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

[mdmkolbe]

Exactly. The inflation becomes a tax on anyone holding currency. Each day, everyone looses some percent of their money's value and the government gains some number of dollars.

On the plus side you don't need to pay the IRS to collect this tax, but that is about the only positive aspect.

Re:Inflation

[LoyalOpposition]

Well, it's going to hit the economy. It hits the economy when the Treasury starts issuing checks based upon it. The question is--what are others going to do? Normally, it's inflationary when the Treasury issues checks, and it's deflationary when the Treasury borrows (issues bonds.) The key is that it's neither inflationary nor deflationary if they issue the same amount in bonds as they issue in checks. Well, disregarding taxation for the moment, which has the same deflationary effect as bonds.

By others, I mean the Federal Reserve System. Normally the Federal Reserve System sells bonds to counteract the inflationary effect of the Treasury's issuing checks, or they buy bonds to counteract the deflationary effect of the Treasury's issuing bonds, whichever effect is prevalent at the moment. This is called sanitizing the monetary effects of fiscal acts by the Treasury. On the one hand I would expect the Federal Reserve System to start selling bonds. By all accounts the Federal Reserve System has a huge reserve of bonds. The net result then would be that the Federal Reserve System's store of bonds drops, and there's no effect on inflation, and the government would still be borrowing from the public; it would just be the Federal Reserve System borrowing instead of the Treasury. On the other hand, the Federal Reserve System has been trying to pump liquidity into the economy by keeping the Federal Funds Rate at 0% so it's conceivable that they would permit the increased liquidity to stand at the risk of future inflation.

~Loyal

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

[UltraOne]

I am the OP. As several people have posted, this approach is exactly equivalent to printing money. The reason it needs to be platinum coins rather than paper bills is that there is a law that limits the total value of paper bills that can be printed, but there appears to be no limit on the value of platinum coins that can be minted.

Of course, if you were to print a large enough amount of money, it would lead to inflation (or asset price bubbles, which actually seem to occur first in the current economy). The mechanism by which excess money supply causes inflation is by increasing demand to the point where bottlenecks appear in the economy. For example, people want cars, have money to buy them, but there aren't enough factories right now to supply demand - so the price of the limited pool of available cars is bid up. If labor markets are tight, employers looking for people to work to fill the demand created by the extra money will need to bid up wages to attract workers.

The key point is that all those mechanisms only work if an economy, or significant parts of it, are operating near peak capacity. This is the complete opposite of the situation we are in right now. Industrial capacity utilization was at 76.7% in June, several percentage points below the 1972-2010 average (80.4%) an well below the 85.1% peak in the 1990's. Unemployment is also high compared to historical averages.

In the current environment, it is vastly more likely that increasing the money supply will improve economic conditions without triggering inflation. Even at its pre-financial crisis recent peak (when unemployment was much lower than it is now), annual inflation (CPI-U, Dec 2006 to Dec 2007) was only 4.1%. Also keep in mind that the entire amount created ($5 trillion in my example in the OP) will not hit the economy at once. Initially it will be in an account at the Federal Reserve, and only as the government spends the money would it reach the economy.

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

[aliquis]

Nothing to worry about.
(US debt to GDP since 1929, source Deutsche Bank, picture taken from Q2 2011 report of Brummer & Partner Zenit hedge fund.)

Meanwhile:
* Profits share of GDP
* Wages share of GDP
(http://www.marketwatch.com/story/corporate-profits-share-of-pie-most-in-60-years-2011-07-29)

Re:Inflation

[Mindbridge]

Ah. You study at the University of Chicago or something, I guess? Such opinion is extreme ideology and is hard to take seriously. For example:

> Government spending does not "stimulate" the economy.
I see. I suppose that is why the major banks downgrade their GDP estimates as a result of the prospects of decreased government spending? And why the UK economy nose dived as a result of the austerity package?

> The value of a theory is measured by its ability to predict... yet Keynesians have never predicted any major economic events... even though Monetarist and Austrian economists have.

Heh.
Monetarism quite correctly predicted the stagflation. It is failing miserably in the current situation of liquidity trap, however. It predicted that Japan will recover 10 years ago after increasing the money supply, for example. Nothing happened. The effects of QE2 were far smaller than predicted, etc.
Austrians: Even Milton Friedman did not think that theory had much to do with reality.

Also, all of those theories were predicting massive increase in inflation and/or long term interest rates due to the economic policy in the past two years. What happened? The interest rates are at historic lows instead. That's a massive failure of the predictions.
Only the liquidity trap theory predicted what happens accurately. And it is a consequence of the Keynesian theory.

The way to fix the economy in a normal, non-liquidity trap situation (i.e. almost always) is through monetary policy exclusively, no question about that.
Monetary policy does _not_ work well at this very moment, however. A fiscal stimulation is needed to get the economy out of the swamp and get the interest rates above 0%. After that we can revert to monetary policy again.

Re:Inflation

[PopeRatzo]

You have 100 (add multiplier here) shares (I mean money, pounds, dollar or bitcoins, lol) you print more of them (or mine), this simply devalues the pool.

Not when you have the power to say that money means whatever you say it means.

There seems to be this misconception, especially among technocratic IT dudes who get their economic education from Civ IV, that money, currency, is tied to some absolute value, the way a meter is equal to 1,650,763.73 wavelengths of the orange-red emission line in the electromagnetic spectrum of the krypton-86 atom in a vacuum.

Money does not work that way. It never has. China says their yuan is worth X amount of dollars and the US says the dollar is worth X amount of euros. But none of those units of measurement is set to any standard. Even the "gold standard" wasn't really a standard because gold was still being pulled out of the ground, and its perceived value changed with cultural trends. The Indians really like gold, for example, so gold becomes more valuable. That's it. So you never tie your currency to a metal, you tie it to how much people want that metal, which is not a fixed number. Since there is no absolute standard for money, it can mean whatever we decide it means. All of this other nonsense is just smoke and mirrors to keep people from realizing that fact.

More and more, the economic elites measure wealth in very ugly human terms. A CEO is worth 800 workers and 100,000 Chinese peasants. Sort of the way a really successful athlete has to measure his worth by comparing his salary to the salary of the guy who's not catching as many touchdown passes. He doesn't even know how many zeroes are in the amount of money in his contract, but he knows his contract has to be just a little richer than the guy who had the biggest contract last year. The money itself has no meaning. Without poor people being sufficiently poor, rich people can't feel sufficiently rich. The entire purpose of money now seems to be to give rich people a way to measure how much more valuable they are than a tool & die maker or coal miner or single mother of three. Or a 62 year old unemployed auto worker.

Everybody stays poor simply to prop up the egos of the rich. When you start getting bonuses in the tens of millions and salaries in the hundreds of millions, the only way that's left to increase a rich man's perceived value is to have the perceived value of everyone around him to go down. That's what "supply-side" or "trickle-down" economics is all about. It was also called "Reaganomics" in honor of the man who presided over its inauguration as the economic system of the future. If the species should survive that long, people will look back at the turn of the millennium with disgust, as a period when the means were available to alleviate so much poverty and inequity and suffering, but the rich and powerful kept that suffering in place just to make themselves feel rich and powerful, so they could go to bed at night knowing they were that much more valuable than everyone else.

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

[thomst]

The deficit is caused primarily by two things: The lower tax receipts from the huge destruction of wealth during the 2008 crash. The increased spending in the social safety net that automatically kicks in during such downturns.

So wrong.

Although lower tax receipts stemming from the loss of wealth definitely play a role in the current deficit, lower tax receipts from the Bush tax cuts for the wealthiest individuals and profligate tax expenditures for corporate tax loopholes (GE, anyone?) contribute far more. Likewise, 10 years of off-budget (and thus deficit-financed) wars have added massively to the deficit. Additionally, interest-only payments on the existing national debt also play a non-trivial role, since money spent on paying debt service is money that's not available to pay for other stuff (such as the afore-mentioned social safety net and multiple wars).

Long term out deficit is a product of bad demographics and health costs.

Demographics and spiraling health costs are only part of that grim picture. Far, far more threatening is the prospect of exponential increases in the national debt as a result of interest-rate-driven increases in debt-service costs.

The current, artificially-maintained, low interest rates cannot last forever. Eventually, even the Federal Reserve's ability to keep them so low - by printing money - that banks actually make money on overnight inter-bank loans (due to the delta between inter-bank interest rates and inflation) won't be sufficient to keep them from creeping up. When that happens, the cost of paying even the interest on the national debt swiftly will grow until it exceeds the current budget. As an example, should the prime rate exceed 10%, annual service on even a mere $14 trillion in national debt will be nearly one-and-a-half trillion dollars.

Just let that figure soak in for a moment. And that money will pay for NOTHING except interest on the national debt. The cost of every other item in the budget - from national defense to entitlement programs, including national parks, NASA, air traffic control, interstate highway maintenance, and so on - will HAVE to be deficit-financed, because tax revenues simply won't be anywhere close to enough to pay for them out of current receipts.

As Commander Kruge put it, "Exhilarating, isn't it?"

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.

Re:apparently we have to have a subject line

[BZ]

> that isn't western europe about every 60 years

France last did this in 1960. That's 51 years ago.

Germany last did this in 1923. Closer to 88 years.

Italy did this when they went to the Euro, as far as I can tell.

On the other hand, Canada hasn't done this. So I'm not sure what your "Western Europe" schtick is about.

Also note that if $1 "fake" has the same buying power as $1 billion "real" (which is how currency reforms of the sort you describe usually work), then it's not like the creditors lose out. They lost out during the inflationary period, not the redenomination.

One other comment. Our currency is "strong" because we've had it a policy that it be so (at the expense of domestic employment), and because other countries have policies of propping up the value of the dollar to improve their domestic employment situation.

Re:Eck.

[demonlapin]

You should have to learned to play the guitar. You should have learned to play them drums.

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:Postpone only

[UltraOne]

I am the OP. The reason this approach counts as an 'escape hatch' is that it appears that the executive branch already has the authority to carry it out (in 31 USC 5112(k) ). To stop it, Congress would need to pass a law. To do that in the face of a presidential veto would require 2/3 supermajorities in both the House and Senate. As long as Obama can get 34 of the 51 Democrats in the Senate (or 53 Democrats plus independents who caucus with the Democrats) to back this approach, there is nothing that the House can do to stop it.

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.

Focus on reality rather than rhetoric

[Anonymous Coward]

The federal budget has been growing faster than national GDP. ... Since GDP cannot be controlled, it is spending that must be controlled. Period and end of debate.

While the poster correctly identifies that the key to measuring the amount of sovereign debt (and deficit) is evaluating it relative to GDP, asserting the budget grows faster than GDP over any meaningful timeframe doesn't make it so. US spending on non-Social Security, Non-Medicare, Non-Debt Interest programs* is about 14.7% of GDP. Compare that to Eisenhower's administration in 1960 which turned in a budget excuding the same things (Medicare didn't exist yet) of 14.2%. It is perfectly reasonable to discuss budget growth outstripping GDP growth, but that isn't empirically what is occuring (again, excluding medicare - that is a legitimate long term underfunded issue that will either require cuts, taxes, or significant changes in health care spending trends to address).

The only undisputable portion of the above is that we take in less in revenue than we spend in outlays, but that doesn't mean that the only way to address that is with less spending, although that is one viable option. Increased revenue or simple GDP growth would also both address this issue.

For those wondering, James Kwak lays this out nicely in The Atlantic and he offers links from the CBO to back up these numbers - but you don't have to take my word for it (with a shout out to LeVar Burton!):
http://www.theatlantic.com/business/archive/2011/07/our-real-deficit-problem-has-nothing-to-do-with-traditional-government/242442/

*For reference, we exclude Soc Sec due to the fact that it has a separate dedicated tax system, medicare b/c it didn't exist at the comparison point, and Debt Interest b/c it doesn't measure the size of government programs.