Framing Platinum Coin Seigniorage: Part Four, Political/Economic Objections
This series provides a framing document for Platinum Coin Seigniorage (PCS). In the three previous parts of the series, I pointed out that there are three classes of opponents of High Value Platinum Coin Seigniorage (HVPCS, $30 T and above). The first and largest group opposes all Platinum Coin Seigniorage (PCS) of whatever type. The second, opposes HVPCS, but favors using the Trillion Dollar Coin (TDC) for the limited purpose of avoiding the debt ceiling. The third, opposes HVPCS, and doesn't really favor using the TDC either, except, perhaps, as a last resort to avoid the debt ceiling. It favors an incremental approach to PCS beginning perhaps in the millions or billions in face value, and over a long period of time, after giving people years to adjust to Treasury using platinum coins with unusual, and unprecedented, face values, eventually building up to a TDC.
Parts two, and three, this post (Part Four), and the two remaining posts in this series consider still more objections brought forward by people in one or more of these categories, and my replies to them. As you're seeing, if you're following the series, the opponents of HVPCS are throwing everything but the proverbial kitchen sink at it. In this post, I'll consider some political/economic objections to PCS.
An HVPCS coin is a less acceptable option than a TDC or HVCS coin
Less acceptable to who? Certainly, HVPCS would be less acceptable to the FIRE sector than other PCS options. But the truth is that all PCS options would be unacceptable to them. They will scream hysterically if any PCS option is used; and then will raise huge amounts of money, and work as hard as they can to repeal PCS legislation. So, what's the difference whether an HVPCS, TDC, or HVCS approach to PCS is used? Why do we care about how they will react?
The important question is how most people will react; not how special interests will. And people will react much more favorably to PCS, if enough money is minted to fill the public purse, change the game, and solve their perceived debt/deficit problem, than will react if only enough is minted to avoid the debt ceiling, or to fund specific programs with relatively small amounts of seigniorage. That's why HVPCS is actually a much more acceptable option than either of the other two.
An HVPCS coin would bring on “Black Swans”
The argument here is that any new significant thing that we do, will have unintended consequences; and that some of them will be “black swans.” Nassim Nicholas Taleb says (pp. xvii – xviii) that a “Black Swan” is an event with three attributes:
It is an outlier . . .” in the sense that it is “outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. . . it carries an extreme impact . . . human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.”
Keeping this definition in mind, perhaps beowulf's formulation of the PCS option might be considered a black swan; though Ellen Brown had envisioned the possibility of a TDC in her 2007 book, before beowulf advocated it, but without framing it in the context of existing legislation. That might make PCS more a “white swan,” an unexpected event we might have been able to anticipate. However, even if PCS itself is a black, white or “gray swan,” it's much harder to contend, even with the most open-minded thinking about it, that it's potential consequences are likely to include events “. . . outside the realm of regular expectations.”
Looking at the various objections we're surveying here, they include a wide range of unintended consequences, and we are anticipating them, discussing them, evaluating the likelihood of the various possibilities. Black Swans can always arise, and we need to prepare for them as best we can. But that preparation can't include avoiding new innovations that promise to help us solve serious problems that are visiting very heave social and economic costs on much of out population. But, instead, it ought to include measures we can take to adjust and correct for risks that are known and even unknown.
I think that deficit spending using HVPCS, comes with various fail-safes we can use if things begin to develop chaotically. One of them, perhaps the most fundamental, is that we can simply stop using the seigniorage in the TGA, and start issuing securities again. Even if we did that, by then we'd be a better position relative to the perceived threat from the debt, we've been hearing about everyday. Another, is that the Federal Reserve can pay Interest on Reserves (IOR), as it is doing now.
Yet another, is that we can monitor the effects of seigniorage spending carefully, to track the changes occurring in the financial institutional structure caused by seigniorage in itself. Finally, we can use taxation to cool off any overheating of the economy due to seigniorage spending.
In short, with the various alternatives for adjustment we have available, if necessary, and very careful monitoring of effects, I think that fear of the inevitable unintended consequences of using seigniorage should not deter us from using it to attempt to solve the political problem of the national debt and end austerity. To suggest otherwise, is to mistake the “black swan” for a conservative bogeyman. But then again, perhaps that's what Nassim Nicholas Taleb intended all along.
Won't creating all this money by using PCS to repay debt and perform deficit spending without issuing any new debt be inflationary? In a word, no!
The credits in the Treasury General Account (TGA) ultimately resulting from using $60 T PCS aren't immediately spent. So, they don't all enter the economy immediately, but over a very long period of time from 15 – 25 years in duration. To gauge the inflationary impact, you have to analyze when and how the credits would be entering the economy.
Roughly $6.5 Trillion in debt subject to the limit was owed by the Treasury to other agencies or to the Fed itself. That debt could be redeemed in the same week after minting a $60 T coin. But the payments wouldn't be inflationary because they would not enter the non-government economy. Nevertheless, these payments would cut back debt subject to the limit by close to 40%, because of the ridiculous quirk in the law that counts intra-governmental debt toward the debt ceiling.
Next, the 10 T or so of debt held by private corporations, individuals, and foreign governments would only be paid as it falls due. Much of it would be paid over the first three years. But, the additional reserves placed in the system by paying the debt, and not issuing new debt instruments would be less inflationary than rolling over bonds would be.
Also, their presence in the banking system, would clearly flood it with reserves and drive overnight interest rates down to zero, rather than raising them. For the Fed to hit any non-zero rate targets it would have to support them by paying IOR, to drain the excess reserves. So, there's no inflationary impact from repaying debt instruments as they fall due by adding reserves to the banking system.
That leaves deficit spending. In the case of a $60 T coin, and a national debt of $16.4 Trillion, we'll assume that $43.6 Trillion would be left in the TGA for future deficit spending. However, the fact that the credits are in the TGA doesn't mean that the Treasury could spend them. In fact, it can only spend them if Congress appropriates deficit spending. So, the bottom line is that the $43.6 T doesn't go into the economy until it's appropriated. Then some portion of it can be inflationary if Congress deficit spends past the point of full employment; but if it doesn't, then there won't be demand-pull inflation. And, if it does, then the inflation will be due to unwise Congressional appropriations and not to using PCS.
In short, there's no way that PCS in itself can have an inflationary impact, no matter how high the value of the platinum coin is. That's because repayment of already held debt is less inflationary than continuous rollover, and gradual increase, of debt. Repayment of debt to government agencies including the Fed doesn't enter the economy, and using PCS-generated funds to cover deficits is not in itself inflationary, unless deficit spending is so large that it continues past the point of full employment.
”First Do No Harm”
“First, Do No Harm,” is a great maxim; but when excessive caution and delay have the very high costs we see in our economy; then we have to weigh those already experienced and continuing costs of not minting a $60 T or other HVPC, and also the risk that the capability to use HVPCS may be repealed, against the potential cost and very low likelihood of inflation resulting from using it to fill the public purse, and then only to pay down the national debt and cover Congressional deficit appropriations. As I've already argued, there's no causal transmission mechanism directly from PCS-based spending to demand-pull inflation. And demand-pull inflation is by far the consequence of HVPCS that people fear most.
It would shake investor confidence in the US
Some skeptics warn that using a $60 T coin would shake investor confidence in the United States lead to the dollar's replacement as the reserve currency, and might and cause the de-evaluation of the dollar in international exchanges. I'm very skeptical about this possible scenario. First, the $60 T coin proceeds would first be used to pay off intragovernmental and Fed debt. This can have little effect on the non-government economy because nothing goes into it as a result of this pay off. Also, the outstanding public debt would suddenly be down by 40%, guaranteeing that would be no more debt ceiling crises in the US for some time. I can't see how this would do anything but increase confidence.
Second, when the seigniorage is used for deficit spending, the immediate effect of that would be to supply no more securities to the market and to create the expectation that supply would be limited in the future. That can only increase demand for the securities still outstanding, increasing their desirability.
Third, during the first year after HVPCS is used another $1.7 T in short-term debt would be paid off, at least. That too, would increase demand for the remaining securities in the market place. As for the swap of $1.7 T in reserves for the securities, I've already argued earlier, that the reserves may be less inflationary than securities, which means that the swap might well be mildly deflationary. But whether it is, or is just a swap with little inflationary impact; it's hard to see why this would effect the value of USD in international trade.
On the reserve currency business, I don’t think there will be any impact on that status as a result of using the coin, because, again, there will be no inflation resulting from it. But let’s say people panicked and replaced USD as the reserve currency. Then 1) our exports would increase and unemployment here would decline; and 2) our military interventionism in foreign policy would take a hit; because fighting wars overseas would be much more expensive due to the decreased value of USDs. Seems to me both of those things are good for us.
If we mint the $60 T then we will “freak out” bond traders since we're “flipping them the bird.”
Well, all I have to say about this one, is that it's probably true. After all, anyone would “freak out” if the primary source of supply for their business was threatened. But what I don't understand about this complaint is why the President and the rest of us ought to worry about it. After all, the bond traders don't worry about us, or the 31 million people who are now dis-employed, do they?
So, if the bond traders are mad at the US, then can they do about it? They can't drive up the interest rates on bonds already sold, and they can't force the United States to sell any more debt instruments if the Treasury doesn't want to. Maybe they can get the Fed to pay a higher IOR rate. But that will have minimal effects on our politics.
In my next post, I'll discuss objections to HVPCS based on institutional impacts
(Author's Note: h/t to Jack Foster for proposing a framing document for HVPCS. This is it; but divided into 6 parts for blogging convenience. The rest of the series will continue with objections made to HVPCS and my answers to them.)
(Cross-posted from New Economic Perspectives.)