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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)."
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.
> 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.
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
"Most people in the U.S. wouldn't know they live in a tyrannical state if it walked up and grabbed their junk." - MyFirs
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.
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.
Slashdot needs a "-1, Wrong" moderation option.
The Urban Hippie
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)
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.
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.
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?"
Check out my novel.
The entire foundation of your argument is wrong.
Federal spending as percent of GDP
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.