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Posted by on Jan 23, 2013 in Economy, Politics | 0 comments

What is the Debt Ceiling, Should it be a Problem and What is the Deal with This Platinum Coin? (Guest Voice)

What is the debt ceiling, should it be a problem and what is the deal with this platinum coin?
by Contributing Columnist Robert P. Coutinho

Now that the fiscal [banned word rhyming with stiff] has gone by, what is all the new talk about? Sit down; have a strong drink; smack yourself in the head as needed and read the sad story of a dysfunctional system from the outset.

Our forefathers, in their infinite wisdom [read: naïve stupidity], set to Congress the purse-strings of the government. That was not the problem. They set to the administration (i.e. the office of the presidency) the task of actually sending the money to the people who are owed. That is not exactly the problem either. They also set up no means for the president (specifically the Treasury Department) to pay the bills without the approval of Congress. You see, they had no idea that a future Congress might actually spend money and then refuse to pay the tab.

In their defense, I suppose their naivete was understandable given that they gave Congress the power to print money. Since all expenses were supposed to be paid in the money that Congress could actually make, there was no reason to expect that Congress would ever refuse to even print the money necessary to pay the bills. If you or I printed our own money to pay our bills we would be guilty of counterfeiting. Congress had the sole power to create money. The Treasury Department had to take orders from the president based on the wishes of said Congress. A long while back (about one hundred years actually) Congress set the job of deciding how much money the Treasury would print (on any given day) to the newly created Federal Reserve Bank. That is not to say that Congress withdrew its power! It simply delegated the task to an agency that is “kinda, sorta, a little bit” governed by Congress and the president.

So, if the Congress ordered them to do so, the Federal Reserve could add any amount of money to the Treasury. All it takes is a few keystrokes on a computer. It would cause all sorts of problems if the Federal Reserve were to do this on a routine basis, since they would be granting the country money without ever making sure that some of that money came back in taxes, but hey, what is a little hyperinflation compared to Congress needing to learn arithmetic? Instead of simply ordering the Federal Reserve to credit the Treasury account, Congress borrows the money. Get it? We borrow the money that we have the sole capacity to create in the first place. It is sort of like playing Monopoly and thinking the bank can run out of money. You might run out of dollar bills (in the Monopoly game), but the bank can issue any amount of money.

At any rate, the debt ceiling is a figure that Congress has set as to how much the Treasury Department can issue in bonds. Of course, we do not really need to issue bonds, we can simply credit the Treasury account at the Federal Reserve, but Congress has not authorized that. In addition, Congress has set a limit on how much money can be in print (the green paper we call dollars) at any one time. So, if Congress does not raise how much the country can “borrow”, then the administration would run into the problem of running out of money in the account at the Federal Reserve. Whether or not the Federal Reserve Bank would actually bounce the checks is another question, but we will not bother covering that here.

Meanwhile, the Obama administration has a card (or should I say coin?) up its proverbial sleeve. The Treasury Department can mint coins. It does so. Many of the coins are not even expected to touch human hands. Really! They have the coins moved directly into containers so that they are pristine. These coins are then sold to collectors. The mint also produces coins that are not even negotiable; such coins are known as commemorative coins. The numismatists (coin collectors) love to accumulate such things (along with the kinds of coins that have actually been used). This brings us to the bizarre, if potentially useful, situation to which I referred when mentioning the coin up the administration’s sleeve. Although coins made of gold, silver and copper have limits to their denominational levels, Congress has approved the minting of platinum coins in any denomination. Some of you may have recently heard about the proposed Trillion Dollar Coin. This is what they are talking about. Congress probably expected that the platinum coins would only be commemorative, but the actual lettering of the law does not restrict the administration in this way.

Now, to be fair, if one was to consider minting a trillion dollar coin, there seems to be little reason not to, instead, mint a five-trillion dollar coin, or perhaps an eight-trillion dollar coin. I use the latter figure because the national debt is about sixteen trillion dollars. If the Obama Administration decides to go to the extreme measure of minting a ridiculously-valued coin, I personally think that the eight trillion dollar one is the one best suited to the task.

What would the administration do with this coin? Deposit it in the Federal Reserve, of course—just like you or I could go to a bank and deposit money, so could the Treasury Department. The reason I prefer the eight trillion coin is because, if Congress is going to be so idiotic as to fail to allow the administration to pay the bills that Congress has already accumulated*, then President Obama should match their silliness with a gesture somewhere just as extreme. Thus, he should pay off half the debt with one coin and keep open the possibility that the other half will go with another minting if Congress refuses to get its act together.

What would be the likely consequences of such an act? Well, that sort of depends on just how dysfunctional Congress really is. I have mentioned in numerous articles on this site that Congress both could and should actually be doing something closely related to this action. Since we (we being the United States of America) have a non-exchangeable fiat currency, we have the capacity to do all sorts of things that countries could only dream about one hundred years ago. I will not go into all of that here as it would take up too much space and is outlined in my previous articles. To sum it up, though, in theory such a move would have no economic consequences—provided that nobody created them under false interpretations.

That last phrase is the real sticking point. Most economists, many, many financial institutions and the vast majority of the public would likely panic if the president minted the coin without coming out and explaining in great [read: super humongous, enormous beyond the capacity to describe] detail why simply adding the money to the treasury should not matter. If the general public were not reassured, it would likely lead to any of a number of economic catastrophes; among them are extreme inflation (way beyond the level that such a move would warrant), loss of the U.S. Dollar as the world-wide reserve currency, a run on all the banks in the world, a ceasing of all international trade as we know it, and, of course, the Mayan Apocalypse (now several weeks overdue).

There are some fairly smart people, Nobel-winning economist Paul Krugman among them, who have suggested that the administration should actually entertain such a move as minting a high-valued coin. In Krugman’s case, to be fair, he was probably kidding. However, as Modern Monetary Theory (MMT) suggests, such a move is actually fiscally sound. Why? Because the only restraint that the federal government should worry about concerning spending and taxes is the amount of inflation it produces. Note that I linked taxes in with the spending. As far as the fiscal situation is concerned, taxes and spending have nearly the same effect.

So…at the moment we have some seventeen million or so people who are unemployed or underemployed. We could guarantee all of them jobs (thus setting minimum wage and benefits all at once since any employer offering less would be offering a worse deal than the federal government, and would have to then compete with the government for workers) and simply send out the checks each month (or week, or half-month, however the government decided to pay them). Instead of worrying about borrowing the money (which, in itself is virtually a misnomer anyways), we would simply spend the money into existence. In order to combat runaway inflation, we would have Congress set income taxes (or some other form of taxes) to a level that will keep inflation to tolerable levels (adjusting taxes up during boom times and down during recessions and slow growth). Taxes take money out of circulation, so, if you have too much money in circulation (thus causing inflation to be too high), you could curb the situation by taxing the excess money back out of existence. Case closed.

This is why the trillion dollar coin is such a neat idea. It might actually get people to realize that MMT is real.

*Since I first wrote this the House of Representatives (read Republican House of Representatives) has apparently backed down on its threat to fail to authorize the Treasury Department the capacity to pay the bills. I suppose this is really for the best, but I kind of liked the idea of a coin denominated at one trillion dollars…any anyways, we may still get the chance as the House is only proposing borrowing for the next three months (without solving the problem of running out of money, of course).

Robert Coutinho is a disabled pharmaceutical chemist living in Massachusetts. He has been learning about life, the universe, and everything since he was born in 1963. He has had little else to do since his disability began in 1997. He has written a fictional novel, Their Last Best Hope, which is currently available at Tate Publishing, Amazon and book stores.