Trillion Dollar Coin Explodes: Krugman, Congress is talking about it

Krugman talks long and loud on the Coin:

“First, as a legal matter the Federal government can’t just print money to pay its bills, with one peculiar exception. Instead, money has to be created by the Federal Reserve, which then puts it into circulation by buying Federal debt. You may say that this is an artificial distinction, because the Fed is effectively part of the government; but legally, the distinction matters, and the debt bought by the Fed counts against the debt ceiling.

The peculiar exception is that clause allowing the Treasury to mint platinum coins in any denomination it chooses. Of course this was intended as a way to issue commemorative coins and stuff, not as a fiscal measure; but at least as I understand it, the letter of the law would allow Treasury to stamp out a platinum coin, say it’s worth a trillion dollars, and deposit it at the Fed — thereby avoiding the need to issue debt.

In reality, to pursue the thought further, the coin really would be as much a Federal debt as the T-bills the Fed owns, since eventually Treasury would want to buy it back. So this is all a gimmick — but since the debt ceiling itself is crazy, allowing Congress to tell the president to spend money then tell him that he can’t raise the money he’s supposed to spend, there’s a pretty good case for using whatever gimmicks come to hand.”

Krugman does not know it yet, but he will figure out the coin is Platinum Coin Easing. If we are forced to use the coin, the accounting shows the impact will be similar to quantitative easing.

It’s just a matter of time before Obama brings up the coin. It’s a few months at most. Here is Rep. Jerry Nadler talking about the coin:

“There is specific statutory authority that says that the Federal Reserve can mint any non-gold or -silver coin in any denomination, so all you do is you tell the Federal Reserve to make a platinum coin for one trillion dollars, and then you deposit it in the Treasury account, and you pay your bills,” Nadler said in a telephone interview this afternoon.

I asked whether he was serious.

“I’m being absolutely serious,” he said. “It sounds silly but it’s absolutely legal. And it would normally not be proper to consider such a thing, except when you’re faced with blackmail to destroy the country’s economy, you have to consider things.”

I don’t think the coin will be used, but the idea of the coin has now hit critical mass. He’s a congressperson, so he only knows what his aides are telling him. If his aides are talking about it, you can be sure all of the democratic aides are talking about it over drinks. It’s just part of the everyday conversation in the support staff of congress.

Nadler is right – it’s not normally proper to consider such an extreme tactic. It is terrible it had to come to this, but here we are. It would be good if we just didn’t have a debt ceiling at all. Then, it would be so much nicer if the government had a well established, and commonsensical method to allow for the Treasury to print money directly – along with rules on how much and when this could be done.

But we don’t have those nice things, so we’re forced to watch the spectacle of the greatest country in human history resorting to a legal trick, in order to pay its bills.

If you look back at my writings on the Traders Crucible, I was against the Coin for a long time. I thought it was a farce, and degraded our nation. But I was wrong.

The coin is easy to understand. I can explain how it works to my 65 year old mom, and she totally gets it. The coin makes explicit we are printing money. We’re making money out of nothing, and it can help our society. Those are some of the good part of the coin.

But there are bad parts of the coin too. The dangers of printing too much money exist. These dangers are far from us today, almost comically far away. But this will not always be the case, and now everyone knows we can print money.

Giving the power to politicians to print money is a bit terrifying – this power has caused problems before. Although, looking at the list of hyperinflaitons, you’ll be struck by the lack of long term impact of hyperinflation. Poland isn’t doing all that badly today, and recovered faster from their bout of hyperinflation than we have from our little depression.

Every policy, every choice, every action has a string of consequences – and not all of these consequences are good, even if the overall impact is positive.

(Update 1-4-2013 4:44pm  The most interesting man in the world could decide to end the debt ceiling crisis at any time. https://twitter.com/DosEquisSR/status/287323265981112320  )

(Update 5:31pm I finally get my dream of a Zero Hedge Post on the Trillion Dollar coin, with a completely awesome chart on the total value of platinum available. )

(Update 6:36pm We are going international with an article in Spiegel Online)

Comments

  1. Robert Rice says:

    Krugman:

    In reality, to pursue the thought further, the coin really would be as much a Federal debt as the T-bills the Fed owns, since eventually Treasury would want to buy it back.

    He seems to believe his claim is self-evident. Perhaps I am being obtuse at the moment; why would the Treasury Secretary care to “buy back” money created ex nihilo to fund government spending or utilized to pay down government debt? Is that money creation and subsequent spending not debt free? Where is the resultant liability to the Treasury?

    The platinum coin proposal is not the fundamental issue before us. What the PC brings to our attention is a much needed conversation on government self-financing, by whatever means. It is the crux.

    Leaving our history of periodic government self-finance aside and considering its theoretical value, in my judgment, there are many advantages to this policy. The counter-concern of the naysayers is abuse. What if the government creates money in excess and causes harmful levels of inflation, or is wasteful, or whatever? I believe this to be a specious and self-refuting argument, one that could be leveled against the very idea of government itself. What if we give our peers authority to police us, to wage war, to tax, to borrow, to ___________and they abuse it? I do not find the potential abuse of authority to be a sufficient basis for rejecting authority. The implementation of an economically useful and beneficial policy is not to be dismissed over slippery slope what ifs. Yes, government will have to use its authority responsibly, as it must with any of its authority. Responsibility is the essence of our union. There is no government which will operate effectively without the individual choice to honor our authority and hold each other accountable to it. Our government currently has enough weaponry to render the planet uninhabitable, and yet we seem to find a way to sleep at night. I regard harmful levels of inflation far less serious than this.

    The abuse of government self-finance comes with natural consequences for those who abuse it. Undoubtedly excess inflation would result in a backlash from the voting citizenry, an important campaign advantage available to the incumbents’ challengers. Should the elected have any desire to retain their representative employment, they would be wise to use the authority responsibly.

    There is no reason Government self-finance cannot be implemented with checks and balances to minimize the risk of abuse while allowing for the benefits to flourish. Perhaps giving a more explicit authority to government for self-finance and delegating it to the Treasury Secretary helps keep money creation out of the hands of Congress or the President (although the Secretary could be removed from office, should that be necessary; this oversight of the Secretary would be similar to Congress’ oversight of the Federal Reserve Board). Perhaps a limitation to the quantity of money over some period of time would be useful (I’m not particularly keen to this idea, but remain open to discussion on it), similar to self-finance utilized during the Civil War. The merits or demerits of various risk reduction measures can be evaluated. We should however agree government self-finance has substantial value, and the risk can be minimized.

    The Treasury Department should share in the dual mandate of the Federal Reserve and have an additional tool to facilitate this end. Our forefathers replaced the Articles of Confederation when they were found wanting, Articles they regularly complained left the government with too little authority to enact certain useful policies. In its place, our Constitution was written and ratified, with a goal toward a more perfect union. Hamilton and others were eager to achieve a functional and happy, unified country. We should not lose sight of this. Law has an important place in civil society–it is to serve the cause of peace and equitable justice for all–but flexibility and openmindedness to improving upon current code also has an intrinsic value. I believe it is irrefutable government self-finance will lead to just such an improvement. Toward a happier, healthier union we look.

    • “There is no reason Government self-finance cannot be implemented with checks and balances to minimize the risk of abuse while allowing for the benefits to flourish.”

      The “checks and balances” are already built into the system– Tsy can only spend what Congress appropriates. Any appropriation outlays in excess of receipts (and of course the tax code is written by Congress as well) must be funded by either borrowing or with coin seigniorage.

      • Robert Rice says:

        Sure, I think it is arguably true our current system has sufficient C&Bs. At the time of writing though, my concern wasn’t to evaluate whether appropriate/sufficient C&Bs are in place. The goal was to look at the bigger picture, not get too bogged down in the minutiae of the trees. Even if it proves to be true there isn’t sufficient C&Bs currently, there’s no reason there can’t be. Hopefully you can appreciate I was tryin’ to keep the post at a more manageable length, instead of describing our current system, looking at its pros and cons, you get the idea. Baby steps ;-) Step one, open minds to government self-finance, step two, evaluating implementation.

        Bear with the choir preaching, but we have a history of self-finance, which is in some respects currently legal, e.g. the platinum coin, U.S. notes (though not nearly enough), I would argue the Fed using money creation and OMOs to replenish primary dealer accounts so they can in turn purchase more treasuries at auction hence funneling said created money to the Treasury is pretty close to government self-finance (although this money is accounted for on the Treasury’s balance sheet as a liability, which is really just an accounting fiction once the Fed holds the debt; the government owes itself money; why are we worried about that “debt” exactly?). The government self-finance waters are muddy though, not as clean and explicit as they really ought to be. We would all do well to accept the concept of government self-finance and thoroughly clean up the procedures/means of doing such, along with the C&Bs, and what not. This IMO is what our on going debt ceiling debacle and paranoia over boogie man debt encourages us to look toward.

        • Somehow we trust the fed to be prudent and pragmatic. We should find some ways to make government spending and money creation prudent and pragmatic.

          Our current strategy is to jump out from behind a pole wearing a gorilla mask. We terrify people into supporting a balanced budget, instead of using fiscal policy as a tool to make our lives better.

          People talk about the failure of functional finance, but the late 40s through the 70’s were far, far better for a larger percentage of our population than the 80s-2008 era, and the blowout end wasn’t nearly as bad.

        • It does need to be a massively cleaner system for getting fiscal policy done. Today, it’s a mis-mash and ends up confusing nearly everyone.

          We borrow privately created money, which usually works ok but has significant problems with increasing leverage against real estate. Then, we perform QE which is almost like printing money by the government, but has the additional impact of removing very safe financial assets from our system at a time when the money markets are begging for more safe financial assets.

          A very good option at this point would be to just spend money directly into the system – but the policy by which we can do this is the platinum Coin option. Of course, this is just a terrible long term solution, and it doesn’t have any C&B at all.

          I am very, very glad the coin is getting traction right now, simply because it will cause the idea of the U.S. defaulting on it’s debt to die away completely.

          Then of course, we can focus on debasing. ;) I cannot wait until Zero Hedge gets up the Monetary Realism = enforced hyperinflation. It’s just a matter of time.

          • Robert Rice says:

            It amazes me Congress commits to spending, and then as a country we sit around arguing about whether to fund it. If Congress commits to the spending, the Treasury needs to fund it, or Congress is setting the country up for default. Is it responsible fiscal policy to commit to spending and then argue about whether to fund those commitments? We should not sacrifice the faith and credit of the United States or even threaten such. That has been a priority since day one, and so it should remain. Government self-finance eliminates the nonsense over whether we’re going to fund the spending. Eliminating the debt ceiling would have the same effect (although a less desirable option IMO, as the accumulating debt affords the deficit hawks regular ammo to deceive the masses into believing the country is bankrupt). If we as a country need to argue, let’s argue about what the spending is being allocated to or about how much, not whether we fund it.

    • Detroit Dan says:

      Brilliant! Thanks…

    • Cullen Roche says:

      We reside in a capitalist economy that constrains the power of govt by design. Why is that so hard for MMT to understand and appreciate? The entire design of our political system constrains the govt in various ways. No branch has unchecked powers. And the power to create money is certainly not something we just leave up to a few people in the govt. Yes, there are loopholes and we all know the govt could (in theory, Modern Monetary Theory) just pluck from its money tree. But that’s not how the system has been designed. It’s almost like MMTers read JKH’s CIA and then just decided to ignore it because it made too much sense.

      The govt is constrained by design. For a reason. Just like you’re constrained from killing your neighbor. Yeah, you can do it and the govt kills people all the time, but that doesn’t mean this power is totally unchecked. The govt has chosen to outsource money creation to an oligopoly of pvt entities. That’s 100% in keeping with our govt’s design and our economic design. There’s no reason to go off in the MMT fantasy land where we ignore the actual institutional design and just start stating the obvious (that the govt could, in theory, create money from nothing). We can understand everything MMT teaches and still stay completely within the realm of reality and our institutional design. The MMT myth is totally unnecessary and a complete distraction to understanding reality.

      This loophole is a temporary fix to a silly problem. I like Barro’s idea – eliminate the debt ceiling in exchange for eliminating this loophole. No-brainer.

      • Robert Rice says:

        Cullen, government self-finance has been around a lot longer than MMT. They have no monopoly on the proposition. I don’t even think about MMT anymore except when you mention it.

        Government self-finance isn’t a fairy tale fantasy, the Treasury has this authority right now. How “loopholee” the platinum coin is, is up for debate. I’ve argued it isn’t that loopholee, but it’s irrelevant even if I prove mistaken. The creation of U.S. notes is current Treasury authority for government self-finance, but as we’ve discussed before, the quantity is limited by a relic of a law that could simply be updated. Update the limitation and print million dollar notes. Same effect as the platinum coin, no one can argue it’s a loophole, problem solved.

        You can only go so far with debt given interest becomes excessively burdensome at some point. If we stay on our current trajectory, the government has no choice but to eventually create money.

        • Cullen Roche says:

          No, the Treasury prints cash to meet the demands of federal reserve banks who issue it to banks whose clients need it to draw down accounts in inside money. The Treasury does not print cash to finance its spending. Cash is a facilitating feature in a system designed around inside money. Neoclassicals and some heterodox schools get this relationship entirely backwards. The entire monetary system is designed in a very specific and deliberate way to ensure that no entity has too much power. Not even the banks control the money supply because their issuance is demand based! It’s quite logical. This shouldn’t be controversial. Anyone arguing for self issuance does not appreciate or care for the actual deliberate dispersion of powers here. You might as well get rid of all the checks and balances in govt if this is the line of reasoning that is to be used because nothing is more powerful an potentially corrupted than the ability to create money.

          • Robert Rice says:

            There is a difference between Federal Reserve Notes, which as you pointed out the Treasury prints on behalf of the Fed to meet the needs of the public demand for cash (and what not), and United States Notes, which the Treasury used to print (and still has the authority to print but chooses not to because of redundancy with FR notes) for government self-finance. Government self-finance via “Green Backs” is how the Union funded the Civil War:

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

            For the Federal Goverment to carry out its duties, it needs money to spend. When taxes are insufficient, borrowing is not always an option. This leaves government self-funding, which has worked in the United States before. It can work again.

            But frankly the historical precedence is irrelevant. Our concern is the truth value of propositions and the soundness of arguments. Here’s my argument:

            P1: Government needs money for spending to operate and accomplish its duties.
            P2: There are three avenues to funding government spending; taxes/fees, borrowing, and money creation for self-funding.
            P3: Taxes/fees and borrowing are incapable of funding government spending in all circumstances.
            C: Therefore, money creation for government self-funding is necessary under some circumstances.

            The argument is valid, and as long as the premises are true, the argument is sound. In which case, which premise is false? The only one I can imagine you disputing is P3. Proving the converse strikes me as a tall order, but if you’d like to take a swing, I’m open-minded to your thoughts.

            • Cullen Roche says:

              The argument is only valid as long as the govt changes the way it finances itself. At present, there is no need for US Notes because they “serve no function that is not already adequately served by Federal Reserve Notes”. Of course the US govt could choose to finance itself if it wanted to. But again, this is a very specific change in the way the govt issues money. Right now, the US govt must procure funds via taxes or bonds or this one loophole. And I very seriously doubt this loophole will exist in 5 years. We all know the US govt could pluck from its money tree if it wanted, but that is not the current design of the system. Perhaps in extraordinary times (like a civil war) the US govt might change the laws for various purposes, but until that happens this whole “self funding” thing is a moot point. The US govt is designed in a very deliberate fashion so as to disperse the power of money creation AWAY from the govt. Again, this shouldn’t be controversial. Anyone who understands the structure of our govt and economy can see that this all makes complete sense.

              • Robert Rice says:

                The argument is only valid as long as the govt changes the way it finances itself.

                By definition, an argument is valid if the conclusion necessarily follows from the premises. The reason my argument is valid is because the conclusion does in fact necessarily follow from the premises. There is no contingency “if such and such changes, then the argument is valid;” it already is valid. If you’d like to dispute that, then like a good logician, show the formal fallacy.

                Because you won’t be able to show the formal fallacy (there is none), the conclusion follows from the premises. And because the premises are true, the argument is also by definition sound, which implies the conclusion is true. Money creation to fund government spending is a necessity within some circumstances.

                In which case, to be consistent with the truth (i.e., good economic theory), if you believe the government can only tax or borrow, then you must also believe the government’s existing system is flawed or the circumstances wherein self-funding is required will rarely if ever arise. I don’t imagine you believe the latter since I can point to a number of circumstances in U.S. history where self-funding was needed and used, which is to say the empirical evidence stands against such a belief. So what are you arguing with me about exactly if you are being consistent and hence believe the government system is flawed? I’m advocating for government self-finance because it is a matter of rational economic theory; your point in opposition is what? You want to focus on the secondary issue of current U.S. fiscal operations? Current U.S. fiscal operations do allow for U.S. government self-finance. It’s already on the books–regardless of your belief about trillion dollar platinum coins and loopholes, U.S. Notes were explicitly created for government self-finance. The problem is there is a very old limitation on the amount of issuable paper for such purposes, that and our economy has grown dramatically since such times (at the time of the Civil War hundreds of millions of dollars was a whole bunch of money). Following the Civil War, the government reduced the amount of issuable U.S. Notes; many were not very supportive of the idea because they retained paranoia over paper money and held to foolish beliefs about metal being “real money”. Is our goal to protect sacred cows and no longer useful laws or to improve our economy for us and our times?

                Our fiscal operations and monetary system have not been static and fixed throughout our history. There’s been arguments over these issues for 200+ years. Changes to the system have been made, changes back have been made, but underlying all of this fuss is the material issue; what’s the good argument, the good theory, the truth? That’s what matters, and I do believe government self-finance is just that.

                • Cullen Roche says:

                  Robert, you and I both know there is a statutory limitation of $300 million for US Notes. If you want to argue that that sufficiently backs your argument in a system where the govt has over $16T in liabilities then fine. Then I also have a black mole on my ass that sufficiently categorizes me an African American! ;-)

                  These notes are not only a relic of the pre-Fed era, but they are totally insignificant in the larger scheme of things and there would need to be a required change in the statute to make them relevant. So, your point is irrelevant unless laws are changed. Unless 0.018% is statistically relevant to you….

                  • Robert Rice says:

                    I didn’t think you had an answer. Your comment was cute though, I’ll give you that.

                    • Cullen Roche says:

                      Being able to issue 0.018% of the outstanding liabilities is your solution to the problem? The US govt spends 10 billion dollars a day and 300 million in US Notes is your irrefutable evidence of self funding? Talk about a Pyrrhic victory….Robert, let’s be serious. That’s an irrelevant number. You know it. I know it. The coin idea is silly, but at least it’s not insignificant in numerical terms…US Notes aren’t proof of a damn thing except an era long gone that doesn’t exist in any relevant sense and ain’t coming back.

                  • Robert Rice says:

                    You’d mentioned awhile back that mommy and daddy gave you a good education. Well, I’d hate to fault mommy and daddy for your shortcomings, but they should’ve taught you not to bear false witness about another man. Perhaps you weren’t a good listener? Whatever the case is, when you want to deal with my arguments, let me know and we can have a substantive conversation. I’ve been clear, and you seem to be going out of your way now to oversimplify and otherwise misrepresent my position rather than making a genuine effort toward an evaluation. It’s all rather ironic given the other day you were railing against the academic economic establishment for their failure to hold their beliefs as falsifiable. What was it Jesus said about taking the 2×4 out of your own eye before you insist on removing the sliver from another’s? I think that transgression begins with an “h”.

                    • Cullen Roche says:

                      “Bear false witness”? Bartender, I’ll have what Robert’s having!

                      I said US Notes were statistically irrelevant and would require a law change in order to be relevant. This whole conversation has been about cash and its relevancy as a self funding source. In your initial response to me you said we could:

                      “Update the limitation and print million dollar notes.”

                      In other words, CHANGE THE LAW AND PRINT MILLION DOLLAR NOTES. So US Notes require a law change because they do not presently meet the needs for self funding. Which is exactly what I said from the start. You already agreed with me before you declared your Pyrrhic victory and then accused me of “bearing false witness”. I didn’t bear false anything. I didn’t misrepresent your position. I used your own quote against you. You already agreed with me that US Notes require a law change, which was the point I originally made (the system is not currently designed for self funding of govt)….Sheesh. No need to get upset. We agree that self funding is an option if rules are changed or loopholes are used. What’s to get get worked up about?

                      Oh, and for future reference, you should leave people’s parents and personal insults out of future comments. Insults are where losing arguments go to die. You will NEVER build your own argument up by tearing someone else down personally. Never.

                    • Robert Rice says:

                      Cullen,

                      You wrote:

                      Being able to issue 0.018% of the outstanding liabilities is your solution to the problem?

                      Prior to this I wrote:

                      The creation of U.S. notes is current Treasury authority for government self-finance, but as we’ve discussed before, the quantity is limited by a relic of a law that could simply be updated. Update the limitation and print million dollar notes. Same effect as the platinum coin, no one can argue it’s a loophole, problem solved.

                      Still having difficulty identifying the misrepresentation? I never argued or even suggested the current quantity of U.S. Notes the Treasury has authority to issue is the solution to our spending shortfall and/or debt.

                      At any rate, I’m certain there are more productive, fruitful endeavors for me to pursue. You of course remain welcome to deal with my actual arguments.

                    • Cullen Roche says:

                      You’re just being difficult for no reason. You explicitly stated that US Notes were evidence of existing self financing:

                      ” Current U.S. fiscal operations do allow for U.S. government self-finance. It’s already on the books–regardless of your belief about trillion dollar platinum coins and loopholes, U.S. Notes were explicitly created for government self-finance.”

                      Then I pointed out that your point was irrelevant because it would require law changes to be statistically significant. A point you agreed with from the start. So we agree. You know this law must change. No need for the screaming, I am better, my time is so important stuff….you made a statistically irrelevant point knowing it was irrelevant. Big deal. So Congress can change the laws. But dont just blatantly misconstrue what US Notes actually are so you can say “once upon a time”….it’s a waste.

                      I don’t see the big disagreement here and what’s worth getting upset over. The US govt is currently designed so that it is not self financing. Yes, there is the coin loophole and your $300MM measure which allows the govt to spend for a few minutes. Yes, we could change the laws. But these laws are self imposed for good reason. There is a very rational dispersion of power that has been designed. There’s nothing irrational about it and it’s totally in keeping with our form of govt and our capitalist economy. I don’t see the big fuss.

            • Hi Robert,

              You wrote;

              “Here’s my argument:

              P1: Government needs money for spending to operate and accomplish its duties.
              P2: There are three avenues to funding government spending; taxes/fees, borrowing, and money creation for self-funding.
              P3: Taxes/fees and borrowing are incapable of funding government spending in all circumstances.
              C: Therefore, money creation for government self-funding is necessary under some circumstances.

              The argument is valid, and as long as the premises are true, the argument is sound. In which case, which premise is false? The only one I can imagine you disputing is P3. Proving the converse strikes me as a tall order, but if you’d like to take a swing, I’m open-minded to your thoughts.”

              Some comments below;

              P1: Agree. (if you belong to that ideological camp)
              P2: Money creation for self-funding is complicated as you need to take time/cycles into perspective. Short term; yes, it is possible to do this. Long term: it is possible (we have done it) although not sustainable in long term as money creation is simply slicing the pie of wealth into additional pieces – as such, printing money does not create more wealth and if it did, we could all be happy campers just printing all day long. (wouldn’t that be great)
              P3: Agree. However, as any responsible person or business entity abiding to common rules – if you are out of money to spend, you shall not spend. Period.

              C: Unfortunately, your Keynesian conclusion is what has brought us this financial bomb we are in currently since we have gradually spent above our means over several decades and consequently Nixon had to close the gold peg due to too much of this (lost correlation with the scarce amount of gold due to too much paper money per ounce reserves). After 1971 and the break from the gold peg money printing has become unrestrained (since paper is not pegged to anything static any more) and therefore we currently have an unprecedented credit expansion which we can only overcome, as Ludvig von Mises put it, in one of two ways, a) we acknowledge that we have spent above our means now being broke and subsequently stop spending (very deflationary and hard/impossible politically) or b) we continue living in our fantasy land and go on printing to continue spending above our means and subsequently reach currency collapse due to hyperinflation/lack of trust in the paper.

              This has been proven many many (and most importantly all) times to be the outcome of irresponsible printing/dilution of money.

              Respectfully,
              Jan

            • Oilfield Trash says:

              Robert

              Here’s my argument in response

              P1: Government needs money for spending to operate and accomplish its duties.
              P2: There are three avenues to funding government spending; taxes/fees, borrowing, and money creation for self-funding.
              P3: Taxes/fees and borrowing are incapable of funding government spending in all circumstances.
              C: Therefore, money creation for government self-funding is necessary under some circumstances.

              Your current wording of P2 is not necessarily ‘descriptively false,’ but it definitely implies restrictions to create money for self-funding are absent from your argument. Nothing wrong with that, until you analyze your argument in the domain for which it was offered.

              A domain specifies the conditions under which a particular argument will apply. If those conditions do not apply, then neither does the argument.

              Since in the USA there are restrictions to the creation of money for self-funding; P2 with it current wording will not apply. If you remove P2 C is false.

              • Robert Rice says:

                OT,

                I appreciate your comments and genuine attempt to deal with the argument.

                If you remove P2 C is false.

                No, if you remove P2, the conclusion wouldn’t necessarily be false, the argument would be invalid.

                As to the argument’s validity and the truthfulness of P2, I was making an argument for the necessity of FG self-finance. The implication of the argument is; even if I was to grant current policy/law does not allow for self-funding, it should change. In other words, current law/policy is irrelevant to what the FG ought to be doing. Ought was my concern.

                • Oilfield Trash says:

                  Robert

                  “No, if you remove P2, the conclusion wouldn’t necessarily be false, the argument would be invalid.”

                  You are correct, my logic is somewhat rusty, and C would be invalid not necessarily false.

                  We agree (I hope) that in the context of the current domain C is invalid and therefore not relevant.

                  “As to the argument’s validity and the truthfulness of P2, I was making an argument for the necessity of FG self-finance. The implication of the argument is; even if I was to grant current policy/law does not allow for self-funding, it should change. In other words, current law/policy is irrelevant to what the FG ought to be doing. Ought was my concern.”

                  In this context your argument, at least to me, seems to be transforming to one that is heuristic; since C as structured in the current domain is known to be invalid, but as you state above C was offered as a first step towards the more general conclusion that the FG ought to be doing self-finance.

                  No problem offering C in a heuristic context, but without offering empirical evidence C would generate a positive heuristic, you run the risk of reasonable criticism C has an ideology bias.

      • It comes down to the fact that the government ultimately has two and only two choices when it wants to get hold of some real economic resources: either it expropriates them outright, or it borrows them and replaces them at a later date. That’s it. There is no third choice.

        All of these things like taxes, selling bonds, the platinum coin and the “operational” ability to issue as much nominal money as you like are at the end of the day simply ways to achieve (a) or (b), or some combination of the two.

        The government is obviously limited in its ability to borrow as much as it likes from the real resources of the economy because its ability to return those economic resources is itself limited. And if the government does not intend to return what it borrowed, because, for example, there is no entity above it that can force it to do so, then it did not borrow the resources; it expropriated them.

        • I massively disagree on this, at least the way you phrase it now.

          The government can create real wealth when we are not at full capacity. By cutting taxes or spending more, it can create more demand and cause idle, wasted resources to become used.

          The most precious resource we have is human capital, and having people sit on their ass instead of working is a tragedy and waste. We’re all poorer when this happens, and the government can (sometimes) correct this problem.

          • Mike, I agree that the government can create output, value, wealth or whatever. But how does it do so? It can’t just magic things out of thin air. It has to do get hold of some economic resources (people, land, stuff), and put them to work, just like anyone else who wants to create something. Then the question is, how does it get hold of those resources, to which the answer can only be (a) or (b).

            • Here is the disagreement: Monetary recessions happen – and government can help prevent/mitigate those monetary recessions. Preventing those real resources and real growth that would not haven been created or happened.

              That’s how govt can create real wealth without borrowing or appropriating. It’s not like I recommend this as the only way to stimulate growth, but it can happen, and is happening right now. The Fiscal multiplier is around 1.5 with monetary policy at the zero bound, which means government is creating real wealth.

              • I agree that monetary recessions can happen. To me, a monetary recession suggests something where the solution won’t require the governemnt to borrow or expropriate anything. By definition (surely), what it requires is money, which the government can issue without cost.

                What I was alluding to up there (and probably a bit opaquely), was how the government finances its spending. I don’t think that the fact that the government can issue currency is that significant as far as being a financing source goes. It’s certainly not true that it gives the government unlimited ability to spend, unless you think that it’s true that the government can expropriate an unlimited amount of the economy’s resources.

                • Cullen Roche says:

                  V, sorry if I am interrupting, but resources precede taxation naturally. So the govt moves resources from private to public domain for public purpose. I think we’re on the same page here. Currency is what MR calls “outside money”. It serves to support inside money (bank money). The money system is designed around the private sector with inside money taking the dominate role and govt using outside money in various ways to influence inside money.

              • Mike, Where the issue might be is that I don’t find the government’s ability to issue money (or platinum coins for that matter) to be that economically significant as a source of finance. Ultimately, it’s just another way to skin the same cat.

            • Cullen Roche says:

              Hey V, the govt can put resources to work by redistributing them. So, take from Peter to pay Paul via taxes for X work or it can deficit spend by selling bonds to Peter thereby obtaining funds to pay Paul for X work. I like to think of this as a perpetual flow of income (plus NFA in deficit spending). In a time like now when the output gap is wide this is positive. In essence, MRists are demand siders when the economy is operating below full capacity. Thoughts?

              • I think that we’re all agreeing here, but I’m just not being very clear about what I’m saying.

                The question I was trying to address is, given that if the government wants to do something, it needs to take control of some resources to do it, how does it go about doing so.

                It can either borrow resources or it can (ultimately) expropriate them as taxes. Some of these activities will make the economy bigger, some (I think we can probably agree) smaller and some will have no effect.

                Whatever happens, it remains the case that the resources it used to do so had to come from somewhere.

                • Cullen Roche says:

                  I can’t say that you’re empirically right, but I would certainly guess that you’re right. The govt could theoretically do some very stupid things with the way it procures funds and then utilizes those funds. I think that’s ultimately the problem most people have with pvt vs public spending. Pvt spending is inherently more efficient because if it’s not efficient then it dies whereas public spending that is inefficient suffers no consequences in many cases.

                  But yeah, ultimately, the govt must move resources from pvt to public. The system we’ve designed is rather brilliant because the govt chooses to use inside money for its spending purposes. And inside money exists because it has supposedly undergone some private approval process (loan creation). I would argue that the problems are multiplied when the pvt sector doesn’t appropriately manages risks at the loan level and then govt uses these resources in inefficient ways. Lots of moving parts there. Richard Werner has written about this “disaggregation of credit” which is a concept I think blends rather nicely with all of these understandings….

            • Its like Kipling said…
              “For the strength of the pack is the wolf, and the strength of the wolf is the pack.”

  2. I don’t agree that the coin is like QE. What you have described in the post that aims to prove it is:

    “Treasury issues $ 1 trillion in bonds. That puts $ 1 trillion in its account at the Fed. Therefore, reserves are down $ 1 trillion. The Fed immediately buys the bonds in exchange for reserves. End result is that Treasury is up $ 1 trillion in its account; Fed is up $ 1 trillion in bonds. On day 2 (illustration purposes), Treasury spends the $1 trillion. Reserves increase by $ 1 trillion. End result – deficit financing of $ 1 trillion with an all-in cost to Treasury of the interest rate paid on reserves.”

    The fact that the Fed bought back bonds is irrelevant in the above. It just describes 1T in new fiscal deficit. The coin is identical, therefore I would argue that it is equivalent to deficit spending, not QE.

    • Go through the math a few more times, and you’ll see how the coin is a close variant of QE.

      The spending is independent of the financing of the spending. The coin deals with the financing of the spending. The accounts at the fed and treasury end up with the same result as QE, so the effect of the coin must be the same.

      JKH, beowulf, and others point out the timing of the impact of the coin can be different, depending on how the coin is used. If it is used to retire debt immediately, then it’s like a big splash of QE all hitting at once. If its used to finance spending over a period of time, it is much more similar to the ongoing QE III.

      • Did the math, still the same. What you describe as QE is actually 1T of deficit spending plus QE, not QE itself. In the end the private sector is up 1T reserves, not 1T bonds as in deficit spending alone. And the QE component does nothing. What counts is 1T more assets. The new assets, whether they be reserves or bonds are easily swapable, the Fed buys and sells them all the time. So if coin = 1T new deficit + 1T QE swap, it is really the deficit component that does the work.

        • Regular QE:

          Treasury issues bond
          Treasury spends
          Fed buys bond
          Fed issues reserves

          Net effect:
          Treasury spends
          Fed bond asset
          Fed reserve liability

          Platinum Easing:

          Fed “buys” coin (i.e. accepts coin deposit)
          Fed issues Treasury deposit
          Treasury spends
          Fed issues reserves

          Net effect:
          Treasury spends
          Fed coin asset
          Fed reserve liability

          Same deficit spending

          Coin instead of bond on Fed balance sheet

          The easing comparison is best illustrated by comparing the full time line in each case, which should include assumed exit strategies:

          Regular QE exit:

          Fed sells bonds and drains excess reserves, which is the QE exit effect

          OR (important):

          Fed matures bond, drains Treasury account at the Fed, which Treasury must cover by issuing replacement debt to the market, which drains excess reserves, which is the QE exit effect

          Platinum exit:

          Treasury withdraws coin from the Fed, which drains Treasury account at the Fed, which Treasury must cover by issuing replacement debt to the market, which drains excess reserves, which is the platinum exit effect

          I.e. platinum exit is directly comparable to the second version of regular QE exit

          This comparison of exit strategies is an important part of understanding the comparison in general

          I noted this here also:

          http://monetaryrealism.com/quick-and-dirty-update-on-platinum-easing-discussions/

          And if you read the Krugman post carefully, the exit comparison is central to his argument as well

          I.e.:

          Krugman has correctly identified the key point in the easing comparison

          • I disagree.

            Regular QE:
            Fed buys bond
            Fed issues reserves

            THAT is QE, you described QE+deficit.

            Deficit:
            Treasury issues bond
            Treasury spends

            Therefore to me coin=QE+deficit.

            • QE is not instantaneous; it takes place over a period of time – while a deficit is being incurred in parallel. The comparison between regular QE and PCE takes into account that a deficit is being incurred while QE is in process and that a comparable deficit is being incurred while the Treasury balances from platinum easing are being spent – that’s why you have to compare the full cycle in each case. This is explained in my original post:

              ………………

              “CQE takes bonds out of the market in parallel with Treasury issuing them.

              PQE holds market bonds constant in parallel with Treasury not issuing them.

              Same result.

              I think there’s been some analytical confusion in cases where an attempt has been made to compare PQE with CQE, while holding the cumulative deficit constant – i.e. prior to the deficit spending that PQE is designed to enable. That won’t work – and it doesn’t need to – because PQE is by design a potential antidote for the obstruction of ex ante deficit spending by a debt ceiling impasse.

              And the reason the analysis won’t work – and doesn’t need to – is that PQE is designed to inject Treasury balances prior to spending and actual deficit creation – so one needs to work through that scenario in which the objective of facilitating further spending is accommodated in order to compare properly the cases of CQE and PQE .”

              ……………

            • Also, remember that Keynes said it is better to be vaguely right than precisely wrong.

              In that regard, the precise definition of a deficit has nothing to do with issuing a bond. The deficit is spending in excess of taxation.

              The deficit is an income/expense concept. Bond issuance and platinum coin issuance are flows of funds concepts. Its the interaction of the two – income and flow of funds in each case – that is the appropriate comparison between bonds and the coin. And that requires a comparable time horizon with comparable deficits and flow of funds magnitudes in order to have a consistent comparison.

          • Or the Fed holds onto the TDC forever (remember, the Fed buys coins as they’re deposited, there’s no maturity date like with a T-bond). The Fed could scale up as required its de facto Fed bill program, the “Term Deposit Facility”, to drain excess reserves. Right now, the Fed is dipping its toe in the water– $3B at a time in 1 month Fed bill (oops, I mean CD) auctions. I get the impression the Fed governors are waiting to see if anyone in Congress notices they’ve stopped asking for bonding power and just went ahead and took it (don’t sweat it guys, they will never catch on). In any event, Tsy is always on the hook for net interest one way or another. Just as with IOR, TDF interest is deducted from the Fed’s net earnings rebate to Tsy.

            Term deposits will facilitate the implementation of monetary policy by providing a new tool by which the Federal Reserve can manage the aggregate quantity of reserve balances held by depository institutions. Funds placed in term deposits are removed from the accounts of participating institutions for the life of the term deposit and thereby drain reserve balances from the banking system. Reserve Banks will offer term deposits through the Term Deposit Facility (TDF), and all institutions that are eligible to receive earnings on their balances at Reserve Banks may participate in the term deposit program.
            http://www.federalreserve.gov/newsevents/press/monetary/20120911a.htm

            • Very true … although those terms deposits were designed originally as a management tool to assist with regular QE exit – versus platinum as a chaser to regular QE expansion.

              Slight policy detail requiring a bit of modification.

              :)

              Still, a very pragmatic suggestion, particularly given the Fed minutes yesterday, which were not exactly friendly to the creation of more reserves – so term them out immediately as part of the platinum plan, as you wisely prescribe.

              P.S.

              Still, be aware of the road sign that has the number $ 60 trillion on it.

              Although – I’m sure the originator of the platinum coin idea will continue to drive within prudent speed limits.

              :)

          • You’ve omitted to mention the fact that, as with the deposit of the coin, QE effectively leaves nothing on the Fed balance sheet. That’s the crux of the disaster, and the reason why the Fed has to become involved in the first place: The auctions fall flat, no one will buy Treasury debt – which is to say that the concept of the Fed effectively selling that debt to ease reserves, and thereby avoid inflation, is a fantasy.

            • Reserves are just an alternate funding mechanism for the cumulative deficit.

              Switching from reserves back to debt is just a matter of pricing in term structure.

              There’s always a price for Treasuries.

              And inflation isn’t driven by bank reserves.

              And, as beowulf points out, the Fed has the flexibility on its own to auction reserves with a term structure and pricing similar to Treasury debt.

              And the Fed can always raise rates for monetary tightening purposes.

              And the economy will be super-sensitive to interest rate increases at some point.

              That’s always the case – and that’s the point at which institutions become absolutely ravenous buyers of Treasuries. It’s just pricing.

              In sum, there’s enormous operational flexibility for managing exit from regular QE and/or platinum QE.

        • PeterP,

          The coin doesn’t do much to stimulate the economy – I totally agree the coin does little or no work to increase demand on its own.

          The coin is a good way to get around the debt ceiling. It could be used to purchase bonds, reducing the debt of the U.S.

          The coin could also be useful as a stimulus if the created money was spent and no bonds were issued.

          We are not claiming the coin has economic impact when we say the coin is “Platinum Coin Easing”. We’re just claiming the end result of using the coin to retire debt would be very similar to the end result of QE.

          Does this help?

          • “We’re just claiming the end result of using the coin to retire debt would be very similar to the end result of QE”

            Agreed, Mike

            Again, it’s the deficit spending that has the direct economic impact – not the funding mechanism

            A useful comparison is between the factual case and two counterfactual flow of funds cases, where deficit spending is the same in all three cases:

            a) Factual – deficit spending of (G – T), combined with bond issuance of (G – T), combined with regular QE of (G – T)

            b) Counterfactual # 1 – deficit spending of (G – T) combined with platinum coin easing of (G – T)

            c) Counterfactual # 2 – deficit spending of (G – T) with MMT “no bonds” of (G – T)

            All three scenarios include the same amount of new deficit spending of (G – T), combined with the same amount of new reserve issuance of (G – T)

            It is the reserve effect of (G – T) in each case that is the “easing” characteristic. The public holds reserves instead of bonds in each case

            And the fact that all three include the same deficit spending assumption emphasizes the basic accounting/economic idea that the idea of deficit spending is separate from bond issuance – just that bonds are a required new issuance funding mechanism in today’s system

            • Jose Guilherme says:

              “deficit spending of (G – T) with MMT “no bonds” of (G – T)”

              I think the MMT case must allow for bonds. Surely, MMT would not deny the need for proper accounting entries in the process of deficit spending. It’s only that the bonds are directly “sold” by the Treasury to the (presumably, fully dependent) Fed and thereafter never leave the Fed’s books.

              Where we’re now seeing (hopefully) a TDC, MMT always sees a T bond. :)

              Also, on this point:

              “…
              which drains Treasury account at the Fed, which Treasury must cover by issuing replacement debt to the market, which drains excess reserves”

              The draining of excess reserves might happen in two different ways.

              Either the market buys the bond using pre-existing reserves; in that case the process has a single step.

              Or the commercial banks start by “lending” to the government, placing an asset on their books (the “replacement T bond) and creating a new liability – a government deposit. Then (step 2) the government transfers the deposit to the Fed thus causing a reserve drain effect on the banks.

              This second possibility is the one considered in all the accounting tables of Marc Lavoie’s paper on neo chartalism.

              • Re: “no bonds”

                I’m referring to the Mosler/Mitchell proposals, which eliminate bonds in their entirety – treasury spends without borrowing and commercial bank deposit and reserve accounts are credited.

                The last time I checked (a long time ago), neither of them seemed to care about consequential central bank accounting. But they certainly don’t see a bond where a platinum coin would reside in the platinum easing idea.

                (That said, central bank accounting is definitely feasible from an operational standpoint under the “no bonds” proposal. The best way to do it IMO is to set up an internal funds transfer from the Fed to Treasury (which is the asset alternative to a liability overdraft). This entry doesn’t necessarily have to be a bond or a marketable asset of any type. But I’ve never seen an MMT proposal that bothers with this level of detail. They seem to assume it away as “irrelevant”.)

                The relevant comparison of exit strategies for regular and platinum easing has to be in terms of an internal transaction between the Treasury and the Fed – because platinum transactions by construction are “off-market”.

                • Jose Guilherme says:

                  And yet Stephanie Kelton (then Bell) does admit the purchase of a bond by the monetary authority. In her words,

                  “…First, a government could create its own spendable balance by allowing its monetary authority to credit the account of its fiscal authority. This (…) can be accomplished through the purchase of the fiscal authority’s IOU (e.g. a government bond) by the monetary authority. Thus, if the central bank purchases a newly-issued security from the Treasury, it will do so by crediting the Treasury’s account”.

                  This is from a 1999 paper. Thus, there was a time when the founders of MMT did care about that tiny detail called “consequential central bank accounting”.

                  • OK –

                    I’m just going by recall from my impressions of Mosler and Mitchell.

                    I believe Mosler has the closest thing to what could be called a formal no bonds proposal, with Mitchell close behind as an expressed preference rather than an explicit proposal (again, as I recall).

                    But as you mention it, my impression also is that Kelton has often been more precise than the others about accounting – and has even noted that difference in analytic style herself. Given that, she’s also likely to have considered different accounting scenarios and possibilities.

                    Also – as I recall – I think Fullwiler may have favored short term bill issuance as opposed to full scale “no bonds”. If so, that’s interesting, because there’s a material difference in the scope of (contiguous) net financial asset distribution in that case (only banks with “no bonds”; banks and non-banks with bills).

                    • IIRC, Bill would nationalize the banks, which I take would consolidate the cb and Treasury functions under Treasury and eliminate the command economy established by a few unelected and unaccountable technocrats setting the interest rate. But I don’t recall the details either.

                      Warren’s proposal was no Treasury issuance longer than 3 mo bills and setting the rate permanently to zero. I believe that both Bill and Warren call for ending the deficit offset requirement, so the simple step would be to formally consolidate cb and Treasury functions under Treasury and get rid of the “politically independent” command system run at the cb. According to Warren without interest rates setting by the cb, the cb function is essentially just providing liquidity and a computer program would be sufficient to do this, releasing former cb personnel to more productive work.

                    • Cullen Roche says:

                      This is a point I constantly make. The only reason there is even a need for a Federal Reserve System is because the banks are not part of the govt. The very existence of pvt competitive banking (as opposed to a govt “money monopoly”) means the Fed is a necessary intermediary primarily for settlement of interbank payments to stabilize and regulate the cross payment system. If there was a nationalized banking system there would be no need for a Fed. In essence, nationalized banking is full MMT.

                    • I don’t recall Scott’s proposal in detail if he has one specifically, but IIRC, he doesn’t address the cb and interest rate setting issues directly and doesn’t go as far as either Bill or Warren wrt “no bonds” either. As far as I know, he is not pushing for a change in the system the way Bill and Warren are, which would take an act of the legislature to accomplish.

                    • Randy’s latest at Economonitor suggests using Treasury warrants as an accounting measure for Fed financing of Treasury deficits as the govts bank. Of course this would take legislation to accomplish, but this is an accounting solution for “no bonds.”

                      http://www.economonitor.com/lrwray/2013/01/04/does-obama-have-a-platinum-coin-up-his-sleeve/

                      When Uncle Sam needs to spend and finds his deposit account at the Fed short, he can replenish it by issuing a nonmarketable “warrant” to be held by the Fed as an asset. With the full faith and credit of Uncle Sam standing behind it, the warrant is a risk-free asset to balance the Fed’s accounts. The warrant is just an internal IOU—from one branch of government to another—really not anything more than internal record keeping. If desired, Congress can mandate a low, fixed interest rate to be earned by the Fed on its holdings of these warrants (to be deducted against the excess profits it normally turns over to the Treasury at the end of each year). In return, the Fed would credit the Treasury’s deposit account to enable government to spend. When the Treasury spends, its account is debited, and the private bank that receives a deposit would have its reserves at the Fed credited.

                      From the Fed’s perspective it ends up with the Treasury’s warrant as an asset and bank reserves as its liability. The Treasury is able to spend as authorized by Congress, and its deficit is matched by warrants issued to the Fed. Congress would mandate that these warrants would be excluded from debt limits since they are nothing but a record of one branch of government (the Fed) owning claims on another branch (the Treasury). The Fed’s asset is matched by the Treasury’s warrant—so they net out.

                    • Bill gives some specifics:

                      My specific proposals for banking reform are dealt with in some detail in these blogs – Operational design arising from modern monetary theory – Asset bubbles and the conduct of banks – – Breaking up the banks.
                      I start from the proposition that the only useful thing a bank should do is to facilitate a payments system and provide loans to credit-worthy customers. Attention should always be focused on what is a reasonable credit risk. In that regard, the banks:
                      ▪ should only be permitted to lend directly to borrowers. All loans would have to be shown and kept on their balance sheets. This would stop all third-party commission deals which might involve banks acting as “brokers” and on-selling loans or other financial assets for profit.
                      ▪ should not be allowed to accept any financial asset as collateral to support loans. The collateral should be the estimated value of the income stream on the asset for which the loan is being advanced. This will force banks to appraise the credit risk more fully.
                      ▪ should be prevented from having “off-balance sheet” assets, such as finance company arms which can evade regulation.
                      ▪ should never be allowed to trade in credit default insurance. This is related to whom should price risk.
                      ▪ should be restricted to the facilitation of loans and not engage in any other commercial activity.
                      So this is not a full-reserve system. The government can always dampen demand for credit by increasing the price of reserves and/or raising taxes/cutting spending.
                      The issue then is to examine what risk-taking behaviour is worth keeping as legal activity. I would ban all financial risk-taking behaviour that does not advance public purpose (which is most of it).
                      I would legislate against derivatives trading other than that which can be shown to be beneficial to the stability of the real economy.
                      So I support bank nationalisation? Probably, but that is for another day. Having a strong public banking system to compete against the private banks will achieve mostly the same ends and is more likely to be politically acceptable in the current climate.

                      http://bilbo.economicoutlook.net/blog/?p=7299

                    • Jose Guilherme says:

                      ” In essence, nationalized banking is full MMT”.

                      I don’t think full MMT requires nationalized banking; th key point is having the Treasury get the automatic deficit financing from a subordinated NCB. The commercial banking system could remain in private hands.

                      On the other hand, it’s certainly possible to have fully nationalized commercial banking and still not have MMT. Suffice to pass a law requiring that the deficit be financed by non bank private entities – households and firms. In that case, the Treasury would still have to sell bonds to the private markets even with the commercial banking system entirely in the hands of the state.

                    • Cullen Roche says:

                      There’s no money monopoly without nationalized banking. The entire existence of the Fed is to support the existence of a private oligopoly of competitive banks. That’s why the Fed was created – to support this oligopoly. It was not created to nationalize the money supply. The only way you have a full monopoly on money is for the state to take over issuance of it. I know MMT tries to claim that bank money isn’t the “real” money, but that’s just sheer nonsense for all real purposes. Bank money is the ONLY money that matters for the real economy. All forms of outside money are facilitating features and could be done away with. They only exist in the first place to influence inside money in some way. It’s a system by banks for banks designed around banks. And as long as there is private competitive banking MMT will never be a reality. It’s not a coincidence that all MMTers hate bankers and many of them want to nationalize banking….They don’t seem to realize it (or won’t admit it), but the existence of a pvt competitive banking system is totally at odds with what MMT wants. Full blown state money is MMT’s base case.

                    • Tom,

                      In fact, Mosler’s proposal is “no bonds” – pure and simple:

                      “I would cease all issuance of Treasury securities. Instead any deficit spending would accumulate as excess reserve balances at the Fed. No public purpose is served by the issuance of Treasury securities with a non-convertible currency and floating exchange rate policy. Issuing Treasury securities only serves to support the term structure of interest rates at higher levels than would be the case. And, as longer term rates are the realm of investment, higher term rates only serve to adversely distort the price structure of all goods and services.”

                      And as I recall, Mitchell favors the same approach.

                    • Warren Mosler Reply:
                      June 24th, 2012 at 11:01 am
                      mmt says the govt (and/or its designated agents) is the sole determinant of that which it demands for the payment of taxes.
                      For the US this means the US govt. determines what it will accept for payment of taxes, and it has elected to accept only $US, of which only designated agents of the US govt. can ‘supply.’
                      That is, the $US is a public monopoly.
                      A govt that accepts gold, for example, for payment of taxes, has elected not to be the sole supplier of what it accepts for payment of taxes.
                      (note that I find it best to state this without the word ‘money’)
                      Also in the case of the dollar, net $US financial assets are what’s exogenous for the non govt sector, for example.
                      However bank deposits, and gross financial assets in general can expand endogenously within sectors.
                      There is no conflict between all of the above.
                      http://moslereconomics.com/2012/06/22/mike-norman-economics-general-theory-and-special-cases-in-modern-monetary-theory/comment-page-1/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A%20CommentsForTheCenterOfTheUniverse%20%28Comments%20for%20The%20Center%20of%20the%20Universe%29#comment-196513

                      Warren continues:

                      Warren Mosler Reply:
June 24th, 2012 at 11:13 am
                      for me
http://www.moslereconomics.com/mandatory-readings/a-general-analytical-framework-for-the-analysis-of-currencies-and-other-commodities/
                      has proven useful as the base case for analysis of a currency.

                      Warren Mosler Reply:
June 23rd, 2012 at 8:11 pm
                      any monopolist can have what I call ‘designated agents’ authorized to supply the ‘commodity’ in question and still be a monopolist
                      try asking any ‘private banker’ how much control govt. exerts over his lending function, and how much more control it could exert if it so elected

                    • Cullen Roche says:

                      It’s strange to me, that Mosler says the “financial sector is a lot more trouble than it’s worth” and “I don’t agree that the financial sector produces real value. at least I’ve never seen any come out of it in the last 40 years”, yet the banks are the agents of the govt serving as the govt’s puppets as part of their “monopoly” for “public purpose”. Why must we twist the reality here with blatantly contradictory phrasing? There’s no need. The US govt has chosen to privatize the money supply and it’s dominated by an oligopoly of private competitive banks. There’s no need for any of this to be so confusing as it’s quite straight forward. Banks rule the monetary roost and the govt chooses to play a supporting role. What’s the big deal with that? Why misconstrue it and hate on banks half the time while pretending they’re central to MMT’s money monopolist myth and public purpose role????

                    • I guess I was thinking of this:

                      Warren Mosler Reply:
March 23rd, 2011 at 1:58 am
                      yes, if i were put in charge tomorrow i’d immediately order the tsy to issue nothing longer than 3 month bills.
                      that would be the least disruptive way to get from here to there and require no legislation or law alterations

                      In thread: http://moslereconomics.com/2011/03/18/guest-on-reuters-insider/#comment-47093

                    • Oh, wait, came up with it:

                      Warren Mosler Reply:
                      July 9th, 2012 at 7:17 pm
                      The current institutional structure is plenty ok to allow all the deficit spending needed to sustain full employment.
                      And as per my proposals I’d make the current 0 rate policy permanent and also not let the tsy sell anything longer than 3 mo bills.
                      in thread: http://moslereconomics.com/2012/07/08/the-certainty-of-debt-and-taxes-comments-on-the-fiscal-cliff/#comment-200041

                    • What I quoted is his formal proposal for no bonds, on his website .

                      With respect to your reference, that appears in context to simulate a sudden and unexpected imposition of constrained reality.

                      :)

                    • comment on Wray’s “warrant” idea is just below, outside nested

                    • That’s not the proposal on his website.

                      He’s needs to clean house if that’s his revised proposal.

                • That’s an odd use of the term “warrant”. In fact it conflicts with normal use, which is a form of option, whereas the book value of the claim on the Fed’s book would have to be the value of the analogous “underlying”, rather than the the value of an option on the underlying. Otherwise, you can’t balance the books with the value of an option (i.e. warrant), which is less than the value of the analogous underlying. Warrants as the term is normally used aren’t “IOUs” – they’re options on IOUs.

                  That said, quite apart from terminology, he’s talking in effect about the same thing as what I suggested above, which is basically an internal funds transfer from the Fed to treasury:

                  “The best way to do it IMO is to set up an internal funds transfer from the Fed to Treasury (which is the asset alternative to a liability overdraft). This entry doesn’t necessarily have to be a bond or a marketable asset of any type.”

                  • JKH,
                    I think warrant is meant in the sense when a judge issues a warrant authorizing the police to search a home or arrest a suspect. Whether Randy knows it or not, he’s describing something that already exists. “FMS 6200: Department of the Treasury Appropriation Warrant”. I’ve never heard of anyone putting a market value on a judicial warrant, so its unclear to me how the Fed would go about pricing appropriation warrants. :o)

                    “Congress passes 12 annual appropriation acts, as well as supplemental appropriation acts, each year. These appropriation acts provide budget authority to obligate and expend funds from Treasury for specific purposes. After reconciliation with OMB, a Treasury representative prepares and issues the FMS 6200: Department of the Treasury Appropriation Warrant… The appropriation warrant is evidence of the congressional action and serves to establish the amount and period of availability of monies the agency is authorized to withdraw from Treasury’s central account”.
                    http://www.fms.treas.gov/tfm/vol1/v1p2c200.html

                    • right – that sort of usage had occurred to me afterward

                      although the application of it for bookkeeping purposes seems just as odd in a different way, as you suggest

          • i.e. whether retiring old debt up front and issuing new debt within the debt ceiling limit – or simply spending from up front platinum created balances – its the same reserve issuance easing result over a comparable period of deficit spending

  3. Detroit Dan says:

    Robert Rice– That was brilliant. Thanks…

  4. Good for Nadler for stepping up to suggest something out of the box. I would note that he misspoke here…
    “There is specific statutory authority that says that the Federal Reserve can mint any non-gold or -silver coin in any denomination, so all you do is you tell the Federal Reserve to make a platinum coin for one trillion dollars…”

    Of course its the US Mint that strikes coins, not the Fed. Just as with the Bureau of Printing & Engraving (which prints currency), the Mint is part of the Department of the Treasury.
    Nadler’s got the right idea though and I’m pretty sure the federal squirrels in the Tsy building will know who to call. :o)

  5. But we don’t have those nice things, so we’re forced to watch the spectacle of the greatest country in human history resorting to a legal trick, in order to pay its bills.

    But Michael, arent we also forced to endure the “legal trick of making the Treasury a currency user in the first place? Doesnt the coin trick just one up the “Treasury borrows from the Fed” trick? Ultimately doesnt this kinda prove that the GOVT not the FED is the currency issuer? Is there another clause somewhere which gives the control back to the Fed or is this it?

    • We don’t have an integrated Central Bank and Treasury yet, and we don’t have integrated monetary and fiscal policy.

      At this point, we need to do something slightly radical to get attention to the idea of government money printing. The TDC is going to be the path to do this, and my fingers are crossed.

  6. Dunce Cap Aficionado says:
    • Dunce Cap Aficionado says:

      Of course I’m late to this game and didn’t read through the posts…

      Regardless, would like to buy Beo a drink right now.

    • Robert Rice says:

      Signed. I had actually created a petition back in August 2012 trying to encourage the White House to engage in government self-finance, but I was successful in getting one person to sign it. Take a wild guess who that was? ;-) I e-mailed it to Cullen at TPC (on August 12th), but he probably never even noticed it. It eventually expired…

      http://wh.gov/g0n1

      Oh well. Glad to see this petition actually getting some signatures. All that social Facebook, Twitter crap I’ve yet to sign up for apparently works.

  7. At least now we know what congress will pave the road of good intentions with… platinum.

    http://tradewithdave.com/?p=14624

  8. Wow, this is all pretty crazy, huh? Congrats guys, looks like your idea is blowing up.!

  9. JKH, of course there’s always a price for treasuries, the problem is it reflects what they’re worth, which is poop. If there was, as you indicate, “enormous operational flexibity” the situation wouldn’t be the contorted mess that it is. Fact is, your response is typical of the panacea: Just so much smoke and mirrors, apparently maintained to obfuscate the reality of the problem and the pain of the fix.

  10. Super awesome.Congress holding the purse strings is just such a bother.So lets print a 2 thousand dollar coin, pretend it is a trillion dollars and then run it to the fed so they can spend a trillion more dollars that haven’t even been printed yet.

    This is so laughable.I would love to be in the room with foreign investors that these same rube are trying to pawn off bonds on to after doing such a ludicrous thing.Good faith and credit, pppfftttt HA HA HA HA HA.

  11. One last question.What would happen if the worlds greatest thief were to somehow infiltrate the FED and steal the coin?
    Does that mean our economy comes crashing down, is there an insurance company with the resources to insure the coin, do we just print another coin and call it a trillion dollars and forget about the first coin being it was only worth 2 thousand dollars?

    • Hoser,

      I almost hate to dignify this comment with a response. NO, stealing the coin would not bring our economy to a halt (it takes a congress full of Tea Partiers to do that) and WTF would the thief do with the coin….
      “Hey buddy…. you got change for a trillion?!!”

      • Robert Rice says:

        Heh, the thief could always drill a hole through it, attach it to a platinum neckless, and wear it as a medallion? “Gots me some new bling, son!”

        An intruder would have an easier time breaking into the Pentagon than into the Fed’s New York vault.

  12. surrounded by Jacka$$es says:

    The problem we are facing is that the government spends more than it brings in… chronically. Whether they get the Congress to increase the limit or print a silly coin, we still have the same problem… just worse.

    • One problem is that we need more spending, not less. The government is not like a household.

      Consider the entire United States as one entity, and make a balance sheet for this entity. Put the public and private sector into this balance sheet. It becomes obvious that a private sector surplus – aka “Savings” – can only be positive if there is a public sector deficit.

      If the government runs a surplus, it means the private sector – people like you and me – are running a deficit. That’s not how I like to live.

      • Going to keep trying:

        “current account deficit = gov’t deficit plus private deficit plus medium of exchange entity deficit”

        Imo, the central bank wants all new medium of exchange to come from the “hedge fund” model (including banks). That is actually the problem. Debt and the “hedge fund” model should not be allowed.

        I’ve never had this verified, but I am pretty sure medium of exchange (currency plus demand deposits) is what moves between the entities in current account deficit = gov’t deficit plus private deficit. I also believe all new medium of exchange is assumed to come from the “hedge fund” model (including banks) in current account deficit = gov’t deficit plus private deficit.

      • “One problem is that we need more spending, not less.”

        Not necessarily, put more people into retirement and fund it correctly.

        “The government is not like a household.”

        It should be made to act like one.

  13. The most interesting man in the world has noticed the Trillion Dollar Coin:

    https://twitter.com/DosEquisSR/status/287323265981112320

    !! :)

  14. Sounds like Enron-esque accounting to me.

  15. Robert Rice says:

    Cullen, you began your critique of my comments by suggesting the implementation of government self-finance is unnecessary and so unlikely to be implemented as to be regarded as fantasy. I’ve now spent some time pointing out you are mistaken, both to the necessity of self-finance as well as to the likelihood of it being implemented. The authority is already on the books. This country has engaged in government self-finance periodically throughout its existence for at least 150 years and retains the authority to do so. There is historical and legal precedence for this funding policy as well as empirical data suggesting it worked. What the Treasury needs for effective implementation is an updated quantity or an elimination of the limitation altogether, that’s it. That isn’t so unlikely it should be regarded as fantasy. Furthermore, I provided you with an argument which demonstrates self-finance is necessary. You have failed to address this argument, preferring instead to fixate on whether current Treasury authority is significant, although in a manner which both misunderstands and mischaracterizes the purpose for bringing these facts to your attention. I think if you would more thoroughly consider the necessity of government self-finance, you would be more open-minded in your speculation as to the likelihood of its practical execution.

    I wrote the following to you here at MR nearly six months ago:

    I briefly skimmed the first two entries Cullen, and I didn’t notice any mention of the following: The Treasury can issue paper money, and not simply on behalf of the Fed. The SCOTUS ruled as much in 1862:

    Subsequent to this ruling, for over a 100 years (until 1971) the Treasury issued paper currency, otherwise known as United States Notes:

    The reason they stopped seems to be twofold:

    1. Redundancy. “United States notes serve no function that is not already adequately served by Federal Reserve notes. As a result, the Treasury Department stopped issuing United States notes, and none have been placed into circulation since January 21, 1971.

    2. Limitation on the quantity:

    ” The amount of United States currency notes outstanding and in circulation—
    (1) may not be more than $300,000,000;”

    I don’t know why we don’t update that limitation by adding five zeros (the limit would become 30 trillion). [the weblink references in the original have been removed in an effort to avoid requiring moderator approval]

    For some time, I have been perfectly aware that the limitation on the quantity of U.S. Notes issuable and usable for government self-finance is problematic for the Treasury to utilize its authority in any useful manner. However, from this premise, it does not follow the Treasury’s current authority is insignificant when refuting your characterization of self-finance as non-real and so unlikely to be enacted as to be regarded as an utter fantasy. My goal was to persuade you self-finance is not unrealistic, it is current authority, having been on the books for 150 years and within our grasp. All we need is the quantitative update.

    The Treasury is like a bird, which naturally has wings and the ability to fly but lacks the opportunity because it finds itself locked in too small of a cage. All the bird needs is to be set free so it has the freedom to engage in the ability it already has (moving the bird into a larger living quarters would work too). This doesn’t smack of “fantasy”. Our elected and appointed officials can use this historical precedence to argue for raising the limitation on U.S. Notes, or even to make platinum coining explicitly available for self-finance (although I think the less direct, implicit argument is sufficient for the TPC). This isn’t our first rodeo in ex-nihilo funding.

    Again, a simple update on the limitation would suffice, given since the 1860s, the bird has grown from a juvenile with enough room to fly, into a full grown adult without sufficient space to spread its wings. The bird keeper never gave the bird a larger cage. It should. We need to implement existing authority, and to do so, a relatively minor revision to the law should occur.

    Self-government finance will work as a matter of sound theory, has worked as a matter of historical fact, has legal precedence supporting it, and still remains on the books as existing authority via U.S. Notes simply requiring an updated quantity. The U.S. Notes cannot even be accused of being a loophole given our recorded history. That is persuasive, relevant, significant.

    • Cullen Roche says:

      Wake me up when our govt actually starts self financing itself in a consistent and significant form (not some silly loophole or your “significant” $300MM observation). Until the laws are changed and the implementation is executed your position is totally irrelevant. Luckily, because our govt is designed to constrain “the bird” we’ll never have to worry about you waking me up.

    • “The Treasury is like a bird, which naturally has wings and the ability to fly but lacks the opportunity because it finds itself locked in too small of a cage. All the bird needs is to be set free so it has the freedom to engage in the ability it already has (moving the bird into a larger living quarters would work too). This doesn’t smack of “fantasy”. ”

      Dude, you sound like you’re co-writing an Econ textbook with the author of 50 Shades of Grey.

      I’ll just point out two things.
      1. Whether Tsy issues debt or debt-free money, it must make interest payments to maintain a positive short term policy rate. This can be paid directly as interest on the debt or indirectly as the Fed’s interest on excess reserve payments (the cost of which is deducted from Tsy rebate) but one way or another, if you wanna to dance, you gotta pay the band. Curiously enough, since 3-month T-bills are at 0.07% and the Fed’s IOR rate is 0.25%, its actually cheaper for the US Government to borrow money than to create it out of thin air!
      2. US Notes stopped being a fiat currency in the 1870s. Although FDR took us off the domestic gold standard in the 1930s, we didn’t actually leave the silver standard until 1968 (up until that time, US Notes could be exchanged for silver dollars). Our current monetary system is confusing enough, I don’t think adding to it elements from our even more confusing earlier systems will help matters (especially if the changes first require Congress’s approval, that always takes longer than expected).

      • Whether Tsy issues debt or debt-free money, it must make interest payments to maintain a positive short term policy rate.

        Or set the policy rate to permanently zero as Warren recommends.

        Why is it a good idea to have a small group of unelected and unaccountable “technocrats” (many of whom don’t have a clue about monetary operations or actual economics) to set the policy rate. Just how is that not a command system, given what is generally believed (erroneously) about the power of monetary policy to influence the economy? Seems like the antithesis of the free market to me, as well as of democracy.

        • Cullen Roche says:

          As we say, better to have a tool and not need it than to need it and not have it. I am not a big believer in monetary policy, but I don’t think there’s much rationale behind completely snuffing it out. Besides, the Fed sets the overnight rate, not the price of all money. Banks do that by ultimately setting the price of loans. The overnight rate is a factor in this, but ultimately the price of loans is set by other more important market based factors. This is not even close to a “command system”. It’s about as close to a market based system for money as you’re going to find. Banks compete to make loans based on the demand for their services. Inside money is influenced by outside money, but it’s ultimately the market that determines the price and quantity of inside money.

          And the Fed is accountable. No need to whip out the hyperbole as the Austrians do when they start claiming their stupid “audit the Fed” BS.

          • it’s ultimately the market that determines the price and quantity of inside money.

            The yield curve is based on projections from the overnight rate and expectations of future Fed action. Banks use the overnight rate and yield curve is setting interest rates they charge based on the spread that determines the prime rate. Loans are then based on the prime rate with respect to the creditworthiness of the borrower, increasing with increasing risk. So, yes, lender in private sector do set the rates they charge but this is heavily influenced by the price they themselves pay to borrow and their expectations for rate changes in the future.

            In addition, it seems that most experts even operated on the basis of the loanable funds-crowding out model, leading them to think that the Fed actually does control the economy through monetary policy and can micromanage it better using monetary policy than would be possible through fiscal policy.

            So I don’t think that your response adequately deals with the issue of the command nature of monetary policy, or the accountability issue wrt democracy. But whatever.

            • Cullen Roche says:

              The Fed sets policy based on market conditions. Bond traders front-run Fed. We shouldn’t completely confuse the idea of the Fed setting overnight interest rates with the Fed controlling the economy. The Fed is mostly a group of jokers guessing future economic conditions and attempting to influence the cost of inside money in the way they see appropriate. But don’t confuse that for a command economy. That’s something only economists like Scott Sumner could do. :-)

              • Well, we don’t, but “they” do. And they not only have the ability to influence rates across the board but they do in practice based on false ideas. While that may not be a command economy in the totalitarian sense, it is a lot more power and influence that a bunch of bozos should be granted as a matter of “political independence.” But when you add all this up, that is all the independent central banks and related international organizations like the IMF, run on neoliberalism and monetarism, it’s a significant global influence for the worse.

        • Policymakers can wrap their brain around platinum coin easing, and part of its appeal is how similar it is to current QE arrangements– leaving the Fed in control of short-term rates. Perhaps its not the most confidence-inspiring idea to then suggest Fed should stop controlling short-term rates anyway and just let it go to 0% permanently.
          There’s a convention in science fiction that there should just be one “out of this world” thing going on with everything else staying pretty factual. When you throw in a second magical element, you lose the audience as their suspension of disbelief snaps. For example the recent Bruce Willis movie Looper was a great time travel movie until the moment it turned into a mediocre time travel AND telekinesis movie.

          That’s a sound principle. Defusing the debt ceiling crisis by funding the US Govt with platinum coin easing… THAT is a pretty dramatic dramatic plot twist. Its a good story which, as Henry Kissinger would say, has the added advantage of being true.
          I don’t think it improves the story (or, for what its worth, the economy either) to insist the govt throw its monetary policy steering wheel out the window at the same time. That would only happen after policymakers accepted a third point, they should replace it with a fiscal policy steering wheel– and add power steering while they’re at it (e.g. adjust payroll tax rates quarterly based on something like Mike’s TC rule). One step at a time, Tom, you gotta save some of the plot twists for the sequels. :o)

      • Robert Rice says:

        1. Why should anyone be concerned with 2.5 billion in interest paid on every trillion of excess reserves created from FG self-finance, which the Treasury wouldn’t be paying anyway (this is a Fed IOR program)?

        2. Then by your own admission, U.S. Notes have been a fiat currency again for over four decades. And what’s confusing about U.S. Notes being utilized in FG self-finance, given it is legal and with precedence, the only obstacle being a needed update on the relic limitation?

        Whether the Treasury uses platinum coins, printed notes, or quantities of electrical current running through transistors to fund its spending, I really don’t see why we should be too terribly concerned with the means. By whatever means, we need responsible FG self-finance implemented into fiscal policy.

        • The only wrinkle in the experience with US Notes was the high inflation it caused. A govt that monetizes its spending sounds nice to liberals because then the government has total control. Inflation be damned.

          http://macromarketmusings.blogspot.com/2011/03/three-monetary-systems-during-civil-war.html

          • Cullen Roche says:

            In fairness, the bigger issue during the civil war was the collapse of production. The government spending that exacerbates inflation is a secondary factor. I’ve written about this quite extensively….

          • Robert Rice says:

            No one is ignoring the potential for FG self-finance to lead to inflation should the FG create excess money that leads to excess demand. However, responsible money creation is not going to lead to inflation. As I argued previously, the potential abuse of authority is no argument against having the authority. It’s an argument for having checks and balances on that authority. In other words, the implication is authority with accountability.

            And the last thing motivating me to encourage FG self-finance is some nefarious interest in power. I have a different theory on my motivation, and it has something to do with the common welfare of us all. Is it possible I might be motivated by that? I could have the same motivation our founders had in wanting to make the Union a happy union.

            Paranoid concerns of boogie men in every closet and under every bed… I understand being skeptical–some skepticism is healthy–but then have a good rebutting argument.

            • Self financing would almost certainly lead to high inflation as our system is arranged because you’d have dual money issuers. Not only would there be banks issuing money as loans, but there would be a government issuing money without liabilities. You would be better off nationalizing the banking system and then having the government issue all the money in one concentrated system. Otherwise, your idea is a recipe for inflation.

              • Robert Rice says:

                “…almost certainly lead to…”

                Show me price stability and self-finance are mutually exclusive in terms of a sustainable economic system. I’d be very interested in seeing that argument.

                • Just do the math. The government spends $1 trillion per year (as they’re doing now) plus the banking system is handing out loans as usual. The self financing is new additional money in the system on top of the regular loan process. You don’t think this would cause inflation at all?

                  • Robert Rice says:

                    I don’t believe FG self-finance has to cause inflation; that’s the difference. Self-finance and price stability are compatible goals. The achievement of those goals depends on the appropriate set of policies.

                    Economists might feel at times they are in similar shoes with physicists, who have spent decades trying to reconcile General Relativity with the Standard Model, but I don’t believe it is nearly as difficult to reconcile price stability and FG self-finance into a sustainable economy.

                  • lars

                    The amount of credit money would decrease likely if there were more debt free govt money. People dont WANT to go into debt to banks, they HAVE to. Bank loans would likely drop if there were more govt money. Of course this is exactly why banks fight this type of proposal. They want everyone spending every last dollar on debt servicing.

                    • Robert Rice says:

                      And that is exactly what I’m foreseeing in terms of policy shifts and revisions to law; the creation of a lot more debt free money, and the reduction and tightening of debt based money. The encouraging side effect is; the populace will live less as servants to the rentier class, who live in riches from no useful labor. By the time the average citizen finishes paying off the principal and the corresponding interest on their home’s 30 year mortgage, they will have paid somewhere in the neighborhood of double the purchase value. Add to this student loans, vehicle loans, credit card, etc.–apparently the citizenry enjoys living as the bankers’ servants in service to their debt’s interest payment. Many amongst the populace end up slaves, milked for their money, with just enough freedom and comfort to shut them up. Explicit slavery leads to revolutions, most will accept quite a bit of difficulty surviving as long as they have a little freedom and comfort. This is not just. Our existing system is designed to benefit the few over the many. We need more economic fairness.

                    • Most loans are consumer mortgages. So unless the government starts giving people money so they can buy homes you’re likely to be wrong. I don’t think any of you have thought this through entirely. It sounds like a typical liberal policy panacea that sounds cute in theory and would probably be disastrous once it was actually implemented.

                  • Lars,

                    You’d think we would have some good way to empirically determine how much inflation this would cause.

                    We don’t because economists have been ignoring the sector balances for such a long time. They don’t even know the basics about the relationship of the money economy to the real economy – basics like how much money is actually being created at any one time.

                    Until we start using Lavioe/Godley to determine these basics, we’re just bullshitting. Nobody really knows how much spending would cause inflation.

                    On the other hand, you should really look at the treatment of the Platinum Coin by JKH. It’s clear – it should be called platinum coin easing because it is so similar to quantitative easing.

                    So far, quantitative easing has not resulted in much inflation at all. We are at generational lows in inflation here in the United States. It seems like another 30% or so of quantitative easing would have very little or no impact on inflation.

        • “Then by your own admission, U.S. Notes have been a fiat currency again for over four decades.”
          Robert, there are no US Notes circulating in the economy (the official “in circulation” total is basically what private collectors have squirreled away). Do you not see the point that Tsy can mint ANY sum of legal tender right now under current law but can only print $300 million in US Notes (and most of that is locked up by collectors)?
          Why are you focused on building a counterfactual reality that would take an enormous amount of political capital to ever pass Congress and become real (and let’s be honest, will probably never be real). Even if somehow you make your dream come true, what does that give you? Tsy would have then have the authority to print ANY sum of legal tender— in other words, what Tsy has right now with coin seigniorage under current law! Let’s not over-complicate this. Its the same basic principle that a girlfriend in real-life is better than a girlfriend in Worlds of Warcraft (though, we can agree to disagree if you wish). :o)

          • Robert Rice says:

            I might disagree with you on whether a girlfriend in real life is preferrable to a girlfriend in WoW ;-) I can tell you of what use girlfriends in real life have served, but that would probably be a little inappropriate. I will just say it’s been one degenerate after another… Have you seen some of those cartoon ladies? I don’t play WoW, but I know a couple who does, and my god; where can I purchase my ticket into the matrix? I guess I’d grant your point in this way; if Cinderella existed in real life and not just her evil step sisters, well that’d be different. I’m sure the good, well-rounded girls who have their crap together are out there, just all too few and far between IME. I’ve never run across one.

            At any rate, the reason I brought U.S. Notes up was to provide evidence the FG has in fact engaged in self-funding before and retains this authority on the books. There is historical and legal precedence. You don’t believe that strengthens the argument for the use of a TPC?

            Now, some argue the TPC is a loophole. As much as I generally disagree with that claim, they cannot level that allegation against U.S. Notes; they were created for the very purpose of self-funding. So, to try and draw all my points together and clarify them as well as I can, I’m killing three birds with one stone:

            1. There is historical and legal precedence for self-funding.
            2. U.S. Notes are not subject to the “loophole” rebuttal.
            3. In the event the TPC is regarded as too much of a loophole, the authority to print U.S. Notes for the purpose of self-funding remains an alternative “plan B” already on the books, although the limitation will need to be raised/lifted (which may be no more difficult that raising the debt ceiling and hence require no more political capital; self-funding, btw, is a preferable long term solution to doing away with the debt ceiling).

            You’ve seen me defend the use of a platinum coin here on this site. You’ve also seen me mention, I don’t know how many times over the last six months, that there is a limitation on U.S. Notes issuable. You’ve seen me do both, rather vigorously in fact. Have you considered that you are missing the point of my comments?

            There is an underlying theoretical belief we should be arguing for in conjunction with the present means available to the FG for self-funding (e.g., the platinum coin, U.S. notes plus changed limitation, you name it); the FG needs to self-fund in some contexts. This is the economic theory underlying the legal argument.

            • “Now, some argue the TPC is a loophole. As much as I generally disagree with that claim, they cannot level that allegation against U.S. Notes”

              That’s because you can’t call something that’s flatly illegal a loophole.

              “In the event the TPC is regarded as too much of a loophole, the authority to print U.S. Notes for the purpose of self-funding remains an alternative “plan B” already on the books, although the limitation will need to be raised/lifted”

              There is no authority to print US Notes for the purpose of self-funding. Tsy will first need the cooperation of Congress to raise the US Notes ceiling (and the prohibition on using US Notes as reserves would have to go). What makes this plan less than optimal is that the entire crisis is due by the lack of cooperation of Congress with Tsy on raising the debt ceiling. That’s not a solution, that’s a crisis swap.

              “Have you seen some of those cartoon ladies? I don’t play WoW, but I know a couple who does, and my god; where can I purchase my ticket into the matrix?”

              Words fail me.

  16. “Dude, you sound like you’re co-writing an Econ textbook with the author of 50 Shades of Grey.”

    How would you know? ;)

    • Robert Rice says:

      I don’t imagine this post will make the cut given my other “entirely out of line” comments here have given the moderator good reason to promote me to the very special MR babysitter, requiring moderator approval before each post, watch list, but if you want to know, he’s just embarrassed someone dear to him forgot a copy of the book at my home after we played our game of touch. What can I say, it was inspirational.

      • Robert Rice says:

        lol, ironic, apparently I’ve been removed from the watch list ;-)

      • Cullen Roche says:

        When you’re a bad boy daddy puts you in timeout. When you act like a big boy daddy lets you out of timeout. I may have some “misgivings”, but one thing “mommy and daddy” didn’t do is teach me to treat total strangers on the internet without a certain level of respect. I don’t think it’s too much to ask that you treat your hosts with a certain level of respect. After all, none of this is personal. We’re just kicking around ideas and we’re all heterodox guys/gals who agree on more than we disagree on. Try to keep that in mind. After all, I hate having to monitor the actions of old men who insist on behaving like children. So please don’t make me do it. Thanks.

        • Robert Rice says:

          Perhaps the hosts should treat their guests with the level of respect they expect? Imagine that, instead of some hypocritical, phony baloney bullshit about me mistreating any one of you. Some of you dish it out, I return the volleys, and you cry about being mistreated because I don’t just sit here and roll over. Man up. Do you need a hug? We can trade jabs, or we can stick to the arguments. I’m all about the arguments.

          Consistency is a virtue.

          • Cullen Roche says:

            “Man up”? See, this is the problem. You seem to think the internet is your playground where you go can around “jabbing” with other people. I used to box and play football back in another life. That was where men “man up”. The internet? Not so much. The internet is a place where civilized people can kick around ideas and communicate in a convenient and friendly manner. Unfortunately, the lack of a face to face interaction leads SOME people to believe they’re “arguing” when really they’re just sitting in front of a computer tapping letters into a series of tubes where some jerk in his underwear is screaming into the other end. Make no mistake – I may sound contentious at times, but I am never attacking the person on the other end. At worst, I am vigorously questioning the validity of their IDEAS.

            My advice – take your internet “arguments” a bit less seriously and you’ll avoid going from a well reasoned discussion to talking about people’s “misgivings” and parents. Or not. I don’t really care.

    • >>“Dude, you sound like you’re co-writing an Econ textbook with the author of 50 Shades of Grey.”
      >How would you know?
      http://www.youtube.com/watch?v=AJXKVOxqkWM

  17. Robert Rice says:

    Do you actually believe the self-righteous back patting that comes from your keyboard? Pontificating about proper internet etiquette after mocking me yesterday for an argument I didn’t make:

    Robert, you and I both know there is a statutory limitation of $300 million for US Notes. If you want to argue that that sufficiently backs your argument in a system where the govt has over $16T in liabilities then fine. Then I also have a black mole on my ass that sufficiently categorizes me an African American! ;-)

    and,

    Being able to issue 0.018% of the outstanding liabilities is your solution to the problem? The US govt spends 10 billion dollars a day and 300 million in US Notes is your irrefutable evidence of self funding? Talk about a Pyrrhic victory….Robert, let’s be serious.

    … both of which solicited my comments to you about bearing false witness and how mommy and daddy Roche should have taught you how not to do that. I’m sure there is a wannabe victim’s anonymous counseling available for you should your feel bads still be feeling bad. Lying in the bed you made, bud. Now, don’t forget what Jesus said about 2x4s and slivers.

    By arguments, I didn’t mean “heated discussions,” I was using the term in the technical sense used by logicians, just as I meant validity yesterday. Evaluating propositions for their truth value through an evaluation of whether a conclusion follows from true premises–I’d much prefer discussion on this. Fair enough? What do you say we let sleeping dogs lie, and return to an evaluation of ideas through genuinely respectful conversation that employees the virtues you so eagerly defend in word. Jabbing is of no interest to me, although I don’t have a problem dishing it back, should that be necessary.

    • Cullen Roche says:

      Uggg. The mole comment was a joke. Hence the stupid wink accompanying it. You really need to lighten up. I wasn’t attacking you or “bearing false witness”. And I am sorry if it came across like that. Sheesh.

      Have a glass of wine and take the edge off.

  18. Robert Rice says:

    Hi Jan,

    P1: Agree. (if you belong to that ideological camp)

    The hint of underlying relativism in your comment is a little concerning. Consistent with the correspondence theory of truth, a proposition is true regardless of one’s opinion or presupposed ideology, insofar as it correctly describes reality. I may be making more of your chosen wording than I ought and do not mean to be patronizing–sometimes we need to be more concerned with trying to understand each other versus picking apart each other’s comments (reading between the lines if you will; we are all in this together, right?)–but I don’t see how accepting the proposition “governments require money to operate” as true arises from a prior ideological commitment. I suppose in theory, a government could be outfitted with volunteers or dictators and their slaves, but even then. At the very minimum, I think we can agree this premise is true (that it reflects reality) of most governments, certainly those operating in capitalist economies.

    P2: Money creation for self-funding is complicated as you need to take time/cycles into perspective. Short term; yes, it is possible to do this. Long term: it is possible (we have done it) although not sustainable in long term as money creation is simply slicing the pie of wealth into additional pieces – as such, printing money does not create more wealth and if it did, we could all be happy campers just printing all day long. (wouldn’t that be great)

    True, as we approach full employment/full production, continuing a self-finance strategy, without sufficient offsetting taxes, is likely to lead to harmful levels of inflation. However, self-finance is very useful in insufficient demand environments to provide the government with comfort to spend sufficiently as a remedy–the funding is certain to be available, the deficit hawks can’t complain about “unsustainable, accumulating debt,” and so on. The objective is to have an additional fiscal policy tool, and to use that tool in a safe and beneficial manner. Taxes and even borrowing will continue to have their use too.

    Inflation does not follow from money creation in a deterministic manner. I cannot determine if you meant to suggest such, but your comments somewhat read in this manner. Certainly money creation influences prices insofar as it leads to higher demand. But, for inflation to mechanically follow from money creation, one would have to argue inflation results in all money creative circumstances. I personally believe price stability and FG self-finance through money creation are compatible goals and can be implemented into a sustainable economy.

    P3: Agree. However, as any responsible person or business entity abiding to common rules – if you are out of money to spend, you shall not spend. Period.

    True. Currency users by definition use currency, which implies they are spending restricted by income. However, the Federal Government can operate from a different paradigm. It should operate from a different paradigm. It has that authority today via platinum coins or U.S. Notes, although the latter, as has been beat to death in related conversations, is restricted by law to a useless amount. A simple update would change that.

    C: Unfortunately, your Keynesian conclusion…

    The conclusion is just a conclusion. Money creation for FG self-finance was around long before Keynes. What matters is whether it’s true, not whether I follow Paul and you follow Apollos. If we all followed ourselves and stopped seeking hero worship or to be on the hero’s team, I think we could all be more productive as a society.

    …or we continue living in our fantasy land and go on printing to continue spending above our means and subsequently reach currency collapse due to hyperinflation/lack of trust in the paper. This has been proven many many (and most importantly all) times to be the outcome of irresponsible printing/dilution of money.

    The failure of previous generations to execute FG self-finance without harmful side effects is no argument against its proper execution today. What I would like to know is what your justification is for believing price stability and FG self-finance are mutually exclusive, given this is the implication of your position?

    • This is why I tend to avoid theory. What you’re talking about is a total change in the way our monetary system currently operates. In order to allow self financing on any significant scale you’d have to first convince the most powerful industry in the history of mankind that their profits are about to be sliced. Banks rule the monetary system. They dominate Washington DC. So, in order to pass self financing on any meaningful scale you have to first convince the banks, bankers and capitalists that they’re about to take a back seat. Good luck with that.

  19. Lars
    Most loans are consumer mortgages. So unless the government starts giving people money so they can buy homes you’re likely to be wrong. I don’t think any of you have thought this through entirely. It sounds like a typical liberal policy panacea that sounds cute in theory and would probably be disastrous once it was actually implemented.

    Yes most loans are consumer mortgages but they make a lot of their money at the margins with credit card debt, student loans and car loans too. I don think giving money for people to buy homes is a policy suggestion by anyone Ive seen.

    Reducing the NEED to acquire credit just to exist, even if by only 10-20%, would make a significant impact I believe.