Federal Reserve Bank

Use Coin Seigniorage Now!

Joseph M. Firestone — Tue, 05 Apr 2011 19:13:31 -0400

(Author's Note: Most of this diary was previously published back in January; but I've revised it slightly for these reasons. First, a Government shutdown is now upon us, even though the debt ceiling issue isn't quite at the forefront yet. Second, I'd like more comments and discussion on this proposal, because, at a minimum, it would give the Treasury the wherewithal to pay Social Security interest and benefits without relying in any way on new Congressional appropriations, or on raising the debt ceiling. And third, I'd like to get these ideas through to the Administration somehow, in hopes that, if pushed into a corner by the House, they might use them. Perhaps this is a vain hope, however, since, as wonky as the reputation of some in the Administration is, no one has been able to come up with original proposals that can get around the tea-party drive to cut the heart out of most Government social programs.)

All eyes now are on the 2011 appropriations conflicts and the continuing resolutions the Republicans are using to extract greater and greater spending cuts from the appropriations process. We're on the eve of a possible Government shutdown, as the tea-partiers in Congress insist on the cuts they favor, and the more mainstream right-wing Republicans go along “reluctantly” with them, and push the more “moderate” Democrats into a corner where they have “no choice” but to begin decimating the social safety net.

However, this round turns out, however, and whether or not the Government shuts down, there will be a new shutdown threat, now predicted for May, when the Government reaches the Federal debt ceiling, and the Republicans in the House are asked to pass an extension of that ceiling. If they don't do so, then they'll be forcing both a Government shut-down, and also a possible US default in paying its debt obligations to its creditors. Republicans see this as yet another opportunity to force spending cuts and “entitlement reform” out of the Democrats and the Obama Administration.

There is an effective response the President ought to make to the threat of a refusal to raise the debt limit, which would allow him to avoid the “forced” spending cut scenario. In fact, he ought to preempt the impending threat, right now, way before there is a Congressional vote on the debt ceiling. The basis for the preemptive move I'm referring to is given in a post by Beowulf, called “Coin Seigniorage and the Irrelevance of the Debt Limit,” and, was also discussed in a post by myself called: “Will He Say He Has No Choice or Will He Use Seigniorage?”

You should read both of these posts, if you're interested in getting into some of the details on coin seigniorage, or getting more deeply into the political context of the whole issue. But to summarize the main point on seigniorage, the Treasury, which the US Mint is part of, could order the mint to produce special very large face value Platinum coins (e.g. each coin might have a face value of 500 Billion USD or more), and to deposit those coins in the Mint's account at the Fed. The Fed could not refuse the coins or fail to credit their face value because they are legal tender. Since the Federal Reserve Banks (though not the Board of Governors and the FOMC) are legally in the private private sector, acceptance by them of a deposit in the form of the jumbo coins, resulting in their markup of the Mint's Account by the face value of the coins, from an accounting point of view, gets recorded as a sale of the coins to the private sector. The portion of the receipts from the “sale” representing the Mint's seigniorage profit, after the costs of minting the coins are subtracted, may then be periodically swept into the Treasury General Account, and would go into the category of “miscellaneous receipts” to the Treasury, lifting the Treasury's revenue total.

Enough jumbo coins could erase the annual deficit, and since part of government expenditures in any year involves paying off interest and principal on the national debt, enough of them would also erase the national debt over a decade or more. There would be no national debt to leave to our grandchildren, and also there would be a continuously declining debt-to-GDP ratio. Technically, there would also be no more deficit spending, even though in most years, Government spending would continue to exceed tax revenues.

The impact of coin seigniorage in eliminating deficits, the national debt, and bringing the debt-to-GDP ratio to zero isn't very important economically, since the size of these numbers doesn't create any solvency risk, or impair the Government's ability to sustain future fiscal activity. But that impact is very important politically and psychologically, because arguments about deficits and the national debt will end, and we'll be free to concentrate on what's really important for our grandchildren, namely leaving them more real wealth and a better life than we have.

So, coin seigniorage looks like a solution to the debt ceiling crisis and also to Congress's requirement, which is the cause of our having a national debt, that the Treasury must issue new debt when it plans to deficit spend. To meet the coming debt ceiling crisis, I think the President ought to use it to preempt the Republican House by doing the following.

-- Direct the mint to create a jumbo platinum coin with face value $500 Brillion.

-- Direct the mint to deposit the coin in its account at the New York Federal Reserve.

-- Direct the Treasury to “sweep” the mint's account to collect profits from coinage (this would result in marking up Treasury's account at the New York Fed by $500 Billion).

-- Inform Congress and the public that the previous actions were taken to head off any possibility of default or Government shutdown due to the House's possible refusal to raise the debt limit. The President should also mention that increasing the size of Treasury's account balance at the Federal Reserve will not be inflationary because Government spending will remain exactly the same as it would have been if the coin had not been minted.

-- Wait for reactions to this move. The ensuing uproar from many quarters including the business community, many economists, and the Federal Reserve, will focus on fears of inflation, and it's likely that top economists, and some Federal Reserve officials such as Ben Bernanke will claim that spending without issuing debt to absorb the new money placed into the private economy is inflationary, because the quantity of money in the economy will increase. It's likely that this view will create quite a stir in the media, and even that the value of the dollar will go down in international markets briefly, because the expectations of people will be affected by this argument.

-- Respond to this reaction by pointing out that it was forced on the Administration, which could not stand idly by while the full faith and credit of the United States was threatened by irresponsible Congressional partisans whose purpose was to take the economy hostage to force an agreement on spending cuts that are against the wishes of the American people, as indicated by every public opinion poll appearing in recent weeks. The President should also point out, that even though he doesn't believe that the minting of jumbo coins to pay for spending is inflationary, for reasons he previously stated, he is willing to work with Congresspeople who think there's a possibility of inflation enduring beyond the initial psychological reaction to minting jumbo coins, and then he can suggest two proposals that Congress may want to consider to remove the need for the Executive Branch to issue jumbo coins to meet debt ceiling crises.

First, Congress could eliminate the debt ceiling so that the US has no more crises of this sort again. Congress can still cut/control spending through the appropriations process, even in the absence of a debt ceiling, and this is the appropriate way for Congress to do it so that individual Congresspeople must go on record for any cuts in Federal programs they want to make.

Second, Congress could eliminate the requirement that Federal deficit spending must be matched by issuance of new debt dollar-for-dollar. The President could emphasize here that if this was done, not only would there be no more debt ceiling crises, but the Federal Government could pay off most of the national debt, except for very long-term instruments, within ten years, because the only thing that is maintaining that debt is Congress's requirement that new debt be issued in response to deficit spending.

He can also point out here that he doesn't think that the rollover of Federal Government debt is any problem for the long run because of the way the US's fiat currency system works. But for those who do think it is either a short or long-term problem, then this option will eliminate the problem because it will eliminate the national debt which we will not then have to hand on to our grandchildren. He can then add that he knows that many will react to this proposal by saying that it will be inflationary to try to eliminate the national debt this way. But he thinks that since the amount of Government spending won't change if we implement this proposal; he doesn't think so. But if it should turn out that inflation results from this effort to pay off the national debt; then the Treasury will simply begin to issue debt again to drain off the excess money supply.

-- The President, after making these proposals, should add that the $500 Billion in revenue from coin seigniorage will probably take the Government through August or September without its having to issue new debt, and that if Congress can't come to agreement on what to do about the debt ceiling before then, he will issue a new jumbo coin, this time one having $1.5 Trillion in face value, and that he will use the new coin for program spending and also to pay off $1 Trillion of the national debt. He can also say that he hopes he doesn't have to do that, but like institutions in the private sector, the Government can't operate well in an atmosphere of psychological uncertainty. Government workers have to know that their work and family lives will not be placed under stress by partisan conflict in Washington. In addition, private sector businesses and workers are greatly impacted by any freeze in Government spending caused by attempts at hostage-taking by Congress.

I think that Mr. Obama is a winner in the scenario I've outlined. He will be much more popular than he is now by virtue of rendering the debt ceiling threat impotent, and because he will be perceived as acting strongly and cleverly to get around the Republican House to avoid a shut-down of the Government and the possibility of default.

The Republicans will come back for another bite at the shut-down apple when they take up the Omnibus spending bill. But here they will find that they won't be able to use the ballooning deficit/national debt rationalization to justify their attempts to hold the Government hostage to get cuts in discretionary spending and the social safety net. President Obama will have, by then, demonstrated that by using seigniorage he can take the deficit and debt issues completely off the table, and that Congress can't simply force Government to shut down by hostage-taking as long as coin seigniorage is there.

This lesson won't be as clear in the case of the $500 Billion coin, even though some of that money will be used to pay off debt. But, once people see that the national debt doesn't need to rise if seigniorage is used; it will be easy to explain that if it is used more, the national debt can actually be paid down or paid off. Of course, if the President ends up having to use the $1.5 Trillion coin, then there will be a very graphic demonstration that having a national debt is a matter of a policy choice which Congress is now making, not a matter of necessity.

After that, objections to Government spending based on the idea that it will increase the deficit and the debt will be “off the table.” And then we can move on to handle the many real problems of the American people without worrying about the purely political and psychological, but non-financial and no-economic, problems of the debt, and the deficit.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

President Obama Should Use Coin Seigniorage Now!

Joseph M. Firestone — Wed, 19 Jan 2011 19:23:27 -0500

The media and much of the blogosphere are framing the coming debt ceiling decision, somewhen in the March to early May period, as one in which the Republican-majority House of Representatives may refuse to extend the Federal debt ceiling, forcing both a Government shut-down, and also a possible US default in paying its debt obligations to its creditors. Republicans, especially “tea-partiers,” saying they will not vote to extend the ceiling, see this as an opportunity to force spending cuts and “entitlement reform” out of the Democrats and the Obama Administration.

-- Direct the mint to create a jumbo platinum coin with face value $500 Brillion.

-- Direct the mint to deposit the coin in its account at the New York Federal Reserve.

-- Direct the Treasury to “sweep” the mint's account to collect profits from coinage (this would result in marking up Treasury's account at the New York Fed by $500 Billion).

The Republicans will come back for a second bite at the shut-down apple when they take up the Omnibus spending bill. But here they will find that they won't be able to use the ballooning deficit/national debt rationalization to justify their attempts to hold the Government hostage to get cuts in discretionary spending and the social safety net. President Obama will have, by then, demonstrated that by using seigniorage he can take the deficit and debt issues completely off the table, and that Congress can't simply force Government to shut down by hostage-taking as long as coin seigniorage is there.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

Will He Say He Has No Choice or Will He Use Seigniorage?

Joseph M. Firestone — Wed, 05 Jan 2011 15:38:19 -0500

The media and much of the blogosphere are framing the coming debt ceiling decision as one in which the Republican-majority House may refuse to extend the Federal debt ceiling, thus forcing both a Government shut-down, and also a possible default of the US in paying its debt obligations to its creditors. Republicans saying they will not vote to extend the ceiling see this as an opportunity to force spending cuts out of the Democrats and the Obama Administration.

This second round of hostage-taking is no surprise given that the Administration folded like a cheap suit a few weeks ago, when the Republicans got an extension of the Bush Tax Cuts and also a great deal on the Estate Tax, in return for some concessions the Administration could use to save its face, but without any deal however, on either extending the debt limit, or getting the Omnibus spending bill to fund the Government in 2011.

So, the Administration left these two hostages on the table for the Republicans to take in the new Congress. And, as a result, the Republicans are now stepping forward to say they want many more “spending” concessions in return for extending the debt limit.

The President is making a lot of noise about the dangers of default through Austan Goolsbee, the Administration's Chief Economist, and we can look forward to real shock doctrine treatment over the next few months, informing us about the evils of default and urging everyone to come together with some sort of compromise that, of course, will involve no tax increases for the wealthy, or cuts in defense, but a cutting away of programs for people, which are termed “discretionary” or “welfare” or "entitlements" by deficit hawks, including this President. There will be a big kabuki show, and Wall Street will pressure both the Republicans and the President to come together in a “compromise,” while progressives will be exhorted not to be purists, and instead to be “adults” about the necessity of dealing with the hostage takers and “cutting” or is it “gutting” Social Security and Medicare.

Now, I'm not sure the Administration wants to run through any scenario other than the one I've just outlined, because it seems to me that this President has a Hooverite pay as you go agenda; that he's planning to implement at whatever cost to the American Middle Class and the poor. This man approaches economics as if the period 1930 – 1980 never happened. Centrist Democrats and Republicans are his partners in implementing this plan. The Republicans provide the extremist shocks, and then “force” the Democratic Party "adults" to make cuts that are supposedly “distasteful” to them.

We've seen this charade a number of times now. The debt ceiling issue may just be the latest shock administered to get people to accept the austerity program outlined by the Co-Chairs of the Catfood Commission, Erskine Bowles and Alan Simpson, even though every public opinion poll, most recently the 60 Minutes/Vanity Fair poll, has shown that heavy majorities are against what they recommend.

Whether this kind of scenario is what the Administration is planning or not, however, I think it's still useful to pull off the mask and point out that President Obama does have a real choice on the debt ceiling issue. There is an effective response he can make to a failure to raise the debt limit. In fact, he can begin to respond even before there is a Congressional vote on the debt ceiling.

The response I'm referring to has just been outlined in a post by Beowulf, called “Coin Seigniorage and the Irrelevance of the Debt Limit.” Here are some the key assertions of the post:

If you think about it, it does seem odd that the US Government is the monopoly supplier of US dollars and yet our politicians go through life thinking the government will run out of money unless it can borrow more. Of course that’s not true, the coins in your pocket are legal tender and yet were not issued against debt. They’re minted by the US Government, backed only by the gilt-edged credit of the American people, no one is paid interest on it and they don’t add a penny to the statutory debt. What’s more, the use of coins as legal tender is scalable, they could replace the use of Tsy debt sales. No, you wouldn’t have to carry more coins in your pocket. Nothing would change except Tsy would be credited by the Federal Reserve for the sale of interest-free Treasury coins (presumably of large denominations) instead of interest-bearing Treasury bonds.

The two great powers of a sovereign state are the monopoly of violence and seigniorage, the profits from the creation of money. If the federal deficit (that is, expenditures in excess of tax receipts) were funded by seigniorage revenue, not only would there be no debt service owed on the money, there’d actually be no deficit. Seigniorage (whether generated by the Federal Reserve or by the US Mint) is supposed to be booked by Treasury as “miscellaneous receipts”, since the funds can appropriated for other govt uses, it actually reduces the deficit dollar for dollar. . . . The bottom line is, the Secretary of Treasury already has the authority to create money without debt so there’s no fiscal reason to raise the debt limit. What’s more, since the Federal Reserve began paying interest on reserves in 2008, there’s no longer a monetary reason to raise the debt limit either.

The point is, in section 5136, Congress characterizes the exchange of coinage produced ex nihilo by the US Mint for the face value equivalent in Federal Reserve notes (or more typically, by marking up the balance in Tsy’s reserve account) as a “sale”– “Provided further, That the Fund may retain receipts from the Federal Reserve System from the sale of circulating coins at face value for deposit into the Fund“. What’s more, the statute also says, “at such times as the Secretary of the Treasury determines appropriate, but not less than annually, any amount in the Fund that is determined to be in excess of the amount required by the Fund shall be transferred to the Treasury for deposit as miscellaneous receipts“. Unless Congress intended “receipts… from the sale” to not mean exchange revenue and for “the public”, “miscellaneous receipts” and ultimately “seigniorage” to have each have two different meanings depending on whether we’re referring to the US Mint or to the Federal Reserve System, my suspicion is that Mint seigniorage and Fed seignoirage were intended to be treated the same for budgetary purposes.

If, in fact, Mint seigniorage is legally indistinguishable from Fed seigniorage as miscellaneous receipts revenue, it does offer an escape hatch (or more like a subway tunnel really) if Congress refuses to increase the statutory debt limit this spring. The Secretary has rather broad authority to mint coins, Congress was apparently feeling generous when it authorized platinum coins in 31 USC 5112(k) (“with such specifications, designs, varieties, quantities, denominations, and inscriptions and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe…”). If deficit spending was paid for (eliminated actually) with miscellaneous receipts revenue generated by selling the Fed jumbo denomination coins, and since the Federal Fund Rate can now be pegged with Interest on Reserve payments in lieu selling Treasuries to drain excess reserves, Tsy could fund govt operations indefinitely without ever raising the statutory debt limit. . . .

There's much more in Beowulf's very important post, which “goes into the weeds” of seigniorage a good bit, and you should read it all. To put the main point a little more simply. The Treasury, which the US Mint is part of could order the mint to produce special very large face value Platinum coins (e.g. each coin might have a face value of 50 Billion USD), and to deposit those coins in the Mint's account at the Fed. The Fed could not refuse the coins or fail to credit their face value because they are legal tender. Since the Fed is technically in the private sector, acceptance by them of a deposit in the form of the jumbo coins, resulting in the markup of the Mint's Account by their face value, gets recorded technically as a sale of the coins to the private sector. The receipts from the “sale” representing the Mint's seignorage profit, may then be periodically swept into the Treasury General Account, and would go into the category of “miscellaneous receipts” to the Treasury lifting its Treasury's revenue total.

So, the bottom line here is that coin seigniorage looks like a solution to the debt ceiling crisis and also to Congress's requirement, which is the cause of our having a national debt, that the Treasury must issue new debt when it plans to deficit spend. The big question is whether President Obama will use seigniorage to answer the threats of the tea party hostage takers and defuse the present situation, or whether he will say that he has no choice but to compromise with them, even though he could use seigniorage to render their threats impotent.

Of course, things are not as simple as I've just framed them. If the President were to start using seigniorage, the Republicans would probably respond by holding the Omnibus spending bill hostage and attempting to shut down the Government that way. But if they do that, I think they're likely to find themselves in a much more difficult political position than they are in now.

First, Mr. Obama will be much more popular than he is now by virtue of rendering their debt ceiling threat impotent. He will have humiliated them, and he will be much more popular in the country because he will be perceived as acting strongly and cleverly to get around them to avoid a shut-down of the Government and the possibility of default.

Second, when they come back for their second bite at the shut-down apple, they will also find that they won't be able to use the ballooning deficit/national debt rationalization to justify their attempts to hold the Government hostage to get cuts in discretionary spending and the social safety net. President Obama will have, by then, demonstrated, that by using seigniorage he can take the deficit and debt issues completely off the table.

Once they are off the table, the way will be clear for a great debate over full employment vs. avoidance of inflation as two primary goals of responsible Federal fiscal policy. The conservatives, of course, will want to avoid any possibility of inflation by restricting Federal spending and keeping unemployment high. But they won't win that debate until there is measurable inflation to frighten people with. And we probably won't see that until full employment comes back.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

Time to Take on the Banks

Eric Lotke — Fri, 16 Oct 2009 15:32:49 -0400

It's time to take on the banks. 74% of American voters agree that “greed and risky decisions of banks and financial companies led to the financial crisis and recession, and it's time that Congress cracked down on their reckless practices to protect consumers.”

The American people are angry. There is a strong, bi-partisan appetite for reform. By a 64 to 27 percent margin, people believe that “we need stricter safeguards on banks and financial companies to improve accountability by reining in excessive bonuses, protecting consumers from exorbitant fees, and making financial dealings safer and more transparent.”

All these findings come from a new survey of registered voters done by the Benenson Strategy Group for SEIU. People understand what damage was done and who’s to blame. And behind the damage is a strong sense of betrayal.

•• “While taxpayers are still suffering under the economic crisis, the big banks are back to business as usual after their bailouts, ignoring their commitments to help taxpayers and are helping themselves instead, making tens of billions in profits on the backs of the American taxpayers.” 75 percent agree.

•• “It's outrageous that after taking trillions of our tax dollars in bailout money, the big banks are now spending millions to lobby against reforms that would protect us from their abuses in the future.” 72 percent agree.

The solutions are clear as well. Supermajorities in the eighty percent range support technical reforms like capping rate hikes and regulating overdraft fees. Similar supermajorities support philosophical reforms like limiting executive compensation and requiring that bail-out money be used for business lending. That’s what the people want.

Now it does get partisan. Democrats have an opportunity to lead. People didn’t vote last November for laissez-faire capitalism and billion dollar bonuses. They didn’t bail out banks that were too big to fail so they could take over banks that were smaller and did.

But reform is stalling. The proposed Consumer Protection Finance Agency gets weaker every day. Efforts to regulate derivatives — what Warren Buffet called “weapons of financial mass destruction" — are barely off the ground. A grassroots push to Audit the Fed and find out what it did with our money ($2 trillion) hits deaf ears in the Senate.

Almost exactly six months ago, Senator Dick Durbin (D-Ill.) called banks the most powerful lobby on Capitol Hill. “And they frankly own the place.”

Now is the pivot point. After the melt-down and the election, now it’s time to find out if they still do. Democrats can show that they’re on the side of working people. They can show the courage to take on the banks. If it wasn’t obvious before, the SEIU poll makes it clear.

Next week the American Bankers Association will meet in Chicago, and protesters are organizing to be heard. Democrats can take a side.
——
Curious what happens if we don’t win this fight? Read my novel. 2044. The Problems Isn’t Big Brother. It’s Big Brother, Inc.

New Housing Crisis, Old Isms

David Sirota — Fri, 21 Mar 2008 13:28:26 -0400

For many folks, the term "The Fed" (ie. The Federal Reserve Bank) induces drowsiness. It sounds like such a boring institution, dealing in stuff like interest rates and basis points that seem so academic. But as I explain in my newspaper column out today, while The Fed's instruments may be esoteric, its power is enormous - and it is using that power to cut Wall Street a huge check in what is a public embrace of four isms that have taken over our government.

The column really tries to break down this very complex financial crisis in terms that anyone can understand (and I'll admit, it took a heckuva lot of research to be able to boil down all the jargon into a digestible format - I hope I succeeded). It shows that the isms at work in the Fed's decision to spend $200 billion of your taxpayer money - Disaster Capitalism, Big Boy Bailout-ism, Feed the Beast-ism, and Trickle Down-ism. These are ideologies that have been around for a long time, and have been a staple of public policy for the better part of three decades.

The housing crisis is being used as a justification to hand over taxpayer cash to the same financial industry that has created economic emergency we now face. That's not surprising - this is the industry that has contributed about a billion dollars to political candidates since 2002. That money buys a lot - including a Bush-appointed Federal Reserve chairman clearly more interested in floating his Wall Street friends a loan than in helping homeowners now being foreclosed on.

This is the kind of bailout reserved for the big boys - the kind the free marketeers say shouldn't be given to regular folks. At a time of record deficits, the federal government is handing over your taxpayer money to Wall Street with no strings attached, feeding the machine that has brought out economy to the brink. And the public justification is straight "trickle down" economics. We are told that if we just help the banks, the benefits will trickle down to the rest of us.

The good news is that Congress seems to be getting a wee bit more interested in the Fed's shady behavior. Republican Chuck Grassley says he wants better transparency in the deals being cut between America's central bank and the financial industry sharks. Meanwhile, Democrats like Barney Frank and Chris Dodd are pushing back on the Trickle Down-ism with a bill that would help homeowners rather than asking them to wait for crumbs from the barons on Wall Street.

But the bad news is that all the oversight and legislation may come well after The Fed forces taxpayers to foot the bill for Wall Street's predatory lending and irresponsible speculation.

Read the whole column at Creators, Credo Action, The San Francisco Chronicle, The Denver Post, In These Times, Credo Action, TruthDig or Alternet. The column relies on grassroots support, so if you'd like to see my column regularly in your local paper, use this directory to find the contact info for your local editorial page editors. Get get in touch with them and point them to my Creators Syndicate site. Thanks, as always, for your ongoing readership and help contacting local editors. This column couldn't be what it is without your help.

Cross-posted from Credo Action and CAF