Friday, July 22, 2011

Circumvent the Debt Limit Crisis

Why don’t we just retire the debt? We don’t need it, and it causes endless concern. We just borrow or own money back from ourselves and the Treasuries further enrich the rich, as they end up owning most of them.
Recently I posted an idea from Rep Ron Paul as a way to get rid of debt now held by the Fed as a result of Quantitative Easing. A better idea has surfaced that involves coin seigniorage. That is the profit made on the cost of a coin relative to its face value. 
In short it goes like this. The US Mint is authorized to mint coins in any denomination, oh say $2 trillion, which is a huge profit. The Treasury then sweeps the profit from the Mint’s account at the Fed into its own General Account. With these funds it buys back Treasury bonds which reduces its General Account balance and increases bank reserve balances at the fed. It is essentially Quantitative Easing through the Treasury. It would be legal, feasible, and require no new legislation.
Of course, it won’t be done. People’s minds will recoil from the simplicity of it. If it were to happen the President could give the following speech copied from here.
My Fellow Americans:
1) Until now we’ve been borrowing the money the Government created back from the private sector, in order to cover our deficit spending, so the national debt has been steadily growing.
2) That’s silly! According to the Constitution, this Government, of the people, by the people, and for the people, is the ultimate source of all US money. So why should we ever borrow US money back and pay interest on it, since we can create it any time by the authority of the Constitution and Congress?
3) Congress has also imposed a debt ceiling, which, as you know, we've now reached, so we can’t borrow back our own money, anyway. 
4) So, on my order, and in accordance with legislation passed by Congress in 1996, and with the US Code, the US Mint has issued $30 Trillion in a single platinum coin, and deposited it at the NY Fed. It’s legal tender, so the Fed credited the PEF with about $30 Trillion in USD credits using its unlimited authority from Congress to create US Dollars.
5) This is not inflationary because the Fed will put our coin into its vault, and keep it there permanently out of circulation, and we will use the $30 T in USD credits only to pay back debt and to spend what Congress has already approved, which is only a fraction of these credits and far from the amount needed to cause inflation.
6) My action ends the debt ceiling crisis, because we have no further need to borrow our own money back in the markets, so we don’t need the tea party or other Republicans, or even my fellow Democrats to agree to raise the debt ceiling.
7) Now the Treasury, has plenty of money, much more than we need, in fact, to pay for all appropriations Congress has already approved for 2011, and, again, we won’t have to borrow our own money back.
8) So we will pay all Government debts which will come due in 2011. Treasury securities and all other debts included. We will also pay back all debts held by other agencies of Government and the Federal Reserve. When we do this we will lower the national debt by about $7.5 T, reducing the “debt burden” by about half this year, and creating an actual Social Security trust fund with 2.6 T in cash reserves in it; and again, to do this we don’t have to borrow our own money back, and we will also reduce our interest costs on the outstanding national debt.
9) None of the $30 T in new credits created by our actions is “money” in the economy until the Treasury spends it. For now it is just capability to spend awaiting the appropriations of Congress to mandate deficit spending, should it need to compensate for the reduction in demand, probably close to 10% of GDP right now, caused by your own desire to save (which we want to do our best to facilitate), and your desire to import goods from foreign nations.
10) We have created $30 Trillion in new credits even though we needed only a fraction of that to cover anticipated deficit spending and debt repayment until 2021. The reason for this, is that I wanted to have enough capability created in the Treasury account, so that the national debt could be completely paid off (except for a small amount in very long-term Treasury debt still not mature by 2021), and all projected Federal deficits covered over the next 10 years.
11) Of course we can always make new coins if our projections turn out to be wrong; but I thought it would be best to ensure that all $14.3 T of the “debt burden” can be completely eliminated from our political concerns; and also to provide enough funds in our spending account at the Fed so that it would be very clear to Congress and all newly elected Representatives and Senators, that even though they, according to the Constitution, continue to control the purse strings, the national purse is very, very full, and that we will be able to afford whatever deficit spending for the public purpose, including for full employment and Medicare for All, that Congress, in its wisdom, chooses to appropriate now and before the election of 2012.
Good night, my fellow Americans and Sweet dreams! Rest well knowing that our beloved country won't be defaulting on any of its debts, and that I've prevented this without going over the legal debt ceiling, by providing money for spending mandated appropriations, in compliance with the laws authorizing coin seigniorage, while supporting the Constitution's prohibition against our Government ever defaulting on its debts. I hope that in the future everyone will obey the 14th Amendment's prohibition against questioning the validity of Federal Government debts, and think twice before they indulge themselves in such loose talk. America will always pay its debts in US Dollars according to the terms of the contracts it has concluded, and in line with the pension payments and other obligations that it owes. Neither you nor the rest of the world need ever doubt that again!
Further discussion of this approach is found here.


  1. If Tim Geithner is so smart, why hasn't he suggested such a thing to Obama? I don't trust him, though (too fast-talking and shifty-eyed). Is he just pulling Obama along for the ride to a new U.S. oligarchy? What about Ben Bernanke? Are all these guys out of touch with the lives and reality of America's working stiffs?

  2. JAVS,
    I suppose Geithner is very busy doing what bureaucrats do, which does not include thinking outside the box. I think we are already an oligarchy and Obama has been sucked in. Bernanke is doing as well as he can as an old time economist. We could do worse a la Greenspan. Yes, they are out of touch with the working stiff. They serve the oligarchs. A new report from Northeastern U shows that for the last 7 quarters business profits are way up salaries for the working stiff are nil. Hey, its good for us rentiers; not so good for our grandchildren.