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Seigniorage Hack Could Resolve Debt Limit Crisis 696

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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  • Re:Inflation (Score:2, Informative)

    by Anonymous Coward on Saturday July 30, 2011 @11:56AM (#36933060)

    Are you retarded? Of course it wouldn't be $5 trillion worth of metal.

  • 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.

  • 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.

  • Re:Inflation (Score:2, Informative)

    by hedwards ( 940851 ) on Saturday July 30, 2011 @12:15PM (#36933212)

    Eventually the whole sum might hit the economy. They'd just be creating this so that they could pay their bills. It's a subtlety that a lot of folks don't seem to get. Just authorizing a rise in the debt ceiling isn't going to cause problems if there are spending cuts or tax hikes we might not hit that limit.

    Same goes for this, if the deficit shrinks and reverses it's well within the realm of possibility that the whole sum wouldn't ever be used. Which of course is fantasy because we can't balance the budget without some new revenue and the Tea party hobbits won't allow that to happen.

  • 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.


  • 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 [] 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) [] 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*.

  • Re:Inflation (Score:2, Informative)

    by Anonymous Coward on Saturday July 30, 2011 @01:33PM (#36933818)

    GDP is defined by the equation:

    GDP = C + Ig + G + Xn

    C is consumer spending
    Ig is gross private domestic investment
    G is government spending
    Xn is net exports

    For every dollar the government spends G, the GDP increases by a dollar. Government spending can't 'overtake' GDP.

  • 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 [] 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 Anonymous Coward on Saturday July 30, 2011 @02:55PM (#36934336)

    The federal budget has been growing faster than national GDP. ... Since GDP cannot be controlled, it is spending that must be controlled. Period and end of debate.

    While the poster correctly identifies that the key to measuring the amount of sovereign debt (and deficit) is evaluating it relative to GDP, asserting the budget grows faster than GDP over any meaningful timeframe doesn't make it so. US spending on non-Social Security, Non-Medicare, Non-Debt Interest programs* is about 14.7% of GDP. Compare that to Eisenhower's administration in 1960 which turned in a budget excuding the same things (Medicare didn't exist yet) of 14.2%. It is perfectly reasonable to discuss budget growth outstripping GDP growth, but that isn't empirically what is occuring (again, excluding medicare - that is a legitimate long term underfunded issue that will either require cuts, taxes, or significant changes in health care spending trends to address).

    The only undisputable portion of the above is that we take in less in revenue than we spend in outlays, but that doesn't mean that the only way to address that is with less spending, although that is one viable option. Increased revenue or simple GDP growth would also both address this issue.

    For those wondering, James Kwak lays this out nicely in The Atlantic and he offers links from the CBO to back up these numbers - but you don't have to take my word for it (with a shout out to LeVar Burton!):

    *For reference, we exclude Soc Sec due to the fact that it has a separate dedicated tax system, medicare b/c it didn't exist at the comparison point, and Debt Interest b/c it doesn't measure the size of government programs.

  • Re:Inflation (Score:5, Informative)

    by Mindbridge ( 70295 ) on Saturday July 30, 2011 @03:17PM (#36934466) Homepage

    Ah. You study at the University of Chicago or something, I guess? Such opinion is extreme ideology and is hard to take seriously. For example:

    > Government spending does not "stimulate" the economy.
    I see. I suppose that is why the major banks downgrade their GDP estimates as a result of the prospects of decreased government spending? And why the UK economy nose dived as a result of the austerity package?

    > The value of a theory is measured by its ability to predict... yet Keynesians have never predicted any major economic events... even though Monetarist and Austrian economists have.

    Monetarism quite correctly predicted the stagflation. It is failing miserably in the current situation of liquidity trap, however. It predicted that Japan will recover 10 years ago after increasing the money supply, for example. Nothing happened. The effects of QE2 were far smaller than predicted, etc.
    Austrians: Even Milton Friedman did not think that theory had much to do with reality.

    Also, all of those theories were predicting massive increase in inflation and/or long term interest rates due to the economic policy in the past two years. What happened? The interest rates are at historic lows instead. That's a massive failure of the predictions.
    Only the liquidity trap theory predicted what happens accurately. And it is a consequence of the Keynesian theory.

    The way to fix the economy in a normal, non-liquidity trap situation (i.e. almost always) is through monetary policy exclusively, no question about that.
    Monetary policy does _not_ work well at this very moment, however. A fiscal stimulation is needed to get the economy out of the swamp and get the interest rates above 0%. After that we can revert to monetary policy again.

  • Re:Inflation (Score:2, Informative)

    by zippthorne ( 748122 ) on Saturday July 30, 2011 @04:14PM (#36934758) Journal

    No, infrastructure spending doesn't increase employment. At best it's a net breakeven. You have to spend resources on it, and those resources come from somewhere. They come from taxation. Everyone loses a fraction of their effort to compel a small number of people to work on the infrastructure project.

    But those construction workers might very well have been hired into projects all over the rest of the economy if you hadn't bled it for the infrastructure project. Or maybe non-construction workers that are harder to count.

    The benefit of any infrastructure project is the improvement in efficiency in transporting or creating goods and services by the very economic actors you bled to create it. The jobs to actually build the project, while highly visible are actually part of the *cost* of the project.

    And that is why the stimulus failed, and why it will always fail. They thought they could buy "jobs" without really considering what a job really is.

  • Re:Inflation (Score:5, Informative)

    by thomst ( 1640045 ) on Saturday July 30, 2011 @04:55PM (#36935050) Homepage

    The deficit is caused primarily by two things: The lower tax receipts from the huge destruction of wealth during the 2008 crash. The increased spending in the social safety net that automatically kicks in during such downturns.

    So wrong.

    Although lower tax receipts stemming from the loss of wealth definitely play a role in the current deficit, lower tax receipts from the Bush tax cuts for the wealthiest individuals and profligate tax expenditures for corporate tax loopholes (GE, anyone?) contribute far more. Likewise, 10 years of off-budget (and thus deficit-financed) wars have added massively to the deficit. Additionally, interest-only payments on the existing national debt also play a non-trivial role, since money spent on paying debt service is money that's not available to pay for other stuff (such as the afore-mentioned social safety net and multiple wars).

    Long term out deficit is a product of bad demographics and health costs.

    Demographics and spiraling health costs are only part of that grim picture. Far, far more threatening is the prospect of exponential increases in the national debt as a result of interest-rate-driven increases in debt-service costs.

    The current, artificially-maintained, low interest rates cannot last forever. Eventually, even the Federal Reserve's ability to keep them so low - by printing money - that banks actually make money on overnight inter-bank loans (due to the delta between inter-bank interest rates and inflation) won't be sufficient to keep them from creeping up. When that happens, the cost of paying even the interest on the national debt swiftly will grow until it exceeds the current budget. As an example, should the prime rate exceed 10%, annual service on even a mere $14 trillion in national debt will be nearly one-and-a-half trillion dollars.

    Just let that figure soak in for a moment. And that money will pay for NOTHING except interest on the national debt. The cost of every other item in the budget - from national defense to entitlement programs, including national parks, NASA, air traffic control, interstate highway maintenance, and so on - will HAVE to be deficit-financed, because tax revenues simply won't be anywhere close to enough to pay for them out of current receipts.

    As Commander Kruge put it, "Exhilarating, isn't it?"

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