Monetary Realism

Understanding The Modern Monetary System…

Did the Fed have a legal basis, Thread II

That last thread was getting too confusing (January 23 comments were appearing both above and below January 16 comments), so I closed that comments page and opened this one.


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80 Responses

  1. beowulf says

    “Then the issues become things like loss of purchasing power aka “inflation” and political cronyism aka “pork,” which are other reasons that many folks are wary of fiat.”
    Interesting there’s at least one Republican on the Hill who understands where Obama is vulnerable (a pity the Romney campaign was too damn stupid to understand this last year).

    As for inflation, I’ve been a broken record on this, you don’t wait till you’re thirsty to start digging a well. Yes the govt should be filling the output gap, but even before AD reaches AS, there better be a plan in place to control inflation. It could be Bill Vickrey’s cap and trade inflation market or President Wilson’s plan to replace the corporate income tax with an excess profits tax or something else entirely, but it has to be something. If not, the the inflationistas will smother any activist fiscal policy long before full employment is reached.

  2. Tom Hickey says

    As far as I can see, once the principle is granted, then the game is largely won, since it reframes the debate away from the need for austerity and puts it on effective and efficient management of real resources, which precludes unnecessarily idling available resources owing to “affordability” concerns that are non-existent. Then the issues become things like loss of purchasing power aka “inflation” and political cronyism aka “pork,” which are other reasons that many folks are wary of fiat.

  3. Tom Hickey says

    Joe, I am all for using the coin in any way possible, but I don’t believe it is going to happen, for political reasons. Politics is doing what is best for the party, i.e., retention and expansion of power, rather than what is good for the country as whole.

    I think that pushing the coin can force the issue, however. If this rises to top of the agenda, then there are a lot of ways it can go, once the power structure realizes that it is means to retention and expansion of power.

  4. Joe Firestone (LetsGetitDone) says

    I agree it’s the political question that is fundamental; but not that your formulation is teh relevant political question. Mine is: Do you start by doing something something you have the power to do which will end austerity politics; or do you start with a token use of that authority which will stir up just about as much political opposition but which, in itself, won’t solve anything? Gee, both our questions are rhetorical? How did things work out that way? -:) -:) -:)

  5. Joe Firestone (LetsGetitDone) says

    As long as beo has re-posted that, I’ll take the liberty of linking to my critique of that post here: I expect it applies just as well to beo’s re-issue!

  6. Joe Firestone (LetsGetitDone) says

    I agree we badly need the MMT background and continuing education on MMT. So, you take and whoever else wants to can take care of that. Meanwhile, I’ll keep pushing for the $60 T coin.

    “I look at the strategy and tactics a bit differently. The use of coinage as seigniorage is never going to happen politically, platinum proof coins not withstanding. The president has ruled it out.”

    On the above: never say never, when a human decision maker is involved. And remember, the President 1) goes back on what he says all the time; and 2) the Administration ruled it out for immediate debt ceiling crisis. Right now they’re not committed further than that!

  7. Joe Firestone (LetsGetitDone) says

    Enough integration can be achieved by the Treasury filling the public purse, paying down the debt, and covering the deficit; and the Fed responding as necessary by maintaining its target FFR. The first part of this before the Fed response by the Treasury Secretary getting the coin minted and then giving the head of the NY Fed and the Fed Chairman their marching orders

  8. Joe Firestone (LetsGetitDone) says

    Bad analogy. WE;re not talking about a nuclear launch. We’re taking about the President being able to repay the debt and cover the deficit. At the end of the first year most of the $60 T would still be there. Hardly a nuclear strike, except maybe on the Fed. Ha! Ha!

  9. Joe Firestone (LetsGetitDone) says

    Don’t care who supports the coin. If Obama does it, opinions will change over night or in a week. And the $60 T will be there so no one’s support will be needed until later.

    Finally, I don’t think the chances are good that O will use the $60 T coin; so I agree with you there. But I think the likelihood that an incremental approach will work is non-existent. So, in my view, we have an unlikely approach that is very likely to work; as opposed to a more likely approach that will never work because it will be killed politically by the austerians before it gets off the ground. Thanks, but I’d rather try to change the likelihood of the approach that works being adopted by the President. I don’t like kabuki! Annd, at bottom, that’s what you’re proposing.

  10. Joe Firestone (LetsGetitDone) says

    Beo, this argument isn’t persuasive to me. A TDC doesn’t take austerity off the table. A $60 T coin does. Also, once the $60 T is in the TGA, it doesn’t matter if the reaction is so negative that the law gets repealed. The cow is out of the barn. That’s why $60 T works and both the TDC, and the incremental approach won’t.

  11. Joe Firestone (LetsGetitDone) says

    “So I doubt that jamming through the coin would leave it at that just by assuming fait accompli, without taking sufficient measures to reassure different interest groups and the voting public that the coin would not upset the applecart.”

    I figuring that Obama will mobilize OFA and construct his own propaganda campaign to sell the coin after the fact. I’m not assuming that acceptance of what he did would be a fait accompli; but that the $60 T in the TGA would be fait accompli. After a week, reduction of the debt by $6.5 T would also be a fiat accompli, and as more time passed, more and more pay-off would a fait accompli. Also with the $60 T in the TGA, removal of the rationale for austerity would also be a fait accompli.

    If Obama’s propaganda machine gets beat by the opposition, under those conditions, then they ought to hang it up! What’s the opposition going to say. Lay out the campaign for me. I just don’t see an effective one.

  12. Joe Firestone (LetsGetitDone) says

    I agree, Tom. But we’re on the road to fascism anyway. Maybe using the coin and short-circuiting austerity will be an important new factor that with othet things, will turn things around?

  13. Tom Hickey says

    beowulf: “The President ruled out using the trillion dollar coin after the Fed objected (which itself happened, one suspects, after a sub rosa deal was struck with GOP not to block debt ceiling hike. The Republicans folded soon after). If Tsy and the Fed wished to cooperate on a platinum seigniorage platinum program (no doubt with smaller denominations and the Fed in charge of ordering coins), its doubtful the President would rule that out.”

    When this originally came out, I said I didn’t buy into it. The people doing the talking were relatively low level Fed and Treasury officials rather than the Chairman or Secretary. Those officials would not have opened their mouths without direction fron above.

    This was in my mind an obvious ploy to get around the President, Treasury sec, and Fed chair from getting involved in a political hot potato. This decision was made by the president, perhaps in consultation with Geithner and Bernanke, but I doubt it. I suspect it was made in consultation with the president’s political advisers.

    The conclusion, I believe, was that they had the GOP in a vice between the Chamber of Commerce and the wingnutz, which is exactly where they want to be. Boehner just warned the party that the president is out to “obliterate” them. He is correct. The coin won’t be needed. The president is now confident that if the GOP holds the country hostage, they will get the blame and likely loss the House in 2014. Boehner knows this. Now he has to escape the vice, or the game is over for them.

    But the coin still has use strategically and I recommend pursuing it from various angles to keep in it in the public’s attention. But let’s be clear that strategy is involves breaking the grip of the government as big household or firm analogy regardless of whether the coin is actually used. That alone would be a great success. If people would come to understand why direct self-funding is neither inflationary nor an incentive to spend without restraint, that would be even better.

  14. beowulf says

    “Where is the law that allows the Fed to electronically create reserves?”
    12 USC 355. The Fed can buy Treasuries on the open market to create reserves and sell them to drain reserves. This is all done electronically.

    “There is no law that prevents the Treasury from coining a Trillion “one dollar coins” to meet its obligation to the spend what has been authorized by Congress.”

    Right but the “one dollar coins” must be made out of metal, not air quotes. Treasury’s authority to mint coins is delegated by Congress and 31 USC 5112 sets conditions, such as… “The dollar coin shall be golden in color, have a distinctive edge, have tactile and visual features that make the denomination of the coin readily discernible, be minted and fabricated in the United States…”

    Once the Mint deposits the coinage with the Fed, the seigniorage profits can be transferred electronically but the coins themselves remain in the physical world. For that matter, I’ve never of heard of US Notes being printed electronically (that wasn’t really an option during the Civil War), so electronic spending would be neither coinage nor US Notes. On the other hand, I guess you could could say its more like US Notes in the sense its not legal for Tsy to use either to create additional dollars. 😮 )

  15. Clonal Antibody says

    Where is the law that allows the Fed to electronically create reserves? There is no law that prevents the Treasury from coining a Trillion “one dollar coins” to meet its obligation to the spend what has been authorized by Congress. The Trillion “one dollar coins” would not be subject to the Debt Ceiling. So is electronic spending by the Treasury issuing coins, or issuing US Notes?

  16. Tom Hickey says

    But that’s what is in place now. Treasury directs its bank to credit accounts and then needs to get reserves to clear that only the bank can produce and it is prohibited from getting them from the bank at present. That could easily be changed by removing the prohibition against Treasury overdrafts at the cb and adjusting accounting to allow the cb to run with negative equity.

    The obvious way out in that case is formal consolidation or nationalizing the cb the way that the UK did and ending the public-private arrangement that now exists in the US, which is confusing a lot of people, creating a technocratic command system with out public accountability, and leading to conspiracy theories that undermine confidence in the system.

    Once the coin has launched the debate, then the whole system comes under question. But it is already under question, especially by the conspiracy theorists, some of whom are in Congress. Ron Paul may be gone, but Rand Paul is in the Senate planning a presidential bid as early as 2016. So this is not going away anytime soon.

  17. beowulf says

    The President ruled out using the trillion dollar coin after the Fed objected (which itself happened, one suspects, after a sub rosa deal was struck with GOP not to block debt ceiling hike. The Republicans folded soon after). If Tsy and the Fed wished to cooperate on a platinum seigniorage platinum program (no doubt with smaller denominations and the Fed in charge of ordering coins), its doubtful the President would rule that out. Aside from the practical benefits of using platinum coin easing as a QE tool, there are two reasons that it’d be prudent for Tsy and the Fed to start a platinum coin seigniorage pilot program.
    1. The availability of this policy tool will deter Congress from trying to use the debt ceiling as a political hostage in the future.
    2. After 9/11, it was recognized that a catastrophic event could hinder Tsy auctions, leaving the govt unable to fund operations at a time when timely govt action would be critical. As the GAO reported in 2006, It’d be “prudent for Treasury to explore other funding alternatives to use during a wide-scale disruption… [to] provide Treasury a last resort source of funds when
    other options are not viable.” When you read the words “last resort source of funds”, doesn’t the mind picture a trillion dollar coin?

    Tsy could mint a TDC or a series of smaller denominations to be placed (without monetizing) in a Ft. Knox vault. In case of a wide scale disruption, a regional Fed bank (even if the NY Fed was out of commission, there are 11 others) could place an order for platinum coinage. The title to the coinage would transfer instantly, with Tsy booking the seigniorage, even while custody of the coinage remained with Ft. Knox (Dividing title and custody is a point I hadn’t considered until New York magazine interviewed the former Chief of the US Mint Police, Bill Daddio).

    Clonal, money is created either by the Fed or the Mint. The money you wish to transfer electronically has to start from one or the other (and your answer determines if it counts against the debt ceiling or not).

  18. Clonal Antibody says

    The question that crops up is is electronic creation of money equivalent to producing a coin, or is it equivalent to producing a US Note? the 1864 law does not impose any restrictions on the amount of coinage or electronic transfers. Only on US Note issuance by Treasury. So is direct electronic crediting of bank accounts by the Treasury equivalent to coinage, or is it equivalent to issuing US Notes, or Neither. If neither, then it is not forbidden by law.

  19. Tom Hickey says

    I look at the strategy and tactics a bit differently. The use of coinage as seigniorage is never going to happen politically, platinum proof coins not withstanding. The president has ruled it out.

    The value of the coin debate is that the issue of direct issuance has come to the fore. If the country were to go to direct issuance it would be through either US Treasury notes or electronic deposits.

    What the coin does is show that this is a possibility operationally under the current system and all that is preventing is voluntary political restraints. The question then becomes why impose those those restraints? What is the cost-benefit analysis. It would seem that what is being forfeited is huge policy space. What is gained is a rather dubious self-imposed leash that has been ineffective in that the debt ceiling is consistently raised.

    Moreover, the so-called fiscal discipline is imposed to restrain inflation and an examination of that assumption hows it to be fallacious (Fullwiler). Excessive “printing” in never the primary cause of inflation or hyperinflation, as erroneously presumed, budget’s don’t have to be balanced even in the long-term, and there is no intertemporal governmental budget constraint (Fullwiler).

    A balanced economy (adequate growth, full employment and price stability) is not the result of a balance budget but sectoral balances that adjust for changing saving desire (Kelton’s seesaw). Increasing policy space allows for this without threatening inflation. Not doing so results is inefficient use of available real resources and an unbalanced economy, i.e., needlessly high unemployment and lower than necessary productive investment.

    If we just argue over the use of the coin, we are missing a strategic opportunity to actually change the game for the better.

  20. beowulf says

    “a TDC thunderbolt won’t work; but a $60 T lightning strike is a fait accompli”

    So a TDC won’t work, but a coin 60 times as much will? This reminds of the old aviation theory (since discredited) that above the speed of sound, an airplane’s controls work in reverse.

    The theory here apparently is that above the trillion dollar barrier, platinum coinage becomes more politically acceptable the larger the denomination.
    Alas, you don’t have to be Chuck Yeager to realize that the supporters of the $60T coin are a subset of those who would support the trillion dollar coin, who are themselves a subset of those who would support a $25 billion coin pilot program (and even that sum might need to be smaller to get the ball rolling).

    Like General Patton said (Cullen is fond of George S. Patton quotes), don’t make the best the enemy of the good. No economist outside the MMT echo chamber has ever endorsed a $60T coin, no elected official ever will. So what’s the point? If you want to see platinum seigniorage used by the govt as a policy tool, the only way forward is one step at a time.

  21. beowulf says

    The argument he raised was so silly, (i.e. coinage should count towards the debt ceiling), it probably wasn’t necessary for me to write at all. Tsy and the Fed know very well that the accounting for a single trillion coin is exactly the same as the accounting for a trillion $1 coin. The operational issues are rather straightforward.
    The only legal issue at stake is whether Tsy can put coins to the Fed. We both agree that the law is clearly on Tsy’s side if it did wish to put coins to the Fed (under the Custodian of Money statute).
    What it comes down to, really, is the political question: does Tsy start by dipping its toe in the water (with the Fed’s cooperation) or by jumping in the deep end?

  22. Joe Firestone (LetsGetitDone) says

    I understand Clonal. I know all about their “villager” echo chamber. But we need to stop giving them a pass on that and work hard to discredit them as ignoramuses who don’t know what they’re talking about. I think Phil, while very polite began that process. But I also think that beo’s reply was far too modest. The commenters at the DorfonLaw site evidently don’t know that beo is the originator of the proposal to use platinum coin seigniorage with very high face values. I doubt that even Buchanan and Dorf know this. I think beo should have stated who he was upfront rather than just linking to the Wired article. These guys ended up just ignoring beo’s comment.

  23. Clonal Antibody says

    To them the people writing about the proposal are not VSP’s – Krugman and Jack Balkin do however fall into that category. Diehl is considered by them to be “A Political Hack” – same as they would view any “Political Appointment”

  24. Joe Firestone (LetsGetitDone) says

    Ha! Ha! In the interests of keeping the peace here, I won’t take the bait using the Cullen/MMT analogy.

    But replying to your equation; I really don’t think that K’s opinion will matter if the President first mints the $60 T coin. Once he does it, his propaganda apparatus will move into high gear and if Professor K opposes the President then more and more people will be talking about Professor K’s “flashing neon sign”

  25. Joe Firestone (LetsGetitDone) says

    I saw that. They just ignored you. Best do a post refuting them!

  26. Joe Firestone (LetsGetitDone) says

    It was a good comment, and they didn’t answer effectively. But remember they have 3 other posts on this subject.

    Actually, after reviewing their posts this evening, I now think that there arguments are pretty superficial. They’re also ignorant about PCS. Beo never suggested the coin, once minted, would ever be redeemed from the Fed. And neither have I in all my writing on the coin since January 2011, and by now I may have 50 posts dealing with the coin in some way. One of our central points was always that it would become a Fed asset and would just remain there forever, swapped for electronic credits in PEF, which would then mostly be swept into the TGA.

    First time I ever saw the suggestion that the coin would be redeemed by Treasury was in one of Paul K’s post; and with all due respect, he’s hardly written anything on the coin, has read even less than he’s written, and hasn’t really thought it through, in terms of PCS options or implications.

    The GWU lawyers are really attacking Krugman’s proposal for the coin. They don’t know anything about any of the proposals and clearly haven’t anything from anyone of the people who wrote about the coin, before Jack Balkin’s piece about it in July 2011.

  27. Joe Firestone (LetsGetitDone) says

    Phil, a TDC thunderbolt won’t work; but a $60 T lightening strike is a fait accompli, and with quick repayment of intragovernmental and Fed debt will make the President sufficiently popular to weather the storm; and when he proposes progressive economic measures thereafter; the excuse will no longer be there that we can’t afford it.

    So, what will they say? That they’re angry at him for filling the public purse with $60 T and so won’t do any deficit spending? Good luck with that! Once the excuse of “no money/burdensome debt” is gone the public will fry their butts if they do that. I’m telling you, folks. If they don’t have the debt; then when it comes to fiscal policy; they ain’t got nuthin’!

  28. beowulf says

    I piled on at the Dorf site. :o)
    “Suppose the Administration were to say that it is minting platinum coins notwithstanding the fact that doing so would be tantamount to violating the debt ceiling.”

    Except its not tantamount to violating the debt ceiling. Public debt subject to limit is measured by the sum of the face amounts of guaranteed principal owed to bondholders.

    When Tsy sells coins to the Fed, its an asset sale. Tsy is under no legal obligation to buy coins back from the Fed, so it is not counted as public debt.

    I know it feels like this shouldn’t be legal, but it actually is. It does make me smile to see this denounced as a liberal plot. I have it on very good authority that the guy invented the trillion dollar coin is a Republican and voted for Mitt Romney last fall.

  29. JKH says

    This exercise in some ways is a variation on the usual misinterpretation of Fed policy independence. Independence refers to the formulation of monetary policy – such as the fed funds rate target or the QE programs. Treasury is not at the table for the decisions on those policies. But this does not preclude operational co-ordination with Treasury. And if the Fed could assist Treasury with funding – legally, and without interfering with Fed monetary policy – this would not be a violation of Fed policy independence. But it is also why the platinum coin idea as a response to a debt ceiling constraint would require full integration with QE policy – since both the coin and QE create reserve funding for Treasury’s obligations. That said, reasonable monetary policy bounds on the extent of such reserve funding is why more shocking versions of platinum easing would never be feasible under existing institutional arrangements.

  30. Clonal Antibody says

    His reply to you was quite derogative and also quite facile.