Should we #MinttheCoin?

The trillion dollar platinum coin idea is making all the headlines these days.

Background on the Coin:
Co-Author of Platinum Coin Law Weighs In
What about money scares everyone so much?

Background on where the idea came from:
Trillion Dollar Coin Inventor
Origins of the TDPC


The Fiscal Cliff was averted at the last second, as I expected. The deal struck was horrible for pretty much everyone. Bush income tax cuts were kept intact for everyone under $400,000/yr, but the payroll tax cut was allowed to expire. So, in reality, pretty much everyone's taxes went up. Yay, us.

Now the new point of argument is back on the debt ceiling. Congress reached an agreement to avert the point they created to provide motivation to get a budget done (fiscal cliff), but now they have a new point they created to provide motivation to get a budget done (debt ceiling). Economically, the debt ceiling serves no useful purpose. Hitting it would be disastrous, far worse and more unknown than the fiscal cliff.

If we allow ourselves to hit the ceiling, we will in effect declare voluntary default. This is like telling the bank you have the money to pay off your loan, but don't want to pay it off, except that you are a currency user and could actually run out of money to pay your loan and the government as currency issuer can never run out of money.

What are some of the effects of voluntary default?

1) Faith in the dollar would be gone or shaken severely. The safest assets worldwide are U.S. Treasuries. Failing to make good on them would shake confidence in them and the entire dollar system. All of which amounts to Global Financial Crisis, part II which is much, much worse than part I.

2) Spending would drop precipitously. Increased uncertainty and decreased confidence in worldwide financial markets would mean people would hoard money out of fear of losing more. Spending = someone else's income. So when spending decreases, income decreases. This is the good ol' paradox of thrift. We need to increase spending, not decrease it.

3) Unemployment would go back up. Perhaps faster and way worse than in 2008-9.

4) That deficit we're trying to close would get much bigger. So those wanting to close it wouldn't win in this scenario either.

5) Probable deflation, which further hurts household's balance sheet positions.

6) Interest rates would probably go haywire.

7) Stock market collapse, again. Any gains made since '08 would likely be gone again. Retirement savings and pension funds would be hurt badly, if not completely wiped out.

Basically, we can't and won't hit the debt ceiling. So why are politicians threatening to do so?

Economically, the ceiling is useless, which is why we should just get rid of it, but politically it is a tool to try to limit government spending or the size of government. But note that the size of the debt isn't a measure of the size of government. It IS the measure of the savings in US dollars of all those who hold treasury securities, which includes US citizens. So setting a debt ceiling doesn't usefully limit the size of government either.

Hitting the ceiling just isn't an option. We shouldn't even have a ceiling. If we expect our economy to grow, then we should expect the debt to get bigger and bigger forever and ever and this isn't a bad thing and won't cause hyperinflation.

So if the choice is between minting the coin and hitting the ceiling, the choice is easy. Mint the coin.

The Treasury can mint the coin because of a loophole in the law, but that doesn't mean doing so is invalid or not a viable option. It is very valid, real, and viable. It demonstrates very well that the issuer of the currency does not need to issue debt to spend. It issues debt in part to drain reserves from the private sector to avoid inflation and to control interest rates. It also issues debt to provide safe assets to the private sector.

Spending without issuing debt does not automatically mean inflation. To get inflation, we must spend past capacity. We have lots of unused capacity in our economy, we aren't going to cause inflation with the trillion dollar coin.

Minting the coin would only prolong the malaise of our moderate deficit providing low growth overall. It wouldn't fix the economy by itself.

That said, I am not in favor of using the coin. I would much rather our politicians come together and make a budget suitable for good growth and a strong economy with full employment and a robust financial system. They don't seem to want to do that. It is terrible that one party would unilaterally exploit a loophole in the law to support its own ends, but it is also terrible that a party would hold hostage the economy with a needless debt ceiling because they can't find common ground in the budgeting process. To me, it doesn't matter which party is which. If they were reversed, I'd feel the same.

It is all extremely disappointing. It is disappointing that they don't understand their own monetary system and it is even more disappointing they can't work together.

In summary, 3>2>1.

1) Hit debt ceiling. Voluntarily default on promised payments. Economic disaster.

2) Mint the coin. Avoid economic catastrophe, but continue low growth malaise.

3) Repeal the debt ceiling. Cut payroll taxes. Spend more on infrastructure and less on defense and porkbelly spending. Don't worry about the deficit and debt. Focus on unemployment, inflation, GDP, and poverty instead.

Keeping Faith & Hope

Despite a deal being reached to raise the debt ceiling, market reaction was less than positive. (At least gas prices are falling!). However, in times like these it's important to remember to keep faith and hope for better times.

It's true that I think we are suffering needlessly because of a grave misunderstanding of our financial system (of what money is, of how government finances work, of what causes inflation, etc.). But it's also true that suffering is not necessarily a bad thing.

We can always unite our suffering to Christ's and "offer it up" as they say in some schools and monasteries.

We must also remember that we are not made to live in this world forever. The things and experiences we enjoy here are not lasting and may even distract us from our true destination. In this way, suffering can be a good thing, it can help us turn away from material detachment to things that really matter: serving others, maintaining and creating loving relationships, striving to be the best we can be.

I think Pope Leo XIII said it best:

From contemplation of this divine Model, it is more easy to understand that the true worth and nobility of man lie in his moral qualities, that is, in virtue; that virtue is, moreover, the common inheritance of men, equally within the reach of high and low, rich and poor; and that virtue, and virtue alone, wherever found, will be followed by the rewards of everlasting happiness. Nay, God Himself seems to incline rather to those who suffer misfortune; for Jesus Christ calls the poor "blessed"; He lovingly invites those in labor and grief to come to Him for solace; and He displays the tenderest charity toward the lowly and the oppressed. These reflections cannot fail to keep down the pride of the well-to-do, and to give heart to the unfortunate; to move the former to be generous and the latter to be moderate in their desires. Thus, the separation which pride would set up tends to disappear, nor will it be difficult to make rich and poor join hands in friendly concord.

But, if Christian precepts prevail, the respective classes will not only be united in the bonds of friendship, but also in those of brotherly love. For they will understand and feel that all men are children of the same common Father, who is God; that all have alike the same last end, which is God Himself, who alone can make either men or angels absolutely and perfectly happy; that each and all are redeemed and made sons of God, by Jesus Christ, "the first-born among many brethren"; that the blessings of nature and the gifts of grace belong to the whole human race in common, and that from none except the unworthy is withheld the inheritance of the kingdom of Heaven.

I do think that our government could make things better for not only our nation, but for other nations if they properly understood how their finances worked. We could have a more equitable distribution of wealth by making sure the poor obtained that which is necessary for maintaining their dignity. But I also think that even if the government (that is, their policies) were able to provide us with the material goods necessary to maintain our dignity, it would not be enough to make us happy or to earn the rewards of everlasting life. For that, we need virtue, brotherly love, faith in God and in each other, and hope for better times.

Would it not seem that, were society penetrated with ideas like these, strife must quickly cease?

Neglecting the Common Good

I agree with Thomas Bushlack from Catholic Moral Theology that our debate on the debt ceiling is neglecting a key element:

Drawing upon modern Catholic social thought and the work of Thomas Aquinas’ political thinking, the goal of law and political authority is to serve, enhance, and protect the common good of society (see, for example, Summa Theologiae I-II Q. 90). It is perhaps ironic – or tragic – that the common good is the one element that seems to be missing from the current national debate. This seems to be due to the fact that the ideology that holds the most momentum right now in our political system – and hence that controls the terms of our debate – is the far-right ideology represented most vocally by the tea-party movement (but engaged by others as well). This ideology, rather than upholding the common good as the end and goal of government and law, sees government as the very source of the problem. Therefore, those who propound this ideology are seizing upon this moment of debate over government spending, taxation and revenue creation, and the debt ceiling as an opportunity to starve government at its source by cutting off its supply of money. Some of the more extreme elements seem entirely willing to let the whole system come to a crashing halt rather than think about long-term solutions that seek to protect the common good of all involved.

What would bringing the language of the common good back into the discussion accomplish? For one thing, it would re-establish the principle that government has a necessary role to play in seeking the common good (not the only role, but still a necessary one). It would also allow us to recognize that in times of economic hardship sometimes government spending is the last resort to help spur the economy. This principle, established by John Maynard Keynes and until very recently accepted by those on the right and the left, would remind us that the time to cut programs and spending is not during an economic downturn, but rather once the economy has rebounded enough to pick up the slack currently left by the high unemployment rate.

The best of American democracy has always fostered political experimentation and pragmatic results over ideology, but in our current situation the experiment being run by the far right is playing Russian roulette with our common good, and will have disastrous consequences for our economy.

Ultimately, those hit the hardest by this experiment will be those who are already most vulnerable .

In a climate such as this, Christians – and all people of good will – have a responsibility to continue to uphold the principle of the common good as the foundation of our political life together in society, even if it appears that very few are capable of hearing the message right now.

Please pray that our politicians will reach a compromise borne out of humility, prudence, and wisdom; and one that does not neglect the common good, especially those most vulnerable in our society.

Debt Ceiling and Balanced Budget Amendment

What would happen if the government doesn't raise the debt ceiling in time?

To avoid default, the Treasury would prioritize interest payments, which means a lot of other bills won't get paid.

Chairman Bernanke said that this could cut 6% off of GDP and send the US into another recession with GDP going from positive to negative. How does that help boost sales or business confidence?

However, falling GDP means falling revenues which means more spending cuts, and revenues falling further.

It also means the automatic fiscal stabilizers of rising transfer payments will not be funded by deficit spending and therefore not provide the support they have provided in all prior downturns.

For the first time the US would experience an unchecked downward spiral, which could make the downturn that much more severe than the Fed Chairman suggested.

This likely would transfer to other nations for the drop in US consumer, business, and govt spending will mean a drop in sales for euro zone exporters, possibly sending that region into negative GDP growth and falling govt revenues.

This means their current solvency and funding issues further deteriorate as the entire euro zone could experience a funding barrier and general default.

While the ECB can, operationally, write any size check required to fund the entire region, it doesn’t want to do that, and can be expected to wait until things deteriorate sufficiently to the point were there is no other choice.

Ironically, the US debt ceiling, a seemingly innocuous relic of the gold standard, where it once served to protect the nation’s gold supply and should have been eliminated when the US dollar ceased to be officially convertible into gold, could now bring down the entire world economy, and threaten the world social order as well.

Paraphrased and quoted from here.


Similar effects could be expected with a Balanced Budget Amendment. House Republicans and even Senate Republicans (at least my senator, Jerry Moran, sent out an email saying he approved a BBA) are championing a Balanced Budget Amendment (BBA) as the solution to our fiscal woes.

I don't know what they think will happen if such an amendment were to pass, which is very highly unlikely, but it seems they believe that consumer and business confidence will go up and the crowding out (that they think is happening) will stop and businesses will begin to invest again; or I could be even more pessimistic and think that they are intentionally tanking the economy so as to win elections in 2012 ala Paul Krugman, but I really don't think that's the case.

Taking away a large chunk of deficit spending through a BBA would likely result in a large drop in GDP, followed by further drops in revenue, which would then require a further drop in spending...and you see how this cycle is self-defeating right? It would certainly accomplish the goal of a smaller goverment, but I don't know what good it would do for the common good. It would take away many needs of millions of people. Social order would be very difficult to maintain. Many evil regimes came to power amidst times of economic turmoil.

I also don't think that those who champion balanced budgets and deficit cutting understand that doing so would undermine their efforts to balance the budget. The government would certainly be reduced in size, but would the private sector take up the task of providing for the needs of those who aren't provided for by the market? What business invests when consumers aren't buying their products/services because a chunk of their income was taken away?

We could have a smaller government as the Republicans desire, but we can't have a smaller deficit (or no deficit) and not expect to face economic turmoil. We must have a deficit and we must raise the debt ceiling, or better yet abolish such a concept altogether (what's the point of a debt ceiling?). We can decrease government by reducing spending and taxes by more than spending or increase government by increasing spending and taxes by less than spending, and that should be the debate!. But the debate has been about how to reduce the deficit and on that note I disagree greatly with both sides.

Will we raise the debt ceiling in time? Do Republicans care?

The latest on the debt ceiling talks from Ezra Klein:

A bit more information has trickled out over the last few days detailing the exact state of the budget negotiations when they collapsed. Both sides, as they often said, were shooting for about $2.4 trillion in deficit reduction over 10 years. They'd already agreed on around $1 trillion in spending cuts and were making good progress on the rest of it. But Democrats insisted that $400 billion -- so, 17 percent -- of the package be tax increases. And that's when Republicans walked.

Specifically, the Obama administration was looking at a rule that lets businesses value their inventory at less than they bought it for in order to lower their tax burden, a loophole that lets hedge-fund managers count their income as capital gains and pay a 15 percent marginal tax rate, the tax treatment of private jets, oil and gas subsidies, and a limit on itemized deductions for the wealthy.

It's almost not worth going into the details on those particular tax changes because the Republican position has held that the details don't matter: well-designed tax increases won't be looked at any more favorably than poorly designed tax increases. The point, Republicans say, is that there can't be any tax increases, full stop.

For now, Democrats are holding their ground. "Do we perpetuate a system that allows for subsidies in revenues for oil and gas, for example, or owners of corporate private jets, and then call for cuts in things like food safety or weather services?" Press Secretary Jay Carney asked. But at some point, this will cease to be a clean choice between two budget plans and begin to be a question over whether we can raise the debt ceiling. And that, Republicans are betting, is when the Democrats will stop holding their ground.

SERIOUSLY?!

First of all, not raising the debt-ceiling would be economic suicide. Second, reducing the deficit now is not going to reduce it later. It will only cause more economic hardship which will cause revenues to fall. Third, if you are going to reduce the deficit anyway, why on earth would you walk out because of a tax break for those who own private jets?! I understand the Republicans want smaller government, which means no tax increase on anyone, but that means cutting important programs (such as TANF) for the less well off.

Obama is even comprising on the budget talks, something I haven't seen from Republicans who continue to hold their ground and flirt with disaster counting on the Dems to change their stance. From Sam Youngman:

President Obama, seeking a Republican agreement to raise the nation's $14.3 trillion debt ceiling by Aug 2, will not insist that any deal include an end of President Bush's controversial tax rates on the wealthy.

Obama's tactics are coming into clearer focus: they involve seeking higher taxes not on a broad swath of high income earners but on a narrower band of the super rich, such as owners of private jets. This means that those who earn $250,000 have got a reprieve.

Why would a bunch of social conservatives, who I assume care deeply about human life at all stages because they oppose abortion and euthanasia, rather cut assistance to those in need in favor of a tax break for the super rich?