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.