Until WordPress deleted the original post yesterday (I wept), this was going to be my first officially written-in-2013 post. Here it is, in its reconstituted form:
In the last month, there has been talk of two things:
- Raising America’s Debt Ceiling; and
- the Commemorative Coin solution.
Which sounds like a magnificent start to a year of business
ridicule commentary. But first, some background:
The Debt Ceiling
Since the dawn of American time, Congress was responsible for deciding how to spend money, and for deciding how that money would be collected. When the spending decisions involved capital expenditure (on things like roads, etc), it made sense that Congress should borrow money in advance, and then pay it off using future tax revenues. So Congress would authorise the issue of government bonds/treasury bills just after it had passed a bill authorising a particular piece of spending. But it did mean that Congress had to pass a bill to accept each and every issue of bonds and treasury bills.
This worked well up until World War 1, when the business of Congress became largely restricted to authorising new war-time expenditures and approving war-time bonds to fund them. The fatigued gentlemen of Congress concluded that it was high time for some American efficiency – so they decided to allow the Treasury to have a debt limit. Effectively, Congress would pre-authorise the borrowing of a given amount of money to fund its spending decisions.
And since then, the debt ceiling has been quietly and regularly raised as and when the Treasury requested it.
That is, until Obama came to power, and the Republicans got all humbug about his social spending programs. It all reached a head in July 2011, when Congress passed a last minute stop-gap plan, which involved raising the debt ceiling in exchange for a future deal around the budget. As encouragement, Congress included a penalty clause for failure to reach an agreement – a clause more commonly known as “the Fiscal Cliff”. And then 1 January 2013 rolled round, and Congress passed another last minute* stop-gap plan extending the time to make a “real deal” to March 2013.
And I can only assume that this was because they were successful with the 18 months they got last time. Or not.
But anyway – the point is, while all this debacle was still unfolding from the last time they raised the debt ceiling… America, well, hit the debt ceiling. Again.
So the mess just got worse. And giving it more time is like applying a band-aid to the recently-delimbed.
The Republicans: don’t want to borrow any more money until there is a plan and a budget in place to stabilise the debt relative to GDP. Which seems reasonable, if a little hypocritical (I mean – where was all this sensibility when Georgie-B was ushering in a new era of wartime expenditure?).
The Democrats (and Paul Krugman): are frankly flabbergasted that anyone would try to control spending in a recession**.
This leaves America stale-mated – which in some ways might be worse. At least, if a decision were made, it could prove itself good or bad empirically. And now, the argument has shifted away from policy choices and toward “how to break the stalemate”.
Cue: the $1 trillion platinum coin.
The US Treasury is responsible for the collection of government money (through taxes and borrowing), and arranging the expenditure of programs authorised by Congress. What the US Treasury cannot do is create money*** – that task belongs solely to the Federal Reserve.
Except for what is apparently a tiny loophole, because the Secretary of the Treasury has the power to issue commemorative platinum coins of any denomination (the only requirement is that they’re platinum). The suggestion, then, is that the President order the Secretary of the Treasury to mint a $1 trillion platinum coin.
The theory works as follows:
- Timothy Geithner, or his successor, mints a $1 trillion platinum coin;
- The Treasury then deposits the coin in its account at the Federal Reserve (in the same way that we would deposit cash in our savings accounts);
- The Treasury could then use the $1 trillion in its account to repurchase issued debt, thereby reducing the public debt to $1 trillion below its current level.
- Presto: no need to raising the debt ceiling.
- Then, when the Republicans realise that they can’t hold the President to ransom over his spending programs by refusing to allow them to be funded, they will raise the debt ceiling;
- At which point, the Treasury will issue a further $1 trillion in debt and deposit the proceeds in its account at the Fed;
- The Treasury can then retrieve the $1 trillion platinum coin; and
- Melt it.
I can’t decide whether the suggestion is elegant or comic.
But we should probably be relieved that the Treasury and the Presidency have publicly declared that they won’t be using this loophole. Because however you spin it, this is nothing more than the Government finding away around the monetary monopoly of the Federal Reserve.
And seeing how well they’ve done with their fiscal powers – it’s probably for the best that they don’t have monetary powers as well.
The stalemate continues…
*If you can call 1 January 2013 “last minute”. Sounds more like “two minutes late”.
**Keynesian logic is, as always, seemingly illogical at a microeconomic level. Increasing expenditure in a recession is like saying that I should increase my spending if I lose my job. The logic goes: if I increase spending, then the shops that I’m buying from will notice that their sales are increasing and will start to order more product from their suppliers, which will require increased production in the factories, which will open up a job opportunity for me. Of course, if I continue the logic, I would ask: “so at that point, I can go back to my normal spending pattern?” Because surely if I did that, then the shops would make fewer sales, resulting in fewer orders, resulting in me losing my job? But there it is.
***Even though it is responsible for physical printing of the paper notes and the minting of coins in circulation – it does so through, and at the request of, the Federal Reserve.