Phony problem, phony solution

Maybe it’s all kabuki, but when Judd Gregg, who knows the breed, says out loud that the House Republicans won’t see reason on the debt ceiling until the Social Security checks stop going out, it’s time to look around for bolt-holes.

Have you heard about the trillion-dollar platinum coin? It’s a completely imaginary solution, which makes it well-designed for a completely imaginary problem.

The debt ceiling crisis is entirely artificial: a mere political ploy by the servants of the plutocracy to divert public attention from the real problem: the stumbling recovery, high unemployment, and the need for more short-term stimulus. (Yes, there’s a need for fiscal sustainability as well, and re-establishing the revenue base needed for the public services we need performed, but that’s important rather than urgent.) The United States never had a debt ceiling until 1939, and doesn’t need one now. Congress can control debt by its control over revenues and expenditures; all the debt ceiling does is create the possibility that the government will not be able to borrow the money needed to carry out the laws Congress has already passed.

The Debt Ceiling hasn’t been much of a problem simply because previous Congresses have been content to do a bit of grandstanding before doing the right thing.

But now the lunatic fringe that calls itself the House Republican Conference seems committed to besmirching the nation’s honor and wrecking its credit – and possibly crashing the world economy again – as part of a demand that Barack Obama repeal the addition table. Just a tempest in a Tea Party. Yet the consequences could be catastrophic.

Fortunately, the Debt Ceiling is not the only stupid law the Congress has passed. It turns out that, back in 1996, the platinum lobby managed to get the following section written into law:

The Secretary may mint and issue platinum bullion coins 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.

Now, arguably a “bullion coin” is distinct from a “fiat coin” in that its face value is supposed to reflect its precious-metal content. But the law doesn’t say that.

So what if the Mint produces three platinum coins with face values of $1 trillion each? (There’s some debate about whose portraits should adorn them, but my nominees would be Ronald Reagan, George W. Bush, and Alfred E. Neumann; the last coin could have “What, me worry?” in place of “In God We Trust.”) The Treasury deposits the coins with the Fed; they’re legal tender, so the Fed exchanges them for $3T of Treasury bonds now in its reserves. And the coins are not debt: they’re money. Hey, presto! The debt shrinks by $3T, and we don’t have to issue more coins until after the 2012 election. Problem solved.

Yes, it’s a phony solution. But it was a phony problem to start with. The mere fact that the debt of the United States is denominated in dollars, and that the government of the United States can create dollars at will, makes the risk of a Greek-style default inapplicable to our case; Greece’s problem is that it owes Euros, and doesn’t have the authority to print them.

Of course this sort of phony solution won’t solve any real problem. If we print too many dollars, their value compared to other currencies will fall. So eventually public services need to be supported with revenues rather than printing presses. But it can solve the imaginary problem of hitting the debt ceiling.

Is it legal? Arguably, it would be illegal not to do it. The President is bound by the Constitution and his oath of office to “take care that the laws be faithfully executed.” Appropriations bills are laws; he’s not allowed to impound appropriated funds, but must expend them. If the debt ceiling isn’t raised, he won’t have the cash to do so unless he issues the trillion-dollar coins. And if that’s the only way to carry out his Constitutional duties, then he is not just allowed, but required, to do precisely that.

In practical terms, this would be identical to repealing the debt ceiling, so it’s hard to see why the financial markets would have a problem with it; after all, no one but a few gold bugs minds the fact that the government can convert a few cents’ worth of paper and ink into $100 by stamping on it “Legal Tender for All Debts, Public and Private.” (The sensible approach of printing bills is foreclosed because bill issue is also limited by law.)

This may not be the only way to skin the cat. The Treasury could issue scrip that had the status of neither legal tender nor debt, but which the Treasury agreed to accept in payment of federal taxes. Such scrip would trade at the teensiest of discounts to currency, since it would be precisely as good as currency to any person or institution with a tax bill to pay. But if the House Republicans insist on acting like pre-school children, someone has to come in and be the adult supervision. Just letting the ship hit the rocks is not a practical option, even if it were a legal one.

The hardest part would be the speech. The President would have to go before the country and explain that he was willing to try to use the debt ceiling as an action-forcing device around developing a financially sustainable path of spending and taxation, but that – having failed to find honest bargaining partners on the other side – he was faced with a situation that required such an absurd charade.

And there’s the problem. The logical conclusion of that speech would have to be,

And that’s what the election of 2012 is about. Historically, this country has had two great political parties, either capable of wielding power competently and responsibly. Now it only has one. Ever since my election, the Republican leadership in Congress has made it clear that it would prefer the country’s failure to my success.

I hope you will send me back the White House; I have promises to keep, and miles to go. But if you do, send me back with enough Democrats so I can act as the leader of a great country and not the nanny of a bunch of two-year-olds. No one is more committed to the politics of compromise and conciliation than I am. But at some point you have to say, “Enough is enough.”

I’ve had enough. Have you?

And then he’d have to spend from now until November 2012 saying that same thing, over and over. He’d have to accept that our political system makes him a partisan, as well as a national, leader.

And there’s the rub. Nothing could be more foreign to his way of being.

As Machiavelli said, men are the slaves of fortune only if they are unable to adapt their modes of operation to the requirements of the times:

If, to one who governs himself with caution and patience, times and affairs converge in such a way that his administration is successful, his fortune is made; but if times and affairs change, he is ruined if he does not change his course of action. But a man is not often found sufficiently circumspect to know how to accommodate himself to the change, both because he cannot deviate from what nature inclines him to, and also because, having always prospered by acting in one way, he cannot be persuaded that it is well to leave it; and, therefore, the cautious man, when it is time to turn adventurous, does not know how to do it, hence he is ruined; but had he changed his conduct with the times fortune would not have changed.

Or, as Al Pacino said to Robert Duvall, we need a wartime consigliere. Can Barack Obama be that man?

Comments

  1. says

    Thanks Mark…

    Brilliant-good. Deliciously so…
    Seasoned well, with just enough garlic…
    Especially the Obama words that will never be served. But we can dream…

    With all the relentless “the sky debt is falling, the sky debt is falling” I was having trouble sleeping at night…
    And then, I read this paragraph today from my favorite dark sage (Kunstler):

    Europe is arguably worse off money-wise, more broke, flimsier, crapped out, crippled, and paralyzed. Sad, because in outward appearance Europe is – how shall I put this? – better turned out than America. Europe is a fit, silver-haired gentleman in a sleek Italian suit and a pair of Michael Toschi swing lace wingtips, holding a serious-looking Chiarugi leather briefcase. America is pear-shaped blob of semi-formed male flesh, in ankle-length cargo shorts, a black T-shirt featuring skull motifs, tattoos randomly assigned (as if by lottery) to visible flesh, a Sluggo buzz-cut, and a low-rider sports cap designed to make your head look flat. In other words, he lacks a certain savoir-faire compared to his European cousin. But both are broke. Neither has any idea what he will do next – though, for the American, it will probably involve the ingestion of melted cheese or drugs (or both). When the European collapses, a certain air of delicacy will attend his demise; the expired American will go up in flames in a trailer and they’ll have to sort out his remains from the melted goop of his dwelling-place with a front-end loader. This is the way the world ends…

    Shivers….
    Ague this evening for sure…

    Who knew that the platinum progressive fairy was looking out for me all this time?
    And yes, I’ll sleep better tonight knowing the world isn’t going to be flushed down the tea potty any time soon…

  2. says

    Technically, Congress enacted consolidated debt limit legislation in 1917. In 1939 they converted the subtotals into a single headline limit. So that adds 22 years. However, we should subtract the 18 years after 1980 when the sensible Gephardt rule – automatic increases in the appropriations bills – was operative. So the USA has had a separate debt ceiling for only 72 out of its 235 years of existence (31%).

    I’m glad you have come round to my scrip idea, failing outright abolition.

  3. bobbyp says

    “Of course this sort of phony solution won’t solve any real problem.”

    We have a real problem. It’s not economic. It’s political. The solution could address that issue. Hence, it is not “phony”.

    “If we print too many dollars, their value compared to other currencies will fall.”

    That depends. What is “too many”? How do you determine this? What’s wrong with a falling dollar? Our exports will increase. This means more jobs. See Dean Baker. You are way off base here.

    “So eventually public services need to be supported with revenues rather than printing presses.”

    Again, that depends. Further, it does not necessarily follow from the previous, and sadly mistaken, assertion. Two wrongs do not make a right here.

    “But it can solve the imaginary problem of hitting the debt ceiling.”

    It could possibly address the real political problem, but yes, the economic problem is farcically imaginary.

    Will they have enough room on the coin(s) for all those zeros?

  4. Swift Loris says

    He’d have to accept that our political system makes him a partisan, as well as a national, leader.

    The question is, why didn’t he realize this from Day One? It seems he assumed he could stay the same while changing everything else.

  5. MobiusKlein says

    I’d like to see the security around the 1-trillion coin.

    The other trouble is making change for a trillion. You would need a super-tanker filled with $100 bills as part of most transactions.
    (or just trade it in for Google.)

  6. newsouthzach says

    The other trouble is making change for a trillion. You would need a super-tanker filled with $100 bills as part of most transactions.
    (or just trade it in for Google.)

    Obviously you’re having a little joke, but it would in fact be illegal to have enough $100 bills on hand to make change for a trillion — the face value of paper money in circulation at any given time is limited by statute to $300 MM.

    This is a strange country.

  7. MobiusKlein says

    So 1000 Billion dollar coins also won’t work, since you can’t make change for them either. (I’ll note that Douglas Adams made this sort of joke first.)

    By $300 MM, you don’t mean $300,000,000 do you? That seems way too small – one dollar per person in cash.

  8. Brett Bellmore says

    “The United States never had a debt ceiling until 1939, and doesn’t need one now.”

    Did you really mean to imply, as this does, that prior to 1939, if Congress just kept passing spending bills that exceeded revenues, year after year, the government wouldn’t eventually run out of money, requiring Congress to pass a bill authorizing some borrowing? Because my understanding is that Congress has always had to authorize issuance of bonds, (Section 9 is in Article 1, after all.) the “debt ceiling” just consisted of Congress pre-authorizing huge amounts of borrowing, and leaving the details to the executive, instead of passing detailed laws authorizing particular instances of borrowing.

    Perhaps you want to clarify this, you wouldn’t want to mislead people just because it advanced your position…

  9. Brett Bellmore says

    Of course, I’m being a bit snarky, but the point is, simply repealing the debt ceiling wouldn’t do squat, because it wouldn’t give the President any authority to borrow. Rather, what you want is for Congress to transfer it’s power to borrow to the President, without any limits at all. You don’t want to abolish the debt ceiling, you want an infinite debt ceiling, and that we have never, ever had. It wouldn’t restore the status quo before 1939, it would create an inter-branch transfer of power that has no precedent in the US.

  10. Matthew Stevens says

    what you want is for Congress to transfer it’s power to borrow to the President, without any limits at all. You don’t want to abolish the debt ceiling, you want an infinite debt ceiling, and that we have never, ever had. It wouldn’t restore the status quo before 1939, it would create an inter-branch transfer of power that has no precedent in the US.

    Brett, if the President can’t tax or spend without Congressional authorization, there’s no problem at all with an infinite debt ceiling. Congress can balance its books through the budgetary process, giving the President no reason to borrow.

    No, as Mark says, this is Congress trying to “repeal the addition table”: Threatening national default because it’s too chicken-s*** to take responsibility for tax increases or entitlement cuts, railing against “spending” without facing budgetary realities. Repealing the ceiling wouldn’t create an “inter-branch transfer of power that has no precedent in the US.” The opposite, in fact: It would force Congress to finally show responsibility for its actions.

  11. PaulJ says

    Mr. Kleiman

    “If we print too many dollars, their value compared to other currencies will fall”.

    This may be intuitive but it in practice…someone needs to bone up on what “printing money” means.

    The Platinum coin trick would not add any new dollars to the economy – the net increase in financial assets (cash) in private sector bank accounts would be zero.

    It would however remove the face value of the coins from the National Debt.

    Not saying we should do it but it shows how meaningless the idea of National Debt is.

    Paying back the National Debt in full would remove all of the money that has ever been printed (created from thin air) from the economy.

    GDP would have to be expressed using amounts in the Millions instead of Trillions – there would virtually be no cash of consequence left in the economy,

    I will leave it to you to figure out the consequences of that.

  12. Rich C says

    I’m pretty sure that was James Caan (Sonny) who said “we [or maybe "I"] need a wartime consigliere.”

  13. says

    Mobius Klein above: “I’d like to see the security around the 1-trillion coin.”

    A little theater never hurts. The coins, in a strong box, could be escorted by a detachment of Marines on their trip from the Mint to the Federal Reserve.

  14. Brett Bellmore says

    You can argue that “there’s no problem with it”, but what you can’t argue is that it was the status quo prior to 1939. Instituting “debt ceilings” actually represented a relaxation of Congressional management of executive branch borrowing. The post seems written to give the impression that the debt ceiling was some kind of novel restriction on Presidential borrowing, instead, and that what’s being requested is just a restoration of a prior status quo, rather than an unprecedented transfer of borrowing authority to the President.

  15. says

    If I’m not mistaken, dollars in 1939 were backed by specie, and so appropriations in excess of revenues needed to be financed either by issuing debt (the normal way) or by divestiture of federal assets. Now that deficit spending can be financed by monetization, there’s no such thing as returning to the status quo prior to 1939 unless we abandon fiat currency.

  16. Dennis says

    @ NewSouthZach,

    That section of the USC refers to the Secretary of the Treasury, which means that the reference is to the old Silver Certificates. If you check your billfold/money clip you’ll see that almost all (and I mean that in the measure-theoretic sense, i.e. all but a negligible amount) your bills are Federal Reserve Notes.

    I don’t know how long it’s been since I’ve seen a Silver Certificate outside of collections. In other words, that 300M in circulation doesn’t include Federal Reserve Notes. I haven’t been able to track down exactly when that section of the USC was enacted, but I’m betting is well before 1960.

  17. J. Michael Neal says

    So 1000 Billion dollar coins also won’t work, since you can’t make change for them either.

    Sure you can. You seem to be operating under the mistaken assumption that all money is physical bills. This hasn’t been true for a long time. If you send the $3 trillion coins over to the Fed, it could return a computer message transferring $3 trillion back to the Treasury. The Treasury could then use those electrons (the very same ones, I tell you!) to transfer money to the account of someone else.

    You don’t need to do that, if you don’t like. Re-read Mark’s proposal. It would send the coins over to the Fed in exchange for $3 trillion in Treasury *bonds*. There is a certain portion of the debt held by the Fed, and they could transfer that back to the Treasury, which could then sell them to outside customers without increasing the debt beyond the debt ceiling. Or, they could sell one coin to the Fed, one coin to the Social Security Trust Fund and on to the Chinese, collecting $1 trillion in bonds from each.

  18. curious says

    @ JasonSL – I think you may have indirectly identified the true agenda of the House Republican Conference and its opposition to tax increases:

    “A fiat-money currency generally loses value once the issuing government refuses to further guarantee its value through taxation…” http://en.wikipedia.org/wiki/Fiat_money

  19. newsouthzach says

    @Dennis — Thanks, knew there was something fishy about that. I don’t believe I’ve ever seen a Silver Certificate at all.

    Although, you’re wrong about what I see in my billfold. All these notes seem to say “Reserve Bank of Australia…”

  20. beowulf says

    Platinum coins are minted at the West Point Mint. 2011 production schedule is to mint 15,000 $100 Platinum American Eagles– but quantities, denominations and designs are completely at the discretion of the Secretary of the Treasury. I’m sure if Geithner asks nicely, the Army could provide a Blackhawk to take a couple of $1 trillion Gippers (surely it’d have Reagan on the face!) down the Hudson River to Lower Manhattan for deposit at the New York Fed.
    http://www.govmint.com/item/Ronald-Reagan-Commemorative-Bronze-Medal/176977/14

  21. Dennis says

    @NewSouthZach

    Sorry, I thought “New South” referred to Northern US migrants south of the Mason-Dixon line. I shouldn’t have thought that, although I’ll confess to some level of curiosity as to why an Aussie knows that sort of minutia about the U.S. Codes.

  22. beowulf says

    You know Mark, throwing around “phony” this and “phony” that makes you sound disconcertingly like Holden Caulfield.

    “One of the biggest reasons I left Elkton Hills was because I was surrounded by phonies….For instance, they had this headmaster, Mr. Haas, that was one of the phoniest bastards I ever saw in my life.”
    http://laughterhopesockintheeye.wordpress.com/2010/04/08/holden-caulfield-whimpering-little-phony/
    :o)
    Just kidding, you’re quite right in all particulars. The point of using platinum coins is to address a singularly bizarre legal anomaly. The US Govt has a debt ceiling, however an agency of the US Govt (the Federal Reserve) does not have a debt ceiling. So by Tsy exchanging its coinage for Fed-held T-bonds, the US Govt could transfer public debt from its constrained whole to its unconstrained part. Sounds silly, but it beats cutting Social Security or, for that matter, raising taxes.

  23. newsouthzach says

    Dennis: As it turns out, I’m actually a Tarheel, born and bred. Finished school, the economy was in the shitter, got a job offer out here and figured I could stand to be an expat for a while. Thinking about coming home next year if I can find work. I still have no excuse for knowing various legal trivia.

  24. Joshua Rodd says

    The $300mm limit applies to United States notes, not Federal Reserve notes.

    I believe the M0 is around $1 trillion right now, including money stuffed in mattresses overseas.

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