers' intent.

At the time the Constitution was written, all currencies were hard currencies, right?  If that's the case, then it's impossible that the founders would have envisioned unlimited coinage.  MMT woud certainly have been a foreign concept.

 

 

No, both the colonies and the Continental Congress issued bills of credit, which were essentially fiat currencies and suffered depreciation. After the Revolution, the Constitutional Congress prohibited the states from coining money and emitting bills of credit. It granted Congress the power to "coin Money, regulate the Value thereof, and of foreign Coin." (Art. 1, Sec. 8 and 10).

At various times, Congress empowered the Treasury to issue greenbacks--most notably during the Civil War--but it always maintained strict limits on the total number bills the Treasury could put in circulation.

I don't know exactly what latitude the Treasury has when minting coins, but I'm very confident that Framers did not intend for the Executive Branch to be able to create its own fiat currency through coinage.

Again, I'm not saying that there isn't a constitutional argument to be made, but it would represent a radical deviation from precedent, and I cannot imagine that it would be easy to pull off.

I guess that the idea is that in the 1990s, Congress gave the Treasury the authority to issue platinum coins "with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time."

I guarantee that they did not intend to grant the Treasury authority to fiat its own currency. You could argue that it's a loophole the President could exploit, but for the reasons I've outlined, I don't see it holding up.

Definitely a loophole.  That 90s legislation was really just intended for the Treasury to be able to mint a few collectibles.

Btw, did you see Krugman's last column?

This is exactly like someone walking into a crowded room, announcing that he has a bomb strapped to his chest, and threatening to set that bomb off unless his demands are met.

No credit was offered, alas. I wonder if he read my column.

I had to laugh when Krugman in another column said, we'd send the treasury secretary in, wearing a clown suit.

Of course Krug reads Dag.  Or, he should.

I bet he does now.

MW, I have been so focused on the gun issue stuff that I failed to realize that your suicide strategy article was posted in CNN. Wow.

Did you get famous and I didn't notice?

Congratulations!

Thanks, Erica. Not quite famous yet, but I have published occasional op-eds at CNN.com since 2010. The other Michael is more successful. He actually gets paid for his columns.

Did you know realclearpolitics linked your article? I was impressed. Anyway with all the money you're getting for plugging Honey Nut Cheerios on dagblog you can afford to write columns for free.

Yeah, I saw it. That was pretty cool.

Unfortunately, Cheerios canceled my contract after that business with the penguins and the jello bath. Once you become a big celebrity, everyone gets all judgmental on you.

I'm trying to work through this by taking off my socks and counting on fingers and toes.

I suppose that every day there are Treasurys maturing which are paid by issuing new debt, But that wouldn't be prevented by a lack of Congressional action on the debt limit  because the total debt would be unchanged by that refunding.

What would be prevented would be issuing new debt  to pay the Government's bills: the soldiers pay checks, payments to Boeing or whomever for shiny new drones. That would certainly spook american industry  ( and unpaid soldiers) but it  wouldn't directly undermine the full faith and credit status -and therefore the price -of all other existing Treasurys.( And even some of the soldiers and contractors could be paid from the inflow of payments for taxes,duties or whatever else the Government collects for. Something tells me that Senators will miss a paycheck.Pity.)

But that would either be or be close to  being a distinction without a difference since those other existing Treasurys  would be affected  by this evidence that USA.Co can't be counted on to behave rationally. If you were holding a 2014 Treasury which dropped in price for this reason you would be just as annoyed  as if it dropped in price because some bonds came due on ,say March 1, and the Treasury said "Come back later". 

 

It of course wouldn't last long since Congress would immediately raise the debt limit- while whining about Obama's imprudent cash management. But for what it's worth we wouldn't have technically violated the full faith and credit status of the outstanding Treasurys.  

I guess I've got it.

 

 

 

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