national debt

Myths, Scares, Lies, and Deadly Innocent Frauds, Updated: Part One

Joseph M. Firestone — Tue, 20 Dec 2011 23:54:33 -0500

(Author's Note: This post updates Part One of a series reviewing Warren Mosler's book: The 7 Deadly Innocent Frauds of Economic Policy. The updating is prompted by a post by Hannah at DailyKos offering a “. . . a Review Sort of” of Warren's book.

Hannah's post begins by stating Warren's “deadly innocent frauds” (DIFs), and then goes on to point out that they are not innocent and then to make a number of claims about Warren's beliefs which clearly indicate that she neither read his book, nor researched his actual positions stated frequently on his web site, nor bothered to note Warren's economic truths that his book counterposes to his DIFs. My point here is not to beat up on Hannah for a careless treatment of Warren Mosler's views, but rather to point out that his actual views were given very short shrift in her piece which also gave no hint of how important they are to progressives and to economics. My original three post review of his book tried to convey the significance of his work, and so I thought it would be appropriate to update these posts now, and remind people of the full scope and importance of what Warren has to say in this easily accessible book.)

One characteristic of modern political and economic discourse is frequent asserting of beliefs about economics and money that have been variously described by some observers as 'myths', 'scares', 'lies', 'innocent frauds', and 'deadly innocent frauds'. 'Innocent frauds' was the courteous labeling of such beliefs by John Kenneth Galbraith in his last book, The Economics of Innocent Fraud. Warren Mosler, an economist, presidential candidate, and sometime co-author of James Galbraith, has added the modifier “deadly” to Galbraith the elder's name for this belief. Mosler's label is particularly relevant today because, given the various problems and crises currently faced by the United States, and the way it has faced them since the Fall of 2008, acceptance of these beliefs or “deadly innocent frauds,” could well doom the United States and its people to a bleak future of economic, political, social, and cultural instability.

The once proud land of opportunity could well be reduced to a gray land of despair and submergence of most of its people in a wholly unnecessary age of lost hope and increasing despair for American parents as well as their children. We see this age taking shape through the economic policies of the Obama Administration and their impact, and through the reaction of the Occupy Wall Street (OWS) movement to economic events. We can now see clearly, in a way that we perhaps could not in early 2009, that America and its dreams could well be sacrificed to a harsh fiscal and economic discipline based wholly on deadly innocent frauds, scares, myths, and outright lies. I'll now, following Warren Mosler's treatment, examine some of the most influential of these, and also rely in part on the earlier work of Cavanaugh, Boettger, and Eisner.

Our Sovereign Fiat Currency System and Our Inability to Involuntarily Run out of Money

First, all the DIFs are frauds in light of the changeover of the United States to a fiat money system during the Nixon Administration. As Warren describes it:

Historically, there have been three categories of money: commodity, credit, and fiat. Commodity money consists of some durable material of intrinsic value, typically gold or silver coin, which has some value other than as a medium of exchange. Gold and silver have industrial uses as well as an aesthetic value as jewelry. Credit money refers to the liability of some individual or firm, usually a checkable bank deposit. Fiat money is a tax credit not backed by any tangible asset. In 1971 the Nixon administration abandoned the gold standard and adopted a fiat monetary system, substantially altering what looked like the same currency. Under a fiat monetary system, money is an accepted medium of exchange only because the government requires it for tax payments. Government fiat money necessarily means that federal spending need not be based on revenue. The federal government has no more money at its disposal when the federal budget is in surplus, than when the budget is in deficit. Total federal expense is whatever the federal government chooses it to be. There is no inherent financial limit. The amount of federal spending, taxing and borrowing influence inflation, interest rates, capital formation, and other real economic phenomena, but the amount of money available to the federal government is independent of tax revenues and independent of federal debt. Consequently, the concept of a federal trust fund under a fiat monetary system is an anachronism. The government is no more able to spend money when there is a trust fund than when no such fund exists. The only financial constraints, under a fiat monetary system, are self imposed.

Mosler identifies 7 DIFs, all of which are related to the basic idea of fiat money or “soft currency.” The first of these is the idea that in order to spend money, the Government must first raise it through taxation, or borrow it. This is based on the idea that money is either a material thing or backed by a material thing having intrinsic value, which the Government possesses in limited quantities and may run short of.

However, fiat money is not like this. Put simply, the Government (encompassing the combination of the Congress, the Executive, and the Board of Governors of the Federal Reserve system) declares it into existence, in whatever quantity it likes. It can print it! It can credit some entity's account with as much of it as it likes! And it can withdraw it from circulation by taxing, charging fees, or confiscating it according to law. From the Government's point of view, the money it causes to exist is legal tender and all entities under its authority must accept it as legal tender in return for all goods and services for sale in the US, and as repayment for all debts incurred by the Government. The status of money as legal tender is backed by the Government's authority under the Constitution and ultimately by its legal monopoly of the instruments of physical coercion within the borders of the State.

Since the Government has unlimited authority to create its own non-convertible currency that has a floating exchange rate in international markets, it is obviously false to say that it is, or must be constrained in its spending, by its ability either to tax or to borrow. It can impose such constraints on itself if it wants to, of course. And, as it happens the United States foolishly does that, as do other nations sovereign in their own currencies, because they are still laboring under old conceptions of the nature of money, appropriate for a commodity rather than a fiat monetary system. Nevertheless, the belief that the Government is so constrained is the first of Mosler's 7 deadly innocent frauds, because the truth is that:

“Government Spending is NOT operationally limited or in any way constrained by taxing or borrowing.”

Now, if one can but accept this truth, it has many implications. One implication is that the Government never can have any solvency problem with respect to repaying debts it has incurred in its own currency.

It doesn't matter how large those debts are.

It doesn't matter how large its obligations are.

It doesn't matter, from the viewpoint of solvency, how frequently it has to fulfill obligations, or how much money it has to create to pay its obligations.

It never has to run out of money as long as it is willing to create it, and not to “obey” any constraints it has imposed on itself. The simple fact is:

it always has the capability to create the money it wants or needs to spend..

Another implication is that:

it never need be short of money to do or spend for things it either wants to do, or wants to facilitate, or cause or encourage to be done.

It is never true that “we don't have enough money to do x, or y, or z,” when “we” is the Government or the Nation. Rather, it is only true either that we don't 1) fully understand our power to create money or 2) want to do the things that people are asking us to do for reasons we don't want to talk about, so we use the excuse that money is limited instead.

Importance of the First Fraud

This first deadly innocent fraud is of great importance in our present political context. For example, why did President Obama limit the stimulus bill to around $800 Billion in size? And why did he take Medicare for All off the table, at the beginning of the health care reform process? I'm sure there were many reasons for both, but in both cases the idea that greater spending would create much larger federal deficits, and that in the face of these deficits he would either have to raise taxes or borrow more money, may have been a very important consideration.

Or, if he did understand that Federal spending is not limited by taxes or borrowing, he perhaps felt that he might not be able to escape the cultural influence of the first deadly innocent fraud, and explain to the American people that the increased deficit was nothing they had to worry about. Whatever the reason, Obama let Congress know that the "health care reform" bill had to be limited to less than $1 trillion in Federal Government expenditures over 10 years, a level that would have been dwarfed by Medicare for All, but also dwarfed by the amount of money the private sector would have saved if the Conyers-Kucinich Medicare for All bill, HR 676 had passed. He also let Congress know that the bill would have to pay for itself over 10 years according to CBO projections.

Why did Obama decide to limit the size of the stimulus package to roughly $800 billion, when some of the best macro-economists were telling him it needed to be at least twice that size? The answer, again, is either that he believed himself that government spending was ultimately limited by what the Government could raise by taxing or borrowing, or he thought that he couldn't explain to others that this is not true, and therefore also that he wouldn't have been able to defend himself politically against charges of irresponsible deficit spending coming from the Republicans and, perhaps, the blue dog Democrats.

More generally, why has President Obama, except in the case of the War and the financial system bailouts, approached other legislation from the viewpoint of deficit neutrality? Why has he applied that lens to reinventing the energy foundation of the American Economy, to legislation aimed at climate change and environmental protection, to infrastructure spending, to education, to new legislation aimed at creating jobs and lowering unemployment, and to temporary extensions of payroll tax cuts? It is either because he, himself believes in the first deadly innocent fraud, or it is because he thinks that the belief in it is so deeply ingrained in others, that he can't educate people to the truth about our soft currency money system, and can't defend himself or the Democrats against the old-time budget balancing religion, that past generations of Democrats thought they had overcome a long time ago.

Whatever the reason for Obama's adoption of the deficit neutrality point of view, we know now (see his speech at Brookings early on and his actions since) that he was fixing to apply it during the remainder of his Administration, with the exception of the wars, and bank bailouts. The Administration has been making noises about “entitlement reform” for a long time now, as well as continuing to express its fealty to the ideas of deficit neutrality in program spending, or "paying for" what it wants to do, and also long-term deficit reduction.

The MSM has responded with a constant drumbeat of articles and analyses raising the issue of the size of the deficits, the national debts, and the possibility that purchasers of US Securities will raise interest rates creating a burden the Government cannot handle. For more than two years now these predictions of higher interest rates in the US have proven false again and again, though this hasn't stopped columnists from such outlets as the Washington Post, CNN, the Wall Street Journal and numerous others from echoing the economic.fiscal world view and arguments advanced by Peter Peterson, David Walker and the Fiscal Times advocating fiscal austerity to counter the inevitability of inflation or even hyperinflation.

The MSM also often says things like: “It's unlikely that the nation will ever default, but neither is that any longer unthinkable,” a statement that, of course is based on belief in the deadly innocent fraud that the Government's resources are limited to what it can raise by taxing and borrowing, since if the Press understood that the Government's fiat money can be created in whatever quantity the Government needs (see here and here for example), it would clearly see that there never is any possibility of default, unless the Government has been captured by the belief in the deadly innocent fraud itself, and declares a default, when all it really has to do is to make the money needed and repay its debts in its own fiat currency.

Conclusions

And so the first deadly innocent fraud maintains its destructive grip on American society, economy, and politics. The old-time religion, represented by people like Mike Spence, Olympia Snowe, Paul Ryan, Ben Nelson, Max Baucus, Peter Peterson, David Walker, and yes, evidently, Barack Obama, expects us to reinvent out economy and its foundations and to adapt to the new challenges of the 21st century, while refusing steadfastly to use the tools we can apply under our fiat monetary system. In fact, it expects us to ignore that we have such a system, and to act instead according to the economic principles that governed us when we were still on the gold standard.

It expects us to seek a budgetary surplus relative to our fiat currency, and to forget about evaluating a particular Government expenditure by the proper standard of whether its balance of benefits to costs in the value or non-monetary sense is positive for us and American society. If we persist in obeying the dictates of this first deadly innocent fraud, American prosperity will never be re-captured. The American Dream will die, and Democracy in America will, increasingly, be replaced by plutocracy, a process that has now been going on for 33 years since President Jimmy Carter initiated it.

In the next installment in this series, I'll discuss some other deadly innocent frauds analyzed in Warren Mosler's book, and also their implications for current issues.

Bernie: YOU Stop Caving to Peterson/Obama/#supercommittee

Joseph M. Firestone — Sun, 20 Nov 2011 13:00:44 -0500

Dear Bernie,

Today, you told the “Democrats stop caving in . . . ” to the interests of corporations, the tea party, wealthy individuals, and the Republicans in Congress. The only problem with your fiery statement is that you began it by “caving in” to them yourself. You did this by immediately legitimizing their frame of reference by saying:

“Here is something we all can agree on: Federal deficits are a serious problem.”

I'm sorry Bernie, we can't all agree on that, because it's just not true, and it's what the Republicans, the Blue Dogs, most Democrats and the Administration are all using to try to bully you and us into agreeing to spending cuts in key discretionary programs and programs like Social Security and Medicare, and also into not moving for more spending on jobs, better entitlement programs, including Medicare for All, and better discretionary programs we need to solve our many national problems.

The idea that Federal deficit spending is a serious problem is the idea, that along with the belief that the Federal debt is getting to be some kind of irresolvable problem, is in back of the whole anti-deficit/debt thrust of the deficit terrorists like Pete Peterson, David Walker, Alice Rivlin, and all the others in Washington including the President. In turn, this thrust has led to the Bowles-Simpson Catfood Commission, and the current so-called supercommittee that you've been fighting so hard 'lo these past months, and the constant drum beat that “There Is No Alternative” (TINA) to deficit cutting.

So, when are you going to learn that the only way for you and us to end this fight and to win it, is to deny their basic premises and particularly their foundational idea that the United States of America, the issuer of its own non-convertible floating fiat currency, with no external debt payable in anyone else's currency, and the ultimate source of all US Dollars existing in the world, can run out of the money needed to continue to deficit spend, and to pay all its bills including the principal and interest on all its debts, as well as all Congressional appropriations you and your colleagues may choose to legislate?

You say that the deficit is a serious problem. But I think it's not a real problem at all for at least three reasons that refute TINA.

-- First, because nothing bad needs to happen if we continue to run deficits, as long as we don't do so after our economy is operating at full capacity. But we are very far from that state right now with between 25 – 30 million people wanting full time employment and not being able to get it. So, we can't have demand-pull inflation now. It's impossible.

-- Second, because it's the Congress that is constraining the Government from generating money for its debt repayment, or appropriated deficit spending using means other than taxing or borrowing, because Congress prohibits the Treasury from freely issuing Treasury Notes and also requires that it issue debt before it deficit spends, while at the same time imposing debt ceilings that interfere with borrowing to spend appropriations Congress has already made. So, there is no real problem because the constraints were made by Congress and can be lifted by it in a single afternoon, if it wants to.

There Is An Alternative (TIAA). And it is for Congress to stop requiring the Treasury to issue debt when it deficit spends, and to allow it instead to "mark up" its own accounts at the Fed when it needs to spend an already legislated Congressional appropriation, or to repay past debt and interest.

You should be making the truth of TIAA clear to the American people, Bernie, so that everyone knows that any shortage of money to spend is Congress's own fault, and that there is no debt/deficit problem in the sense of an inability to pay, or a need for China, Japan, or the bankers to lend the Government back the money the Government created in the first place, or a need to cut spending, or a need to raise taxes on anyone, or both, to avoid impending or future solvency.

But instead you're reinforcing their message that there is a serious deficit problem. Now that's what I call “loser liberalism,” Bernie.

-- And Third, there is no problem because even under current law, with its constraints on the Treasury's ability to spend what's required to repay debt or spend Congressional appropriations, it has been legal since 1996 for the Executive Branch to issue 1 oz. proof platinum coins having arbitrary face value in the amount of many Trillions of Dollars, deposit those coins at the Fed, and force the Fed to use its money-creating authority to credit Mint and Treasury Accounts with electronic credits equal to the value of the coin. The money placed in Treasury's accounts as a result of this action need not be spent. In fact, if the Executive minted a $60 T coin, then it could not all be spent because the authority for spending by the Treasury would not extend further than repayment of debt subject to the ceiling as it falls due, and payment implementing Congressional appropriations approved up to now.

So, even if such a coin were issued, spending by the end of the year would be limited to repayment of all intra-governmental debt, including all debt held by the Fed itself, and the Federal spending appropriated by Congress for the remainder of this calendar year. Most of the $60 Trillion would still remain unspent to be used for future debt repayment as the securities fall due, and payment for future Congressional appropriations that would not be covered by tax revenues.

As long as those appropriations don't outrun tax revenues more than is necessary to enable a full employment, full capacity utilization economy, no one has to worry about demand-pull inflation resulting from excessive Government spending. It won't happen. And if there is any inflation from other causes, which is possible, and even probable, if we don't prevent excessive commodity speculation through appropriate laws and their faithful enforcement, any cost-push inflation, won't have anything to do with Government spending.

You can find a more detailed explanation of this coin seigniorage idea and its implications here, here, here, and here. Without going into detail in this open letter, I'll just say that if the President uses coin seigniorage in the way I've outlined, he can fill the public purse with such a large volume of USD electronic credits that no one will be able to say, ever again, that the US has a deficit/debt problem because it is running out of money. And, additionally, in a very few years, the Treasury's payment of the Government's debts as they fall due, without any further debt issuance, to spend Congressional appropriations not covered by tax revenues or other sales, will result in most of the debt subject to the ceiling, except for long-term debt, being paid. There will be very low levels of debt subject to the ceiling and eventually no debt of this kind at all.

So, to summarize, it is not true that “. . . Federal deficits are a serious problem.” And it is not true that we have to do anything to reduce deficits defined as a gap between Federal spending and Federal tax revenues. The whole exercise in deficit reduction that the president and the other deficit terrorists have put this country through has been an immensely wasteful distraction.

As you say in your HuffPo piece:

“This is a pivotal moment in American history. The rich and large corporations are doing phenomenally well while the middle class is collapsing and poverty is increasing. Now is the time to answer the question that the Woody Guthrie song poignantly asked, "Which side are you on?" The Democrats must answer boldly that they are on the side of working families and the middle class and that they will fight to protect their interests.”

And you, Bernie, must also answer boldly with the truth. People who are on the side of working families and the middle class, like yourself, cannot continue to say that “we can all agree that there is a serious deficit problem”, because that has been the continuing most important element in the case the deficit terrorists are making.

To defend our ground, and the 99%, we need to deny and defeat that false framing. We cannot reinforce it! We need an alternative framing.

And that framing is, the Federal Government needs no money from anyone to pay its debts and to spend what Congress has appropriated. We are a fully sovereign nation, and as long at we retain that full sovereignty, including its fiscal aspects, the Government can spend/create any money it needs in accordance with the authority given to it by the Constitution of the United States. It is up to the Congress and to the Executive to use that authority as necessary to create and maintain full employment AND price stability, as well as all other aspects of the Public Purpose, as that purpose is defined and specified by the people of the United States of America.

Best,

Joseph M. Firestone, Ph.D.

Would Congress and the President Try to Cut Federal Spending If . . .?

Joseph M. Firestone — Sat, 06 Aug 2011 00:57:30 -0400

This one is a message intended for all progressive organizations, especially those who have worked so hard to derail the drive for cuts in Social Security, Medicare, and Medicaid, or are working hard to protect other valuable discretionary programs.

There's another hostage-taking coming in the next three months over the 2012 Budget legislation. You know it! I know it! Everyone knows it!

So ask yourselves these questions:

1. Would Congress and the President be trying to cut Federal spending if the Treasury General Account (TGA) at the Fed had more than $50 Trillion in it?

2. Would Congress and the President be trying to cut Federal spending if the President has already paid off roughly $50% of the national debt?

3. Would Congress and the President be trying to cut Federal spending if the national debt was scheduled to be almost entirely paid off by September of 2014 and they knew that the Treasury had the money already to make the necessary payments?

4. Would Congress and the President be trying to cut Federal spending if they knew that the US could never become insolvent and never had to borrow back its own dollars?

5. Would Congress and the President be trying to cut Federal spending if they knew that all four of these conditions was true?

So what if I told you that by the time the hostage-taking is likely to happen all of these conditions can provide the background for budget negotiations, and whether they do or not depends on what the President, alone decides to do?

Then shouldn't it be the highest priority of those who are opposed to austerity and cutting the social safety net to carry out a strong campaign to make the President take the few simple steps needed to create these conditions and head off the hostage-taking?

Here are the steps:

A. Mint a platinum coin with face value of $60 Trillion, deposit it in the U. S. Mint's Public Enterprise Fund (PEF) Account at the Fed, then have Treasury “sweep” the difference between the cost of minting the coin and its face value into the TGA.

B. Immediately pay off the $6.2 trillion owed by the Federal Government to the Federal Reserve Bank, the various Government Agency Trust funds, among them Social Security and debts to other Government Agencies.

C. Pay off the non-Government sector debt, as it comes due using Proof Platinum Coin Seigniorage (PPCS) revenue when necessary. Since the estimated cost is about $300 Billion paid off per month; we can expect another $1 Trillion to be paid off by the end of the year leaving a national debt of about $7.1 Trillion, with a bit less than $53 Trillion still left in the TGA.

D. Pay for any 2011 spending not covered by taxes between now and the end of the year, estimated at about $600 Billion, using the credits in the TGA, rather than issuing debt.

The function of minting the high face value proof platinum coin, filling the Federal purse using PPCS, and beginning to pay off the national debt quickly, is to demonstrate dramatically that there is no US solvency problem, nor any debt and/or deficit reduction problem.

Issuing the coin and getting the Fed to issue $60 Trillion in credits to Treasury, will demonstrate exactly that, and blow any justification for austerity and spending cuts out of the water. The Republicans won't be able to spin that; and without a plausible claim that austerity is necessary, the drive to take hostages and force austerity on America will evaporate. Within a few weeks we will have a new political discourse, and hostage-taking will no longer be part of it.

(Cross-posted from Correntewire.

End the Austerity War Against the People: Mint the Platinum Coin!

Joseph M. Firestone — Fri, 05 Aug 2011 01:36:20 -0400

How can the President win a victory for the people in the coming hostage-taking over the budget? Here's a scenario!

1. Mint a platinum coin with face value big enough to cover pay-off of the national debt, and the gap between tax revenues and Government spending for many years to come. For example, $60 Trillion in face value would generate enough electronic credits in the Treasury General Account (TGA) at the Fed to last for about 20 years or through 2030. Result: $60 Trillion in the TGA, none of it spent, so no possibility of inflation.

2. Immediately pay off the $6.2 trillion owed by the Federal Government to the Federal Reserve Bank, the various Government Agency Trust funds, among them Social Security and debts to other Government Agencies. Result: Reduction of the national debt from $14.3 Trillion to $8.1 Trillion, all of it owed to the non-Government sector. None of the $60T spent in such a way that the money goes into circulation; so no possible inflation.

3. Pay off the non-Government sector debt, as it comes due using Proof Platinum Coin Seigniorage (PPCS) revenue when necessary. Result: Since the estimated cost is about $300 Billion paid off per month; we can expect another $1 Trillion to be paid off by the end of the year leaving a national debt of about $7.1 Trillion, with a bit less than $53 Trillion still left in the TGA. The $1 Trillion in debt "swapped" for non-governments sector cash reserves is very unlikely to cause inflation, since the debt instruments are probably more inflationary.

4. Use PPCS to pay for any 2011 spending not covered by taxes between now and the end of the year, estimated at about $600 Billion. Result: $52 Trillion left in the TGA. And since the 2011 deficit spending hasn't created full employment, no inflation will result from this action either.

5. Go into the negotiations on the budget with a position, saying

“there will be no spending cuts in this budget at all. In fact, I want a) a full payroll tax cut for employers and employees until full employment is reached; b) immediate lifting of the limit on number of weeks someone can get unemployment insurance; c) restoring food stamp program spending to its state before the recent cut; d) immediate revenue sharing for the States in the amount of $1,000 per person to enable State Governments to retain public service jobs; e) A Federal Job Guarantee program with a base wage of $8.00 per hour cost-of-living adjusted from the lowest cost of living SMSA in the nation upward, with full fringe benefits, and including Medicare enrollment for FJG workers; and f) an increase in SS payments by 50% effective immediately. Now, what is it you gentlemen want?”

Result: They will say that's ridiculous, and threaten to shut down the Government. The President can reply by pointing out that he has solved the austerity/solvency/debt/deficit problem, and there's no need to cut spending.

6. Make a major address to the American people telling them the situation and the history of Republican efforts to tank the economy, informing them of your proposal to head off the likely double-dip recession, end unemployment, and strengthen Social Security, point out that the Treasury General Account has $54 Trillion left in it, and that the national debt is being repaid at a rate of $200 - $300 Billion per month, will be 50% repaid by the end of 2011, and will be almost entirely repaid by 2014. So, there is no deficit, debt, or deficit reduction problem. There is plenty of money in the Federal till to do all the things you've proposed and provide jobs for all, and create plenty of sales to get business roaring.

Tell them the Republicans are standing in the way of jobs for everybody, and that they need to get on the phone to their representatives and demand that they make a deal with all the President's proposals in it. Result: Congressmen and Senators will get all kinds of mail, phone calls and other communications supporting the proposals and telling them to end the sufferings of the American people, or else. That will be even more likely to happen if the economy is continuing to get worse. However, the Republicans will probably still reject the President's proposals, call them profligate spending, and the tea party Reps. will probably threaten to shut the Government down, if their demands are not met.

7. The President can then call for a meeting with the leaders of both Houses to get the demands of the Republicans on the table, and see whether there can be a settlement. The Republicans will propose all kinds of harmful cuts in spending, no tax increases and will demand passage of the Bush Tax cuts on a permanent basis. Emboldened by the presence of $54 Trillion in the bank, the Democratic Leaders will demand passage of all of the President's proposals; but they will probably no longer demand expiration of the Bush Tax cuts, because they will probably recognize that there is no longer any visible money problem.

The President can end the meeting by saying that the Republican position on cutting spending is untenable because he has proven that the US has no revenue problem, and that there is no reason for austerity. At the same time, he can suggest to the Democrats, if they called for letting the Bush tax cuts expire, that there is no economic justification for doing that, and that the only justification is one of fostering greater economic equality; an important issue, but perhaps not one that ought to block a deal with a Republican House on the budget. Then he can ask the leaders to get back to their caucuses and propose a compromise that is likely to pass both Houses.

Result: The President will have leverage to propose a compromise to the country. The Democratic leaders will have no problem getting the full support of their caucuses for the deal. The Republican leaders will have problems with their tea party people; but they can point out that the proposed compromise doesn't violate Grover Norquist's pledge, and also that it will be very hard to oppose a compromise that will definitely produce full employment for everyone who wants to work, and that carries with it no visible debt problem.

8. The President should, at that point, immediately outline a compromise proposal to the nation including all of his demands, and also one Republican demand, namely a continuation of the Bush tax cuts. He can emphasize that he has ended the deficit/debt problem with its need for austerity for good. He must again ask the country to tell their Senators and Representatives to support him in his new compromise which gives the Republicans what they've wanted badly, and also gives to the people the programs that will finally create the good jobs needed to end unemployment.

He can also ask them to fulfill his special request, which is to tell their Representatives and Senators that if they vote against his compromise, the voter will vote against them if they are primaried in 2012, and will even vote against them if the other major party runs an acceptable candidate who supports the President's jobs proposals.

Result: the flood of messages coming into the Capitol will cause the Republicans to “cave” to the compromise proposed by the President. And the President will finally have stood up to the hostage-takers and arrived at a good deal for the people of the United States.

I can't conclude this scenario without noting, that the successful outcome of the coming budget hostage-taking will not be possible without changing the background of any negotiation that will accompany it. Specifically, to be successful, and resist the hostage-takers, the President must change the situation to remove the most obvious justifications for cutting spending.

The function of minting the high face value platinum coin, filling the Federal purse using PPCS, and beginning to pay off the national debt quickly, is to demonstrate dramatically that there is no US solvency problem, or any debt and/or deficit reduction problem.

Issuing the coin and getting the Fed to issue $60 T in credits to Treasury, will demonstrate exactly that, and blow any justification for austerity and spending cuts out of the water. The Republicans won't be able to spin that; and without a plausible claim that austerity is necessary, the drive to force austerity on America will evaporate. Within a few weeks we will have a new political discourse.

The main problem I see with this scenario is getting the President to use PPCS to shake up the austerian system, destroy its forward momentum, and bring forth a new progressive era. He has the power to do it; but he is so tied into his Hooverian austerity-mongering, that I don't think he will use PPCS even though it could well mean the difference between victory or defeat in 2012 for him. He'd rather cling to his neoliberal world view than to learn and to change the terms of the debate and the political paradigm that he is so comfortable with.

That's why I propose that we press for his resignation now! Before he comes up with any more horrible deals with the Republicans and the tea party. Face It! This man can no longer be our leader. His pragmatism is not the pragmatism of FDR and the great Democrats of the past. It is a corrupt short-run pragmatism. He does not deserve our support or our loyalty! What he needs to do is to heed Oliver Cromwell's old admonition to the long parliament:

“You have sat too long here for any good you have been doing. Depart, I say, and let us have done with you. In the name of God, go!”

In other words, ask him to resign, immediately!

(Cross-posted from Correntewire.

Proof Platinum Coin Seigniorage: A Political Game Changer for Progressives!

Joseph M. Firestone — Wed, 03 Aug 2011 08:35:04 -0400

Now that a debt ceiling deal has ended the immediate crisis, the attention being given to the President's options, in case there was no deal on the debt, will fade into the background, and most of the options offered to get past the debt ceiling won't be discussed again, until the next time there's a “debt ceiling crisis.” In highlighting, in previous posts, the President's option of using Proof Platinum Coin Seigniorage (PPCS) to pay back part or all of the national debt, other bloggers and myself writing about PPCS, have raised broader questions of whether the President should use it to:

-- 1) pay back the national debt entirely,

-- 2) spend more than the United States collects in tax revenue whenever Congress appropriates such spending, and

-- 3) replace the current method of creating the credits necessary to spend Congressional appropriations through issuing and selling debt instruments with PPCS as the basis for creating those credits.

The answers to these questions suggest that PPCS should not be forgotten until next time, because if it were implemented right now, it would be a political game changer for the economy and also for progressives almost immediately.

Using PPCS to Pay Back the National Debt

Minting proof platinum coins with arbitrarily high face values, depositing them at the Fed, receiving electronic credits equal to the face value of the coins from the Fed, and then having the Treasury sweep the profits into the Treasury General Account (TGA) can fill the Treasury's purse to an arbitrary level selected by the President. The profits can then be used to redeem debt held by the Fed, debt held by the Trust funds (including Social Security) and Government agencies, and debt held by the non-Government Sector, including domestic investors and foreign Governments and investors.

The importance of using PPCS to pay back the debt isn't economic. Modern Monetary Theory (MMT) tells us that Governments like the US with free floating, non-convertible fiat currencies, and no external debt, cannot be forced into insolvency by economic conditions or factors. So, the government spending capacity of those nations isn't affected at all by the size of the national debt, or the debt-to-GDP ratio. Nor does the level of the deficit reduce spending capability; even though if it is too great, inflation may be the result. However, nations and governments are not purely economic and financial systems. They are also political systems. So, the issue of paying off the national debt has to be viewed from a political point of view, whether paying it off is necessary economically or not.

From a political point of view, deficits, the national debt, and very high debt-to-GDP ratios are a serious political and messaging problem for those who want to spend more than the Government can collect in tax revenues. People simply don't understand the fiat currency system, and they view the Government as they would their own household. They know that their debt is bad for them, and they also think that public debt is very bad for their country and must eventually be paid back through taxes.

We could try to educate people in the MMT point of view that Government “debt is not debt,” and could also eventually get them to accept that Government debt in the aggregate can be continuously rolled over and never paid off, and that its absolute level and even the debt-to-GDP ratio are of no consequence. But success in this kind of educational project would not come for years and years. It's a slow process, and we need to free up Government fiscal policy to handle our various problems by spending more than it taxes in the short run; not the long run.

So, how can we get people to support us in doing that? I think we need to remove the worries people have about public debts and deficits by removing them from the fiscal picture of the Government, i.e. by paying the debt off and by never running any technical deficits where Government spending exceeds Government revenue.

Until PPCS was legislated in 1996, the Executive didn't have the ability to do that without gathering enough revenue from taxation to generate sufficiently high surpluses for as long as it took to pay back the national debt. And that course was unacceptable, because paying back all the debt subject to the limit using surpluses would have been equivalent to draining the economy of all liquidity and destroying all economic activity.

Now, however, the PPCS capability allows the US Government to fill the Federal purse with financial assets sufficient to re-pay the national debt without removing and destroying existing private savings. PPCS could be used to pay back debt held by the Fed and debt held by the trust funds and other Federal Agencies, a total of $6.2 Trillion, almost overnight. The remaining national debt of $8.1 Trillion, would be repaid as it matured, along with interest due on the securities. Since most of the outstanding debt will mature within 3 years, in that period of time the US would be nearly debt-free, and its debt-to-GDP ratio would be among the lowest in the world.

It's important to emphasize that the capability to use PPCS, and to pay off the national debt, lies with the Executive Branch, alone. President Obama could see to it that the process is begun and that the repayment of the first $6.2 Trillion was completed this very week. By election time next year, close to $9 Trillion in debt would have been paid off, and the US debt-to-GDP ratio would be less than 40%. Mr. Obama could claim to be the President who placed the nation on the road to debt freedom, all without causing additional pain or the economy to deteriorate further. Here are some of the political implications of using PPCS this way, and minting a platinum coin with a large enough face value (say $30 to $60 Trillion) to pay off the national debt and do other things as well.

-- Lots of political slogans supporting doing nothing about our problems, due to “financial constraints” instantly are swept away. Imagine, if you can, American politics without having to argue about, or cope with, slogans or sound bites like these.

-- “The Government is running out of money.” (Not with a $60 T coin in the bank.)

-- “The Government can only raise money to spend by taxing and borrowing” (Not with PPCS)

-- “We can't keep adding debt to our national credit card.” (We won't be using any of the money on the credit card.)

-- “We need to cut Government spending and make do with no more money.” (Only if more spending would definitely cause inflation.)

-- “if the Government borrows more money, then the bond markets will raise our interest rates.” (The Government won't be borrowing anymore.)

-- “If we continue to issue more debt, our main creditors: the Chinese, the Japanese, and our oil suppliers, may cease to buy our debt, making it impossible for us to raise money through borrowing which, in turn, would force us into radical austerity, or perhaps even into insolvency, which would then be followed by radical austerity and repudiation of our national obligations." (Again, the Government won't be borrowing anymore, so who cares if they no longer want to buy our debt)

-- "Our grandchildren must have the burden of repaying our national debt." (There won't be any debt or any burden.)

-- “Now, the final step – a critical step – in winning the future is to make sure we aren’t buried under a mountain of debt.” (Again, no debt; either mountain or molehill.)

-- “Our government spends more than it takes in. That is not sustainable. Every day, families sacrifice to live within their means. They deserve a government that does the same.” (But it is sustainable. If we use PPCS, then we can have gaps between taxes and spending every year.)

-- “We need to cut entitlements like Social Security and Medicare, because we are running out of money and they are not fiscally sustainable.” (But they are with PPCS, because we won't be running out of money!)

-- “If we make the hard choices now to rein in our deficits, we can make the investments we need to win the future.” (Given PPCS, what we do now about deficits has nothing to do with our capability to make the investments we will need)

-- “We need to reduce our deficits to be fiscally sustainable.” (Deficits have nothing to do with fiscal sustainability in the sense of continued capability to spend, which will be very plain to people if $60 Trillion is sitting in the TGA.)

-- “We face a crushing burden of debt. The debt will soon eclipse our entire economy, and grow to catastrophic levels in the years ahead.“ (Can't say that if most of the debt is about to be paid off.)

-- “Our debt is out of control. What was a fiscal challenge is now a fiscal crisis. We cannot deny it; instead we must, as Americans, confront it responsibly.” (PPCS can confront it responsibly, but the bipartisan horror just enacted can't.)

-- “We believe the days of business as usual must come to an end. We hold to a couple of simple convictions: Endless borrowing is not a strategy; spending cuts have to come first.” (Right! So let's stop borrowing and use PPCS.)

-- “Everyone knows that the U.S. budget is being devoured by entitlements. Everyone also knows that of the Big Three - Medicare, Medicaid and Social Security - Social Security is the most solvable. . . . “ (The budget can be be as big as we need it to be with PPCS.)

-- “The Social Security Trust fund is a fiction, a mere bookkeeping device.. . . There is no free lunch. There is nothing in the lockbox.” (There will be if we pay back the trust fund through PPCS.)

-- “There is a deficit/debt reduction problem for the Federal Government that is not self-imposed.” (What's the problem? We can't run out of money with PPCS!)

-- “The Federal Government is like a household and that since households sacrifice to live within their means, Government ought to do that too.” (What nonsense! As PPCS shows very well; the Government is not like a household. Households can't create unlimited funds through PPCS; but the Federal Government can.)

-- “The only way to tackle our deficit is to cut excessive spending wherever we find it.” (It's always good to cut spending that's not in the public interest. But if spending is having good results, and we're using PPCS, then there's no reason to cut it, whether taxes cover the spending or not.)

-- “We should also find a bipartisan solution to strengthen Social Security for future generations.” (With PPCS, we can easily strengthen SS by extending benefits, and we don't need to do it through a bipartisan Rube Goldberg contraption.

-- “The United States is in danger of becoming the next Greece or Ireland.” (Even without PPCS it can't become Greece or Ireland, only the next Japan. But with PPCS it can become the United States again.)

-- “Fiscal Responsibility means stabilizing and then reducing the debt-to-GDP ratio and achieving a Federal Government surplus” (With PPCS, the debt-to-GDP ratio will be stabilized and reduced, but no "surplus," in the sense of more tax revenue than spending, will ever be necessary for revenue purposes.)

With the debt paid off, sound bites like the above won't be around anymore. When progressives bring up Medicare for All, or Federal Job Guarantees, or State revenue sharing to save jobs, a payroll tax holiday, or an infrastructure rehabilitation program, or education programs; or large scale programs to create a new energy foundation for our economy, conservatives will have to debate the merits of the proposals. They won't be able to say that we can't afford it because we're running out of money. When progressives propose funding for food stamps, or extending unemployment to 156 weeks, or even propose that all limits on the number of weeks for collecting unemployment be removed, conservatives won't be able to reply that we have a deficit problem, or that our national debt is too high, or that we have to be concerned about our poor grandchildren. They'd just have to admit that they don't care about the unemployed, and that insofar as they do care, they only care about making more of them so that wages stay low.

-- The neoliberal economic paradigm of response to policy proposals is constraining our politics in a very tight strait jacket, choking the life out of progressive initiatives. The first response to all proposals for change is to ask whether a proposal is fiscally responsible, where fiscal responsibility means, government spending that, whatever else it does, leads to a declining debt-to-GDP ratio over time. If CBO projections show that a program will increase deficits and add to the debt-to-GDP ratio, they are opposed, and, most often, rejected on grounds of “fiscal unsustainability.”

PPCS can change all that. It can change the paradigm governing political games in Washington. The deficit hawk ideas of fiscal sustainability and fiscal responsibility will no longer be relevant, once $60 Trillion in electronic credits are in the Treasury General Account (TGA). Then the important questions will be whether the proposed programs are likely to achieve public purposes or not, and whether if they are, our representatives will appropriate for "deficit" spending, if necessary, the already existing financial resources. A political game organized around messaging about the public purpose, is much preferable to one focused on whether we can meet a set of long-range targets in some deficit reduction austerity plan that, over time will destroy the real wealth, capabilities, and employability of most Americans.

-- If PPCS is used, messaging around the public purpose can't be opposed by austerity; but, instead, it will be opposed by claims and fears that PPCS will result in inflation. The argument of PPCS vs. inflation, however, is a much easier argument for progressives to win than the current argument of austerity vs. need. The reason is that in dealing with this last argument, progressives have granted and continue to grant the idea that deficit reduction is necessary for fiscal responsibility in the long run. This is a myth. But it is powerful. On the other hand, if PPCS gets rid of the need for austerity we can then consider whether PPCS will be inflationary.

Scott Fullwiler has recently done a comprehensive analysis of inflation possibilities with PPCS. It turns out that it is very unlikely to cause inflation because there appears to be no transmission mechanisms from the mere presence of PPCS profits in the TGA to inflationary outcomes. As always, Congressional appropriations followed by spending can produce inflation, if that spending exhausts the productive capacity of the economy. But that kind of inflation would result whether or not PPCS is used as the basis for spending.

Using PPCS to Spend More than the United States Collects in Taxes

Having revenue generated by PPCS, and using it to pay off debt, doesn't guarantee that Congress will want to appropriate spending in excess of tax revenues, and have PPCS revenue close the tax/spend gap. Congress may want a budget in which spending doesn't exceed tax revenues anyway, even with $60 Trillion sitting in the TGA. Or if it wants to appropriate spending in excess of tax revenues, it may still insist that the uncovered spending be preceded by selling new debt instruments in dollar-for-dollar correspondence to the new debt.

Or, perhaps the President may wish to close the tax/spend gap by issuing debt, rather than using PPCS revenue, because he wants to continue subsidizing investors in the bond markets. Projections based on CBO's say that over the next 15 years interest costs on the national debt would approach $12 Trillion. Paying off the national debt will eventually reduce these interest payments to zero. Investors in the bond markets will be angry at this development, so the Treasury continuing to issue debt, to be paid off on an annual basis, to provide them at least a fraction of the projected income (about 10%) expected under the old debt-based regime, is a possible outcome of the political conflict that is likely to occur when the Government tries to use PPCS to pay off the national debt.

This would result in continuing the existence of the national debt, though not in growing it, since the $14.3 Trillion we have now would be paid off, and any new debt incurred could be paid off quickly using PPCS, especially if Treasury issues only securities with terms of a year or less. If this were done, a decision to keep issuing debt, and using PPCS only to pay it off wouldn't materially effect the political background of budget debates. There would still be very low debt levels, with the debt being paid off every year and very low debt-to-GDP ratios. So, the very damaging austerity rhetoric and proposals we see today would still disappear and would no longer paralyze progressive politics.

Using PPCS to replace borrowing as the Basis for Creating the Credits Needed to Spend Congressional Appropriations

What if the President decided to use PPCS to create that TGA balance of $60 Trillion, and and also decided to replace all debt issuance as the basis for spending Congressional appropriations, and relied instead on taxes and PPCS revenue, alone? Then, there would be no more Federal debt, and there would be no further interest subsidies to the bond markets and foreign nations for placing their USD reserves in what is essentially a risk-free interest-bearing savings account at the Fed. The Government would “save” nearly $12 Trillion in projected interest costs over the next 15 years.

Considering that PPCS profits are considered “revenue” and not “debt,” the Federal budget would always be in balance, and so, the Government would never technically have a “deficit,” defined as the gap between spending and revenues. The gap between tax revenues and spending would continue to exist, however, and that gap is very important, because when Government spending exceeds tax revenue, the gap adds to non-government (including private) sector net financial assets, dollar for dollar. On the other hand, when tax revenues exceed spending, the gap subtracts from non-Government net financial assets. Of course, in the case of such a “surplus,” no PPCS credits would be subtracted from the TGA.

Possible Political Implications This Fall

I said earlier that having that $60 Trillion in the TGA, would change the background of political discourse and the paradigm governing political debate. With PPCS it could focus on public purpose and its relationship to policy proposals, rather than on issues of austerity and whether or not a particular proposal was “fiscally responsible” or “fiscally sustainable.” This change in focus will make a great difference in American politics, because it will expose the real motives of politicians very quickly, since they won't be able to hide behind the austerity slogans and rationalizations.

It's very important to see that this change in background and the terms of discourse doesn't have to wait for any new election results. If President Obama were to implement PPCS in the right way, this week, the transformation of discourse could start immediately. The $60 Trillion in the TGA account would sit there, a huge elephant in a small room. An overnight payment of debt immediately reducing the Fed and Intragovernmental debt to zero, and paying off $6.2 Trillion of the debt counted against the limit, would hit Washington like the proverbial ton of bricks, making it clear that the extension of the debt limit just passed was meaningless compared to the impact of PPCS. Progressives in Congress could immediately apply pressure to void the recent agreement on hurtful spending cuts this year. How could the leadership in Congress oppose voiding it? By saying that the agreement is more important than the fact, evidenced by the $60 Trillion in the TGA, that there was never a need for any spending cuts at all?

Good luck with that! A refusal to restore the cuts would make the people doing the refusing a laughing stock! Even if they got away with that first step, what would happen when Thanksgiving rolls around and the “super Congress” is deciding on further cuts and then presents these for an up or down vote. Will a majority in either House vote for cuts on the grounds that deficit reduction demands it, with $52 - $54 Trillion still sitting in the bank and Trillions in debt scheduled to be repaid over the next year? How would they spin that? How would they paper it over?

How will they act if and when progressives move to restore food stamp cuts and extensions of unemployment insurance, and State Revenue sharing, and payroll tax holidays? How will they act when the public realizes there's a huge amount of money in the TGA and no reason for Congress to go around cutting programs that benefit them? And when hundreds of thousands of outraged citizens, perhaps even millions, demonstrate across the country against the austerity kabuki and the tea party that was about to condemn working America to a decade of stagnation and suffering, when there was absolutely no reason for it; what will Congress do then?

I gotta say, I think they'd cave. The change in the material background resulting from the PPCS $60Trillion application would be a very powerful catalyst, powerful enough to overcome habitual patterns of thought, and delivering a shock to the neoliberal system that would free up progressivism to be militant and moral again.

(Cross-posted from Correntewire.

Coin Seigniorage and Inflation

Joseph M. Firestone — Tue, 02 Aug 2011 00:12:23 -0400

This post by Scott Fullwiler is the definitive post on how proof platinum coin seigniorage (PPCS) relates to inflation.

Progressives in Congress: Vote for the President to Do It!

Joseph M. Firestone — Sun, 31 Jul 2011 15:40:35 -0400

Today the MSM question of the morning for Congressional Progressive Caucus members is a variant of this:

“Which is worse, voting for a debt ceiling increase bill that doesn't raise any revenue and that will lead to major cuts in discretionary programs, and in entitlements including Social Security, Medicare, and Medicaid, or voting to defeat a bill that does that and causing the United States to go into a default.”

So, there it is: a false choice again, being used to make progressives look bad if they say they will vote against anything but a clean debt ceiling deal.

In replying to these questions, some progressives are saying, both are worse, and it's completely illegitimate to tie the debt ceiling vote to deficit reduction. Deficit reduction should be discussed separately when it's time to pass a budget. Of course, the progressives are right about what ought to happen. But the problem is that will have to decide whether to vote for a bill that will grievously hurt their constituents, or to vote against it.

What they most need to know at this point is that they have to reject outright the framing given in the question above. The choice is not between voting for default and voting for a terrible deficit reduction bill. The choice should have been put this way:

“Which is worse, voting for a debt ceiling increase bill that doesn't raise any revenue and that will lead to major cuts in discretionary programs, and in entitlements including Social Security, Medicare, and Medicaid, or voting to defeat such a bill and placing the debt ceiling problem in the hands of President Obama to handle”

The answer to this properly framed question is that it is better to vote to defeat any such bill, and to leave the President to handle the problem. Make no mistake about it. The President can prevent the default himself. There are 6 options he can use, and he will have a constitutional duty to do whatever is in his power and authority to prevent default. Here are the 6 options:

-- Challenging the debt ceiling based on the 14th Amendment Section 4
-- Selective default
-- Proof Platinum Coin Seigniorage (PPCS)
-- Running an overdraft at the Fed
-- The Fed burning its Treasury Bonds
-- The “exploding option” plan

I've previously discussed them in some detail here and also analyzed and compared them. http://www.correntewire.com/what_if_a_debt_limit_extension_is_voted_down...
I've also written many posts on PPCS, because I think it is the preferred alternative among the 6. I won't repeat what I've said earlier here. Instead, all I want to do is to emphasize that a vote against a “compromise bill” that doesn't compromise with progressives is not a vote for default.

It's a vote for the President to use his powers to solve the problem without requiring harmful spending cuts in an economy that can afford absolutely no cuts without corresponding spending increases.

Today the MSM question of the morning for Congressional Progressive Caucus members is a variant of this:

“Which is worse, voting for a debt ceiling increase bill that doesn't raise any revenue and that will lead to major cuts in discretionary programs, and in entitlements including Social Security, Medicare, and Medicaid, or voting to defeat a bill that does that and causing the United States to go into a default.”

So, there it is: a false choice again, being used to make progressives look bad if they say they will vote against anything but a clean debt ceiling deal.

In replying to these questions, some progressives are saying, both choices are worse, and it's completely illegitimate to tie the debt ceiling vote to deficit reduction legislation. Deficit reduction, they point out, should be discussed separately when it's time to pass a budget. Of course, the progressives are right about what ought to happen. But the problem is that they will have to decide whether to vote for a bill that will grievously hurt their constituents, or to vote against it. There is no escaping that vote for them, whether they think tying an increase in the debt ceiling to deficit reduction is fair or not.

What they most need to know at this point is that they can and also have to reject, outright, the framing given in the question above. The choice is not between voting for default and voting for a terrible deficit reduction bill. The choice should have been framed this way:

“Which is worse, voting for a debt ceiling increase bill that doesn't raise any revenue and that will lead to major cuts in discretionary programs, and in entitlements including Social Security, Medicare, and Medicaid, or voting to defeat such a bill and placing the debt ceiling problem in the hands of President Obama to handle”

The answer to this properly framed question is that it is worse to vote for a "compromise" than it is to vote to defeat any such bill, and to leave the President to handle the problem, by himself. Make no mistake about it. The President can prevent the default himself.

There are 6 options he can use, and he will have a constitutional duty to do whatever is in his power and authority to prevent default. Here are the 6 options:

-- Challenging the debt ceiling based on the 14th Amendment Section 4
-- Selective default
-- Proof Platinum Coin Seigniorage (PPCS)
-- Running an overdraft at the Fed
-- The Fed burning its Treasury Bonds
-- The “exploding option” plan

I've previously discussed them in some detail and also analyzed and compared them. I've also written many posts on PPCS, because I think it is the preferred alternative among the 6. I won't repeat what I've already said, and urge you to read some of the posts at the link. Instead, all I want to do is to emphasize that a vote against a “compromise bill” that doesn't compromise with progressives is NOT a vote for default.

It's a vote for the President to use his powers to solve the problem without requiring harmful spending cuts in an economy that can afford absolutely no cuts without corresponding spending increases.

So, make the President do it! Make him solve the problem and avoid a default! That is the best thing that progressives in Congress can do now to save the economy and begin to kill the current austerity mania that will destroy the futures of our children and Grandchildren.

And for those of us outside of Congress, the best thing we can do is to ask our Representative and Senators to vote against anything except a clean debt ceiling deal, and to point out to them that they would not be voting for default; but only for placing the problem in the hands of the President who will have to handle it without making a big deal that hurts most Americans and that also, incidentally, forces them to walk the plank! Tell Bernie Sanders! Tell Sheldon Whitehouse! Tell Al Franken! Tell Dennis Kucinich! Tell Raul Grijalva! Tell Keith Ellison! Tell Barbara Lee! Tell Donna Edwards! Tell Louise Slaughter! Tell Marcy Kaptur! Tell them all!

Tell them to make no mistake! Tell them in no uncertain terms, that we will not forgive them in 2012 for giving away parts of the social safety net; when they easily could have avoided it by voting for the President to take care of the problem without making a deal. The The President is dealing with the Republicans and going after our bread and butter! And Congressional progressives are aiding and abetting him by accepting false framings of the issue, and deluding themselves or trying to delude us into thinking they have no choice. Tell them that we do know they have a choice. Tell them to stop marching with the oligarchs, or we will find other Senators and Representative who will march with us!

(Cross-posted from Correntewire.com.

What If a Debt Limit Extension is Voted Down?

Joseph M. Firestone — Sat, 30 Jul 2011 16:00:38 -0400

(Thanks to DailyKos commenter 2laneIA for suggesting this post and the title)

It's only a few days now until August 2nd. Perhaps a compromise on lifting the debt ceiling will be reached before then. Perhaps none will be reached. Perhaps the President will veto a compromise if it doesn't extend the ceiling sufficiently to support deficit spending until after the 2012 elections. If a debt ceiling extension is voted down, or if the President vetos an unacceptably small extension, then what is to be done? I've now run into six primary options the President can select among to avoid default. The six are:

-- Challenging the debt ceiling based on the 14th Amendment Section 4
-- Selective default
-- Proof Platinum Coin Seigniorage (PPCS)
-- Running an overdraft at the Fed
-- The Fed burning its Treasury Bonds
-- The “exploding option” plan

Let's look at them in more detail.

1. The 14th Amendment option

This option is the most well-known one right now, having been discussed on the web at least since last Fall.

The 14th Amendment to the Constitution says in part:

“Section 4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. . . . ”

People, including myself, have claimed that the debt ceiling is in conflict with the 14th Amendment and is therefore unconstitutional, and have called for the President to go ahead and issue more debt and wait for a legal challenge. That challenge may never come, because the House of Representatives alone will lack standing in the Supreme Court. In an article appearing today, at CNN, Jack Balkin offers an argument interweaving legal and political considerations, points out that the President would first have prioritize repayment of debt to conform to the Amendment, which might cause an inability to make Social Security payments fully and on time, creating great political pressure on Congress to pass a clean extension of the debt ceiling.

I'm not sure this analysis is entirely correct, since it may be possible for the Social Security Trustees to go to the Treasury with its Bonds, demanding payment for them so that Social Security payments can be made. Since the bonds are debt, and actually count against the debt ceiling, the President may not be able to hold up the payments. In any event, Professor Balkin continue his argument with:

Assume, however, that even a prolonged government shutdown does not move Congress to act. Eventually paying only interest and vested obligations will prove unsustainable -- first because tax revenues will decrease as the economy sours, and second, because holders of government debt will conclude that a government that cannot act in a crisis is not trustworthy.

If the President reasonably believes that the public debt will be put in question for either reason, Section 4 comes into play once again. His predicament is caused by the combination of statutes that authorize and limit what he can do: He must pay appropriated monies, but he may not print new currency and he may not float new debt. If this combination of contradictory commands would cause him to violate Section 4, then he has a constitutional duty to treat at least one of the laws as unconstitutional as applied to the current circumstances.

This would be like a statute that ordered the president to hire 50 new employees provided that none of them is a woman. The second requirement violates the Constitution, so the president can hire the 50 employees and ignore the discriminatory provision.

Here the president would argue that existing appropriations plus the debt ceiling create an unconstitutional combination of commands. Therefore he chooses to obey the appropriations bill -- which was passed later in time anyway -- and ignores the debt ceiling. He orders the secretary of the Treasury to issue new debt sufficient to pay the government's bills as they come due.

I'm not at all sure that the President will have to wait for a prolonged Government shutdown, to invoke the 14th Amendment: but whether he waits or invokes it on August 3rd, I think Balkin's argument is too narrow in focusing only on the possibility that the President may invoke the 14th against the debt ceiling. Perhaps, for example, as my friend Beowulf suggests (in e-mail corrspondence), he could make "a flanking attack" on the Congressional limitation of $300,000,000 on Treasury printing US Notes? This limitation is older than either the debt ceiling legislation, or the current appropriations bill, and if he did challenge it successfully, then the Treasury would have its unrestricted power to create currency restored, a very powerful hedge against debt ceiling legislation, and an enabler for ceasing to issue debt at all.

2. Selective Default

The second option, is the Treasury declaring a selective default only on Federal Reserve-owned debt instruments in order to wipe these off the books, and create headroom relative to the debt ceiling. This is clearly an extra-legal procedure. The Federal Reserve Board of Governors is a Government agency; but those bonds are owned by the Fed Regional Banks, which in our system, are not Government agencies, but rather privately owned "Federal instrumentalities." Here's wikipedia:

"The Federal Reserve Banks have an intermediate legal status, with some features of private corporations and some features of public federal agencies. The United States has an interest in the Federal Reserve Banks as tax-exempt federally-created instrumentalities whose profits belong to the federal government, but this interest is not proprietary.[74] In Lewis v. United States,[75] the United States Court of Appeals for the Ninth Circuit stated that: "The Reserve Banks are not federal instrumentalities for purposes of the FTCA [the Federal Tort Claims Act], but are independent, privately owned and locally controlled corporations." The opinion went on to say, however, that: "The Reserve Banks have properly been held to be federal instrumentalities for some purposes." Another relevant decision is Scott v. Federal Reserve Bank of Kansas City,[74] in which the distinction is made between Federal Reserve Banks, which are federally-created instrumentalities, and the Board of Governors, which is a federal agency."

3. Proof Platinum Coin Seigniorage

Congress provided the authority, in legislation passed in October 1996, for the US Mint to create platinum bullion or proof platinum coins with arbitrary fiat face value having no relationship to the value of the platinum used in these coins. These coins are legal tender. So, when the Mint deposits them in its Public Enterprise Fund account at the Fed, the Fed must credit that account with the face value of these coins. This difference between the Mint's costs in producing the coins and the credit provided by the Fed is the US Mint's profit. The US code also provides for the Treasury to periodically “sweep” the Mint's account at the Federal Reserve Bank for profits earned from these coins. Coin seigniorage is just the profits from these coins, which are then booked as miscellaneous receipts (revenue) to the Treasury and go into the Treasury General Account (TGA), narrowing the revenue gap between spending and tax revenues. Platinum coins with huge face values, $1, $1.6, $2, $3, $6.2, $15, and $30 Trillion coins have been mentioned, could close the revenue gap entirely, and, if used often enough, technically end deficit spending, while still retaining the gap between tax revenues and spending.

4. Running an Overdraft at the Fed

This option suddenly got some press this week as people begin to cast about for a solution. John Carney at CNBC says that overdrafts are more like “gifts” from the Fed than they are the kind of debt instruments the Fed is prohibited from buying from the Treasury, and that's the gist of his argument. The problem with this argument, also quickly echoed by Felix Salmon is outlined by my friend Marshall Auerback in correspondence this way:

In the past, Treasury had access to both a cash and securities draw authority (hat tip, Cullen Roche of "Pragmatic Capitalism”). Intermittently between 1942 and 1981, Treasury was able to directly sell (and purchase) certain short-term obligations to (and from) the Federal Reserve in exchange for cash. Congress first granted this cash draw authority temporarily in 1942:

1. allowed it to lapse several times, and extended it 22 times until 1979, when it modified some of the terms and added controls.

2. In 1979, Congress also authorized a securities draw authority, which permitted Treasury to borrow securities from the Federal Reserve, sell them, and then repurchase the securities in the open market and return the securities to the Federal Reserve within a specified period.

3. The securities draw authority was never used. After Congress authorized Treasury to earn interest on its Treasury Tax & Loan (TT&L) account balances in 1977,

Congress allowed both draw authorities to expire in 1981.

That Congress allowed them to lapse would imply that it's no longer operative . . .

In short, in 1981, Congress ended the Treasury's drawing authority by allowing it to expire.

5. The Fed “Burning” its Treasury Bonds to Get Them off the Books

Ron Paul suggested this one. If the Fed agreed to the proposal, it would create at lead $1.6 Trillion in headroom between debt subject to the limit, and the debt limit. The proposal hasn't been met with notable enthusiasm. In fact, I don't think the Chairman has even dignified it with a reply. However, the objection to it is similar to the objection to Treasury declaring a default on its Fed-owned debt. The result would be a big whole in the Assets of the Fed Banks owning the debt instruments. They're unlikely to support this proposal.

6. The “Exploding Option”

Jack Balkin presents the “exploding option” idea this way:

The government can also raise money through sales: For example, it could sell the Federal Reserve an option to purchase government property for $2 trillion. The Fed would then credit the proceeds to the government's checking account. Once Congress lifts the debt ceiling, the president could buy back the option for a dollar, or the option could simply expire in 90 days. And there are probably other ways that the Fed could achieve a similar result, by analogy to its actions during the 2008 financial crisis, when it made huge loans and purchases to bail out the financial sector.

As near as I can make out, the idea here is for the Fed to pay for an option on the property, that it would not then exercise by some date certain. When the option expires, the Government, having an increase in the debt ceiling by then, would pay back the Fed, give it a small profit, and keep the property.

Presumably, this could be done indefinitely, if Congress has still failed to raise the debt ceiling by the end of the option period, or the option period could be made long enough that it is very improbable that the debt ceiling would not be raised. The “exploding option” idea is undoubtedly ingenious; but:

-- I wonder whether the option isn't functionally a debt instrument, and also whether
-- the option isn't being “monetized” by the Fed in complete analogy to the monetization of debt instruments that is expressly prohibited by Congress?

Comparison of the Options

From my point of view, selective default and the fed burning its bonds are both far out options. I just don't think the accounting rules governing the Fed would allow it to approve procedures that resulted in huge losses for the Fed regional banks. The Fed would never agree to such alternatives.

The overdraft and “exploding option” alternatives are likely to be much more acceptable to the Fed than options that destroy the financial assets of regional banks. However, both of these options are a bit legally questionable. As I said above, the overdraft procedure appears to have been ended by Congress in 1981, when it had every opportunity to renew the Fed's drawing authority.

Felix Salmon is taken with the Fed allowing overdrafts. He thinks this solution is a really elegant one because it would allow Treasury to keep on spending until it could arrive at a new debt ceiling. He also thinks that the Fed would have to honor Treasury checks by allowing an overdraft because if it didn't do so, that would “trigger a massive recession” and violate the Fed's full employment mandate.

I find this unconvincing because the Fed has been violating its full employment mandate since passage of the Humphrey-Hawkins during the 1970s. It has always taken its price stabilization mandate much more seriously than its full employment mandate. So, I think that the Fed may not honor Government overdrafts, because Government special drawing authority was ended in 1981.

The “exploding option” alternative is certainly inventive. However, if I understand it correctly, it's a transparent artifice for allowing monetization of the functional equivalent of federal debt instruments. So, I think it's legality is questionable, and that the President should be careful before he resorts to it.

In fact, the first four options being compared all propose procedures of questionable legality. All might turn out to be politically feasible, because the House Republicans may not be able to get standing to challenge the President. Nevertheless, if many representatives feel that the President's solution to the debt ceiling problem is of questionable legality, and they also find themselves unable to get standing in Court, they may well feel justified in pursuing impeachment. They won't get far, because the Senate will never sustain them; but nevertheless another impeachment circus is likely to be very costly for an Administration that wants somehow to improve the jobless rate before the elections of 2012.

This brings us to the Constitutional option. This is a legally fascinating option especially since the President might challenge the debt ceiling or other legislation such as the limits on Treasury printing money, or the legislation withdrawing the Treasury's overdraft authority; It's also a politically attractive option, because it makes the President look strong, relative to the House Republicans. It's also interesting because if he issues a constitutional challenge and goes on issuing debt, it's very doubtful that the House Republicans will have a practical legal route to contest what he's done. On the other hand, as with some of the other options, their very inability to get redress from the law may goad them into attempting to impeach the President, and I suspect that the Administration would want to avoid that outcome, with all its distractions.

Coin seigniorage isn't some crazy or radical idea, even though some who want to be considered Very Serious People (VSP) have had that kind of reaction to the idea. Instead, it is a legal instrument that the President may, depending on how things work out, have to use in a bit more than two weeks to comply with his oath of office. It may be the only way for him to avoid breaching one of the laws which he is supposed to enforce. As such, it has to be taken seriously, and treated with more than just a few dismissive conclusions, accompanied by a lack of explanation.

Many writers on the current debt ceiling crisis have been taking the view that the 14th Amendment constitutional challenge route is the best thing for the President to do if there is no agreement on the debt ceiling. But, a constitutional challenge requires violating the debt ceiling, or some other legislation, claiming that the chosen law is unconstitutional, and relying heavily on the House's inability to have standing to take the President to Court in order to sustain the President's action. The President may get away with this, but it is radical in the sense that it claims the Executive's right to make a unilateral judgment of constitutionality in opposition to clearly written legislation, without getting a by your leave from the Supreme Court. Surely we can all see how dangerously radical this kind of practice is for the rule of law in the United States?

In other posts, I've made the case that the debt ceiling isn't in violation of the 14th Amendment as long as PPCS is an option for the President. Also in an e-mail communication, beowulf, the blogger who wrote the seminal blog on coin seigniorage, offered the following opinion on why a 14th amendment-based challenge will not work, given the existence of PPCS.

. . . No federal judge -- Supreme Court justices included -- will take the extraordinary step of enjoining an Act of Congress if the President who asks them to had an opportunity to sidestep the constitutional issue lawfully but neglected to do so. . . . .

. . . The moral of the story is if the Court thinks there is no alternative to breaching the debt ceiling, it probably would find it unconstitutional (or rather, it would decline to hear the case on Standing grounds, leaving the President's decision to ignore the debt ceiling in place). On the other hand, if the Court thinks the President had a lawful alternative-- like coin seigniorage-- but neglected to use it, they're not going to bail him out.

This argument is compelling to me given the history of the Court. The Court defers to the legislature if it possibly can, and prefers the President to avoid constitutional challenges if he has a means of doing so. In this case, he does, and the means is proof platinum coin seigniorage.

(Cross-posted from Correntewire.com.

The President's Address on the Debt Ceiling: An Exercise in Fantasy

Joseph M. Firestone — Tue, 26 Jul 2011 23:40:58 -0400

Many people have been, deservedly, very quick to jump on John Boehner for the lies he told in answering the President's Address; but they have been a lot less anxious to lay out the lies or at least falsehoods told or implied by the President, himself. I don't intend to excuse the Speaker's lies or the Speaker, by showing that the President doesn't have clean hands. I don't intend to say that lying is alright because everybody does it. All I want to do is show that the President was feeding us fantasy too, because I believe, strongly, that we won't solve our national problems if we don't firmly reject fantasy, whoever may be its author. So, let's look at some quotations from the President's speech, and see where the fantasy is.

“For the last decade, we’ve spent more money than we take in. In the year 2000, the government had a budget surplus. But instead of using it to pay off our debt, the money was spent on trillions of dollars in new tax cuts, while two wars and an expensive prescription drug program were simply added to our nation’s credit card.”

No. Mr. President, during the years the Government had a budget surplus, the Government simply borrowed less than it did in other years, and also less than it paid back when its debt instruments came due. So, the Government did use its surpluses to “pay back” part of the debt during the years of surplus, and no money was saved for future years when it was then spent on new tax cuts, new wars, and the drug prescription program.

As for the “our nation's credit card” business, the Government's “credit card” situation is very different from our own. First, the limit on the Government's ability to issue debt is not based on the Government's ability to borrow, or on the Government's ability to generate financial assets, which, aside from Congressional constraints, is constitutionally unlimited. Nor is the limit imposed by any creditor, as it is with us.

Instead, the limit on what the Government can borrow is determined by the Government itself. Specifically, it is determined by Congress which imposes the debt ceiling, now causing a fiscal crisis. Without that ceiling, that self-imposed constraint, the limit on what the Government can borrow in US Dollars is indeterminate, if it exists at all.

Second, you and I can't keep adding debt to our credit cards, not only because we have a limit, but long before we reach such limits, we may well want to stop adding debt, because our ability to maintain and pay off our debt burden, may be running out. That ability is limited because we can't produce financial resources at will.

The Government is different however. It is not like a household or even the largest corporation. It is not the user of our national currency. It is the creator of it. All of our dollars come from the authority of the Government to spend, and, in the act of spending to create dollars.

If the Government has debt, it can always pay that debt simply by marking up the accounts of its creditors. Also, unlike your household or mine, it doesn't matter how much is on the Government's credit card, it can always repay its debts whenever they come due, unless Congress does something stupid to stop it from doing so.

In fact, its own constraints aside for a moment, the Government has precisely the same ability to repay its debts, however high those debts are, and however high its debt-to-GDP ratio is, so long as those debts are owed in the currency (USD) it has the authority to create. It doesn't matter whether the Government owes $14.3 Trillion, or $30 Trillion, or only $50,000. Its ability to pay, self-constraints aside, is exactly the same. It doesn't matter if its debt-to-GDP ratio is 10% or 100% or 300%, it's ability to meet its debt obligations is exactly the same, if it only decides to shed its self-constraints.

So, when President Obama says or implies that we can't keep putting debt on our national credit card what is he really talking about? He's not talking about the Government's intrinsic ability to pay or not. What he's talking about is that Congress has 1) placed a debt ceiling on the Executive Branch's ability to borrow, and 2) passed a mandate requiring the Government to issue debt when it deficit spends. These are Congress's constraints on the Treasury and they are causing our current so-called fiscal crisis, assuming the President's continued unwillingness to raise revenue for deficit spending other than by issuing more debt.

The austerity mavens, including the President are telling us that we, the people, have spent too much and run up debts that are too large on our national credit card when Congress has a) required us to use our credit card and, as a result, maintain and increase our national debt, and then b) given us a ceiling of debt which they raise from time-to-time, which has nothing to do with our Government's ability to pay. How unjust is it to create this Catch-22, claim there is an objective problem with a national debt that only exists due to their own restraints, and then say to us, after they've just finished extending the Bush Tax Cuts for the rich and providing an estate tax giveaway, that this phony fiscal crisis requires that everyone (except the rich, of course) accept “shared sacrifice”?

It is not true that we can't keep placing debt on our national credit card, so long as Congress removes its arbitrary and unnecessary debt ceiling. If it does that we can keep placing debt on that credit card if we want to without threatening our solvency as a nation.

It is also not true that we must keep issuing debt instruments and keep increasing the national debt when we want to deficit spend, because of some intrinsic feature of the economic system. As I've written in many recent posts, we can generate all the revenue we need by using proof platinum coin seigniorage, including the revenue we need to pay the national debt entirely, as US debt instruments fall due.

In connection with his reconstruction of how the nation came to this pass Mr. Obama said that as a result of the tax cuts, wars, and the prescription drug plan:

“. . . . the deficit was on track to top $1 trillion the year I took office.”

But this anticipated deficit was not due simply to these factors. Most of the anticipated $1 Trillion deficit was due to the loss of tax revenues accompanying the Crash of 2008. If not for the recession, the tax cuts, wars, and prescription drug costs would not have produced a deficit of this size.

“To make matters worse, the recession meant that there was less money coming in, and it required us to spend even more -– on tax cuts for middle-class families to spur the economy; on unemployment insurance; on aid to states so we could prevent more teachers and firefighters and police officers from being laid off. These emergency steps also added to the deficit.”

They did, but what is misleading in this account is that the President fails to tell us is that his grossly inadequate stimulus left too many people unemployed, and provided so little assistance to the States, that while it stabilized the unemployment rate, it did so at a very high level ensuring that Federal tax revenues would remain low and that the deficit would still be very high; but without the benefit of having enabled full employment.

“Now, every family knows that a little credit card debt is manageable. But if we stay on the current path, our growing debt could cost us jobs and do serious damage to the economy. More of our tax dollars will go toward paying off the interest on our loans. Businesses will be less likely to open up shop and hire workers in a country that can’t balance its books. Interest rates could climb for everyone who borrows money -– the homeowner with a mortgage, the student with a college loan, the corner store that wants to expand. And we won’t have enough money to make job-creating investments in things like education and infrastructure, or pay for vital programs like Medicare and Medicaid.”

And later he says:

“For the first time in history, our country’s AAA credit rating would be downgraded, leaving investors around the world to wonder whether the United States is still a good bet. Interest rates would skyrocket on credit cards, on mortgages and on car loans, which amounts to a huge tax hike on the American people. We would risk sparking a deep economic crisis -– this one caused almost entirely by Washington.”

The falsehood here is assuming that the bond market actually controls the interest rates that Governments like the United States must pay. Sure, they can determine interest rates if the Government and the Fed sit idly by, and lets them do so. However, the Federal Reserve and the Treasury, can target bond interest rates and set these for the bond markets by manipulating overnight bank reserves. Specifically, one way to do this, is that the Treasury can cease issuing long-term bonds, and sell only three-month bonds. Three-month bond interest rates are generally controlled by overnight rates for bank reserves, and overnight rates can be driven down to near zero by flooding the banks with excess reserves. That's basically how the Japanese keep their bond interest near zero, even with a debt to GDP ratio of nearly 200%, and that's how we can do the same.

Alternatively, the Fed ihas driven down interest rates through its policy of Quantitative easing (QE). QE currently involves providing banks with cash reserves in return for non-cash bank assets including Treasury Bonds. QE results in an increase in cash reserves, which drives down overnight interest rates for borrowing such reserves. Low rates in the reserve market again, drives down bond market interest rates on three month Treasuries, and exerts downward pressure on bond market interest rates across the board.

Yet another move we can make to remove the effects of the bond markets and the ratings agencies upon public finances, is for the Treasury to stop issuing debt for every dollar it deficit spends. It can do this by using coin seigniorage to generate additional revenue, and by borrowing only for a portion of its deficit spending. If Treasury did this, interest rates in the bond market would be driven down because of the shortage of treasury bonds in the marketplace.

Of course, if Congress allowed the Executive to deficit spend without issuing debt, or the Executive decided to deficit spend only after raising revenue through coin seigniorage, then the Executive Branch could choose to issue no more debt, and then bond market interest rates wouldn't be an issue at all. So none of the effects described by the President just above would happen, all the problems he points to are due to more debt causing higher interest rates through the bond markets. If increasing debt can't cause that, because of interventions outlined above, then the bond market/interest rate scare is “off the table.”

In short, the bond markets aren't in control of US public finances. They are not in a position to influence what our taxing or spending policies ought to be, or whether we will default on our obligations.

“This balanced approach asks everyone to give a little without requiring anyone to sacrifice too much. It would reduce the deficit by around $4 trillion and put us on a path to pay down our debt. And the cuts wouldn’t happen so abruptly that they’d be a drag on our economy, or prevent us from helping small businesses and middle-class families get back on their feet right now.”

Calling his plan “balanced” is just propaganda. First, it assumes that there is a deficit/debt problem; but this assumption is based on the idea that the US Government can become insolvent or is otherwise constrained in its spending by economic necessity. It also assumes that we've borrowed too much, and that this requires us to slow down deficit spending over time. However, these assumptions are just false. As the currency issuer, the US can't ever run out of money, and the only real world constraint it has on its spending is demand-pull inflation, which we needn't worry about until we've reached full employment.

Second, $4 Trillion over 10 years in spending cuts and/or increased taxes, averages out to $400 billion per year less money either going into the private economy from the Government sector, or being taken back by the Government. If the spending is high fiscal multiplier spending, as much of it appears to be, then we may be looking at as much as $1 Trillion per year in reduced GDP. Anyway you slice it friends, that will cost jobs, careers, family hardship, and lower economic growth, and it is unlikely to reduce deficits very much or at all, simply because the effects of the economy's automatic stabilizers will ensure that more government spending and less taxes will result from these cuts.

Third, this $400 Billion per year of “shared sacrifice” which is supposed to ensure that no one suffers too much is, to use a popular phrase of yesteryear, “lipstick on a pig.” We know that the impact of the spending cuts contemplated will fall disproportionately on the poor and the middle class. They will be “sacrificing” income, jobs, and services that are very important to them, but any “sacrifices” made by the wealthy and large corporations will be largely symbolic and will not cut to the bone.

Fourth, the President says that the cuts wouldn't happen so abruptly that they'd hurt the economy. But this assumes that current Government deficits are large enough to compensate for savings desires and imports, and that the economy has already received enough of a boost that it will fully recover by the time the full impact of austerity is felt. If they are not large enough, and the economy doe not recover; then what? Do we then follow this inflexible austerity plan and go ahead withdrawing net financial assets from the private sector at the rate of $400 Billion per year, in the expectation that this will lower the debt-to-GDP ratio?

“So the debate right now isn’t about whether we need to make tough choices. Democrats and Republicans agree on the amount of deficit reduction we need.”

Democrats and Republicans do not agree on the amount of deficit reduction we need. Nor do they agree on how deficit reduction should be achieved. There are even many Democrats, though, perhaps not in Congress, who believe that there is no debt or deficit problem at all, and that the President's whole exercise in austerity is motivated by a false economic ideology, and by a desire to show “the independents” that he is a responsible “bipartisan” grown-up who deserves their support in 2012. Here he is using the left-right frame, viewing the independents as people in the middle who are relatively homogeneous and ideologically disillusioned with the right and the left.

So, he thinks he can pick up these folks “en bloc” by showing that he has made both progressives and conservatives angry at him. In this, I think he is ignoring the possibility that there are independents from all parts of the left-right spectrum, who have become independent because the two parties represent their interests very badly, preferring to see to it that the wealthy and the corporations are represented at the expense of their constituents. In any event, President Obama's attempt to appeal to independents may fail, because they really have no interest in his independence relative to the bases of the legacy parties; but care much more about his actions in supporting the big banks, a corrupt financial system, continued globalization of the economy, and failure to produce jobs, and viable health care reform for everyone.

“That’s not right. It’s not fair. We all want a government that lives within its means, but there are still things we need to pay for as a country -– things like new roads and bridges; weather satellites and food inspection; services to veterans and medical research.”

We do have to live within our means; but a phrase like this is meaningless, when it comes to the Government's ability to generate new net financial assets in the private sector. That capacity is unlimited. And while we do have to worry about demand-pull inflation under certain conditions. The US never has worry about running out of money as do, for example, the members of the Eurozone or other nations that aren't sovereign in their own fiat currency system. What “our means” really refers to is our real resources and our capacity to produce further real resources in a sustainable way. It does not refer to financial sustainability, or to fiscal sustainability in the meaning of that term spread by Peter G. Person, and Barack "Hoover" Obama.

“Understand –- raising the debt ceiling does not allow Congress to spend more money. It simply gives our country the ability to pay the bills that Congress has already racked up. In the past, raising the debt ceiling was routine. Since the 1950s, Congress has always passed it, and every President has signed it. President Reagan did it 18 times. George W. Bush did it seven times. And we have to do it by next Tuesday, August 2nd, or else we won’t be able to pay all of our bills.”

This is one of the biggest falsehoods told by the President. Let's say there is no agreement, then, is it true that we won't be able to pay our bills? Only if the President fails in his own constitutional duty and doesn't take the measures he is able to take to make it possible for Treasury to spend appropriations. Yves Smith, in a recent interview with Paul Jay of the Real News Network, points to three alternatives the President can use: 1) the constitutional challenge; 2) selective default; and 3) Proof Platinum Coin Seigniorage (PPCS).

Yves characterized PPCS as the most "radical" of the three alternatives. Depending on the coin seigniorage option selected, that may be true; but I think that from the legal point of view, at least, PPCS is the least radical of the alternatives. I think that's true because it's the only one of the three that is completely within the law as currently written and interpreted.

The first option, the constitutional challenge, requires violating the debt ceiling, and then claiming that the law is unconstitutional and relying on the House's inability to have standing to take the President to Court in order to sustain the President's action. The President may get away with this, but it is radical in the sense that it claims the Executive's right to make a unilateral judgment of constitutionality in opposition to clearly written legislation, without getting a by your leave from the Supreme Court. Surely we can all see how dangerously radical this kind of practice is for the rule of law in the United States?

"The Federal Reserve Banks have an intermediate legal status, with some features of private corporations and some features of public federal agencies. The United States has an interest in the Federal Reserve Banks as tax-exempt federally-created instrumentalities whose profits belong to the federal government, but this interest is not proprietary.[74] In Lewis v. United States,[75] the United States Court of Appeals for the Ninth Circuit stated that: "The Reserve Banks are not federal instrumentalities for purposes of the FTCA [the Federal Tort Claims Act], but are independent, privately owned and locally controlled corporations." The opinion went on to say, however, that: "The Reserve Banks have properly been held to be federal instrumentalities for some purposes." Another relevant decision is Scott v. Federal Reserve Bank of Kansas City,[74] in which the distinction is made between Federal Reserve Banks, which are federally-created instrumentalities, and the Board of Governors, which is a federal agency."

Since the Bonds held by the Fed are held by the regional banks, this second option would involve a major hit to the assets of these banks and also an operating loss. It would involve not just questioning, but also denying a debt of the United States, and would therefore violate the 14th Amendment to the Constitution. From a legal point of view I think the Treasury unilaterally deciding to inflict a substantial loss on privately owned banks, whether Federal Instrumentalities or not. and also violating the 14th Amendment, is a very radical option.

Getting to the third option of Coin seigniorage, the authority to do this was legislated by Congress in 1996. If the President uses PPCS, he 1) won't exceed the debt ceiling; 2) won't be challenging the constitutionality of the debt ceiling; 3) will be able to spend all Congressional Appropriations; and 4) will be able to uphold his constitutional obligation to see that all US debts are paid. In other words, there are no legal downsides to this course of action, even if it may involve a very different way of raising revenue than issuing debt instruments.

On the positive side, if the Administration were to use PPCS, it wouldn't have to make a deal with the Republicans about the debt ceiling at all. It wouldn't have to create hurtful cuts in the safety net or in discretionary programs, because it would not need a deal at all. I've argued elsewhere, that in case there is no agreement on extending the debt ceiling, that it becomes the President's constitutionality duty to use one of a number of PPCS options to avoid default, since only they are unambiguously legal. In that case, some form of PPCS, would no longer be a choice, but a mandate, which the President would have to fulfill.

So, it's not true that we won't be able to pay our bills on August 3rd, if the debt ceiling isn't extended, unless the President fails in his constitutional duty. The Congress may be acting stupidly in not extending the ceiling; but in doing so, it would not be forcing the US into default. It would, instead be placing a constitutional burden on the President. It is he who would force the US into default if he fails to shoulder this burden and do his duty.

(Cross-posted from Correntewire.com.

What's Wrong With You? An Open Letter to Congressional Dems & the President

Joseph M. Firestone — Mon, 25 Jul 2011 02:16:52 -0400

Dear Dems and Mr. President,

I've been a lifelong Democrat. But now, I don't know anymore. I'm still registered alright; but when I look at your behavior, I think I'm a freely floating voter resource now, and I'd probably respond to a poll as one in that amorphous blob of independents that stands for “the two parties suck; but we don't agree on much else.” I'm sorry about that. I really had high hopes after the 2008 election, that a new period of Democratic resurgence had come, and that the Reagan era had ended.

Instead, of course, I'm seeing an Administration that is out-reaganing Reagan, and a Democratic Party in Congress that just goes along, and goes along, and goes along, no matter what the President and the leaders give away to Republicans just to get a deal, any deal! That's all very disgusting! Especially, when you self-described protectors of working and middle class Americans are fixing to cut Social Security, Medicare, and Medicaid benefits for the sake of a Hooverite fairy story, told by the President, which tells you that the Government will run out of money if we, “the richest nation on earth,” or so they keep telling us, in hypocritical bursts of national boosterism, try to maintain and extend a social safety net that is the least generous and most inadequate among the group of modern industrialized nations.

What's wrong with you? Why do you Dems in Congress believe in the fairy story that the US Government, the sole issuer of its own currency, can ever run out of money? Why should the Government ever have to borrow back its own money? Why should it ever have debt in its own currency. The whole arrangement is ridiculous. It defies common sense, and it makes you slaves to the Hooverites, because you agree with them that we can't afford “entitlements,” because the bond markets will cut off our credit; so that we must cut back on the safety net to save the Republic.

Well screw the bond markets! We don't need their USD! We can always make our own. On the other hand, they need us; because we provide them a risk-free way to earn interest on their USD holdings.

Now, the Republicans and your own President spinmeister, are whipsawing you into another suicidal vote on spending cuts, using the debt ceiling as the instrument of their “shock doctrine.” Well, you have only a few days left to learn that the debt ceiling is no problem, and that you can, and should, safely vote against any deals that will reduce deficit spending by even a single dollar.

Now hear this! The deficit isn't big enough! It needs to get bigger. It is not making up for demand leakage due to savings and imports. And we don't want to: 1) reduce savings, especially among working people and the middle class, because we desperately need to reduce their debt; and 2) have less in imports, because imports are real wealth the American people receive in return for electronic credits. So, we need that excess of Government spending over tax revenues very badly right now, and any reduction in the deficit can only result in a loss of GDP and a loss of jobs.

Well, you'll say, what can we powerless Dems do? We can't do deficit spending without increasing the debt ceiling, and we can't get an increase in that from the Republicans unless we reduce deficit spending and even cut entitlements; and if we don't get that increase the world economy will tank and we will go into that double-dip recession and perhaps even into another Great Depression. Now, these are punch lines in that fairy story the President is telling, and like most of his stories and punch lines they depend on his not telling you what all the alternatives really are for dealing with a problem.

His style is to give you all the alternatives that are bad for you, and to exclude the ones that might get you re-elected. For example, how did that $800 Billion stimulus bill full of tax cuts, and falling short of what was needed by another $800 Billion, work out for you in the 2010 elections? Did it get people in your district telling you what a wonderful job you and your party were doing bring back the economy? What about that “deficit neutral” health care reform bill that got you the tea party movement, and big defeats in the 2010 election? How's that compromise he made last fall resulting in extension of the Bush tax cuts working for you now when you're trying to save Social Security, Medicare, and Medicaid from benefit cuts?

So, we here we are now, and President Spinmeister is telling us what the alternatives are once again. He's saying we can do a big $4 Trillion deal that will include some revenues but very heavy cuts in needed social and safety net programs; a deal about ¼ to ½ the size, that will be all spending cuts with lesser cuts to entitlements, and a deal in which the President gets to raise the debt ceiling, while making cuts of his choice, where he and the Dems bear the responsibility for a debt ceiling increase. There may be a fourth alternative yet to come out of the off-again, on-again, negotiations; but like all the others it will be dangerous for Congressional Dems to vote for, because it is likely to lead to cuts in programs popular among their constituencies.

Well, Congressional Dems, I have another alternative for you. You can escape from being witless, gutless, suckers for a change. This one doesn't involve any deal with the Republicans or the President. But 1) it does put off all spending cuts until the next big fight over the budget; 2) it does demonstrate very graphically to the American people and everyone else, that the US Government cannot be forced to run out of money by anyone except the Congress itself, and 3) that it can never run out of money for its social safety net programs, however generous they may become, so long as Congress has the will to appropriate the money.

To get this deal, all you have to do is to vote against any deal raising the debt ceiling, and combine with the tea party Republicans to do it. At that point, President Obama will be faced with performing his constitutional duty, which is to do whatever is necessary and legally available to spend mandated appropriations, pay all US obligations, and not exceed the debt ceiling. To perform his duty, there is only one feasible way; the alternative he won't tell you about, to avoid default. That alternative is to use proof platinum coin seigniorage to pay down the national debt, so that deficit spending can resume.

In this piece, I've outlined four options for using coin seigniorage. The most minimalist option would create $1.6 Trillion in headroom between the national debt and the debt ceiling. The second would create $6.2 Trillion of headroom, lowering the debt subject to the limit to $8.1 Trillion. The third option would do what the second option would, but will also allow “deficit” spending to proceed without issuing debt until after the elections, of 2014, and the fourth would do everything the first three will, but allow deficit spending, if necessary, for a decade.

I favor the fourth option which will require issuing a coin with $30 Trillion face value. This coin will not provide the authority for the Government to do deficit spending; but if Congress should appropriate deficit spending, then it will provide the capability for the Government to do the spending. In brief, it fills the Federal purse; but the purse strings will still belong to Congress.

I urge that Dems in Congress read the blog posts linked to above and also become familiar with the four proposals for the seigniorage alternative. Then I ask that you publicize the coin seigniorage proposal and vote against any debt ceiling deal. Make the President do it! Make him stop giving away the reason for being of the Democratic Party! Make him face the possibility of default himself; and shout from the rooftops that he must use coin seigniorage to avoid it. At that point it will be his constitutional duty. No choice, whatever fairy story he chooses to spin.

Of course, the President, and yourselves, will need to be able to explain "the magic" of coin seigniorage to the American people; so I'll repeat a speech I wrote in my last post, which the President can use to explain how he ended the crisis. Here it is!

My Fellow Americans:

1) Until now we’ve been borrowing the money the Government created back from the private sector, in order to cover our deficit spending, so the national debt has been steadily growing.

2) That’s silly! According to the Constitution, this Government, of the people, by the people, and for the people, is the ultimate source of all US money. So why should we ever borrow US money back and pay interest on it, since we can create it any time by the authority of the Constitution and Congress?

3) Congress has also imposed a debt ceiling, which, as you know, we've now reached, so we can’t borrow back our own money, anyway.

4) So, on my order, and in accordance with legislation passed by Congress in 1996, and with the US Code, the US Mint has issued $30 Trillion in a single platinum coin, and deposited it at the NY Fed. It’s legal tender, so the Fed credited the Mint's Public Enterprise Fund (PEF) with about $30 Trillion in USD credits, using its unlimited authority from Congress to create US Dollars.

5) This is not inflationary, because the Fed will put our coin into its vault, and keep it there permanently out of circulation, and we will use the $30 T in USD credits only to pay back debt, and to spend what Congress has already approved, which is only a fraction of these credits and far from the amount needed to cause inflation.

6) My action ends the debt ceiling crisis, because we have no further need to borrow our own money back in the markets, so we don’t need the tea party or other Republicans, or even my fellow Democrats to agree to raise the debt ceiling.

7) Now the Treasury, has plenty of money, much more than we need, in fact, to pay for all appropriations Congress has already approved for 2011, and, again, we won’t have to borrow our own money back.

8) So we will pay all Government debts which will come due in 2011. Treasury securities and all other debts included. We will also pay back all debts held by other agencies of Government and the Federal Reserve. When we do this we will lower the national debt by about $7.5 T,rillion reducing the “debt burden” by about half this year, and creating an actual Social Security trust fund with 2.6 Trillion in cash reserves in it; and again, to do this we don’t have to borrow our own money back, and we will also reduce our interest costs on the outstanding national debt.

9) None of the $30 T in new credits created by our actions is “money” in the economy until the Treasury spends it. For now it is just capability to spend awaiting the appropriations of Congress to mandate deficit spending, should it need to compensate for the reduction in demand, probably close to 10% of GDP right now, caused by your own desire to save (which we want to do our best to facilitate), and your desire to import goods from foreign nations.

10) We have created $30 Trillion in new credits even though we needed only a fraction of that to cover anticipated deficit spending and debt repayment until 2021. The reason for this, is that I wanted to have enough capability created in the Treasury account, so that the national debt could be completely paid off (except for a small amount in very long-term Treasury debt still not mature by 2021), and all projected Federal deficits covered over the next 10 years.

11) Of course we can always make new coins if our projections turn out to be wrong; but I thought it would be best to ensure that all $14.3 T of the “debt burden” can be completely eliminated from our political concerns; and also to provide enough funds in our spending account at the Fed so that it would be very clear to Congress and all newly elected Representatives and Senators, that even though they, according to the Constitution, continue to control the purse strings, the national purse is very, very full, and that we will be able to afford whatever deficit spending for the public purpose, including for full employment and Medicare for All, that Congress, in its wisdom, chooses to appropriate now and before the election of 2012.

Good night, my fellow Americans and sweet dreams! Rest well knowing that our beloved country won't be defaulting on any of its debts, and that I've prevented this without going over the legal debt ceiling, by providing money for spending mandated appropriations, in compliance with the laws authorizing coin seigniorage, while supporting the Constitution's prohibition against our Government ever defaulting on its debts.

I hope that in the future everyone will obey the 14th Amendment's prohibition against questioning the validity of Federal Government debts, and think twice before they indulge themselves in such loose talk. America will always pay its debts in US Dollars, according to the terms of the contracts it has concluded, and in line with the pension payments and other obligations that it owes. Neither you, nor the rest of the world, need ever doubt that again!

So, that's what I think you Congressional Dems should be doing; not caving to the President and the bond markets. And again, I ask you, including Mr. President, what's wrong with you? You're about to cut the heart out of the Democratic Party heritage, and none of you appears, in public, to have lifted a finger to investigate/research whether there were any alternatives to the very poor options you're going down the road with.

Why have you accepted these options?

Why haven't you been moving heaven and earth to find another way of doing things to neuter the debt ceiling in such a way that you wouldn't be hurting people?

Why haven't you been thinking?

Why have you left it to an obscure blogger named beowulf to come up with a solution to the debt ceiling problem that would let you protect the social safety net? You're the ones with the staffs and the lawyers to figure this sort of stuff out?

So, why didn't you do it? Is it because you're just sheeple? Is it because you've been in Washington too long? Is it because you really don't care about the well-being of the people in your districts and States? Is it because you've all been bought by the banks and Wall Street?

What is it? What's wrong with you?

If you can't tell us in a way that we can understand, then I think every one among you should make this your last term in office. And as for you, President Spinmeister, I think it's long past time for you to resign. We didn't intend to elect the reincarnation of Herbert Hoover as our President in 2008; and we'd really rather have another choice in 2012, other than one between HH, on the one hand, and the reincarnations of Warren G. Harding (oops, Mitt Romney), or Bloody Mary (oops Michelle B.) on the other! So, please make America happy, resign!

Give Joe Biden a shot! He doesn't look like much; but maybe he's old enough that he can remember what a real Democratic President is like, and act like one himself if he's given the chance.