Seigniorage Hack Could Resolve Debt Limit Crisis

UltraOne writes "With the US Senate voting to table the Boehner debt limit bill, the US is only a few days away from running out of cash to pay for all its obligations. Slate is reporting on a fascinating legal hack that could come in handy, described by blogger 'beowulf' back in January 2011. Seigniorage is the extra value added when a government mints a coin with a face value greater than the value of the precious metal contained in the coin. The statute governing the minting of coins contains a section (31 USC 5112(k) ) that authorizes the Secretary of the Treasury to mint and issue platinum coins in any denomination or quantity. To keep the government from running out of money, Timothy Geithner could order a $5 trillion platinum coin struck and deposited at the Federal Reserve. The money could then be used to fund Federal Government operations (blog post contains legal details)."

Comments

Inflation

[CrimsonAvenger]

Can you say it?

Do this, and you make it clear to everyone in the world that we're willing to devalue their bonds/dollar investments to near zero just whenever we feel like it...

Re:Inflation

[hedwards]

Not quite, it would only increase inflation if it hit the economy. The effect of having a $5tn coin to borrow against would be more or less identical to issuing another $5tn in bonds. This is just a loophole of sorts the effect on the economy would be mostly the same, although it probably would make the price of platinum spike if they actually went through with trying to mint a $5tn coin.

Re:Inflation

[TheLink]

The difference between other countries creating money and the US Gov doing this is: Petroleum, electronics, grains (wheat), sugar and zillions of other stuff are bought and sold in US dollars.

When Zimbabwe prints Zimbabwe dollars the rest of the world laughs at Zimbabwe. When the USA prints US dollars, most of the world is living in USA's Zimbabwe, so they shouldn't be laughing...

The other thing: the USA has already created trillions of dollars: http://www.google.com/search?q=trillions+federal+reserve

Just because they call them loans doesn't mean the money isn't created out of thin air. After all when the Federal Reserve loans out those trillions where do the minus figures appear? Under whose bank account?

Lastly, if the US is going to create trillions, the US citizens better insist that the US Gov actually builds and does some stuff for them with the money.... Before the rest of the world realizes the US dollar is not worth quite as much ;).

p.s. it's not convincing to say it doesn't cause inflation when you create the money and it doesn't "enter the system". If the money doesn't actually do anything, then there was no need to create it right? The fact that you need to create it means it is doing something.

Re:Inflation

[realityimpaired]

They're talking about literally printing a large amount of money money to solve the debt crisis. You seriously think you need an economist to tell you what would happen as a result?

http://en.wikipedia.org/wiki/Hyperinflation

This is high school economics. Well within the reach of pretty much everybody who posts here, and probably a course that was taken by many people posting here. You don't need somebody with a post-secondary or a post-graduate degree to tell you that when the government starts printing money unchecked, the value of that money goes down.

Re:Inflation

[Dunbal]

Except it also destroys the value of said currency. So it's not really a "tax" as much as its a destruction. Because after a while it doesn't matter how much or how fast you inflate, no one wants that currency anymore. 100% tax on nothing is still nothing. If you haven't diversified out of dollars and into something else by now, you are screwed.

Re:Inflation

[Xaositecte]

This is economics 101 bro.

An Economist could probably go into greater detail about just how fucking bad an idea this is, and all the consequences from it, but anyone with even a mild grasp of economics knows it's a bad idea.

Re:Inflation

[Rockoon]

Which of course is fantasy because we can't balance the budget without some new revenue

The federal budget has been growing faster than national GDP. End of fucking argument.

An analogy is that you earn $X per year and receive a 5% per year raise. Your wife budgets $Y per year for beauty supplies but increases that spending by 10% per year.

$X is the GDP, $Y is federal spending. No matter where $X and $Y start, eventually $Y overtakes $X. Even if the government were to increase taxes to match spending each year, to balance the budget in the manner you suggest, we are still fucked.

The solution is to let GDP grow at least as fast as spending. Since GDP cannot be controlled, it is spending that must be controlled. Period and end of debate.

Re:Inflation

[realityimpaired]

Give the hyperinflation it'd cause enough time, and it would be $5 trillion worth of metal...

Re:Inflation

[shentino]

We devalued our currency when we spent more than we brought in.

This hack only makes public what the politicians already know.

Re:Inflation

[Skreems]

Unless spending faster than GDP on infrastructure actually stimulates faster GDP growth in coming years.

Also because as much as you may like to simplify things, a country does not equal your household in terms of finances. Unless you can print money (legally) the analogy is completely useless.

Re:Inflation

[tmosley]

Ben Bernanke is the economist in charge of the economy.

Too bad his brand of economics is the equivalent of having a PhD in Voodoo and and MD in Witch Doctor Studies.

Re:Inflation

[MightyMartian]

Mainstream Republicans would probably just vote to raise the debt ceiling. The Libertarians and loonies in the Tea Party have other goals, and since moderate Republicans have basically allowed the tail to wag the dog, that's where it sits.

Re:Inflation

[Pinky's Brain]

They can insure you use dollars the same way they insure you pay taxes ... with guns.

Re:Inflation

[Feyshtey]

Aside from the fact that your statement is a logic trainwreck (If you spend more than GDP, GDP might grow, but you're still spending more than GDP, which might grow, but you're still spending more than GDP, which might grow.... ), infrastructure spending has almost nothing to do with the rate of GDP growth. Businesses producing goods which are sold is what grows GDP. Government spending money on infrastructure doesnt increase the value of those goods. It grows government, which grows taxes and regulation which retard growth in business. A decline in business growth, and with it a decline in the value of goods produced by business, is by definition a slow of growth in GDP.

How is it that so many people that so know so fucking little about economics have so much to say on the topic? Is it that they just have to have government spoon feed them and put rubber bumpers on everything for them, so they have to figure out how to give it more money?

Re:Inflation

[Eponymous Coward]

If you have a lot of debt, that is reduced by hyperinflation as well. People who have bought a lot of real estate by borrowing money might do very well in a hyperinflation economy.

Re:Inflation

[HiThere]

Your basic argument is correct, but you have a lot more faith in the honesty and accuracy of the GDP than I do.

The GDP is largely a work of fiction. Of the things is measures, only some have a positive influence on the general welfare, and many of the things it doesn't measure are quite significant for the general welfare. Do you really feel that generating paperwork for the government is something positive? That's but one of the questionable items that go into the GDP. One could raise the GDP by requiring twice an many forms to be filled. (Note that this would also provide jobs, and decrease unemployment. Other numbers that don't directly affect the economy...though they certainly have indirect effects, in many directions.)

What the GDP should measure is gross domestic production. It shouldn't cover what things sold for at auctions. This creates a very difficult problem. It means that you need to assign a value to something independent of it's market value. This is probably impossible. So it's not a coincidence that the GDP is a work of fiction, it's because it's trying to measure something that can't be measured. But it doesn't need to be quite as bad as it is. It's that bad because it's been adjusted over the decades by politicians to make themselves look good.

Pounds of cotton have a real value. Tons of refined iron have a real value. But how do you assign a value to a shirt or a computer chip, outside of what people will pay for it? What about an advertisement? Should it even have a positive value? Some advertisements attempt to inform people that some particular thing is available at some particular location for some particular cost. That has a positive value. Others attempt to convince people to buy something they don't want. That has a negative value. So how to you figure advertisements in the GDP? And even if you were to restrict yourself to cotton and iron, these don't have a large intrinsic value. They acquire a large value in a context where people want to use them to accomplish some purpose. So how do you rate their relative value?

Much of economics is like this. You can have complex models of how things interact, but when you try to summarize them, you come up with essentially meaningless numbers. Is unemployment bad? Then lets give everyone a job carrying bricks from one side of the city to the other. Now there's no unemployment (well, among those able to carry bricks), but is this really a gain? If you don't like that example, give every unemployed person a job as a highwayman. Is this an improvement? Jobs are not important in and of themselves, but only because of what they do, and their value can be either positive or negative. So just measuring unemployment is essentially meaningless. (Provided that the unemployed have some way to support themselves. If they don't, then they're likely to find a job with a negative social value. But that reduces unemployment!)

Re:Inflation

[david_thornley]

Businesses producing goods which are sold is what grows GDP. Government spending money on infrastructure doesnt increase the value of those goods.

It can make it easier for the goods to be made and sold, and that does improve GDP. It can increase employment, which is going to increase the GDP by making it possible to make and sell more goods, which is its main value. It can be spending now so we don't have to spend as much later (i.e., investment).

In the meantime, taxes don't cut into prosperity all that much. Businesses are more interested in interest rates; loans, after all, are what allows most small companies to get bigger.

And some people complain about other people not knowing economics.

Re:Inflation

[aiken_d]

Why is it that peoples vehemence and certainty is directly proportional to their ignorance?

Here are some of the many things you managed to get wrong in a very short post:

1) A government is not a family. Some government spending increases GDP. Not all of it, and it's rarely 1:1, but things like roads contribute to the economy. Net exports is also huge and has no household analog.

2) You seem to think that a deficit is always bad. It is not. As long as debt:GDP ratio stays sane (which it isn't in the U.S.), a deficit that increases the rate of increase in GDP is both fine and beneficial.

3) Debate is never over in economics, especially with complex systems like the U.S. economy. And if debate is ever going to be over, it's not going to be with a teabaggy ignorant rant like yours. Sorry, but anyone who thinks national economies are in any way analagous to household spending has no business offering opinions on the subject. You might as well shout "touchdown!" at a tennis match.

Re:Inflation

[Scubaraf]

Unless you never circulate the coin and melt it down once the debt level falls below that of the debt ceiling.

The point is that the debt ceiling is a made up limit. Most countries don't have one.

Increasing this arbitrary limit does not let us spend more money - it allows us to BORROW more money in order to pay for those things that we already bought!

In other words, the fight we're having over the debt ceiling now should have taken place over the BUDGET. That's were the spending decisions take place. By not raising the debt ceiling now, all we are saying is that we won't pay back the money we HAVE ALREADY SPENT. That sends a bad message to those that might lend us money in the future - raising our rates - and actually makes us SPEND MORE MONEY in the future to service our debt.

If you want to reduce the deficit, fix the budget (more revenues, less spending). Don't shoot yourself in the foot as a punishment for already having spent more money that you have in the hopes that it will force you to budget better next time.

Re:Inflation

[Anthony Mouse]

A temporary measure at best ... as the bonds are paid off money gets destroyed again. Newly minted money inflates the money supply irreversibly.

But that's the thing. The bonds never get paid off.

As a factual matter, issuing bonds actually causes more inflation than printing money. Because financial institutions use bonds and cash basically interchangeably, but bonds collect interest. What that means is that if you print a trillion dollars today, it causes a trillion dollars worth of assets to be created on paper today, and that trillion dollars sticks around indefinitely. If you issue a trillion dollars worth of bonds, a trillion dollars worth of assets is created on paper, but when the bonds mature you have to pay back the money with interest. The bonds are never paid with tax money because that would be economically catastrophic -- it would require raising taxes while cutting spending, which is the recipe for a depression. (This is especially so once the interest payments become a nontrivial fraction of the economy and no dent can be made in the principal without first applying substantial tax revenues to the interest.) So maturing bonds are always paid by just issuing more bonds. $1T worth of paper assets turns into $1.2T, then the $1.2T turns into $1.5T and so on. All those extra bonds sit in banks as reserve the same way cash does, which allows banks to make more loans and produce more inflation.

Ironically, the only way to eliminate the debt without the aforementioned economic catastrophe is to ultimately print money to pay the bonds. And then you end up printing the principal plus the interest, instead of getting out ahead of it and just printing the principal on day one.

Re:Inflation

[slashqwerty]

The federal budget has been growing faster than national GDP. End of fucking argument.

The entire foundation of your argument is wrong.

Federal spending as percent of GDP

$X is the GDP, $Y is federal spending. No matter where $X and $Y start, eventually $Y overtakes $X

As someone else pointed out, $X is the sum of many things plus $Y, so no matter how much $Y grows it will never exceed $X.

The Democrats and Republicans in congress are putting forth proposals to save 1-2 trillion dollars over the next decade which would continue to leave us with massive deficits over the next ten years. We would be a lot closer to balancing the budget if we would pull the military out of Iraq and Afgananistan, end the Bush tax cuts, and stop bailing out big companies.

I will go a different direction

[Osgeld]

INFLATION!! no seriously, this debate is a fluffed up scare tactic, the US is bringing in enough money to pay for its debt, but the US just wants to SPEND MORE than its bringing in so lets just see how much were willing to slit our own throat for bullshit smoke n mirrors projects...

I am not going to argue politics with anyone, and that is because I am disappointed with every single one of the self interest fat ass out of touch snakes in the grass fuckwit children, this administration and last

Re:Better Idea

[Anonymous Coward]

If you think national economics are equivalent or even similar to personal finances, then you really have not thought this through in any way at all.

Bad Idea

[RingDev]

If the government is doing something profitable, they shouldn't be doing it. With all likelihood, if something is profitable, a guided free market should be able to manage it much more efficiently.

The government's duty is to perform services that are by their very nature not profitable. Public schools, police, fire, national defense, etc... it there isn't a profitable model that can provide these services at the level we expect, the it is up to the government to suplement or perform those services.

If the government is turning a profit, it's either doing something wrong, or doing something that someone else should be doing instead.

-Rick

Re:Bad Idea

[GospelHead821]

I could imagine a few hypothetical situations in which the government performing a profitable service is consistent with it being the government. Suppose that it can reasonably efficiently perform the service adjunctly to another service that it provides (one that isn't profitable.) The private sector would have to hire equivalent staff to perform the profitable service, which would counterbalance any efficiencies they might realize. Also, since the government requires funds to provide those unprofitable services, then government ownership of at least some profitable enterprises can offset the costs. "So would taxing private companies providing those same services!" you might object. The government can't tax those companies for 100% of their profits, though.

Re:Bad Idea

[roman_mir]

Public schools definitely shouldn't be done by any governments. As to police and fire, this is up to localities. The only one that's left to the government is national defense, and it looks like they turned it into quite a profitable little enterprise, doesn't it?

Re:Bad Idea

[Anonymous Coward]

The same kind of C grade level fuckwits that run the cogs of the machines in the Public sector are the exact same ones that run the cogs in the Private sector (Everyone here likely knows both public and private knuckle dragging bottom feeders that got their jobs via nepotism, favoritism, or some other -tism). The reason why the Public sector appears far less efficient is because their records are, by definition, more public. Put the Private sector under the same microscope (as happens every now and again) and you find they're all just as inefficient BUT... and here's the part I love...

The Private sector as a profit motive to be as inefficient as possible! There's also the profit motive to avoid paying taxes to the greatest extent possible. So, the net result for Privatizing any public function is... a few guys at the top make a HECKUVA lot more than their Public sector counterparts would (and an increase in price of the service to cover their yachts). Anyone who thinks that the Private sector is somehow magically more delicious than the Public sector hasn't worked in the Private sector long enough to see the baked in and hidden corruption that drives inefficiency.

Re:Bad Idea

[Anonymous Coward]

This idea that we have a free market because it is better at managing things that are "profitable" is a ridiculous truism that has been passed around for I don't know how long. It allows people to mislead others into believing that the free market is its own end and not a means to an end.

The primary, and only good in my opinion, reason we have a free market is to promote freedom for all Americans. Just as a government controlling the economy will impinge on individual freedom, the monetary power of the rich in a truly free market will as well.

Re:Better Idea

[atriusofbricia]

How about instead of increasing the debt limit they A) Stop pissing away money and B) Find a way to MAKE money. Making money doesn't mean in curring more debt. What US the is doing is what most people do in college, they discover credit cards, take out 10 of them, max them out and have to get more credit cards to pay off the one's they've always maxed out. This is EXACTLY what increasing the debt limit is, it's increasing your credit limit or taking out a credit cards because you can't pay them off. At one point stop spending and put money into your bills.

Where was I going with that? Well they can now strike a coin thats worth N dollars, so how is this any better. I'm going to increase my credit limit by N to save me? That is a horrible idea for a consumer let alone a country.

As an analogy that is true. Something else I find interesting is that no one much is point out that the trillions of dollars in "cuts" they're talking about making are over a decade or more and still don't equal the amount of debt the current administration has piled up over just the last three years, never mind the previous administrations far less but still bad damage.

Artificial crisis

[Ironchew]

It's depressing how the debt ceiling is such a matter of contention right now, when it's been increased without much hullabaloo every six months or so since WWII. The reason for any artificial crisis is for politicians to threaten the public with doom and gloom in order to sneak something past them that the public normally would not accept. With Democrats and Republicans both playing along, what do both parties want to sneak by us? My guess is deep cuts to vital social programs, since the Obama administration started calling them "entitlement programs" at the start of the debate.

Re:Artificial crisis

[robogun]

At some point you have to start paying it back. It's at the point half of every incoming dollar has to be immediately spent to pay interest. Did you really think the borrowing could continue forever?

Re:Artificial crisis

[MightyMartian]

So the logical point to draw the line in the sand is during a period of high economic uncertainty, with a major currency (the Euro) in potential trouble, and with the US reporting shitty economic figures as it is? Are you under the delusion that doing it now will make America stronger, that it will aid the economy? If it's such a good fucking idea to default, why have stocks shed billions of dollars, why are rating agencies freaking out and why is the rest of the fucking planet begging Congress to get it's shit together?

You know, sometimes populist political movements really are not all that intelligent. Sometimes they're lead by people who are either fucking morons or are willing to do maximum damage to retain and grow their power. The Tea Party is not a sane political movement, as guys like Boehner are beginning to find out. The Tea Party is a political cancer, a political apocalyptic cult that idealizes a form of government that hasn't existed in any measure in the United States since Lincoln was elected.

Re:Economists, climate scientists?

[UncleTogie]

That is the best example of educated people you can come up with?

Hear hear! They didn't even mention Asia Carrera once!

Don't confuse the issue.

[Lord Kano]

The issue isn't that they're really worried about running out of money. There are tricks that can be pulled to keep spending money that they don't have.

The problem is that the Tea Party backed Republicans aren't going to give Obama the ability to spread the blame around for it. The Obama administration can pull the platinum coin trick, there is at least one other legal method he can employ to keep spending money. The problem, for him, is that next year the Republicans are going to hammer him on the issue. If the Republicans stand strong and force him to employ other means of spending the money, they'll deal themselves a trump card for next year's elections.

LK