Friday, January 11, 2013

If You're Explaining, Everyone's Losing (Platinum Coin Edition)

-- Posted by Neil H. Buchanan

Yesterday, I argued here on Dorf on Law that the Big Coin gambit is being misrepresented as "clearly legal."  I first argued that it is simply wrong to say, as some have done, that when a gap in a law appears to leave open a possibility that is clearly not what the law was passed to accomplish -- in this case, using a law permitting the minting of commemorative coins to evade the debt ceiling statute -- then there is no legal barrier to exploiting that gap.  It might be allowed in some circumstances, but it is not an easy legal inquiry.

Second, I pointed out that the debt ceiling statute itself is broader than people have assumed.  It limits the total national debt, not only as measured by standard Treasury securities, but also by adding in all other "obligations" of the federal government.  Under the Big Coin gambit, the Treasury would clearly and openly be obligating itself to replace the coin(s) with "real money" when the debt ceiling is ultimately raised, allowing Treasury then to issue traditional T-bonds, T-notes, and T-bills.  That means that the gambit is not even an effective end-around on the debt ceiling, because it merely puts a different label on a government obligation.

If one thinks that the debt ceiling statute itself is valid (which I do not, but for reasons that would make Big Coins unnecessary in the first place), then that puts us back in the Buchanan/Dorf trilemma, which we have been grappling with for the last year and a half -- and which none of our detractors have even confronted, much less offered a better solution.

After I published my post yesterday, I read an op-ed in The New York Times, in which USC law professor Edward Kleinbard offered a different "escape hatch" to defeat the debt ceiling (if, as all such analyses assume, the Republicans refuse to increase the debt ceiling before a default).  Kleinbard offered the State of California's solution to its 2009 budget crisis: issuing scrip to people who were supposed to receive money.  The scrip would be transferable, and banks would be expected to allow people to deposit the scrip at or near face value, in exchange for cash.

Kleinbard argues that his "scrip would not violate the debt ceiling because it wouldn’t constitute a new borrowing of money backed by the credit of the United States. It would merely be a formal acknowledgment of a pre-existing monetary claim against the United States that the Treasury was not currently able to pay."  That misses the point.  In fact, issuing scrip would be an even more obvious issuance of "obligations" than depositing Big Coins at the Fed would be.  The government would simply be issuing IOU's to people, promising to pay them real money later.

The scrip program would be problematic, therefore, both because it would violate the debt ceiling statute, and because it would actually constitute a default by the federal government -- which is exactly what we are all (except House Republicans) trying to avoid.  Paying people by not paying people, and then expecting banks to pay people money, is a default by another name.

I noted at the end of yesterday's post that I would argue here that the Big Coin gambit would be worse than having the President simply issue debt, as Professor Dorf and I have argued he should do.  This is, of course, a policy assessment, in contrast to yesterday's legal assessment.  Notably, Paul Krugman has enthusiastically endorsed the Big Coin gambit, arguing that "desperate times deserve desperate measures."  I will use his arguments in favor of the gambit to frame my response.

Notably, by they way, Krugman seems to understand the situation in some ways better than does Kleinbard.  Kleinbard makes the same logical error that many others have made, saying that it is unacceptable to ignore the debt ceiling because "the Constitution is clear ... that Congress alone has the power to authorize new borrowing."  Yes, and Congress alone has the power to spend, and Congress alone has the power to tax.  Hello, trilemma!

At least Krugman passingly mentions trilemma-like analysis in his op-ed today: "Maybe the president can simply declare that as he understands the Constitution, his duty to carry out Congressional mandates on taxes and spending takes priority over the debt ceiling."  Precisely!!  (On the other hand, Krugman simply says "the law is the law" in response to the idea that the coins might not be legal.  This is a classic layman's view, but one might expect a bit more sophistication from Krugman, even though he is not a lawyer.)

Even so, Krugman dismisses objections to the Big Coin gambit in part by mockingly suggesting that objections to the gambit boil down to fear that it would be "undignified," which he dismisses by saying that it would be "better to look slightly silly than to let a financial and Constitutional crisis explode." That, however, is his entire argument in that op-ed.  He says nothing about what the real economic consequences might be if the government looks "slightly silly."

In a blog post earlier this week, Krugman wrote a bit more expansively to try to debunk objections to the gambit.  In addition to the "dignity" question, dismissing people who worry about appearances as "nervous Nellies," he offers this: "The other objection is the apparently primordial fear that mocking the monetary gods will bring terrible retribution."  He goes on: "What the hysterics see is a terrible, outrageous attempt to pay the government’s bills out of thin air."

He then says, correctly, that the Big Coin gambit is merely an accounting fiction, just like all monetary matters.  And even if the Big Coins were never withdrawn from the Fed, Krugman says, that is not going to cause hyper-inflation, so there is no danger that mocking the monetary gods will lead to the problems that monetarist-type conservative economists have been predicting for years.

I completely agree that the problem with Big Coins has nothing to do with creating inflation.  The problem, in other words, is surely not a matter of how this would affect the Fed's balance sheet, the monetary base, or anything like that.  The problem, I think, is that Krugman is (like so many economists, but actually unlike Krugman in other contexts) simply assuming that what makes logical sense will satisfy the public.  If the coins are merely an accounting fiction ("In effect, the consolidated federal government, including the Fed, would be financing its operations by selling debt instruments, just as always."), then why should anyone care?

We should care, because looking "undignified" is not merely a matter of rustling the hoop skirts of nervous Nellies.  Even business columnists at top newspapers like The New York Times make a big deal of the Fed "creating money out of thin air," as I discussed in a column back in 2009.  Krugman's mockery of "the monetary gods" is based on his rejecting, quite rightly, the "bond vigilantes"-based argument about government debt.  Here, however, we are talking not about whether some guys sitting at trading desks are supposedly waiting to short the dollar.  We are, instead, talking about pulling back the curtain on the entirely ephemeral nature of money and finance itself.  That will affect not just Wall Street traders, but everyone in the world.

A monetary system simply cannot work if people do not collectively take a leap of faith.  We accept currency or precious metals -- which have no inherent use value for everyday purposes -- because we think that other people will accept them in turn.  This group delusion allows us to say that money is money.  If the delusion starts to fall apart, then there are very real, very negative effects.

On last night's "The Daily Show with Jon Stewart," the first segment was about the Big Coin gambit.  After explaining the idea, an incredulous Stewart said, "I'm not an economist, but if we're just gonna make sh*t up, I say go big or go home," suggesting that we create a "100 quillion dollar bill."  Stephen Colbert made similar jokes earlier in the week on his show.

This is funny, except that it is not funny at all.  It is no laughing matter to expose the fundamentally unreal nature of money to public ridicule.  The idea of the Big Coin gambit, apparently, is that we should respond to the threat from Republicans to default (undermining the full faith and credit of the United States, on which the global financial system -- and thus our ultimate well-being -- relies) by threatening to undermine the entire global financial system by simply making a mockery of money and how government can create it.  This strikes me as equivalent to two groups of people bickering over which brand of dynamite they want to use to blow up a building.

At least Kleinbard's idea is not so absurd that it would make people question the idea of money itself.  If we are going to default, therefore, and issue more debt, perhaps his solution would be better than having the Treasury try to issue regular debt securities.  I am honestly not sure.  I do know, however, that the scrip option is merely a variation on what Professor Dorf and I have been advocating, which is that the President must not unilaterally cut duly-appropriated spending or increase taxes, but must rather exceed the debt ceiling.

I continue to suspect that a standard debt issue would be less disruptive than scrip, but that is at least an interesting question.  What the Big Coin people dismiss as mere concern about looking "undignified" is, by contrast, a question of the utmost importance.  Financial systems cannot survive when people stop believing that money has value.  Laughing about Big Coins looks like fun.  It is, however, deadly serious.


AF said...

I agree that trying to get out of the crisis by minting a coin would be perilous politically and economically.

What I don't understand is why your preferred solution of simply issuing debt would not. Just as the general public would fail to understand Krugman's sophisticated economic analysis and see this gambit as printing money out of thin air, the general public would fail to understand your sophisticated constitutional analysis and see it as a brazen violation of the law leading to questionable government debt.

Krugman's point, which I agree with, is that the two options aren't mutually exclusive. If the President is going to assert the power to continue government operations despite the debt ceiling, he might as well do it in a way that is plausibly legal. Then he can go on to say pretty much exactly what you would want him to say if he were to just issue debt.

Paul Scott said...

OK, so as I read this, you think the vast majority of people don't realize that all money is created "out of thin air" and that the Big Coin might clue them in. That is the fear?

Sam Rickless said...

The monetary system *does*, as you rightly say, rely on the willingness of people to treat otherwise worthless pieces of paper (or other instruments of exchange) as having value. What I am not seeing is the psychological mechanism that would lead from the minting of the coin (and its use to back the Treasury's issuance of checks) to the collapse of the monetary system. Sure, it's an accounting trick. But the President would go on national TV and explain (a) that it's an accounting trick *permitted by law*, (b) that it is the *only* thing that the law permits him to do in order to avoid violating his Constitutional obligations, (c) that in practice the coins would not circulate and would be removed as soon as the debt ceiling was raised, (d) that the debt ceiling *has* to be raised eventually because otherwise the full faith and credit of the United States will be seriously damaged (at least for a good long time), and (e) that as soon as the debt ceiling is raised he is ready and willing to get to work with House Republicans on finding a balanced way to reduce the national debt (through a combination of additional revenues and spending cuts). My (admittedly non-scientific) guess is that people who know anything about this would laugh and shrug at how goofy Washington has become, on their way to depositing and cashing their Social Security and Veterans Disability checks. Sure, the Limbaughs and Fox News will go apoplectic, Stewart and Colbert will have a field day, but at the end of the day it will be just another tempest in a teapot.

Sam Rickless said...

One more thing. Krugman did say that "the law is the law", and this is indeed, as you say, the layman's view. But Krugman is writing a short column and doesn't have time to explain why the layman's view in this case just happens to be correct. What I take Krugman to be saying is that the relevant Statute permits the minting of the coins even if it was never intended to permit the minting of coins *of such high denomination for the purpose of getting around the debt ceiling problem*. In other words, the law is what it is, even if the legislators who wrote it and the President who signed it did not anticipate or intend what it actually permits.

Joe said...

Money is not a "group delusion" ... what is the point of this hyperbole?

Money is an abstraction of sorts, a physical representation that stands for various things, including certain amounts of work effort, a simplified means of exchange.

It follows certain rules. The basic problem I have with the coin is that it doesn't really take the rules seriously since you know a credible case can be made to find a loophole -- at least if we ignore the intent of the law -- and the problem we have to face is a result of irrationality anyhow, so whatever fixes it with the least amount of mess is okay.

But, this is you know stupid. If you are not going to take things seriously, twisting the law, it is going to get messy. Also, if you are going to use a gimmick, it just encourages further insanity.

It isn't a matter of the monetary system based on some "group delusion." That wasn't George Bailey's point either. The system is based on assumptions that the system will be run sanely, which is far from a delusion & this idea is deluded. I'm ashamed people like Krugman are encouraging us to take it seriously.

Gnash said...

Two questions:

1) You mention that the debt ceiling statute covers not just debt, but other obligations as well. That would imply that coins and currency are covered by it. (They are economically more-or-less equivalent to non-interest-paying debt that never matures, and they are liabilities on the government's balance sheet.) But that is not true: Collectible coins (issued under the same authority as the proposed coin) are not counted, either. How could the coin suddenly be sucked into the debt subject to limit if no other instrument in its class is?

2) You wrote that issuing this coin would clearly not be compatible with the legislative intent. But several authorities, including the law's original sponsor, have said that seignorage was a reason behind the provision. (Collectible coins are worth more than they cost to produce.) Minting a trillion-dollar coin is exactly that - seignorage. The only difference is quantitative. The argument that this is somehow against the legislative intent strikes me as patently false - unless you borrow from Friedrich Engels's dialectic tools and assert that quantity becomes quality. (It would be fun to see US courts pull an Engels!)

Gnash said...

On the other hand, issuing scrip would have all kinds of problems: it would either be an alternative currency or debt that is not backed by full faith and credit. It would arguably be subject to the limit no matter what the Treasury says about it. I think it would also arguably violate the 14th Amendement by creating government debt that the government is explicitly refusing to guarantee. I don't know which of these problems (if any) would be deemed to violate the law (or the Constitution), but there are so many ways to attack the scrip - and millions of people would probably have standing to sue (basically everybody who receives a payment from the government in that form).

TruePath said...

In what sense does this create debt. The coin is not `fake' currency that must be replaced with real currency. IT IS REAL US CURRENCY THE MOMENT IT LEAVES THE MINT. The fact that it is in the form of a coin rather than the dollar bills that would be easier to use is irrelevant.

Hell, why not just keep the fed out of it altogether. Issue sufficient million dollar coins to cover the debt and sell them directly to the public.


I think that considering whether million dollar coins genuinely circulating constitute debt makes it clear they do not. Sure, issuing a coin is equivalent to issuing paper money but that means that UNLIKE A DEBT IT'S PAID FOR BY THE DEVALUATION OF ALL EXISTING MONEY NOT BY THE PROMISE OF FUTURE ECONOMIC PRODUCTION FROM US TAXPAYERS.

TruePath said...

It's unlikely that even several instances of the US engaging in this kind of expansion of the physical money supply would substantially degrade the value of the US dollar by more than the percentage increase in physical money (though this gets complicated with all sorts of things like the velocity of money).

In other words the US dollar has had such a record of stability and the minting would be such a small percentage (and obviously not reflect a general willingness to pay for consumption via inflation) that it wouldn't cause any psychological loss of confidence in the dollar. It would only create inflation in the usual way that it would allow people to bid up the price of products slightly more.

Since, UNLIKE A DEBT THE ISSUANCE OF THIS COIN IS IMMEDIATELY PAID FOR BY THE INFLATIONARY LOSS SUFFERED BY THE HOLDERS OF DOLLARS it essentially amounts to a tax (revenue not debt) and even a relatively fair one so why not do it.

TruePath said...


As the cases about the constitutionality of obamacare have demonstrated legally speaking something is going to count as a tax just when congress says it's a tax and it has the trappings of a tax. Thus even though the penalty for being uninsured in obamacare is economically indistinguishable form an increase in taxes by the amount of the penalty and a credit in the amount of the penalty for anyone who has qualifying insurance it still doesn't actually make it a tax (and thus authorized under the income tax amendment).

Similarly, even though issuing currency acts in many ways like a tax it simply isn't one. People aren't filling out forms and sending money to the government. Moreover, unlike taxes there is no fine grained control over who exactly is taxed (your one option is to tax everyone holding dollars at the same rate).

Cicy said...

I think it would also arguably violate the 14th Amendement by creating government debt that the government is explicitly refusing to guarantee. I don't know which of these problems (if any) would be deemed to violate the law (or the Constitution), but there are so many ways to attack the scrip - and millions of people would probably have standing to sue (basically everybody who receives a payment from the government in that form).

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dilbertgeg said...

Are people who are such experts, incapable of understanding this "national debt"?

It's not even a question about the Fed Gov "borrowing" to spend, EXCEPT for one point. Congress REQUIRES that Tsy must issue Bonds, to at least the amount that Congress orders more money created than destroyed via taxes. Congress also FORBIDS Tsy from directly swapping Bonds, Bills, and Notes for Federal Reserve Notes.

Instead, Congress REQUIRES that the Tsy offer these Bonds etc. at monthly auctions, to be purchased by 20+ Primary Dealers, to sell to other banks.

T-Bonds may look like certificates, but they are nothing more than an Account Balance in specified interest-paying accounts that exist on the Fed's computers. These are Term Savings accounts like a CD at a bank.

When a CD matures, that balance is transferred back to Checking. When a T-Bond matures, that balance is transferred back to Reserves which are no-interest checking accounts. Reserves are also a spreadsheet on the Fed's computers. THAT'S ALL.

T-Bonds are created not "out of thin air" but out of the sovereign powers of the Tsy and Congress to create deposit accts that pay interest. A Legal Power embodied in Law or Contract is not "thin air". Law is the foundation of modern civilization. If Law were nothing but "thin air", ALL contracts would be "moot" and "thin air". But we know that contracts and laws carry the weight and force of the orders and promises and penalties.

We don't use US currency merely because "everyone else does" for some mass delusion. It's true that acceptance is important, but the power behind it is that the Govt demands a certain amount of TAXES as well as FINES and FEES payable in US Dollars, in other words, payable ONLY in the currency that the Govt spends.

You can't pay US taxes in Rubles or Pesos, not unless you go to some FOREX firm and exchange that for a US money.

That's why we agree to use US Dollars, because at least SOME are required to pay SOME taxes in that instrument.

(The tax burden does not have to hit every participant to uphold the US Dollar as the instrument used for commerce in the US economy. If employers and vendors (shops & stores) pay US taxes in Dollars, they will do business in that currency, and you will too.)

Back to the "national debt". more ....

dilbertgeg said...

Back to the "national debt". The Federal Reserve Act is the Law in which Congress requires that Tsy auction off Bonds to PDs and not to the Fed. Those PDs and other banks in turn can sell their T-Bonds to the Fed, and the Fed can supply them with Federal Reserve Notes, which they can then "lend" to the Tsy. Banks are even allowed to do overdrafts at the Fed, and thereby "lend" money to the Treasury after they borrow it.

But Tsy itself is forbidden by Congress to run an overdraft at the Fed. Why?

All this and more is a matter of custom and Law. Laws were written by Man, by elected representatives. Laws can be changed. Congress, if it so chose, could order Tsy to STOP issuing Bonds at auctions for Primary Dealers to buy, for banks to hold (for various terms), and instead allow the Fed and Tsy to directly "swap paper".

That "heresy" is what already "functionally" happens, since the banks themselves are agents of the Fed and operate under the Fed's guidance and financial protection. Congress could "cut out the middleman" banks and let the Fed & Tsy swap paper at will, for whatever amount Congress chose to spend.

The "national debt" would be eliminated at the rate those Bonds reach maturity. That would be great .... if those Bonds were a problem, which they aren't.

Sure, the Fed would then hold Tsy Bonds, just to keep the system of accounting in place, but T-Bonds vanish when they mature, and in any case the Fed returns 100% of it's net profits after expenses back to Tsy.

Congress could organize this and it would work fine. To set base interest like it does now, the Fed could pay interest on Reserve balances similar to rates charged at the Fed Funds Window where Banks borrow as needed. The Fed could pay interest to savers without involving Tsy in the fiction of "borrowing" and the "interest burden".

A big source of profits for Primary Dealers would be removed. Interest would be shifted to an institution that is not associated with "Spending" or "Taxes". (The Fed does not PAY Social Security checks nor corporate welfare payments. The Fed *clears* payments issued by Tsy.)

This would not "help" the Govt be "more solvent" because the Govt is already 100% solvent in it's own currency.

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