July 20, 2011 |
Another day, another round of leaks about a potential debt ceiling deal in the making. Yet this ludicrous standoff could be brought to a conclusion tomorrow, without concessions or the specter of legal challenges. It wouldn't require Congress to take any votes, or a “Gang of Six” to haggle over any backroom deals.
But here's an interesting thing: while it is now considered within the “mainstream” that a small group of intractable reactionaries might hold the economy hostage by threatening not to pay the tab that Congress itself ran up, ending the theatrics by creative but legal means isn't. It's a telling example of how our discourse is narrowed, policed by the Very Serious People who populate the Beltway media.
The escape hatch nobody at the Washington Post or the New York Times is talking about is called coin seignorage. It's based on Title 31 of the U.S. code, which authorizes Treasury Secretary Tim Geithner to “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.”
So tomorrow, Geithner could order the mint to manufacture a couple of trillion-dollar platinum coins and swap them for public debt now held by the Federal Reserve. The coins, unlike the bonds held by the Fed, don't count as debt, so the transaction would bring us $2 trillion below the debt ceiling and the manufactured “crisis” would be averted.
Some Democratic senators – and former president Bill Clinton – have kicked around what they're calling the “Constitutional option” for avoiding catastrophe. Obama would cite Section 4 of the 14th Amendment (“the validity of the public debt, duly authorized by Congress, shall not be questioned”), declare the debt ceiling unconstitutional and order the Treasury to continue issuing bonds. While it may provide a way out of the mess, it's a legal theory that has never been tested in court, and would potentially create a crisis between the executive branch and Congress. Several Republicans have promised to attempt to impeach Obama if he uses the maneuver. Coin seignorage, on the other hand, leaves the debt ceiling intact, and simply steers around it (much more detail on coin seignorage is available here).
The idea has bubbled up within the blogosphere in recent months. Economist Warren Mosler writes that “it does work operationally...the US Treasury is already legally empowered to simply mint its own platinum coin in any denomination it wants and effectively deposit it in its Fed account, rather than sell bonds to the public to fund its Fed account.”
This process doesn’t change actual government spending, so doing it this way doesn’t add to inflation, nor does it change the fact that govt deficit spending adds income and net financial assets to the other, non government sectors. It’s just that the new financial assets will simply be new reserve balances at the Fed, rather than new Treasury securities (which are also simply accounts at the Fed).
Given that Congress is hurtling at breakneck speed toward the cliff of default, one might imagine that a neat accounting trick with the potential to avert an economic catastrophe would get some attention in the corporate media. But as of this writing, none of the country's leading media outlets have touched it.
It has gotten a little mainstream attention on a few news outlets' blogs. Marketwatch called it “the wacky talking point of the day,” and said it sounded “crazy,” even as the post's author acknowledged that “the proposal has got it right that the U.S., as issuer of a fiat currency, can create any amount of cash it wants and doesn’t really need to borrow money to spend it.”
Felix Salmon wrote on Reuters' blog that “tools like the 14th Amendment or even crazier loopholes like coin seignorage would be signs of the utter failure of the US political system and civil society,” and claimed that it could lead to “the loss of America’s status as a safe haven and a reserve currency.” But he never bothered to explain why avoiding a debt ceiling crisis would make us less trustworthy in the eyes of the world than Congress' inability to govern, never mind all the theatrics around the non-question of whether it will pay off its debts.
Think Progress blogger Matt Yglesias dismissed coin seignorage as “an idea that’s circulating in Modern Monetary Theory circles” that, in his view, is “legally mistaken.” But he didn't bother to explain why. He later updated his post with a note: “I now think this might be legal after all, provided the coin is made of palladium.” He was likely referring to a law passed last year authorizing the mint to produce palladium coins, but it specifies a face-value of $25 for the coins. (A response to both Yglesias and Salmon's post can be found here.)
The idea of minting a few trillion-dollar coins to skirt the debt ceiling is certainly unprecedented, and it's possible that Yglesias is right and there is some legal issue of which proponents of the idea are unaware. Perhaps it's accurate to call it a “radical” proposal. But all of that needs to be viewed in the context of what are, today, considered relatively “mainstream” positions – positions that are reported and analyzed daily by the Washington Post and the New York Times.
Consider the debt ceiling debate itself: Congress has the power to authorize any amount of spending and raise any amount of tax revenues it wants, and it chose to spend $1.5 trillion more this year then it will take in in taxes. Many of those holding up the debt ceiling were members of Congress when the budget passed – some voted for it. That debt has already been incurred, and now the hard-right flank of the GOP – the party of purported “fiscal responsibility” – is threatening to simply stiff our creditors, despite the fact that doing so would not only cause extreme economic pain on “Main Street,” it would also send the deficit skyrocketing.
Some within the “suicide caucus” are brazen enough to claim, beyond all reason, that nothing much would happen if the U.S. government were in fact to default. A Democratic president has offered them a deal that is well to the right of where even Republican voters stand, but they are steadfast in their opposition to it. Eighty Republican members of the House have also vowed to oppose an alternative crafted by their own party's leaders.
While the debt ceiling has been raised without fuss under both Democratic and Republican presidents, today it's considered an acceptable conservative position for a minority to insist on gutting popular safety-net programs like Social Security and Medicare – programs overwhelming majorities of Americans across the political spectrum support – in exchange for a “deal” on something everyone knows will happen eventually. (The debt ceiling needs to be raised under every budget proposal, including Rep Paul Ryan's, R-Wisconsin, draconian plan.)
And the sheer insanity of cutting spending -- taking money out of people's pockets – in the midst of the worst economic downturn to hit the country in generations has become so mainstream that it is now a bipartisan position with which virtually every “serious” pundit agrees. Perhaps a headline appearing this week in the satirical news outlet the Onion captured this political moment best: “Congress Continues Debate Over Whether Or Not Nation Should Be Economically Ruined.”
What's sane about any of this? It's a “wacky” situation that just may be crying out for a similarly “wacky” solution. When you're this far down the rabbit-hole, who's to say which ideas are crazy and which are serious?
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