Brad de Long asks for ideas on Geithner’s options on August 3rd, if the lunatics calling themselves Republicans are still blocking an increase in the debt limit.
Be careful what you pray for, you might get it. So Here’s My Plan.
The Bipartisan Policy Center estimates authorised expenditures at $302bn in August and incoming revenue at $172bn, or 57% of all payments due. The gap is therefore $130bn.
Debt interest is $29bn. Ring-fence that and pay in full, as per the Constitution. So that leaves $143bn in dollars to meet $273bn in payments to everybody else: retirees, hospitals, service members, contractors, federal employees, congressmen and the President. That makes 52.4%.
My proposal is that all these other creditors and lawful claimants, without exception, are paid 52.40 cents on the dollar. For the other 47.60 cents, they should receive a pretty, security-printed certificate like this (with much more more copperplate and squiggles than my primitive DTP skills can manage):
What would happen? And is it legal?
These bits of paper – call them geithners, timothies, or Boehner rubles – will have a market value, underwritten by the promise to accept them in payment of taxes. What happens when retirees show up at WalMart with them in hand of August 5? There are touts on the sidewalk offering 50c on the dollar, but that’s a ripoff for the retirees and a business opportunity for the store. I think WalMart rings up Goldman Sachs for a quotation on $50m of geithners. Goldman can sell them on to rich individuals to meet tax bills and corporations to meet social security payments, for say 90c on the dollar. So Goldman offers WalMart 80c. WalMart offers its customers 75c. Hey presto, we have a market. Initially this would be inefficient and regressive, but would rapidly become less so as arbitrageurs pile in.
One of the practical problems is that geithners come in odd amounts, So anybody – from a libertarian blogger to the University of Chicago to Citigroup – can set up a scheme of depositary receipts. The receipts, also security-printed, would be for convenient amounts like $100.
What you would have is a parallel currency. It’s happened lots of times, in inflation-ridden Latin America, to immediately post-war and and post-communist Eastern Europe. When Ireland had a six-month bank strike in 1970, cheques issued by all sorts of businesses became money. Why should a geithner be less credible than a cheque from O’Malley’s Bar in Skibbereen?
Is it legal? Surely not. But as Jonathan Zasloff wrote about his own proposal, who’s going to sue, and what court will hear the case? The Treasury will be sending out $4bn of geithners every day, and they would be in everyone’s pockets – including those of congressmen and judges.
How about constitutional? It’s a usurpation of power from a failed Congress. But Obama has better lawyers than George Bush, and just as royalist. If the President can get away with murder of American citizens, as he currently claims, he can surely get away with a bit of financial effrontery in the public interest. For once, salus reipublicae suprema lex.
Is printing Monopoly money on this scale inflationary? I doubt it. The geithners partially replace dollars that should have gone out; to the extent they are incomplete substitutes, the effect is contractionary. In terms of the federal balance sheet, one form of near-money (Treasury bills) will be replaced by another (geithners). Geithners are riskier and pay no interest, so the velocity of circulation back to the Treasury will be high.
I’m sure there would be all sorts of untoward effects. But it certainly beats the alternative of sending out the 52.4 cents (more for some means less for others) and a non-tradeable promise to make good at some unspecified time in the future.
[Update 20 July
Mark, in comments, suggests that printing dollars is simpler. Yes; but it would have I think to be actual banknotes, which (I’m guessing) don’t necessarily show up on the Fed’s balance sheet.
Sending out lots of $10 bills would also serve as a reminder of Hamilton’s efforts to increase the US Government debt by taking over the liabilities of the states. Hamilton understood, as today’s Republicans do not, that a large pool of low-risk public debt is a good thing for a national economy to have.]