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Seigniorage Hack Could Resolve Debt Limit Crisis 696

Posted by Soulskill
from the or-we-could-just-argue-more dept.
UltraOne writes "With the US Senate voting to table the Boehner debt limit bill, the US is only a few days away from running out of cash to pay for all its obligations. Slate is reporting on a fascinating legal hack that could come in handy, described by blogger 'beowulf' back in January 2011. Seigniorage is the extra value added when a government mints a coin with a face value greater than the value of the precious metal contained in the coin. The statute governing the minting of coins contains a section (31 USC 5112(k) ) that authorizes the Secretary of the Treasury to mint and issue platinum coins in any denomination or quantity. To keep the government from running out of money, Timothy Geithner could order a $5 trillion platinum coin struck and deposited at the Federal Reserve. The money could then be used to fund Federal Government operations (blog post contains legal details)."
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Seigniorage Hack Could Resolve Debt Limit Crisis

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  • Inflation (Score:5, Insightful)

    by CrimsonAvenger (580665) on Saturday July 30, 2011 @11:48AM (#36933000)

    Can you say it?

    Do this, and you make it clear to everyone in the world that we're willing to devalue their bonds/dollar investments to near zero just whenever we feel like it...

    • Re:Inflation (Score:5, Insightful)

      by hedwards (940851) on Saturday July 30, 2011 @11:54AM (#36933040)

      Not quite, it would only increase inflation if it hit the economy. The effect of having a $5tn coin to borrow against would be more or less identical to issuing another $5tn in bonds. This is just a loophole of sorts the effect on the economy would be mostly the same, although it probably would make the price of platinum spike if they actually went through with trying to mint a $5tn coin.

      • Not quite, it would only increase inflation if it hit the economy

        If it is used to increase our borrowing, it's increasing the money supply.

        Otherwise, we can just make a million of these coins, lower all taxes to zero, and use those coins to back a near infinite amount of borrowing (essentially financing the government for the next 100,000 years or so...

        • by hedwards (940851)

          Only at that point, just having the coin in a vault does nothing to inflation. But, as the government borrows against it the inflation would start to occur just like if the debt ceiling was raised as more bonds were auctioned off.

        • Re:Inflation (Score:5, Informative)

          by mdmkolbe (944892) on Saturday July 30, 2011 @12:13PM (#36933198)

          Exactly. The inflation becomes a tax on anyone holding currency. Each day, everyone looses some percent of their money's value and the government gains some number of dollars.

          On the plus side you don't need to pay the IRS to collect this tax, but that is about the only positive aspect.

      • by gman003 (1693318)

        The coin doesn't have to be physically worth $5*10^12, it just has to be labeled that way. They could make the coin out of $0.05 in copper, mark it as $5*10^12, and basically get $4,999,999,999,999.95 for "free" (excluding all the inflationary problems that would cause). It might be an acceptable short-term solution, but I wouldn't try to repeat it more than once.

      • Not quite, it would only increase inflation if it hit the economy. The effect of having a $5tn coin to borrow against would be more or less identical to issuing another $5tn in bonds..

        It will 'hit the economy'; why would the government create new fiat money if they weren't going to use it?

      • Re:Inflation (Score:5, Informative)

        by LoyalOpposition (168041) on Saturday July 30, 2011 @12:21PM (#36933256)

        Well, it's going to hit the economy. It hits the economy when the Treasury starts issuing checks based upon it. The question is--what are others going to do? Normally, it's inflationary when the Treasury issues checks, and it's deflationary when the Treasury borrows (issues bonds.) The key is that it's neither inflationary nor deflationary if they issue the same amount in bonds as they issue in checks. Well, disregarding taxation for the moment, which has the same deflationary effect as bonds.

        By others, I mean the Federal Reserve System. Normally the Federal Reserve System sells bonds to counteract the inflationary effect of the Treasury's issuing checks, or they buy bonds to counteract the deflationary effect of the Treasury's issuing bonds, whichever effect is prevalent at the moment. This is called sanitizing the monetary effects of fiscal acts by the Treasury. On the one hand I would expect the Federal Reserve System to start selling bonds. By all accounts the Federal Reserve System has a huge reserve of bonds. The net result then would be that the Federal Reserve System's store of bonds drops, and there's no effect on inflation, and the government would still be borrowing from the public; it would just be the Federal Reserve System borrowing instead of the Treasury. On the other hand, the Federal Reserve System has been trying to pump liquidity into the economy by keeping the Federal Funds Rate at 0% so it's conceivable that they would permit the increased liquidity to stand at the risk of future inflation.

        ~Loyal

        • Re:Inflation (Score:4, Informative)

          by UltraOne (79272) on Saturday July 30, 2011 @01:36PM (#36933832) Homepage

          This is a very good point. The Federal Reserve currently holds [federalreserve.gov] about $1.6 trillion in U.S. Treasury securities. So it would be possible to sell those securities (which pulls the money that others use to buy them out of the economy) so that the the coin hack had no net effect on the money supply until the Federal government spent more than $1.6 trillion.

          I would argue that we need the additional fiscal stimulus given the weakness in the economy, and that stimulus would not be inflationary. For the people worried about inflation, though, having the Federal Reserve sell Treasury securities would delay any theoretically possible inflationary impact of the coin hack for about a year.

          • by Pieroxy (222434)

            ... until the Federal government spent more than $1.6 trillion.

            But that's next month ! If they didn't need extra cash they wouldn't be where they are !

    • Re:Inflation (Score:5, Insightful)

      by TheLink (130905) on Saturday July 30, 2011 @12:24PM (#36933290) Journal
      The difference between other countries creating money and the US Gov doing this is: Petroleum, electronics, grains (wheat), sugar and zillions of other stuff are bought and sold in US dollars.

      When Zimbabwe prints Zimbabwe dollars the rest of the world laughs at Zimbabwe. When the USA prints US dollars, most of the world is living in USA's Zimbabwe, so they shouldn't be laughing...

      The other thing: the USA has already created trillions of dollars: http://www.google.com/search?q=trillions+federal+reserve

      Just because they call them loans doesn't mean the money isn't created out of thin air. After all when the Federal Reserve loans out those trillions where do the minus figures appear? Under whose bank account?

      Lastly, if the US is going to create trillions, the US citizens better insist that the US Gov actually builds and does some stuff for them with the money.... Before the rest of the world realizes the US dollar is not worth quite as much ;).

      p.s. it's not convincing to say it doesn't cause inflation when you create the money and it doesn't "enter the system". If the money doesn't actually do anything, then there was no need to create it right? The fact that you need to create it means it is doing something.
    • by 0101000001001010 (466440) on Saturday July 30, 2011 @12:41PM (#36933422)

      Not necessarily. The Fed could sterilize the move by selling off an amount of Treasuries equal to the value of the coin and destroying the money it receives. Then the money supply would be unaffected. Effectively the Treasury would be proxy borrowing by having the Fed sell Treasuries, which have already been counted against the debt limit, instead of selling new Treasuries itself, which it cannot legally do.

      It's only inflationary if the money supply is increased.

    • Re:Inflation (Score:4, Interesting)

      by Surt (22457) on Saturday July 30, 2011 @12:48PM (#36933470) Homepage Journal

      It's the best solution to our problems, unfortunately. Defaulting rather than devaluing spreads the pain rather unfairly. Devaluing hits all debt holders equally percentage wise.

      Also, it resolves the housing crisis, which would be great for helping the economy overall.

    • Re:Inflation (Score:5, Informative)

      by UltraOne (79272) on Saturday July 30, 2011 @12:54PM (#36933532) Homepage

      I am the OP. As several people have posted, this approach is exactly equivalent to printing money. The reason it needs to be platinum coins rather than paper bills is that there is a law that limits the total value of paper bills that can be printed, but there appears to be no limit on the value of platinum coins that can be minted.

      Of course, if you were to print a large enough amount of money, it would lead to inflation (or asset price bubbles, which actually seem to occur first in the current economy). The mechanism by which excess money supply causes inflation is by increasing demand to the point where bottlenecks appear in the economy. For example, people want cars, have money to buy them, but there aren't enough factories right now to supply demand - so the price of the limited pool of available cars is bid up. If labor markets are tight, employers looking for people to work to fill the demand created by the extra money will need to bid up wages to attract workers.

      The key point is that all those mechanisms only work if an economy, or significant parts of it, are operating near peak capacity. This is the complete opposite of the situation we are in right now. Industrial capacity utilization [federalreserve.gov] was at 76.7% in June, several percentage points below the 1972-2010 average (80.4%) an well below the 85.1% peak in the 1990's. Unemployment is also high compared to historical averages.

      In the current environment, it is vastly more likely that increasing the money supply will improve economic conditions without triggering inflation. Even at its pre-financial crisis recent peak (when unemployment was much lower than it is now), annual inflation (CPI-U, Dec 2006 to Dec 2007) [bls.gov] was only 4.1%. Also keep in mind that the entire amount created ($5 trillion in my example in the OP) will not hit the economy at once. Initially it will be in an account at the Federal Reserve, and only as the government spends the money would it reach the economy.

    • by hey! (33014) on Saturday July 30, 2011 @01:32PM (#36933810) Homepage Journal

      We are not facing a "debt" crisis here. Judging from current market prices for US securities, people with lots of money to put in safe places still think our public debt is manageable. What we are facing is a liquidity crisis.

      I think the term "debt ceiling" is misleading. Many people seem to think this is about limiting Obama's ability to add to the debt. Issuing treasury securities adds very little to the debt; it's *spending* that creates debt. If I loan you a thousand dollars, you are not "in debt" until you spend that money on something I can't or won't accept as repayment, like your vacation. Under our Constitution the President cannot spend money on his own authority. Spending is authorized, and in some cases mandated by Congress. And of course "spending" usually isn't a cash up front affair. When we order a million dollars worth of missiles from Raytheon, they don't demand cash up front; they deliver the missiles and present us with a bill. The "money is spent", and now the President has to find a way to raise the cash to satisfy Raytheon.

      What Congress is doing is tying the President's hands when it comes to raising the cash to pay the bills.

      If he can't raise the cash by issuing securities, and Congress won't raise the cash by hiking taxes, this leaves him with two options: not pay the bills, or print (in this case *strike*) new money. The problem with creating new money is it ties the money supply to the federal budget, rather than the needs of the economy for stable prices. That's how the Weimar Republic paid its bills. It'd be OK to do once, but if Congress doesn't raise taxes of the debt ceiling, we could be in the same hyperinflation boat.

      Issuing securities is, within limits, a fiscally responsible way to pay the bills, if we can trust the market's judgment of our credit risk. Remember those bills are a *result* of assuming financial obligations; they aren't the *cause* of those obligations. The cause of federal debt isn't federal savings bonds or T-bills, it's federal appropriations. And you can't pay the resulting bills with spending cuts, even if those cuts are a good idea for entirely different reasons. Creditors won't accept fiscal austerity as payment; they want *cash*.

  • by sourcerror (1718066) on Saturday July 30, 2011 @11:49AM (#36933010)

    It's not that much different than just creating virtual "account" money, as it's had been done so far.

  • How about instead of increasing the debt limit they A) Stop pissing away money and B) Find a way to MAKE money. Making money doesn't mean in curring more debt. What US the is doing is what most people do in college, they discover credit cards, take out 10 of them, max them out and have to get more credit cards to pay off the one's they've always maxed out. This is EXACTLY what increasing the debt limit is, it's increasing your credit limit or taking out a credit cards because you can't pay them off.
    • Re: (Score:3, Insightful)

      by Anonymous Coward

      If you think national economics are equivalent or even similar to personal finances, then you really have not thought this through in any way at all.

    • Bad Idea (Score:5, Insightful)

      by RingDev (879105) on Saturday July 30, 2011 @12:09PM (#36933162) Homepage Journal

      If the government is doing something profitable, they shouldn't be doing it. With all likelihood, if something is profitable, a guided free market should be able to manage it much more efficiently.

      The government's duty is to perform services that are by their very nature not profitable. Public schools, police, fire, national defense, etc... it there isn't a profitable model that can provide these services at the level we expect, the it is up to the government to suplement or perform those services.

      If the government is turning a profit, it's either doing something wrong, or doing something that someone else should be doing instead.

      -Rick

      • Re:Bad Idea (Score:4, Insightful)

        by GospelHead821 (466923) on Saturday July 30, 2011 @12:34PM (#36933358)

        I could imagine a few hypothetical situations in which the government performing a profitable service is consistent with it being the government. Suppose that it can reasonably efficiently perform the service adjunctly to another service that it provides (one that isn't profitable.) The private sector would have to hire equivalent staff to perform the profitable service, which would counterbalance any efficiencies they might realize. Also, since the government requires funds to provide those unprofitable services, then government ownership of at least some profitable enterprises can offset the costs. "So would taxing private companies providing those same services!" you might object. The government can't tax those companies for 100% of their profits, though.

      • by RKThoadan (89437)

        I feel that the government should do it's best to provide infrastructure and research to increase the overall strength of the economy and reap some 'profit' from this in the form of taxes from the stronger economy.

        I also prefer anything that leans towards being a natural monopoly to be government run as well, despite that fact that it can be run profitably. I've got privately provided electricity now and I really miss having city-owned power.

      • Re:Bad Idea (Score:4, Interesting)

        by Xest (935314) on Saturday July 30, 2011 @01:19PM (#36933722)

        "The government's duty is to perform services that are by their very nature not profitable. Public schools, police, fire, national defense, etc... it there isn't a profitable model that can provide these services at the level we expect, the it is up to the government to suplement or perform those services."

        I notice you leave health out of this list, and I'm intrigued as to what your reason (if any) was for this?

        The reason I'm intrigued is that in Europe it's something that we tend to lump in with schools, police, fire, but in America it's not, many Americans believe it is something that can be made profitable through health insurance and so forth, and as such I have to wonder if, having left it out, you did so because you agree with this.

        If that is the case, then are you able to explain why you view it as different to say, fire insurance, or crime insurance to justify as to whether you should be able to get assistance from the police, or fire department, dependent on whether you've paid such insurance?

        If it's not the case and you missing it out was merely an oversight, or an attempt to simply avoid the debate then I apologise! I'm just genuinely intrigued to know how some Americans square away that facet of the healthcare debate.

        • by RingDev (879105)

          I left health, and a large number of other things out of my non-exhaustive list. Thus the reason for the word "etc..." I do not have the time nor knowledge to enumerate all aspects of life that I think would be better served by government management. Health care is definately an industry I'd like to see the feds take a stronger roll in. Even if it's something as simple as 'Medicare for all'. But that is one huuuuuuuuuuuge debate with a whole lot of intricacies.

          -Rick

      • by snowgirl (978879)

        If the government is doing something profitable, they shouldn't be doing it. With all likelihood, if something is profitable, a guided free market should be able to manage it much more efficiently.

        Except nearly everything can be done for-profit and turn a respectable turn around. Fire departments used to be private, and you basically bought insurance against a fire. Had a fire and hadn't paid your bill? Oh sorry, we're not going to help you out. Oh, but your neighbor who is paid up? We'll put the trucks out there to protect his house, while yours burns to the ground.

        The point is not if a venture is profitable or not, because EVERYTHING can be made profitable if you're willing to exploit the customers

  • by Hadlock (143607) on Saturday July 30, 2011 @11:54AM (#36933044) Homepage Journal

    This is essentially what Greece is about to do. Announce your own currency, set it at $1 fake dollar = $1 billion real dollars, then give all your creditors $20 fake dollars, call it a day and the debt is resolved! Actually this is what every country does that isn't western europe about every 60 years when their economy craters. The reason the dollar is so strong is that we haven't had to do this since it became a popular tactic about 100 years ago. Once we do that, we lose relevance in the global currency market, and paying off dictators like Saddam, Gadaffi and others puts us on a much more level playing field with Iran, Russia, China, India, Brazil etc. becomes much harder, because their currency is just as likely to be worth something tomorrow, after, or in the middle of a global or regional war.

    • by BZ (40346) on Saturday July 30, 2011 @12:04PM (#36933122)

      > that isn't western europe about every 60 years

      France last did this in 1960. That's 51 years ago.

      Germany last did this in 1923. Closer to 88 years.

      Italy did this when they went to the Euro, as far as I can tell.

      On the other hand, Canada hasn't done this. So I'm not sure what your "Western Europe" schtick is about.

      Also note that if $1 "fake" has the same buying power as $1 billion "real" (which is how currency reforms of the sort you describe usually work), then it's not like the creditors lose out. They lost out during the inflationary period, not the redenomination.

      One other comment. Our currency is "strong" because we've had it a policy that it be so (at the expense of domestic employment), and because other countries have policies of propping up the value of the dollar to improve their domestic employment situation.

    • by alewar (784204)
      I don't think they do this to resolve debt, but because due to inflation, they would otherwise end up paying $20,000 for a soda, which would be something very impractical to do even with $100 bills. At some point they have to convert their currency to something manageable again and as far as I know, the debt is also converted.
    • No, it's not really like Greece. The thing with the US laws is that the debt limit applies to PAPER currency. By issuing a coin, the govt could get around the letter of the law. Here's a link to the same idea from Buzzfeed [buzzfeed.com] and CNN [cnn.com] from a few days ago. The CNN article is written by a Yale constitution-law professor.
  • "All of its obligations"... Not true: monthly income would amount to some 300 billion US$, making the US able to pay only *part* of its obligations (the 300 billion part). Worst is not what the US cannot pay, but what the markets think the US cannot pay (in the near future) -> that is what makes stocks crash.
    • The US has more than enough money to pay all of its debt service. It doesn't have enough money to pay all its debt service and all of its other obligations, but actually paying the debt is not in question.
  • by hackertourist (2202674) <(ln.tensmx) (ta) (tsiruotrekcah)> on Saturday July 30, 2011 @11:55AM (#36933054)

    Given the willingness of both parties to force a default, I suspect any attempt in this direction will be quickly torpedoed by House or Senate.

    • Re:Postpone only (Score:5, Interesting)

      by UltraOne (79272) on Saturday July 30, 2011 @12:20PM (#36933248) Homepage
      I am the OP. The reason this approach counts as an 'escape hatch' is that it appears that the executive branch already has the authority to carry it out (in 31 USC 5112(k) ). To stop it, Congress would need to pass a law. To do that in the face of a presidential veto would require 2/3 supermajorities in both the House and Senate. As long as Obama can get 34 of the 51 Democrats in the Senate (or 53 Democrats plus independents who caucus with the Democrats) to back this approach, there is nothing that the House can do to stop it.
  • INFLATION!! no seriously, this debate is a fluffed up scare tactic, the US is bringing in enough money to pay for its debt, but the US just wants to SPEND MORE than its bringing in so lets just see how much were willing to slit our own throat for bullshit smoke n mirrors projects...

    I am not going to argue politics with anyone, and that is because I am disappointed with every single one of the self interest fat ass out of touch snakes in the grass fuckwit children, this administration and last

  • Eck. (Score:4, Funny)

    by mikkelm (1000451) on Saturday July 30, 2011 @12:00PM (#36933088)

    All the while, the rest of us are stuck moving refrigerators and colour TVs.

  • by John Hasler (414242) on Saturday July 30, 2011 @12:13PM (#36933202) Homepage

    Such a coin would not be compatible with existing coin-op machines.

  • Artificial crisis (Score:4, Insightful)

    by Ironchew (1069966) on Saturday July 30, 2011 @12:21PM (#36933260)

    It's depressing how the debt ceiling is such a matter of contention right now, when it's been increased without much hullabaloo every six months or so since WWII. The reason for any artificial crisis is for politicians to threaten the public with doom and gloom in order to sneak something past them that the public normally would not accept. With Democrats and Republicans both playing along, what do both parties want to sneak by us? My guess is deep cuts to vital social programs, since the Obama administration started calling them "entitlement programs" at the start of the debate.

    • by robogun (466062) on Saturday July 30, 2011 @01:02PM (#36933588)

      At some point you have to start paying it back. It's at the point half of every incoming dollar has to be immediately spent to pay interest. Did you really think the borrowing could continue forever?

      • by Ironchew (1069966)

        I seriously doubt that the Republicans in particular have chosen this particular debt ceiling bill (remaining mostly silent on hundreds before it) to advocate for fiscal responsibility. There is an ulterior motive, and we'll find out what it is afterwards.

      • by MightyMartian (840721) on Saturday July 30, 2011 @01:55PM (#36933950) Journal

        So the logical point to draw the line in the sand is during a period of high economic uncertainty, with a major currency (the Euro) in potential trouble, and with the US reporting shitty economic figures as it is? Are you under the delusion that doing it now will make America stronger, that it will aid the economy? If it's such a good fucking idea to default, why have stocks shed billions of dollars, why are rating agencies freaking out and why is the rest of the fucking planet begging Congress to get it's shit together?

        You know, sometimes populist political movements really are not all that intelligent. Sometimes they're lead by people who are either fucking morons or are willing to do maximum damage to retain and grow their power. The Tea Party is not a sane political movement, as guys like Boehner are beginning to find out. The Tea Party is a political cancer, a political apocalyptic cult that idealizes a form of government that hasn't existed in any measure in the United States since Lincoln was elected.

  • by Hartree (191324) on Saturday July 30, 2011 @12:23PM (#36933268)

    In the congressional hearings sure to ensue:

    "So, Mr. Secretary, you're telling us you were carrying the 5 trillion dollar coin in your pocket and you think you lost it when you pulled out coins for a soda machine?"

  • by Jeremy Erwin (2054) on Saturday July 30, 2011 @12:28PM (#36933312) Journal

    This contradicts the entire spirit of a suicide pact. What's the point if you can cheat death?

  • by Arancaytar (966377) <arancaytar.ilyaran@gmail.com> on Saturday July 30, 2011 @03:16PM (#36934462) Homepage

    The Republicans are boycotting all plans that place the slightest tax burden on rich people, hoping to chicken the administration into agreeing to its cuts to social spending. They do this because they know that while they wield enough power to obstruct the government, it's Obama's face in the news when the shit hits the fan, or the government takes ridiculous measures like this.

  • by dzfoo (772245) on Saturday July 30, 2011 @06:34PM (#36935658)

    Am I the only one that cannot get over a mental mispronunciation of the name Boehner?

    Tsk!

  • by istartedi (132515) on Saturday July 30, 2011 @10:32PM (#36936592) Journal

    --just take half the gold in Ft. Knox. Issue gold certificates backed by it at a value such that the debt is paid; but don't allow redemption.

    Then there's the punster solution:

    Get 14 $1 bills. Tear them in half. That's 14 terabucks.

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