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. Philip Diehl says

    I have just posted the following on The Dorf on Law site dismantling his legal arguments against the TDC:

    A comment on the post “Big Coins, Political Credibility, and Hatred of La…”:

    Professor Dorf,

    “So, if jumbo coins would work and are legal, then I agree with you. But the new wrinkle brought up by Neil’s post is that quite apart from whether the markets would accept jumbo coins: 1) the best reading of the statute doesn’t permit them to be used for this purpose; and 2) even if they can be used for this purpose, they may count against the debt ceiling, and so we’re back where we started from.”

    Since Neil’s argument is predicated on a false premise (i.e., that the law was intended to authorize a commemorative coin), his, and your, arguments fail.

    Sam’s statements about divining legislative intent are sound, but even if you reject his argument, legislative intent contradicts your case.

    On its face, the law authorizes platinum bullion (investment quality) coins, and the first coins we minted under the law were bullion coins. Bullion coins are not commemorative coins; their purpose and the way they are marketed, priced, manufactured and distributed are entirely different. Commemorative coins commemorate something; they are a way for the nation to honor a person, event or a place of great significance to our history. The images on these coins are emblematic of the commemoration. What do the platinum coins authorized by this legislation commemorate, I ask.

    As Director, I sought authority to produce platinum bullion coins in order to have a product that could compete in international bullion markets. (Our gold bullion coin could not.) I wrote the law in such a way to give us maximum flexibility in designing the coin after conducting market research in the two primary platinum bullion markets, the U.S. and Japan. We did just that and within 6 months had an 80% market share.

    As a by-product of the bullion coins authorized by the law, we also received authority to mint proof coins. By law, these are numismatic coins. Numismatic coins come in two flavors: circulating and non-circulating. Again, these coins have different purposes and are marketed, priced, manufactured, and distributed in entirely different ways. The accounting for these coins and the way they register on the federal budget also differ.

    More evidence that the law was not intended to authorize the minting of commemorative coins: the platinum coin provisions were part of a larger bill that included reforms of the Mint’s troubled commemorative program. After a decade of Congressional excesses with the program, we sought and won RESTRICTIONS on the number of commemorative coins the Mint was mandated to produce and sell each year. So does it make sense that the same bill would authorize MORE commemorative coins?

    I have found opponents of the large denomination platinum coin concept typically make facile and uninformed legal arguments against the coin instead of dealing with it on the merits.

    You are on a dead end street. I suggest you now turn to the merits.

    Philip N. Diehl
    35th Director
    United States Mint

    • 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.

      • 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”

        • 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.

        • 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?

        • 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.

        • 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.

        • 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? -:) -:) -:)

    • Clonal Antibody says

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

      • 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.

  2. Joe Firestone (LetsGetitDone) says

    Also, just posted an evaluation of Mike Sankowski’s expression of misgivings about PCS: here:

    This will also appear at all my usual haunts.

  3. Tom Hickey says

    BTW, see Neil Wilson, How the government’s super-platinum credit card works

    It’s the best simple explanation in terms of an apt analogy that I have seen.

    • JKH says

      You MMT guys won’t like this, but I have a different take on the credit card analogy.

      There are two possibilities for its application – in the context of the existing institutional framework, or in some alternative one.

      In the existing framework, it does not apply at all.

      In fact, the analogy represents the opposite of current reality in context. The Treasury spending function is denied the type of credit card from its (central) bank that you or I easily qualify for. It must borrow before it spends. You and I can spend before our debt is due at the end of the month. But it does become a debt, if not paid off.

      In an alternative reality framework (dare I say – standard MMT), it seems similarly awkward. I suppose it would be possible operationally for Treasury to spend in pulsations of overdraft creation that are then crystallized to formal debt on a monthly basis. And I suppose it would be equally possible for a consolidated government (Treasury and the central bank) to spend without borrowing until a monthly tranche of spending is done, at which time the consolidated institution converts the reserves to debt. That would show up as pulsations of increased reserves that were subsequently swapped into debt every month. I’m not sure what the argument would be for such an obsessive operational twitch though.

      As far as paying off the card/debt in either case (with tax revenue or household income respectively), in either institutional framework, the analogy seems additionally awkward.

      Running a perpetual credit card debt balance just doesn’t seem like a great or natural idea objective for you or I.

      But we will probably agree that it’s not inappropriate at all for governments to expect to run perpetually positive debt balances.

      That last point is the only one I see MMT really wanting to make – but it’s fairly minor in the context of a credit card analogy.

      Analogies in monetary economics are usually a stretch in explaining stuff accurately – and sometimes they represent ideological inclination in a rather imperfect way.

    • Joe Firestone (LetsGetitDone) says

      That’s a great post by Neil!

  4. Philip Diehl says


    I see you have re-posted “(MMT – JG) + Medicare = MMT)..

    Galbraith is misguided in believing that job creation programs of the non-profit sector are more insulated from political pressure than federal programs. One only needs to look at the relentless cuts to public and higher education and state and local public services and employment accompanied by addition rounds of tax cuts in many states to know this source is no less vulnerable to budget cuts. In fact, in the age of Citizens United and state legislatures dominated by gerrymander-protected GOP incumbents, states are likely to be MORE vulnerable to these pressures than the US Senate and the WH is.

    As for charitable giving being a reliable source of funding, I have two words: tax reform. Charitable deductions are going to be capped sooner rather than later.

    Tuition cannot be the source in higher education because its already maxing out.

    It can’t be debt because state and local governments almost universally have legal prohibitions against it.

    It’s a pipe dream to think these programs can be undertaken anywhere other than at the federal level.

    • 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!

    • beowulf says

      Galbraith is at UT, no? Don’t forget the oil & gas royalties!

      Seriously though, the education sector has definitely overpriced itself (they probably should go to 3 year degrees like in the UK). Beyond that, nonprofits probably deliver services more cost-effectively than either govt workers or for-profit contractors (less rent seeking by either workers or management).

      But this has gone far afield from my plan to simultaneously tackle monetary and healthcare reform. Like General Eisenhower, If you don’t know how to solve a problem – make it bigger! :O)

  5. Philip Diehl says


    No, I didn’t receive a response to my question. Thanks for this. A few follow ups:

    “However, that $10 T would be paid off as it falls due over a 30 years period, and it can best be understood as Treasury-implemented QE, a swap of financial assets: reserves for the debt instruments held by the public. No new net financial assets are added except the interest paid on the debt instruments. But, of course, that would be paid whether or not new debt was issued.”

    So, let me take this in three parts.

    1) If the annual carrying cost of the debt is $500 billion and we covered that with a half-trillion coin rather than increasing tax revenue or creating new reserves to borrow against, we’d be injecting a half-trillion new $ into the economy every year, and we could expect some degree of inflationary or, during recessions, counter-deflationary (stimulative) effect from this, right? Also, we can expect this $500 billion to rise as interest rates rise from historic lows and as new debt is added to pay for subsequent annual deficits–still right?

    2) In order to prevent the debt from continuing to rise, we’d need to mint another coin equal to the difference between the annual deficit and the carrying cost of the debt, we’ll say it’s $300 billion. Now, combined with 1) above, we’re treading water, that is, the debt is static, correct? (Or are we also paying off a portion of the principle and slowly reducing the debt? This is probably a dumb question.)

    And if I understand you correctly, the funding derived from this second coin is no more, and maybe less, inflationary than issuing new securities to finance the deficit, right?

    Writing this, it occurs to me that this last sentence is not the same as saying it has no inflationary impact. As you know, one reason I’m attracted to HVCS is how it breaks us out of the austerity trap and defeats the GOP’s starve-the-beast strategy. But let me play the devil’s advocate here for the sake of my education.

    3) If we mint coins, as in this example, of $800 billion a year just to maintain the debt at current levels, then mint more TDCs to maintain at current levels the debt owed to the SS and Medicare trust funds, are we not removing both the ideologically-driven constraints and what I’d call (perhaps naively) “responsible” constraints on government spending?

    Certainly in terms of psychology, this would remove any meaningful cap on the federal budget. In a few years all comers would swamp the Congressional appropriators and tax writers to enact more spending and cut more taxes for good reasons, from my progressive perspective, and for ill. I’ve watched Congress for too many years to ignore the fact that this is inevitable. The political incentives are overpowering.

    Is there no downside-tradeoff-risk incurred from this dynamic? Why doesn’t JMK come into play here suggesting we use HVCS as a counter-cyclical tool and put it back on the shelf when the economy is strong? Using HVCS in this way would eliminate the GOP’s perverse incentive to use tax cuts and recessions to build debt and then use the debt as an excuse to gut entitlements, etc.

    Thank you, professor.

    • Joe Firestone (LetsGetitDone) says

      I’ve blogged about some parts of these great threads. The post is up here first: But later this afternoon will be up at NEP, MyFDL, DailyKos, and

      • Philip Diehl says

        A quick response to your argument against the political viability of an incremental approach:

        Your argument assumes that lightning can’t strike twice in the same place and that the TDC won’t get fried in the second strike. If, as I’m highly confident would be the case, the HVCS approach were adopted without preparation of the markets, Congress, influencers, and the public, the reaction would be so negative on all fronts, the act would be reversed forthwith. Any president who did such a thing would immediately be a lame duck, if not impeached, and the HVCS concept would become an orphan left to die on the streets.

        The incremental route is not paved in gold (or platinum, for that matter), but it might work.. Thunderbolts won’t.

        • 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’!

        • 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.

        • 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.

        • 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.

        • 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.

        • 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!

        • 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).

        • 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.

        • 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.

        • 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.

        • 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?

        • 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. 😮 )

        • Tom Hickey says

          Recapping where we are, I think we basically agree on the policy of direct issuance through seigniorage, and while the coin is not elegant, it is the best if not the only option under current law. That leaves the strategy and tactics up for debate. Some favor the all-at-once approach and others the incremental approach.

          I think we need to look at the obstacles. The greatest that I see is the fear of inflation associated with fiat currencies. Even though it is general knowledge that federal spending requires appropriation, most people don’t trust politicians with the purse strings without some restraint being imposed, like issuance of public debt with a debt ceiling or a balance budget amendment.

          The strategy and tactics has to deal with this objection to be successful at implementing the plan. an incremental approach allows for gradual introduction of a program that would be widely perceived as “radical.” If it were shown incrementally that politicians could handle the increased policy space and the outcomes were positive, then the path forward would be open.

          Would that apply as well with the go-for-it option. One could argue that inflation is not an actual problem in any case, so it doesn’t matter. The proof would be in the pudding.

        • 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.

        • 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

        • beowulf says

          The only time the President would be justified to jump in with both feet with a trillion dollar coin is as an alternative to default. It’d be an unusual example of what Naomi Klein calls the shock doctrine. In a crisis situation, political bottlenecks are broken and heretofore impossible solutions (in Klein’s book, right wing policies) become possible. The House GOP was banking on the shock doctrine when they induced the debt ceiling crisis. They figured with his back against the wall, Obama would again agree to spending cuts he’d otherwise never agree to. Threatening to use the TDC sort of stepped on that agenda.

          That’s all well and good and maybe we’ll be in the same spot in three months, but otherwise, taking emergency measures when there’s not a crisis (or by overreacting to a $2 trillion crisis with a $60 trillion coin) won’t go down well. The danger is deeper than just igniting inflationary expectations. Think of it this way, the President is the only person in the country we trust with nuclear launch codes. If he does something that everyone in the world (a few econobloggers excepted) thinks is insane, well, its not just financial markets that will be rattled.

          So start a small pilot program and promise to stop when it starts causing inflation. It won’t, so the program can slowly grow in size without scaring the hell out of everybody.

        • 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!

    • Joe Firestone (LetsGetitDone) says

      Hi Phil, I haven’t been a professor since 1975. I will reply to your questions some time tomorrow. I’m in the throes of finishing a post on previous exchanges in the wonderful discussions we’ve been having here. After that, and what I hope will be a shorter post on a statement of Mike’s I’ll be back. How’s your piece on the views of the GW law profs coming?

    • beowulf says

      Well there’s always using PCS to provide the Fed a discretionary fiscal policy tool and the American people universal Medicare coverage without Congress having to raise taxes or increase the debt ceiling. You’ll have to follow the link for details, but here’s the heart of it.

      So this is the plan, the unstoppable force of $1 trillion in inflationary Medicare spending would meet the immovable object of $1 trillion in deflationary transaction fees. Of course we only need spending and revenue to match at full employment, and even that assumes no trade deficit demand leakage. At other times, the Fed could use this as an adjustable fiscal policy tool (the Board of Governors can amend their fee schedule at any time). When the economy falls short of full employment with balanced trade, the Fed could fund Medicare by cutting transaction fees and filling the deficit by way of the Mint with coin seigniorage…

  6. Joe Firestone (LetsGetitDone) says

    The austerians would have a fit! They’d be propagandizing forever about how we’ve not only destroyed the lives of our grandchildren; but also our great grandchildren. Of course a $60 T issue or series of issues would drain all the reserves available and more. So to accomplish it the Fed would have to QE all the new debt immediately; so that there would be reserves available to buy still more debt until the $60 T level was reached. The Fed could end up owning $60 T of debt.

    • beowulf says

      The key phrase is… “if Obama has the guts to use it.”
      I don’t know if “guts” is the word I’d use but clearly the President lacks the stuff to do something so … unexpected. If he balked at putting a trillion dollar coin to the Fed, raising the stakes by 60 times can hardly be expected to make it more likely he’ll act. For one thing, I somehow doubt Krugman would be on board with that.
      Remember this equation, No Krugman = No PCS.
      It would be like MMT losing the support of Cullen Roche, only 60 times worse.

      • 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”

  7. Joe Firestone (LetsGetitDone) says

    This is a reply to Tom Hickey’s comment in the old thread:

    “Joe, I encourage you to deep pushing on the big one. No reason for there not to be many proposals on the table, from very incremental to the big one.
    Where I see a potential problem arising in going to no-bonds is the wrench that will throw into the gears of financial markets, which have come to depend on safe assets and benchmark yields. Of course, they could be forced to change, but that creates an obstacle that I think is needless.

    Treasury could still issue iaw demand securities at par wo/ interest and let the yield be determined at auction through discount from par if justification in terms of public purpose is found for the subsidy, or just at par wi no discount as a way for those not having access to reserve accounts to hold govt liabilities as assets rather than deposit accounts unless the account were fully insured by govt. Govt could also expand its E/EE bond program for “retail” savers.

    In other words, there are workarounds instead of going to no-bonds cold turkey and getting a mountain of pushback.”

    For me the most important thing is to get that $60 T in the TGA and then use to it take austerity off the table politically. Once the $60 T’s in the TGA and about 50% of the debt (40% intragovernmental and 10% or so short term debt in the first year) then I wouldn’t oppose accommodating the bond markets a bit by issuing some debt wile gradually paying off the longer term debt. A combination of IOR with some short term debt and further debt repayment would work well from my point of view, but I think it would be ill-advised to not fill the TGA first with enough credits to pay off all the debt and support deficitspending for 15 – 25 years, because the oligarchs will do everything they can to repeal the PCS legislation in the absence of a full public purse. In fact, I think that the smaller the amount of proceeds coming from PCS, the harder they’ll work to repeal the legislation, and the more money that’s in there, the more they’re likely to accept it as a fact of life.

    • Tom Hickey says

      “In fact, I think that the smaller the amount of proceeds coming from PCS, the harder they’ll work to repeal the legislation, and the more money that’s in there, the more they’re likely to accept it as a fact of life.”

      I’m just saying to be ready for the objections that will be forthcoming in any case.

      First, TPTB wants to keep the outcome of the game going even if the game changes. No-bonds changes the outcome. If they can still get the subsidized ride of safe assets, probably no big deal how the funding is done as far as outcome goes. But if the rent is cut, there will be pushback until the game is reversed or they are conquered. Odds favor them.

      The second consideration is that the world is still intellectually on the gold standard. If the coin were “worth” 60 T in platinum residing in the Fed vault, no problem. With that not the case, and no debt offset for the deficit, it will not be difficult to convince voters that this is a harebrained scheme that is bound to lead to hyperinflation.

      It’s going to be difficult to reverse that intellectual capture resulting in a cognitive ibias through education in the necessary timeframe, considering mainstream economics is neoclassical and finance is intellectually captured by the gold standard. Greenspan stated that he ran policy as if the US was on the gold standard.

      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.

      • 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.

    • Clonal Antibody says


      Beo did point out that the US has been operating without a budget since September on a continuing resolution. The continuing resolution expires on March 27th. So we revisit the whole debt ceiling/austerity issue starting next month.

      The Kabuki continues apace!

      To me this could be a potential opportunity for HVPCS throughout February, March and April.

      • Joe Firestone (LetsGetitDone) says

        Yes, Clonal. I agree. Also, no one’s ruled out using PCS w/respect to the sequestration negotiations or the budget issues. It seems less directly relevant to these. But that’s because people are thinking about “small ball” PCS. If $60 T is used, then, all of a sudden there’s no reason for not just repealing the sequestration, and then having no further tax increases or spending cuts in the new budget or CR. It also makes the debt ceiling irrelevant next time around. No need to raise it! The $60 T plan offers total victory for Democrats who are real Democrats, if Obama has the guts to implement it, if, that is, he’s even heard of it amidst all the TDC noise.

  8. Philip Diehl says


    “you can’t bail out the banks and bail out the economy. You have to bail out the people first; then they will bail out the businesses and the banks.”

    Yes, TARP was the biggest bait-and-switch in the history of used cars. But I don’t see where either the money or the political will comes from to do another bali-out. When the next crisis comes, I think we’ll go over the precipice, and it won’t be until we hit the ground that the country, out of desperation, will be willing to do what should have been done long ago: break up the banks and break the economic and political power of the oligarchs. HVCS could be a part of this.

    The old paradigm will have to collapse and thereby demonstrate its bankruptcy for all to see. Then the new one can emerge, as in 1929-1933 and 1861-1865.

    • Tom Hickey says

      But remember what else emerged in that period, in Europe, under similar circumstances. Hitler and Mussolini were political tools of corporate and banking interests and they could not have been successful without elite backing. Mussolini pretty much define “fascism” as the corporate state. The West was fortunate in getting J. M. Keynes and FDR instead. Next iteration, who knows how this will play out, a point that Strauss & Howe make in The Fourth Turning.

      • 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?

        • 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.

    • Joe Firestone (LetsGetitDone) says

      Maybe so, Phil. But, if Obama has some of these ideas in mind, then when the collapse occurs, he can move fast to take over the big banks, keep the credit flowing, get the public purse filled with $60 T HVPCS, and then bludgeon Congress into bailing people out with a full SS payroll Tax Holiday, State Revenue Sharing of $1,000 per person, a Federal Job Guarantee (JG) program, Homeowner bailouts, and a major infrastructure program. We’d be out the depression within 6 months

    • Clonal Antibody says

      I would agree with you in my more pessimistic moments.

  9. Clonal Antibody says

    Clonal Antibody
    You chickened out!

    But understandably so!

  10. Philip Diehl says


    “Take the coin, for instance. It would take them about a second to figure out that this is a direct route into the Treasury vault ready and waiting to drive their truck through if adopted.”

    What specifically do you have in mind here?

    • Tom Hickey says

      The coin is designed to show that the Treasury can fund itself from seignorage instead of debt, revealing that the debt limit is a needless fiction inhibiting spending. Once that is established, then the fight begins over where the “limitless” spending that coin seignorage provides. TPTB will do their utmost to garner the largest share of any extra spending that the coin enables. That’s what these folks do for a living.

    • Clonal Antibody says

      I think what he meant was that this could be an open invitation for the rich to feed at the Public Trough

      • Philip Diehl says

        Right. But how? To get to the funding enabled by HVCS, they have to go through the appropriations and/or tax-writing process. How is this different from today?

        For the last 30+ years, the starve-the-beasters have been cutting taxes on the wealthy in the name of deficit reduction while actually driving up deficits in order to use the debt as leverage to gut the New Deal, Great Society, and now Obamacare. While I agree the rich are likely to benefit from HVCS, I think its net effect will be progressive. It will break the GOP’s starve-the-beast strategy thereby relieving pressure to make massive cuts in entitlement programs and domestic discretionary spending.

        • Joe Firestone (LetsGetitDone) says

          Yes, I agree! It will be progressive. It would free Obama to be more progressive.

  11. beowulf says

    Suspend the debt ceiling = suspend the enforcement of the debt ceiling law.
    Once the issuance debt has been authorized (as it will be to pay current obligations through May 2013), Congress lacks the power to un-authorize it after the fact.

    • Clonal Antibody says


      You chickened out! 😉

    • Clonal Antibody says

      If that is the case, if I were Obama, I would make the entire payments authorized by the Congress for the year, and disburse them by May 18th. This would be a quick boost to the economy.

      In other words, “if I am going to be hung for a lamb, I might as well as be hung for a sheep!”

      • beowulf says

        Again the bill doesn’t allow prepayment of this sort, the President is authorized to issue debt only for obligations that must be paid prior to May 18.

        “make the entire payments authorized by the Congress for the year, and disburse them by May 18th. This would be a quick boost to the economy.”

        You mean appropriated by the Congress (authorization is something different), even if there was a budget in place till the end of the fiscal year (end of September), the govt can hardly prepay federal workers 8 months worth of paychecks or pay contractors before they fulfill their contract obligations. More to the point, there is no budget in place. The govt is being funded with a Continuing Resolution that expires March 27.

        • Clonal Antibody says

          I forgot that that is where the March 27 date comes from.

          I am afraid, that there is no avoiding Austerity Alley. I think Philip may be right in his pessimism.

  12. Clonal Antibody says


    This is important!

    What does suspend enforcement mean?

    From House votes to suspend debt limit

    House Republicans voted to suspend enforcement of the debt ceiling through May 18

    What does House votes to suspend debt limit mean?

    They did NOT INCREASE the debt limit but suspended enforcement. In other words, the debt limit is unchanged. If the administration exceeds the Debt limit, it will be in violation of the law!

    Does that mean, that the Government is free to issue as much debt as it wants till then? Or does it mean that the law will not be enforced till then, and the debt ceiling remains. In other words, if you pass the debt ceiling, then after May 18th you are in a lot of hot water, for now the debt ceiling law can be enforced, and that the administration would have been deemed to have violated the law.

    Could you get somebody in the Democratic Party to clarify this? The administration could be setting itself up for impeachment by the Congress after May 18th.

    • Philip Diehl says

      This isn’t a trap, and there’s no danger that Obama will be impeached. This vote is the House GOP’s retreat from its ignominious defeat on the debt limit, like Lee retreating across the Potomac after he ordered Pickett’s disastrous charge up Cemetery Ridge.

      Here’s a good account:

      • Clonal Antibody says


        you are quoting the same article as I did. Please point out the flaw in my logic.

        1. The debt ceiling remains unchanged
        2. If the government issues more debt than the ceiling, it is in technical violation of the law.
        3. The enforcement of the debt ceiling law is suspended till May 18th

        Why can’t Obama be impeached for violating the Debt Ceiling law after May 18th?

    • beowulf says

      Someone emailed me about this yesterday (the ellipses are in the original):
      “Looks like they propose to just suspend the ceiling rather than raise it by a small amount…. So Treasury could just issue any amount of Treasuries for this time until May 2013… ie “no ceiling”…”

      —– I wrote back:
      That’s actually kind of nice, if somethings happens where Uncle Sam really needs to spend some money (war in Korea, string of bank failures), Tsy has an unlimited credit card. The catch is, they can’t prefund the way you suggest, only for obligations that must be paid prior to May 2013 .Amend it to May 2083 and we’ll be fine. :O)
      As to Clonal’s point, the real debt ceiling would be wherever it was when the suspension ended (since Congress can’t revoke authority for T-bonds that have already been issued).

      • JKH says

        They can’t pre-spend.

        What’s the law that says they can’t pre-fund?

        They pre-fund in effect every time they have an auction, since that gives them immediate surplus balances in TGA/TTL.

        Spending and funding are separate actions, with separate limit processes.

        Why not capitalize on the suspension of the contradictory constraint that caused the problem in the first place?

        • beowulf says

          Geez, since apparently if I say the Sun is shining you guys will still need a link to a weatherman who says the Sun is shining, here you go.

          1. The bill doesn’t just suspend the debt limit, it raises it.
          Section 1(a) of the bill suspends the debt limit through May 18. You might think that the current limit would go back into effect on May 19. And it would, except for section 1(b) which increases the debt limit to reflect new debt issued between now and then.
          The bill thus increases the debt limit by an amount to be determined later. That unusual structure lets lawmakers tie the debt limit increase to a specific date, rather than an amount. It also means they get to increase the debt limit, presumably by several hundred billion dollars, without having to expressly vote for such an amount. It’s a less transparent, and therefore less painful, way to increase the debt limit.

          2. Treasury can’t build up an enormous cash hoard.
          In principle, Treasury could use this reprieve to build up a pile of cash before the new limit is determined on May 19. For example, Treasury could issue an extra $500 billion in debt and hold the proceeds as cash to cover deficits once the new limit is in place.
          But the bill drafters already thought of that. To prevent such gaming, the bill limits the obligations that could be financed with new debt. An obligation isn’t covered “unless the issuance of such obligation was necessary to fund a commitment incurred by the Federal Government that required payment before May 19, 2013.” In short, no funny stuff.

        • JKH says

          thx –

          not worthy of that additional confirmation, although it was the first time I saw it expressed this way:

          “section 1(b) which INCREASES the debt limit to reflect new debt issued between now and then”

        • Clonal Antibody says

          see also the other sections not highlighted by Beo

          3. Nevertheless, the bill could allow Treasury running room well beyond May 19.

          We first hit the debt limit on New Year’s Eve. Since then, Treasury Secretary Geithner has raised cash by engaging in extraordinary (albeit now-familiar) measures such as stuffing IOUs into federal employee retirement accounts in place of the federal debt they own.

          A big question is whether the bill would allow the Treasury Secretary to undo those extraordinary measures and reload for the next time we hit the debt limit. The folks at the Bipartisan Policy Center, who do a great job tracking the debt limit, believe that it would. If so, the bill would put off the day of debt limit reckoning well beyond May 19.

        • JKH says

          right, that fits

          and in fact it all fits with what beo had previously noted

          but the point is that “suspension” is an entirely ambiguous if not misleading word to describe what’s actually going on here

          words do matter

          the debt ceiling is being increased – just covering a shorter time period than would normally be the standard

          from a broad time management perspective, its analogous to issuing 90 day bills instead of 1 year bills or 2 year notes

          buys you less time in either application

          but the debt ceiling is being increased

        • Clonal Antibody says


          PERIOD.—Effective May
          3 19, 2013, the limitation in section 3101(b) of title 31,
          4 United States Code, as increased by section 3101A of such
          5 title, is increased to the extent that—

        • Ramanan says

          Yes the Treasury can certainly do that and pre-fund before May 19th (or 13th?) – for a long period such as 6-months or a year. But they won’t do it because it is kind of against the spirit of the agreement.

        • Joe Firestone (LetsGetitDone) says

          Was there an agreement? I have the impression that the Rs had their retreat, decided that now wasn’t an opportune time to hold the country hostage with another crisis, but didn’t want to go one record voting for raising the debt ceiling without also getting some spending cut concessions, which Obama didn’t want to give at this point. So, the Rs suspended the ceiling for the own purposes to escape accountability and avoid primaries from the right. So, what makes you think that the Administration, either explicitly or implicitly agreed not to pre-fund through super-heavy debt issuance?

          In fact, I wonder if the limiting factor isn’t a fear that if they issue too much debt now, they might increase the supply of debt instruments in the market and drain too much in reserves?

        • JKH says

          Otherwise, it would appear the debt ceiling must be raised in effect to conform to a forward date cumulative spending limit – not just suspended.

      • Clonal Antibody says


        They did not suspend the debt ceiling or increase it. They just suspended the enforcement of the debt ceiling law. So what does that mean?

        They may not be able to revoke authority for the issued T- Bonds, but they sure as hell could impeach the President for issuing them!