Just Say No To The Platinum Coin
Minting a Platinum Coin would be a really bad idea.
While the White House remains mum about it, the rather bizarre idea of solving the debt ceiling crisis, even just temporarily, by minting a trillion dollar platinum coin continues to get much attention out in the media. With the exception of Kevin Drum, pretty much every major pundit and economics writer on the left seems to be in favor of the idea, while the right largely rejects the idea as a gimmick. In all honesty, I don’t think anyone expects President Obama to go down this road, but many people seem to be suggesting that the threat of doing so would potentially be something that would force the House GOP to act on the debt ceiling rather than taking the hard line of demanding commensurate spending cuts for every increase in the debt ceiling. Given the utter absurdity of the idea, though, I can’t see how that would actually work. Just as President Obama thinks that he can call the GOP’s bluff because, in the end, they’ll be afraid to actually let the economy hit the debt ceiling limit, it seems rather clear that the GOP would think that they can call Obama’s bluff by daring him to take a step that, in all likelihood he will not take.
Felix Salmon points out why the threat of the platinum coin is unlikely to have the impact its proponents believe:
[T]here are two problems with this approach. The first is that it’s a version of Hank Paulson’s famous dictum that “if you have a bazooka in your pocket and people know it, you probably won’t have to use it”. That wasn’t true for Paulson, and in general it’s not true of bazookas. In politics as in the markets, if you have a bazooka in your pocket, you’re likely to be backed into a position where you’re forced to use it, sooner rather than later.
The second problem is that what we’re talking about here has a kind of Cold War mutually-assured-destruction mentality: “don’t you dare try to force a debt default, because if you do, I’ll come out and render you entirely irrelevant with my platinum coin”. The nihilistic logic of the Cold War was brutal and scary at the time; but at least it was played by people who respected each others’ intellectual prowess. In this case, we’re basically talking about Barack Obama trying to bluff the House Republicans. And as any poker player knows, when you’re up against a very stupid opponent, you should never try to bluff.
The solution to the fiscal cliff crisis was to let the House Republicans overstretch, self-destruct, and render themselves powerless: that’s how to best deal with such people. There’s exactly zero chance that the House Republicans, faced with the Coin Threat, will suddenly turn logical and decide that they’re not going to play political games around the debt ceiling after all. Rather, the Coin Threat is a political game, played by the other side: it’s the executive branch bringing itself down to the House Republicans’ level.
If you believe that the country is best run by grown-ups, you can’t believe in #mintthecoin, because it simply isn’t a grown-up strategy. If you believe that the House Republicans behave in crazy and illogical ways, then you can’t believe in #mintthecoin, because the threat of minting the coin doesn’t work against someone who’s crazy and illogical. And if you believe that the best way to approach the debt ceiling is to try and abolish it altogether, then you can’t believe in #mintthecoin, because the entire strategy is based on the idea of keeping the ceiling where it is, and then trying to circumvent it.
Salmon is largely correct. Rather than suddenly making the House GOP more reasonable, the Platinum Coin Threat is only likely to cause them to dig in their heels even further while at the same time reinforcing, for them and their supporters, the idea that Obama is a President willing to operate outside the law and without the consent of Congress regardless of the costs. If the President actually did go through with the Platinum Coin, the response wouldn’t be capitulation. Instead, as Tyler Cowen notes, it’s likely that what we’ll see in response is a renewed round of partisan warfare, including a plethora of lawsuits challenging the President’s authority. Regardless of what a Court ultimately decides, and I think there are numerous reasons that the Courts would act to strike down what would appear for all the world to be a clear act of Presidential overreach, it would take time for any legal challenge to have an air of finality and, during that time, the resulting uncertainty would be bad for the American economy and our position as the world’s financial capital. We would be the laughingstock of the world. Granted, this would likely happen if we didn’t raise the debt ceiling, but you don’t respond to one really bad idea by proposing another, equally bad, idea in response.
As we learn more about this idea, it’s becoming exceedingly clear that the legal argument in its favor is far less clear than proponents would like us to believe. Edward Moy, a former director of the United States Mint points out several practical and legal flaws with the idea that the President could solve the debt ceiling crisis by minting a platinum coin worth $1 Trillion:
First, it may be legal to mint a platinum bullion coin with a $1 trillion face value, but it’s not legal to pass it off as actually worth $1 trillion if there isn’t $1 trillion of platinum in it. That’s because it’s a bullion coin and not a legal circulating coin. The face value of a bullion coin has no relationship with the metal content because the value is in the metal, whose price fluctuates daily.
Second, for a coin to be worth its face value, it has to be made as a circulating coin.
Here’s how a circulating coin is made. Congress needs agree on the metal content, dimensions, the designs on the heads and tails sides, weight, and other details. Then they have to pass legislation to create a $1 trillion circulating coin. The President needs to sign it. Then the Mint would have to design it get the design approved, procure whatever new materials they need, make the dies, test production, and then make one. Then a bank would have to order one because a business customer needed it to make change. The Fed would pay the Mint face value for the coin. After deducting the cost of the coin, the Mint would return the balance to the Treasury. All this needs to be done before we run out of money. Good luck with that.
Third, the current law does allow the Mint to make a platinum proof coin and does not specify whether this applies to a bullion coin or a circulating coin. A proof coin refers to a mirror-like finish and is made for coin collectors. However, a proof coin must be accepted at face value. Some have argued that the law can be stretched to allow for a platinum circulating coin, but this would not be consistent with the intent of the original legislation.
In other words, if the President went ahead and did this, all we’d really end up with is a really nice Commemorative Coin that says “One Trillion Dollars” on it. That’s not a solution to our fiscal problems in either the short or long term, and it’s no way to run a country.
While I agree that minting a platinum coin is a bad idea, I still agree with Krugman that letting Republicans wreck the economy is a worse idea.
Since the Republicans seem hellbent on holding the the credit rating of the United States and the global markets hostage in order to throw a tantrum, I think it is important for the grownups in Washington to make assurances now that they will use whatever means, gimmicky or not, to protect the economy from the destructive force that is the GOP. If the White House decides to just let the right shut down the government and torpedo the fragile recovery, I will blame Obama, not the Republicans. There should be no question now that we are dealing with psychopaths and should act accordingly. Pretending we are working with a loyal opposition ain’t going to fly anymore.
Worse than extending the debt limit?
And even if Obama agrees with this (and I think he does), it’s probably a good idea to let Republicans worry he’ll do it.
I don’t like it one bit. It’s absurd. But then so is the situation we find ourselves in. The official negotiating position of the opposition party is that they will force us to bounce our checks because they haven’t been able to get their way on budgetting.
Ceterum censeo GOP delendam esse.
@OzarkHillbilly:correction: “Worse than not extending the debt limit?”
So Doug is basically saying that the Republicans are acting like children, and the Democrats should take the high road. And yet he finds Democrats are the party which he cannot support.
Once again, Doug shows that Randian Utopian is the religion of people who never grew up.
@Rob in CT:
The official negotiating position of the opposition party is that they will force us to bounce our checks because they haven’t been able to
getFIX their way on budgetting.FTFY Rob. Let us all get one thing straight: ALL spending and taxation comes out of Congress. This is Congress’s spending. So what they are saying is, “We can’t stop ourselves from fwcking everything up. So, we have 2 choices: We can shoot you in the face, or we can shoot you in the balls. Which is it?”
It’s funny: quite a lot of posts by Doug about how it would be a bad idea to mint a platinum coin, but not so many about how it would be a bad idea by the GOP not to raise the debt ceiling….
Mint the coin, slap Ronald Reagan’s profile on it, and then let Republicans go on TV to argue about how they oppose “the Reagan.”
The Magnificent Coin Gambit is nothing more than pundit fantasy musing.
This particular President has not shown a great deal of interest in gimmickry, especially not on this level.
I don’t think the President needs to do this nonsense in the first place. A government shutdown might prove popular to Hannity viewers and Red State diarists, but it will not be seen so positively by many others, including the rather large segment of the American business community that doesn’t support the GOP extremists.
Apparently for Doug, the main problem is not that his fellow travelers the Republicans are bat f%^kcrazy and threatening to derail the economy with a historically unprecedented and constitutionally dubious political maneuver ( that’s just kind of a given now), but that the President might oppose the economy wreckers with another dubious maneuver. Doug seems to be hinting here that he wants Obama to just surrender, for the good of the country.
Why isn’t he urging the Republicans not to force the issue, to be responsible, and to just raise the debt ceiling? Well, actually, I think I know the answer to that.
Bah !
America has always been about “creating wealth”.
This just makes it all tidy and legal while what passes for today’s GOP tries to figure out if it’s an ass or just a hole in the ground.
Pass a law eliminating the Debt Ceiling and closing the Platinum Coin Loophole.
Done.
Next problem.
@stonetools:
I await with bated breath…. NOT!!!!
Seems to be a different take on the law here:
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/01/08/former-head-of-u-s-mint-the-platinum-coin-option-would-work/?wprss=rss_ezra-klein
Congress already approved the trillion dollar coin in the current legislation, when it gave the Treasury discretion on its design and denomination. The process is easier than Moy would have us believe, and there’s no macroeconomic reason not to pursue it. There is every reason to avert a failure to meet our liabilities.
At the risk of beating a dead donkey the fact this even is being discussed is Exhibit Z to the case of the U.S. slide into fiscal oblivion.
The public has been dumbed down nearly to catatonia. Even the purported educated classes wouldn’t know public finance from a hot rock. You couldn’t explain public finance law to the liberal media with Hooked on Phonics and a puppet show. The liberal academe wouldn’t know the differences between Weimar hyperinflation and gewurztraminer, nor the differences between the Federal Reserve Act and Federal Express.
The country at large simply is not going to make it. I for one expect to be short selling U.S. Treasury debt, on margin, within the near-term event horizon. I expect we’ll see double digit reported inflation rates combined with double digit reported unemployment rates. Perhaps within this decade. The shit will doth hit the fan and soon.
Funny, I thought this was the way Republicans already viewed the President.
Wow, this would be terrible and unprecedented! Thank goodness we don’t see anything like this now.
Obama is pragmatic and devious. Makes him really hard to read. I suspect the plan is more along the lines of challenging Boehner to put up or shut up. Pass a bill raising the debt ceiling with 1.2 B in specific cuts, or when he realizes that it he can’t even pass that through his caucus, pass the debt ceiling increase cleanly without cuts. Treasury should be able to shuck and jive for some time after the nominal deadline until Boehner can get his act together. As a fallback, Dr. Krugman suggests issuing “moral obligation coupons”, basically scrip, IOUs.
Sounds like a plan to me. Put Reagan’s face on them, both to tweak Rs and because he’s the godfather of the modern deficit. Mail them to SS recipients and doctors and insurance companies and defense contractors; anyone with a good lobby. The face of the certificates should read something like, “The US Treasury promises to redeem this certificate in full just as soon as JOHN BOEHNER and the House REPUBLICAN caucus, by raising or repealing the debt ceiling, fulfill their constitutionally required mandate to honor federal debts that THEY have incurred. Speaker Boehner can be reached at 202-225-0600”
I like stability. Mint a whole bunch of proof coins and the hostage is freed now and hopefully forever more. Checkmate, stability.
Or do you want to shoot the hostage this time? Ready to go over the ramparts Doug?
The good news is that according to Greg Sargent, the Republican leaders understand they must raise the debt ceiling:
The bad news? The House Republicans don’t listen to Boehner or McConnell.
Given that situation, Doug’s advice to unilaterally disarm doesn’t seem sensible to me .
@Tsar Nicholas:
This kind of ignorance just keeps on entertaining.
@Tsar Nicholas: “The shit will doth hit the fan”
I’d take your economics more seriously if you weren’t such an illiterate moron. Do you just pick words at random and slop them down?
I will waste zero time thinking about something so silly.
I’ll worry about “Weimar hyperinflation” where there appears to be even the slightest indication that inflation is a problem in the U.S. economy.
@Tsar Nicholas: So if things are going to get so bad, why are you staying here? Why don’t you move to, say, Somalia? That would raise the average IQ of both countries.
Speaking as a numismatist, aka a coin geek, the pic at the top of the article – that is one butt-fugly coin. I still want it though. Gotta complete the set after all.
I agree there is little difference between minting a coin and writing an iou. I wonder how the world would react. I don’t see how either helps us meet our liabilities.
@rudderpedals:
My coin geek heart is going boink -boink – boink. Can you imagine? A proof / MS75 trillion? Holy crap!
The idea that minting sixteen trillion-dollar-denominated platinum coins will cure the problem of the federal debt is ludicrous. Those proposing it are either ironists or kooks (or both).
But I have read in a newspaper article how the government’s ability to repay its debt is backed by “the power of the federal government to print money.”
Talk of minting your way out of this problem, and you are a kook, but talk of printing your way out, and you are a member of the mainstream media.
@wr: I think we all know that is the case; he’s either a squawking cretin or so good an imitation as to make no difference.
What’s going to back the coin up if the platinum is not worth a trillion dollars? Do we have enough gold reserves to back it ? What is platinum worth per ounce anyway ? There needs to be more explanation in common terms about this and exactly how this works. I did not know that the government had a trillion dollars in the treasury to do this; I thought the US was broke.. Something is off here, but I am not sure what.
@Tyrell: The U.S. government is the sole manufacturer of dollars. It can never be broke or become insolvent because it can and does spend into existence any quantity of dollars it desires, or rather that we as a society desire.
@Justinian:
I don’t recall anyone suggesing we mint $16 trillion in coins. For the purposes of spending this fiscal year, we only need $1 trillion.
@Ben Wolf: You mean that this money is nothing more than some sort of fantasy ? How about all that gold that is stored somewhere in Kentucky ? I remember when my economics teacher told us about that and gold stored in huge vaults under the Federal Reserve Bank in New York City. There was some big deal years ago when some congress members demanded to go in to make sure all the gold was still there. Maybe they should do that now; just to reassure everyone.
Maybe I’ ve missed something somewhere along the line.
@Moosebreath: Well said!
@Tyrell: Dollars aren’t backed by gold, nor is there enough gold in Forts Knox to back a more than a tiny fraction if we wanted it to. We went off the gold window back in 1971 because the system was unsustainable; there was no way to continue it due to multiple factors. Everyone else abandoned gold around the same time.
@Tyrell:
You mean that this money is nothing more than some sort of fantasy
A collective one, yes. Or do you think the paper and ink on a $100 bill is worth 100 times that on a $1 bill?
Anyway, all the gold ever mined in human history is worth about $11 trillion or so. The debt is $16+ trillion.
Maybe I’ ve missed something somewhere along the line.
Many things, it would seem.
@Tyrell:
Um, the government is not broke. The government has as much money as it wants to have, since the government is the sole source of currency. It literally prints its own money. If the government wants to print one zillion dollars, then bingo, we have one zillion dollars.
I really wish people would understand how money works.
@Tyrell:
Yes, essentially. What else would it be? Money doesn’t exactly exist in a state of nature. It’s a social construct, just like everything else humans do.
How about it? We are not on the gold standard.
Also, too: gold does not in itself have any intrinsic value. It’s just a bright shiny thing.
@Tyrell:
I thought the dumbest people advocated returning to the gold standard, and then I heard from the man who thought we still use it.
@Rafer Janders:
Which gets to an ultimate point, which Marx articulated quite well even though he didn’t originate it: nothing has intrinsic value. All value is social and established relationally via exchange.
I seriously doubt Tsar knows enough about German public finance in the Wilhelmine and Weimar Republic years to have a clue about why hyperinflation took hold after 1918.
Well, isn’t this nice? The discussion of the trillion dollar coin alone seems to be finally waking some people up to how money really works in relation to the federal debt.
@bk:
What do you have against Somalia?
Tsar busts out the Liberal Media meme…as well as the Hype-Inflation meme…both of which are demonstrably untrue. The only thing dumber is Tyrell thinking we are still on the Gold Standard.
Seriously…no wonder we can’t solve problems. Half the country is mentally challenged.
Tyrell’s posts reveal that maybe this can be a teachable moment for economic policy. My guess is that many and even most Americans have the same misconceptions about how money and the budget works. Even members of Congress seem to believe the debt ceiling fight is about limiting future spending .
There is at least one Congressman who agrees that the platinum coin maneuver is legal:
His reason:
He is of course dead wrong on so many levels, but this is caliber of GOP congresscritter we have these days.
Greg Sargent’s take: All of which points to what may be the most important fact about the whole debt ceiling fight: GOP leaders want to be granted the presumption of leverage based on the threat of default, yet they are not prepared to deliver on that threat. Even worse, they need to somehow signal publicly that they are not really serious about default as an option — otherwise the business community will come down on them hard — while simultaneously maintaining the public posture that the debt ceiling hike really is something Dems will need to pay for with concessions of their own.
The GOP’s debt ceiling threat is an empty gimmick — far more of a gimmick than the “platinum coin” solution to it is.
Rather than suddenly making the House GOP more reasonable, the Platinum Coin Threat is only likely to cause them to dig in their heels even further while at the same time reinforcing, for them and their supporters, the idea that Obama is a President willing to operate outside the law and without the consent of Congress regardless of the costs.
I doubt there is much further digging their heels can do, nor much more idiotic their supporters can be (well, the latter, maybe, but the results are no different).
Heh, yeah, I read that too. Because, you know, his business was a sovereign state that produces its own currency. Oh, wait, it wasn’t? Gosh, perhaps that’s why things were a bit different.
@pylon:
The core problem with Doug’s argument is this: “if you won’t play nice they’ll get crazier!” and we don’t think there’s anything to lose by that. They’re already amazingly crazy.
“This scheme to mint trillion-dollar platinum coins is absurd and dangerous,” Walden said in a written statement Monday. “My wife and I have owned and operated a small business since 1986. When it came time to pay the bills, we couldn’t just mint a coin to create more money out of thin air. We sat down and figured out how to balance the books. That’s what Washington needs to do as well. My bill will take the coin scheme off the table by disallowing the Treasury to mint platinum coins as a way to pay down the debt.”
I wonder if Walden’s business ever borrowed money. If so, I wonder if he then refused to do the things necessary to repay that debt.
Also, Scott Lemieux says it is perfectly legal:
The most obvious problem with the “platinum coin is illegal” argument is that the relevant statue unambiguously authorizes the executive branch to mint platinum coins. As Laurence Tribe, perhaps the country’s foremost scholar of constitutional law, puts it: “Using the statute this way doesn’t entail exploiting a loophole; it entails just reading the plain language that Congress used.” Drum does not dispute this point. Rather, he argues that whatever the text of the statute says, the subjective intent of members of Congress was to just allow for platinum coins to be produced for collectors. But this evidence cannot show what Drum thinks it does.
We are bound by the text of statutes enacted by Congress, not by what individual members of Congress wanted the legislation to accomplish. The purpose of the statute and the intent of members of Congress are important evidence when courts are resolving statutory ambiguities, but here there are no ambiguities to be resolved. The courts might be willing to overlook the plain text of a statute if it produced an absurd result that interfered with the central purpose of a statute or made it unworkable, but that’s not the case here. The goal of some members of Congress to ensure platinum coins could still be minted for collectors would not be obstructed if the statute is read literally.
@Tsar Nicholas: Since you’re so big on German history, I suggest you read up on what happened in German politics after the government applied Heinrich Brüning’s austerity program in 1930. Hint: the answer is related to Godwin’s Law.
@Stan:
Fun little fact, that. Most US schoolkids (me included) learn something like “hyperinflation therefore Hitler.” Which turns out to not really be true at all.
@Rob in CT:
Yeah, ultraconservative economics therefore Hitler is not the way conservatives want the history books to read, but that is pretty close to what actually happened.
If you listen to Doug, Salmon and the other Platinum Coin opponents, they seem so sure that the Republicans are bluffing. They are right about the leaders, but IMO they can’t be so sure about House Republicans.
Well, let’s game it out. Suppose the House Republicans ignore the leaders and all the economists and say , ” We’re going to stick together and not raise the debt ceiling!” Well, then what? Do we just let the economy tank, because issuing the TDPC is just too clownish ? I’d like Doug to answer that.
I don’t particularly like the platinum option or the Fourteenth Amendment option. But at the same time, I’m glad they’re both out there and being publicized to put pressure on the GOP.
@stonetools:
Well, at that point, moderate Republican’s will get together with Dems and pass a clean increase in the debt ceiling…..
BWAAAHAAAHAAAAHAAAAHAAAAhaaahaaaahaaaaheeeheeeheee……
Sometimes I just crack me up.
Breaking: WH Press Secretary asked about the coin, doesn’t rule it out.
Read more: http://www.businessinsider.com/trillion-dollar-platinum-coin-white-house-2013-1#ixzz2HViFkIT5
No back up plan, huh? Well, f&*K that , President Obama. You BETTER have a back up plan. We’re not in Fairy Gum Drop Land anymore. I’m hoping Carney is lying about that.
@stonetools:
“You BETTER have a back up plan.”
If everyone knew what the backup plan was, it wouldn’t be the backup plan anymore.
“You’re NASA for goodnessakes! You have a team of men in a room just thinking sh*t up, and a team backing them up! You’re telling me you don’t have a backup plan??”
Bruce Willis, Armaggedon. From memory, which means it’s probably off. But I always did love that little outburst.
The more I think of it, the angrier I get that we’re even having this conversation at all. The absurdity of the debt ceiling itself, combined with the various ridiculous-sounding end-arounds simply cannot be good for America. Really. Perception matters. We already do enough absurd things without piling this on top.
Ceterum censeo GOP delendam esse.
@Moosebreath:
Intellectually, I understand that Carney wants to present it as if there is no other option other than Congress doing its duty and raising the debt ceiling. But I do hope that there is someone in the back room thinking , ” What if they don’t do their duty?” Because, with the House Republicans, that’s a real possibility. Doug may not think it is, but I wouldn’t bet a nickel on Congressman Walden doing the right thing, speaking of coins, and he is a typical House Republican.
@Rob in CT:
Is that like my , ahem, coinage:
Tea Party Delenda Est.
My Schoolboy Latin days are a long way behind me.
PS. I just Googled it. Apparently, its an alternate version of Cato the Elder’s famous war cry.
@stonetools:
This should help…
Latin Lesson
It would be even worse. “Moderate conservatives pandered to the extreme element therefore Hitler” would be an even more accurate (and immediate) explanation…
I find the tenor of the comments here disturbing.
The interest on the Federal Debt was 429 billion dollars last fiscal year: over 1 thousand million dollars each day. To put the number in perspective, a typical wage-earner makes about 2 million dollars over the course of his working life. Understand then:
The government spends more money paying the interest on its debt in a single day than 500 typical workers earn in their entire lives.
And those are just the finance charges; actual government services cost extra. Day after day, month after month, year after year, five hundred people’s lifetime earnings up in smoke every day just to continue financing the federal debt at its current size. And if you don’t like that way of phrasing things (after all, the taxes are distributed over the whole population, not just blasting five hundred people every day), there the following figure can be used instead:
Every year, the interest on the federal debt costs 2,800 dollars per wage-earner, on average.
How could anyone want this figure raised? Is not the 16.4 trillion dollar debt large enough already? Do we need more than 500 people’s lifetime earnings swallowed up every day in the interest payments on this thing?
Several members of this blog consider it a “duty” for Congress to increase the debt ceiling. Could such members please tell me how many people’s lifetime earnings are to be spent every day in interest payments on the federal debt, beyond which they do not believe it will be in the public interest? If you could please supply me this figure, I could then work the algebra backwards and calculate how large you think the federal debt should be. Obviously such people do not believe it is large enough if they believe the debt ceiling should be raised.
And as for those on this blog who think the government can just print its way out of its problem (“sole source of dollars” it has been called), those comments are the most disturbing of all. Not one economic stone will be left standing on another if the currency loses virtually all of its value, as surely it will if the government finances a substantial part of its operations with fiat money.
And some people on this blog have derogated the whole concept of money (though carefully preserving their own), and have called it just fancily engraved paper or glittery metal. Such persons should know that before the invention of coined money of stable value, almost the only type of employment in existence was slavery, and such will be the only terms of employment available if the currency loses all value. How else can people be employed if there is no meaningful form of money in which to pay them their wages?
@Justinian: You clearly misunderstand the Debt ceiling. This is money already spent. It will cause us to default on our debt and ruin the economy. Raising the debt ceiling has does not increase the debt. Congress has passed appropriations bills which have already spent the money. The worst thing that could happen is to default and further increase the debt.
@Dave:
Finally we are talking about the federal debt and its ceiling.
Increasing the debt ceiling is, by definition, increasing the authority of the federal government to borrow yet more money than it has already. Raising the debt ceiling is raising the authority of the goverment to borrow money. And, once the authority is granted, it is quickly enough exercised, hence the periodic need to raise the ceiling again and again. Some “ceiling” that is!
Anyone, whether a private individual, corporation, or government, who continually has to borrow money in order to pay interest payments is in truly pitiful financial shape, so close to bankruptcy as not to be funny. The very assertion that the federal government will go insolvent if the debt ceiling is not raised is in itself admission that the government is in very deep financial trouble.
Not even the government can spend money it doesn’t have, hasn’t borrowed and (sigh!) hasn’t printed afresh. The money is not actually spent (it physically cannot be), though I grant that authority to spend it in the coming year or so probably already has been granted.
Congress has created an entire schedule of cutbacks to be performed in the event that the government simply does not have enough money to pay for everything Congress has authorized. I forget when that schedule was created (1970s? I don’t know to within a decade), but it is there, and it specifies that all sorts of things be cut before touching repayment of the debt.
Thus it is not true that failing to raise the debt ceiling will automatically cause the government to go into default, though, as a practical matter, it is probably true with this current chief executive. If the law were followed (rather than executive discretion), many, many cutbacks would happen before the government would even begin to default on paying its creditors.
What strikes me is how readily people blame House Republicans for holding the solvency of the federal government as a plaything or bargaining chip, when, from what I see, it is the occupant of the White House who is saying that he’ll send the country into default as a first recourse rather than as a last one if he does not get his way on pieces of legislation.
* * * * *
And as to the blame game, I recall this happening under Ronald Reagan. Every March, Reagan proposed to Congress budgets unbalanced by over 200 billion dollars per annum. Over the summer, Congress hammered out a budget that was badly unbalanced, but not as badly as the one Reagan proposed. Sure enough, in November, Reagan lambasted Congress for passing hugely unbalanced budgets, and blamed it for the ballooning size of the federal debt. Year after year, the same blame game occurred, and the mainstream media licked up every word of it.
After having seen that, I have perfect confidence in the Presidency, in conjunction with the mainstream media, to send this country into disastrous levels of debt and then have the blame thrown upon those who work most diligently to keep the federal government on any kind of sound financial basis.
That’s what I saw then, and what I am seeing now.
The money has, in fact, been spent. There is nothing in the laws of physics which prevents a sovereign currency issuer from crediting accounts. What is at issue is the legal requirement for the Treasury to issue securities to match its deficits. Congress imposed that responsibility and is now interfering with its execution. If it doesn’t want the Treasury to issue securities then Congress should change the law so the Treasury is no longer forced to do so.
@Justinian:
You obviously believe that raising the debt ceiling refers to paying future debt.
YOU.ARE. WRONG.
The way it works is that Congress-including the House Republicans-votes for spending during the year. The money is spent. Then in the spring, Congress votes to increases it’s authority to borrow to pay for the money it already spent.
Is it a half assed way to do it? Sure. But that’s how its done.
Here, read this. Excerpt:
Learn something, besides right wing talking points. You’re welcome.
@Justinian:
It’s odd you would remember that rather than the Bush tax cuts, Medicare Part D and Iraq which were much worse for the deficit and much more recent.
In reply to Stonetools:
A quibble: I believed it referred to incurring future debt. No one believes the government actually pays the principal of its debt; it only rolls it over indefinitely.
But I have looked at the Wikipedia article your post referred to and have come around to the view there stated, and in your post, that the debt ceiling is, as you put it, the half-assed way that Congress authorizes borrowing money it has already de facto authorized through unbalanced budgets. In fact, that article says:
In view of this, Congress is both under moral compulsion to grant authority to borrow the deficit it knew it incurred, and bears also moral responsibility (= blame) for increasing the debt, since it is an act of Congress and not the President.
I realize this is quite a turnabout, and is essentially repudiation of the central theses of my two latest posts, but the Wikipedia article your post referred to did make it pretty plain. And I am glad I entered this blog to have this discussion and be pointed to this information, despite the fact that some people cannot make their points without adding invective to their arguments.
I still stand my many subsidiary points: the burden of its interest payments, the precarious nature of a government that has to keep borrowing money just to stay solvent, and the disaster that awaits us if the government does, in fact, try to “print” its way out of its problems (and it has problems aplenty).
But as to me having only “right wing talking points,” it is hardly “right-wing” to show Ronald Reagan’s claim to fiscal conservatism to be a fraud, nor is it necessarily right of center to look at the burdens the federal debt and its interest payments from the point of view of working people (it could just as well be left-wing). And furthermore they are not mere “talking points.” The five hundred people’s lifetime earnings being spent every day on interest on the federal debt is not talk: it is all too real.
@David M:
In reply to David M, who wrote
You have a point. Space did not permit me to give all the examples of presidents incurring huge deficits and then presenting themselves to the public as fiscal conservatives.
@Justinian:
Government has been “printing” for over a century. Every penny it spends comes from a federal employee altering digits in accounts, even when on the gold standard. That’s why it isn’t something one should be concerned may happen, it’s a normal function.
In reply to Ben Wolf, who wrote:
1. Currently the Federal Reserve Board is to regulate the supply of fiat money so that (a) its value be stable, and (b) the economy be promoted. There are many people such as myself who believe that there is nothing that promotes an economy more than an absolutely stable, non-inflating currency, though there are plenty of economists who hold that by jiggling with inflating the currency this way and that, you can stimulate an economy beyond what it would do with a strictly stable currency.
For the government, though, to (c) “print” or “mint” a trillion dollars of fresh fiat money would cause the value of each dollar to fall by at least a third. That “fix”, would be repeated year after year (and are not deficits continual now, not rare, one-time events?), and the you see the futility of even going down that path.
For those who don’t know, a under option (c), a spiral starts: money has fallen in value, and so the goveernment must pay its functionaries more money just to keep them having the same purchasing power.. (Any government that loses the support of its lowest level functionaries falls quickly enough, history has shown.) These added dollars are then found how? Through yet more freshly printed fiat money, thus accelerating the process. This dynamic is well known (it has happened over and over again), and is given the name hyperinflation This last option would soon enough put us economically at par with the Weimar Republic, certain countries of the current time I have heard about in Africa, and the pre-monetary society generally called the Stone Age.
At the current time, none of the operations of the federal government run on freshly printed fiat money printed for that purpose; it is created only in accordance with justifications (a) and (b) above. That is why the government is in debt; it has to borrow money like all the rest of us if it wishes to spend money it does not have already. Heck, I have fiat money in my wallet, but that does not mean that the Federal Reserve Board had that money printed up for me.
2. A gold standard has been so little practiced people hardly know what it is. There was a time (you have to go back before the Civil War for it) when a person could insist on being paid in gold, not banknotes, for all transactions except those of the smallest size. And a banknote had to be redeemable in gold in order to have any credibility. Then Abraham Lincoln, in order to finance the Civil War, had the “legal tender” act passed by Congress, where the banknote had to be accepted as legal tender. The Supreme Court balked, but Lincoln had the Legal Tender Act re-passed, re-submitted, and the Court relented on its Constitutionality. So many banknotes were printed that they became worth half their supposed value in gold. Over the 1880s and 1890s, the Department of the Treasury withdrew banknotes and minted up gold so that the two could be back at parity, 20 dollars per ounce of gold. That brings us to the time of the Federal Reserve Act, but let me end my dissertation here.
Let it suffice to say that you can’t have hyperinflation with a gold standard (it is hard enough to have inflation of any kind), and the country enjoyed its greatest periods of prosperity when it had its stablest currency.
Yay, goldbuggery!
The most prosperous years for the USA were not in the 19th century, in my reading of history. They’re roughly 1940s-1960s.
The 19th century saw explosive growth enabled by expanding Westward over the frontier (see any “free” land for us to go pick up today? No? Think that might matter in a comparison between 19th and 21st centuries?) punctuated by periodic busts. We were basically a “developing country” at the time. Well now we’re developed, the land is settled and exploited, and we’ve got some issues (when don’t we?). Pining for the 19th century is misguided. You can’t recreate that…. anymore than I think we can recreate the post-WWII period.
Also, I really don’t know how you separate 19 century growth (especially before the demon Lincoln started printing money!) without dealing with the economics of chattel slavery.
And just to point a little something out: we do not have hyperinflation. We barely have inflation at all right now. Since WWII, we went through one period where inflation was actually a problem, and that was ~30 years ago. We’re so far from hyperinflation that anyone blathering about it should be embarrassed.
That is not to say I think the platinum coin option is a good one. I do not. It’s a desperate one, in response to an incredibly irresponsible tactic.
None of the above precludes being concerned about the debt-to-GDP ratio.
@Justinian:
Let it suffice to say that you can’t have hyperinflation with a gold standard (it is hard enough to have inflation of any kind), and the country enjoyed its greatest periods of prosperity when it had its stablest currency.
The country had its greatest periods of prosperity under the gold standard? Total nonsense.
Top Ten Obama Plans to revamp US Currency.
10. Stamp out 10 billion wooden nickels.
9. Accept bottle caps and pull tabs as coins.
8. Monopoly money must be used as legal tender.
7. New dollar coins will be made of lead and we’re all encouraged to handle them as much as possible
6.Pennies will now be made of plastic.
5. U.S. Bonds will new be redeemable in carbon credits.
4. A code mark on your hand will eliminate the need to carry currency saving the US mint billions.
3. An internet user tax will add billions to thegeneral fund.
2. Jack Lews illiterate squiggle will require Obamas auto signature machine. Obama can’t read or write either.
1. A $1 trillion IOU coin will be minted and used to buy scracth of flottery tickets.
If Doug were better known, this post would have been included in Jon Chait’s takedown of the debt ceiling hostage enablers.
@Justinian:
There is no correlation between monetary aggregates (money supply) and inflation. The Quantity Theory of Money does not pass the empirical test.
Gold standards do not prevent governments from crediting accounts. All it does is place an upper limit on the quantity which can be created.
Ever paid taxes? The government debits your bank’s reserves and your bank debits your account. In other words the digits in your account are marked downward; you don’t send the government anything. Every single penny the government spends it puts there by creating it. Spending creates reserves and taxation destroys them.
What you refer to as the “debt” is the government borrowing from itself. The reserves used to purchase Treasurys are put there by government in the first place because the Federal Reserve is the monopoly supplier of reserves..
Also, the money in your wallet was produced on demand. Banks exchange reserves for cash and the Fed sends an armored truck full of newly printed bills.
The United States had six depressions and a dozen other financial crises while on the gold standard.
In reply to Ben Wolf, who wrote:
I never said we didn’t. I only asserted that we never had hyperinflation. And I never said the prosperity was uninterrupted. In the long view, economies do well under stable currencies, and do poorly when no one can trust what money today may be worth tomorrow.
Also, there are fates worse than economic depressions. There is foreign domination. Egypt was under foreign domination continuously from the time of Alexander the Great to shortly after the Second World War, as it was traded between this empire and that one in ancient and modern times. And who ever thought that the fall of the Roman Empire, or the fall of Constantinople, or any other such disaster, was in any way comparable to even the most severe financial contractions and resulting economic depressions?
From what I know, hyperinflation has a far more total and devastating effect on an economy than a mere financial contraction. It, too, is worse than a depression, and will surely occur if the federal government tries to finance its operations by printing (or, zero-and-oneing nowadays) the difference between its expenditures and its revenues.