The Razor’s Edge, John Carney and The Trillion Dollar Coin

“The path to salvation is narrow and as difficult to walk as a razor’s edge.”
Katha-Upanishad, 500 BC

John Carney, whose work ethic is admirable, has three (!!!) new CNBC columns out today about the trillion dollar coin and the debt ceiling (uno, dos, tres). John asserts that the trillion dollar coin would be unconstitutional and that even if the debt ceiling were eliminated, Congress could just as easily screw things up by refusing to authorize debt service payments. Leaving aside the folly of anticipating the next stupid thing Congress does while the current stupid thing has yet to be dealt with, debt service is actually one of the few unlimited, permanent appropriations in the US Code (31 USC 1305), its been on the books since 1874 so it would be a hard slog for Congress to remove that permanent appropriation (Wall Street lobbyists would not be pleased) AND then get it past a presidential veto. So in reality, to paraphrase Arthur Miller, interest must be paid!

But I digress. John’s main argument is that using the platinum coin statute to sidestep the debt ceiling is unconstitutional because its too vast a delegation of power by Congress to the Secretary of the Treasury.

“The statute authorizing the Treasury Secretary to mint platinum coins is very different. Here’s what the relevant section says:

    The Secretary may mint and issue bullion and proof platinum coins in accordance with such specifications, designs, varieties, quantities,denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.

There’s no intelligible principle here at all. Nothing to guide the Secretary of the Treasury about how to exercise this authority, no goal at which his discretionary decisions are aimed. This is just too broad to fit into our constitutional framework.”

I disagree, because, Congress has, in fact, left the Secretary walking on a razor’s edge with many burdens, and little discretion. His path is almost too narrow to fit into our constitutional framework, almost. But first, we must look to other sections of Title 31 to find the Secretary’s duties and powers.
The Secretary of the Treasury shall—
(2) carry out services related to finances that the Secretary is required to perform; *
(3) issue warrants for money drawn on the Treasury consistent with appropriations;
(4) mint coins, engrave and print currency and security documents [i.e. Treasury bonds], and refine and assay bullion, and may strike medals;**
(6) collect receipts…
31 USC 321
—————-
*“The Secretary of the Treasury may borrow on the credit of the United States Government amounts necessary for expenditures authorized by law…” [subject to debt ceiling] 331 USC 3101 & 3104,
**“The Secretary of the Treasury… shall mint and issue coins described in section 5112 of this title in amounts the Secretary decides are necessary to meet the needs of the United States…” 31 USC 5111(a)(1)

Now here’s where John is wrong, the Secretary has no legal discretion in this matter whatsoever. His path is laid out by Congress like he’s the mechanical rabbit at a dog race.
1. Congress tells the Secretary (as supervisor of the IRS) how much to collect in tax receipts and (with somewhat less effort) in miscellaneous receipts.
2. Congress tells the Secretary as signatory of every single appropriation warrant how much money to transfer to federal agency sub-accounts (called “appropriation symbols” for some obscure reason).
3. Congress tells the Secretary he MAY borrow on the credit of the United State to fund expenditures but not for one penny more than the debt ceiling.
4. Congress tells the Secretary he SHALL mint coins such coins as he decides are necessary to meet the needs of the United States.

When Congress orders the Secretary to spend appropriations in excess of the receipts they’ve ordered him to collect, the unavoidable budget deficit must be filled by the combination of the Secretary’s powers to borrow (debt limit-constrained) money and to mint (debt-free) money. If Congress refuses to increase receipts or cut appropriations or extend the debt limit, the Secretary has only one and only one path to comply with all of his legal duties. Maybe I’m naive, but I’m confident the path to salvation will never be ruled unconstitutional by any United States Court.
:o)

Comments

  1. Clonal Antibody says:

    Beo,

    Did you see this?

    From A trillion-dollar-coin idea takes off, and a former head of the U.S. Mint doesn’t see why it shouldn’t

    But for what it’s worth, the guy who was in charge of the U.S. Mint when the original law providing for the minting of such a coin was passed told me he thinks Nadler’s proposal is perfectly legal.

    “My understanding of how this all works suggests that this is a viable alternative,” said Philip Diehl, a former chief of staff to the late Texas congressman Lloyd Bentsen, who was head of the U.S. Mint from 1994-2000.

    Diehl tried to make the Mint function more like a business, and saw an opportunity in the worldwide market for platinum bullion coins. (The gold bullion coins fashioned by the Mint are not produced at the preferred purity for the worldwide gold trade, Diehl said, making them a tough sell on the international market.)

    Diehl planned to conduct extensive market research, focusing in particular on the hot market for platinum in Japan, and wanted legislation that would allow him to react quickly to those results. The Treasury Department, wary of its bureaus making their own friends on the Hill, was “decidedly unenthusiastic” about the legislation, Diehl said, but he worked closely with Republican Rep. Mike Castle, who was chairman of the House Financial Services Subcommittee at the time, and eventually got the bill through the Republican-controlled House with what Diehl called a “blank check.”

    “One of the ironies in this story is that a G.O.P. Congress passed the legislation over the objections of a Democratic Treasury, and now, today, Treasury may well be in a position to use the law as leverage to neutralize the G.O.P.’s threat to hold the debt limit hostage,” he said.

    The legislation served its purpose; the Mint rushed out a platinum bullion eagle coin—in denominations up to $100—and overtook the market.

    “We brought that coin to market faster than any coin the U.S. Mint had ever brought to market, and within about six months of launching it, we owned about 80 percent of the worldwide market for platinum bullion coins,” he said. “The Canadians had dominated the Japanese and U.S. market up to that time, and we basically took them out of his both markets.”

    “Of course, no one ever imagined that a scenario like this would develop,” said Diehl, who is now C.E.O. of a gold seller in Austin, Texas.

    Diehl said he thought it could be used “as a backstop,” and that it appeared to be on more firm legal ground than the 14th Amendment.

    • Thanks for posting, that’s pretty awesome.

      • Clonal Antibody says:

        Key statement by Diehl ( bolds mine)

        Diehl said, but he worked closely with Republican Rep. Mike Castle, who was chairman of the House Financial Services Subcommittee at the time, and eventually got the bill through the Republican-controlled House with what Diehl called a “blank check.”

    • Philip Diehl says:

      From Philip Diehl, Mint director who wrote the platinum coin law:

      The claim that minting a trillion dollar platinum coin is unconstitutional was no basis whatsoever. Congress has given Treasury broad discretion in minting coins since the founding of the republic, and its power to do so is rooted in the Constitution (Article 1, Section 8). Moreover, the accounting treatment of the coin would be identical to other coins produced by the Mint–no different from a quarter.

      Here’s a brief on the subject:

      I’m the former Mint director and Treasury chief of staff who, with Rep. Mike Castle, wrote the platinum coin law and produced the original coin authorized by the law. Therefore, I’m in a unique position to address some confusion I’ve seen in the media about the $1 trillion platinum coin proposal.

      * In minting the $1 trillion platinum coin, the Treasury Secretary would be exercising authority which Congress has granted routinely for more than 220 years. The Secretary’s authority is derived from an Act of Congress (in fact, a GOP Congress) under power expressly granted to Congress in the Constitution (Article 1, Section 8).

      * What is unusual about the law (Sec. 5112 of title 31, United States Code) is that it gives the Secretary complete discretion regarding all specifications of the coin, including denominations.

      * Moreover, the accounting treatment of the coin is identical to the treatment of all other coins. The Mint strikes the coin, ships it to the Fed, books $1 trillion, and transfers $1 trillion to the treasury’s general fund where it is available to finance government operations just like with proceeds of bond sales or additional tax revenues. The same applies for a quarter dollar.

      * Once the debt limit is raised, the Fed ships the coin back to the Mint, the accounting treatment is reversed, and the coin is melted. The coin would never be “issued” or circulated and bonds would not be needed to back the coin.

      * There are no negative macroeconomic effects. This works just like additional tax revenue or borrowing under a higher debt limit. In fact, when the debt limit is raised, Treasury would sell more bonds, the $1 trillion dollars would be taken off the books, and the coin would be melted.

      * This does not raise the debt limit so it can’t be characterized as circumventing congressional authority over the debt limit. Rather, it delays when the debt limit is reached.

      * This preserves congressional authority over the debt limit in a way that reliance on the 14th Amendment would not. It also avoids the protracted court battles the 14th Amendment option would entail and avoids another confrontation with the Roberts Court.

      * Any court challenge is likely to be quickly dismissed since (1) authority to mint the coin is firmly rooted in law that itself is grounded in the expressed constitutional powers of Congress, (2) Treasury has routinely exercised this authority since the birth of the republic, and (3) the accounting treatment of the coin is entirely routine.

      * Yes, this is an unintended consequence of the platinum coin bill, but how many other pieces of legislation have had unintended consequences? Most, I’d guess.

      Philip N. Diehl
      35th Director
      United States Mint
      en.wikipedia.org/wiki/Philip_N._Diehl

  2. “Congress tells the Secretary he SHALL mint coins such coins as he decides are necessary to meet the needs of the United States”

    It looks to me like the “shall” clause fully justifies and even mandates action due to an irrational debt ceiling constraint in the overall funding mix for a deficit whose elements have already been approved by Congress (taxes and spending). More than that, it would give the Fed legal cover to make efforts to enable platinum easing – by fully integrating it with the regular QE program – including tactical management of the interest rate sensitivity of excess reserves by issuing term deposits as appropriate (as you’ve alluded to elsewhere).

    I disagree with the logic of John Carney’s final post – in the sense of mathematical if not legal logic.

    The relevant logic IMO comes from this equation:

    Deficit = tax revenues minus budget expenditures

    If Congress determines the RHS of that equation, it determines the LHS.

    And if Congress already assigns funding responsibility for LHS=RHS to Treasury, then any additional restriction on funding (such as a debt ceiling) over-determines that equation. And if the equation is over-determined, it exposes the functioning of the system to purely political manipulation, which is what is happening now.

    The counterfactual in John’s post should not be executive approval of a debt limit, but rather the elimination of the debt ceiling itself.

    Regarding John’s comparison with the Fed, it would seem reasonable that if the Fed has been delegated the authority to conduct QE programs (among other things), that Treasury be delegated the authority to fund LHS = RHS in the equation above, given that Congress has already approved the RHS elements of that equation and that Treasury has a job to do in that context.

    Within the legal framework as it now exists, as I understand your explanation of it, I think it’s the debt ceiling (not the coin) that should be questioned as unconstitutional, given the obvious pitfall of the potential for grossly bad faith in the passing of laws for spending and taxation in the first place – unless somebody can explain otherwise why and how the legal logic should somehow displace the math logic in this case.

  3. beowulf, here is Ryan Grim:

    The simplest escape route out of the debt ceiling impasse is for the president to direct the Treasury to find a legal way to pay its debts. The Treasury then has a variety of options. One gaining particular attention relies on a law that allows the Treasury to mint a coin of unspecified value and deposit it with the Federal Reserve. Those funds could then be used legally to pay debts.

    To which I appended “Exactly as beowulf had proposed when the 14th Amendment was brought wrt to the platinum coin.” when I posted it at MNE

    http://mikenormaneconomics.blogspot.com/2013/01/ryan-grim-harry-reid-would-back-obama.html

  4. Hi Beo, New post of mine on legality and constitutionality: http://neweconomicperspectives.org/2013/01/trillion-dollar-coin-posts-on-legality-and-constitutionality.html#more-4307 Also at Correntwire, FDL, Kos, and ourfuture.org

    Quotes you at length.

  5. I have to say, this seems pretty persuasive to me.

    Section 5111, in particular.

    “The Secretary of the Treasury—
    (1) shall mint and issue coins described in section 5112 of this title in amounts the Secretary decides are necessary to meet the needs of the United States;”

    • Hi John, you write so damn fast, I started on that after I read the first of your columns (long, well-argued pieces, I should note, and not simply blogger bait with a couple of sentences and a link). You then reloaded and kicked out two more before I had that one piece done. If you were doing anything else, I’d say, you should go into journalism. :o)

      The thing to remember is that in cases like this where the govt is representing the public interest, The Man really does get to play with a stacked deck. Clint Bolick of the Institute for Justice has written frequently on how any two-bit city council can easily show the courts a rational basis to justify all sorts of pointless licensing and other regulatory laws. Now imagine if the public menace to be averted is somewhat larger than the risk of unlicensed stylists screwing up a hair-braid. Let’s say, a default on the public debt, a breach of the 14th Amendment, which the President of the United States asserts will lead to a global economic crisis threatening the national security of the United States. Its hard to imagine any legal argument on the other side that could possibly sway a federal judge.

      Even before it got that far, there’s the question of standing. While the unlicensed hair stylists would have standing to sue the city (before losing on the merits, of course), I’m doubtful there’s anyone with standing to sue Tsy over this because, except for terrorists, pirates and other public enemies, no one on Earth can claim a particularized harm from the continued operation of the US Government (it would be awesome if a band of Somalian pirates took a stab at it). Members of Congress could certainly try, but the DC District Courts probably keeps a “Dennis Kucinich” dismissal order on file for just such eventualities.
      http://www.bloomberg.com/news/2011-10-20/obama-can-t-be-sued-by-lawmakers-alleging-war-powers-act-breach-over-libya.html

      • “I’m doubtful there’s anyone with standing to sue Tsy over this because, except for terrorists, pirates and other public enemies, no one on Earth can claim a particularized harm from the continued operation of the US Government ”

        I want to say Lew Rockwell and the Mises Institute, but the end of the USG would probably be terrible for business… ;)

  6. Chris Hayes – excellent 10 minute discussion (video) with Congressman Jerry Nadler on the platinum coin this morning. Nadler also raised the issue of the constitutionality of the debt ceiling.

    http://www.msnbc.msn.com/id/46979738/#50371482

    • Nice.

      • I am really surprised many of the people in favor of this, like the Congressman, do not think it would be inflationary for the reason that it wouldn’t lead to more spending than what Congress has already authorized. I guess folks like Krugman would invoke the liquidity trap argument, but I would be surprised if the Congressman has this in mind. What happened about the concern of offsetting bond sales?

        • That’s an interesting point. There are those who favor this, but who may not have gone one step further to consider the eventual effect on excess reserves, etc., which may conflict in some cases with their preconceived ideology toward that aspect of monetary policy. On the other hand, Mike among others has emphasized that working through the full implications of this thing can help achieve a better understanding of the fiscal and monetary policy issue in total. That’s one reason I worked out the analogy of platinum easing. Personally, 90 per cent of my interest in this issue has to do with understanding the monetary operation effect in its totality – rather than the debate as to whether it is a good or bad idea as a real life proposal. But the more I think it through as a fiscal and monetary policy scenario, the more realistic it becomes as a real world proposal in the context of the dysfunction that is evident in the existing conceptual framework of a combined appropriations/debt ceiling framework.

          • That makes sense.

          • I agree. It’s entirely insane how few people have worked out the consequences of the debt ceiling or the TDC. There is almost no real commentary on this at all.

            I am working on a piece which lays out the consequences of hitting the debt ceiling. It’s way, way worse than I imagined.

            We’re talking losing 700,000 – 1,000,000 jobs per month until the ceiling is lifted or we use the coin. It’s as bad as the worst months of the great depression.

            Here is the basic logic: We have about a $100bn per month deficit.

            The fiscal multiplier right now is close to 1.5 for new spending, according to the IMF. But this for ADDITIONAL spending. The multiplier on existing spending is probably higher. Back of the envelope, call it 1.8

            This puts us at 100bn * 1.8 = 180bn per month in impact to our economy.

            Annualized = $2.16T for 14.5% impact to our economy.

            Use Okun’s law to figure out the change in unemployment. 14.4%/1.8 = 8% more unemployment! The total non-farm is 134 million people. We would lose approximately 10.7 million jobs.

            This is probably a high estimate, because this would imply losing nearly 1 million jobs per month. But we are certainly talking losses above 600,000 per month.

            And this policy is casually thrown around, as though nothing bad would happen. Just something to jabber about on Sunday morning talk shows, or threaten in press conferences.

            • big numbers!

            • So far, no one seriously thinks that the GOP is going to be stupid enough to shoot itself in the head instead of the foot, as it did with the fiscal cliff. I suspect that, secretly, the Dems are hoping they will though.

              Did you see Bill McBride’s latest on the “default ceiling”? :)
              http://www.calculatedriskblog.com/2013/01/default-ceiling-bluffing-into-nuts.html

              • In a sense, assuming McBride’s forecast is accurate, the ‘modern monetary’ crowd owes the GOP a debt of gratitude. TPC will not be needed, but the debt-ceiling threat has launched it and related insights into the national consciousness.

                • I think that to some degree this was the original intention of Ellen Brown and beowulf, and also of Joe Firestone, who pushed it relentlessly.

                  I doubt that anyone jumping on board at the outset would have ever dreamed of this amount of free publicity for monetary economics. It’s a huge step forward in public awareness and the framing of the debate.

                  • That certainly was my intention, Tom. It still is!

                    • Thanks for the clarification, Joe.

                      Should point out that the intention of Joe and other on the progressive side is to call attention to self-financing (fiscal provision) as a feature of the existing monetary system rather than to limit discussion of TPC as “easing” (liquidity provision) to avoid the 2013 debt ceiling (cashflow crunch).

                      Daily Kos — Money & Public Purpose: Wake Up Progressives: the Trillion Dollar Coin Can Be Game-Changing! by Letsgetitdone (Joe Firestone)

                      http://www.dailykos.com/story/2013/01/10/1178000/-Wake-Up-Progressives-the-Trillion-Dollar-Coin-Can-Be-Game-Changing

                    • Thanks Tom, I have a post out at Corrente, Kos, FDL, and CAF. Here’s the Kos link: http://www.dailykos.com/story/2013/01/10/1178000/-Wake-Up-Progressives-the-Trillion-Dollar-Coin-Can-Be-Game-Changing Should be going up at NEP at 9:00 PM Central time.

                    • Philip Diehl says:

                      Speaking of free publicity, I’ll be on Chris Hayes’ Saturday morning program on MSNBC pumping TPC. I spent some years in DC as a PR flack and I’ve never been near a media frenzy like the one I’ve seen in the last four days. I’ve been inundated with requests for interviews and answers from online, print, radio and television news sources. I’ll be in the Heritage radio Lion’s Den tomorrow morning.

                      I’d feel a lot less comfortable in this role if it weren’t for all I’ve learned participating in your discussions. It has tested my understanding and my instincts about how the pieces come together, and it has given me more confidence about the thickness of the ice as I take another step making the case.

                      Ya’ll are to be commended for kindling the TPC for two and half years then sending it viral. I feel like I’ve joined the Monetary Spring, minus Tahrir Square and the hookahs.

                    • Great stuff.

                      I think Hayes is an excellent reporter/interviewer on this subject.

                    • as I understand it, Stephanie Kelton, of UMKC economics, the editor of the New Economic Perspectives Blog will be there too. I think you’ll find her charming and brilliant!

                    • Philip Diehl says:

                      One other item: the law contains a section authorizing palladium bullion and numismatic coins, again granting broad authority to the Secretary but not as broad as the blank check for platinum coins. And the palladium coins must be treated as numismatic items.

            • “And this policy is casually thrown around, as though nothing bad would happen. Just something to jabber about on Sunday morning talk shows, or threaten in press conferences.”

              Thanks for taking the leading oar on figuring out the consequences of dealing with the debt limit by choking out the US economy. It wouldn’t occur to me to have used Okun’s law but damn if it isn’t handy for all sorts of questions. :o)

              • It’s my bread and butter. My first blogging claim to fame was using Okun’s to figure out the budget deficit proposed by Obama was far too small two weeks before Krugman did the same. I got a few readers from that little post – mostly people saying I was wrong, until Krugman came out and said the same thing.

            • “insane how few people have worked out the consequences of the debt ceiling ”
              See http://www.bipartisanpolicy.org analysis. Mainstream so it ignores most alternatives but comprehensive re debt ceiling.

        • Philip Diehl says:

          It has no such inflationary effect because it allows no spending above what Congress has already appropriated. It simply allows the treasury to pay the bills Congress has accumulated through its prior appropriations.

          • Right.

            But there is a somewhat separate inflation dimension which may be open to debate – which is the perception (perception; not necessarily reality) by many, that the funding of deficit spending by excess reserves (and increased banking system deposit liabilities in most cases) is potentially inflationary relative to funding by bond sales. And temporary expansion of that sort will be associated with the platinum solution, unless the reserve effect “sterilized” as a rule.

            That’s the same objection that some have to QE, which is the partial funding of the CUMULATIVE deficit by bank reserves (and increased banking system deposit liabilities). And with QE, as in this case, the reserve funding obviously occurs in respect of spending that has already been authorized.

            So while the funding of the current deficit with (temporary) platinum induced reserves and deposit liabilities has no inflation impact, in the sense that it is funding of spending that has already been appropriated, there is the inflation implication of the actual funding instrument – i.e. the prospect of a pure monetarist argument, more or less, and that’s a separate argument from the appropriations one.

            And the distinction between those two arguments holds in the case of both regular QE and the platinum coin, which is yet another reason why I’ve suggested this could all be described as platinum easing.

            So there are really two separate inflation arguments coming from the opposition to platinum easing – the erroneous additional spending one and the monetarist reserve/deposit/money one. Of course most involved with this site (including me) believe the second one is also close to pure bunk in terms of its own analytic integrity (the reserve side argument is absolutely wrong; but the deposit liability side of the money effect probably shouldn’t be ignored 100 per cent).

            • Philip Diehl says:

              For the sake of argument, I’ll concede for the moment what I think is a weak inflation counter-argument.

              So on the one hand, we have the prospect of some kind of unknowable rise in inflation based, not on economic realities but on someone’s ill-informed expectations, and on the other hand, we have the very real cost of a default.

              Which door should we choose?

              • Philip, we’re with you.

                Anyone else here think it’s cool that the former Head of the Mint is backing beo’s proposal AND thinks along similar economic lines?

                • :) I don’t even know how to begin. This entire situation had me staying up for hours last night.

                • Philip Diehl says:

                  Thanks. I live in Texas and it’s pretty lonely down here. My sons refused to give me the Christmas gift I requested: a t-shirt bearing the words “I See Stupid People”. Silly, because no one down here would get it.

                  • This is what we are trying to convey – as bad as the coin is in possible inflation and overturning prior ways of doing the government, ruining our economy is 100x worse.

                  • Cullen Roche says:

                    Ha. That’s hilarious. Thanks for taking the time to get involved here, Phil. Most guys of your stature wouldn’t do something like this and it’s important that you’re involved.

                    Best,

                    Cullen

              • Perhaps it wasn’t clear that I’m in total agreement with all your points – just pointing out the apparent nuances in the inflation fears from those that fear it

                • Right, and the same folks that believe in bond sterilization also believe in loanable funds, crowding out, and the money multiplier. They are also oblivious to the the interest on bonds being more “inflationary” than leaving the funds “sterilized” as rb.

            • Philip Diehl says:

              This is very helpful. Fortunately, I haven’t had to deal with the second argument, so far, since I’ve been dealing with people whose mastery of economic theory just reaches the south side of supply and demand. So I make the easier-to-grasp spending argument and move on before eyes glaze over.

              • the south side of supply and demand is probably a good turn anyway at which to exit the race track when trying to understand monetary economics

                :)

          • Hi Philip,

            Great to have your presence here. JKH expressed my thoughts exactly. What the orthodoxy calls ‘monetizing’ the deficit is, in general, a real concern to many from an inflationary perspective, and the platinum coin would do that from their perspective. We think about things a bit differently here, as JKH alluded to. That said, some in the orthodoxy, such as Paul Krugman, would invoke the ‘liquidity trap’ argument to say that in today’s interest rate environment, it doesn’t matter if we monetize the deficit. However, I would be surprised if the general public and mainstream media is thinking about it with that level of sophistication. Moreover, even economists like Tyler Cowen have said “the economics of such a move would work fine” (http://marginalrevolution.com/marginalrevolution/2013/01/should-we-mint-the-platinum-coin.html), and I don’t think he espouses the ‘liquidity trap’ argument, although I could be wrong. It’s like, all of the sudden, a lot less people care about the Treasury just ‘printing money’ when it deficit spends.

  7. Robert Rice says:

    For those interested:

    Paper Money and the Original Understanding of the Coinage Clause by Robert G. Natelson

    http://www.harvard-jlpp.com/wp-content/uploads/2009/02/31-3/Natelson%20Online%20-%20Paper%20Money.pdf

    More to come.

  8. Beo – no major news network has reached out to do a story on your discovery of TPC? A bit surprised. And would the White House not be interested in speaking with you if they were going to seriously consider the coin?