Sunday, January 13, 2013

Two cents on the trillion dollar coin, and a debt-limit schedule

The Fed and Treasury say they're not going to try the trillion-dollar coin idea to avoid the debt limit. But the episode is very revealing about how our fiscal and monetary policies work, (or don't, as the case may be), numerous misconceptions floating around, and leads to a thought on a better way to approach the same objectives, which might be a useful compromise for both sides.

I. Why the limit binds

First, just to be clear, let me clarify the playlist: 
  • Debt: US government bonds, issued by the Treasury. Promises to pay for your healthcare is not "debt," and if the government reneges on that promise it's not a "default."
  • Cash: Bills and coins.
  • Reserves: Essentially checking accounts at the Fed. Banks may freely obtain cash in return for reserves and vice versa.We often say "the Fed prints money" when in fact what it does is to create reserves.
In the first debt-limit debate, I was initially puzzled that it was a problem at all. The "debt limit" does not include currency or reserves, though both are functionally US government debt. That seems like an unfortunate oversight:  Why can't the government just pay its bills by printing money, i.e. creating reserves? Sure, you might worry about inflation sooner or later, but this is a legal question. The government can print money to pay its bills, no?

Well, no, which is really interesting.

For the Fed to "print money," meaning to create reserves, it has to buy some other asset. Though the Fed can manufacture money costlessly, it legally can only do so by buying assets. The Fed cannot engage in fiscal policy, and printing up checks and sending them to taxpayers -- or even dropping cash from helicopters -- is fiscal, not monetary policy.

And the debt limit applies to all Federal debt outstanding, including debt held by the Fed. So, as long as the Fed buys only Treasury bills, the debt limit does, in fact, stop the government as a whole from "printing money" (creating reserves) to pay bills. To do so, the Treasury has to issue debt, borrowing the money, pay its bills, and then get the Fed to buy the debt, so that in the end there is more money outstanding. But a debt limit stops this operation.

Well, the Treasury has the actual printing presses that make good old fashioned cash. Why can't the Treasury  just print up money and use it to pay bills? (Or, deposit the cash at the Fed, thereby get reserves, and transfer the reserves by writing checks.) No, that's illegal too. The Treasury prints the bills, but they can only be issued by the Fed, and in return for already-created reserves.

So the architects of our monetary system and debt limit weren't so dumb after all. Though we have a fiat money system, and, drawing a circle around the whole government, it should be able just to print money and give it to people (social security) or buy tanks and stuff with the printed money, the debt limit does pretty well constrain the government budget.

To emphasize, this isn't about a fight between Treasury and Fed. They can agree they want to print money to evade the debt limit. But they still can't do it. It's a limit on what the  government as a whole can do.

II. Clever solutions

So, our army of clever lawyers and policy wonks is hard at work finding loopholes, either ways to create "debt" that doesn't count as debt, or ways to print money to pay bills anyway.

Here's where the trillion dollar coin idea came up. Apparently, though the Treasury is not allowed to print money or regular coins and pay bills with them, it can issue "commemorative" coins and sell them directly.  So, most simply, it could in principle, pay for a trillion dollars of deficit by minting a trillion dollars worth of commemorative coins. (Coins are just metallic dollar bills; they don't have a metallic value equal to face value.)

That's not very practical. But as a little favor to the platinum lobby, there is no limit to the denomination of platinum coins the Treasury can issue. So, the idea is this: make a trillion dollar coin out of platinum. Deposit the coin at the Fed, just as the Treasury now deposits cash. The Fed creates a trillion worth of reserves in the Treasury's checking account, and the Treasury can merrily write checks.

If the Fed goes along and sells its roughly $1 trillion dollars of Treasury securities, it can soak up that new cash, putting debt in private hands. For the first trillion, the government isn't even "printing money," it is exactly as if the Treasury borrowed a trillion dollars by issuing a trillion of new debt.

(Small update: Many commenters note agency debt. Thanks. As the Fed has about a trillion dollars of Federal debt, so the other agencies have about $5 trillion dollars.  Selling the Social Security "trust fund" would work exactly the same way, and effectively borrow money without busting the debt limit. And it's a lot bigger. Tom Saving explains here. To fund payments other than Social Security, the Treasury would have to come up with some way of telling Social Security "we promise to pay you back" that didn't count as "Federal Debt." I don't know the laws that limit this action. But it's surprising that so much blogosphere creativity has gone in to spending the Fed's $1 trillion rather than the much larger pot of agency debt.)

James Pethokoukis at the AEI covers a few more clever ideas. There are various ways that the  US government could essentially send tradeable IOUs in place of checks, as California did, avoiding its "balanced budget" rules and the prohibition on states issuing currency.  Cash is, in the end, no more or less than a tradeable IOU of the US government.

A less obvious and more realistic option strikes me as important going forward. I assumed above that the Fed only buys Treasury bills when it creates reserves out of thin air. But that's no longer true. During the financial crisis, the Fed bought commercial paper, and lent directly to various financial institutions. (It called the loan an "asset" on its balance sheet, so it seems like the Fed is buying something of value.) Now it is buying and holding mortgage-backed securities.

This is fiscal policy. When the Fed lends directly or buys assets other than Treasuries, the total debt + money increases. The traditional restriction that the Fed should only buy Treasuries separates it from fiscal policy. As some of James' clever ideas point out, you just have to be a bit clever to channel this newly-created money to social security recipients.

III. Default

One of the silliest constantly-repeated red herrings is that running in to the debt limit will force the US to default on its debts and cause a global financial disaster. (This goes right up there with "Greek default will force it off the Euro" in the fallacies-casually-repeated-as-facts department.) 

Just yesterday, driving in to teach my Saturday morning MBA class, Scott Simon's soothing voice on NPR introduced a trillion-dollar coin piece with the statement
... it will certainly be no laughing matter if the U. S. Congress refuses to raise the borrowing limit and the U. S. government defaults on its debt. ...
No Scott, (or NPR writers). If a $100 bond comes due, the Treasury can sell a new $100 bond to pay off the principal without increasing the total amount of debt.  And there's still $2.5 trillion of tax revenue coming in. That's plenty to cover interest payments. If anything, the law is pretty clear that interest payments on the debt are the last thing the government can stop paying, not the first.

This is simply a red herring. Social security checks might stop, farm price support payments might stop, they might have to send the TSA home from airports and let the NRA take care of security (joke here, please don't go nuts). All this might cause a lot of hardship, but there is nothing forcing the government to default. Default would be a choice.

OK, NPR can be forgiven for passing along this trope. But what's Paul Krugman doing with this obvious... I'm having a hard time finding a polite word...piece of misinformation? Writing in the actual Times, which is supposed to be fact-checked:
Finally, just consider the vileness of that G.O.P. threat. If we were to hit the debt ceiling, the U.S. government would end up defaulting on many of its obligations. This would have disastrous effects on financial markets, the economy, and our standing in the world.
Parse that carefully for Clintonian veracity. "Defaulting on its obligations" could mean not paying promised farm price supports, or delaying payments (as the State of Illinois does) to vendors, not actual default on Federal debt. So it's just a nanometer this side of factually incorrect. But you'd have to be very knowledgeable not to infer from the following sentence "disastrous effect on financial markets" that Krugman is not talking about actual "default" (a term meaning "not paying back bonds") from this more metaphorical sort of "default" (meaning breaking an implicit promise).

In his blog, he's less circumspect
By contrast, nobody really knows what happens if America defaults, even briefly. The whole structure of world financial markets is built around the use of Treasury bills as the ultimate safe asset; what happens if they lose that status? It would certainly be an interesting experiment, but one best carried out if you have plenty of bottled water and spare ammunition in your basement.
I agreed on the consequences of default. But, as much as he dislikes Republicans and the debt ceiling, passing on the canard that hitting the ceiling implies a default on Treasury debt is just a little... here we go a search for a polite word again...misleading, no matter how useful it would be to the give-in-and-spend side of the debate if those obstructionist Republicans were to believe it.

Update: In an official statement, the White House chimes in
“There are only two options to deal with the debt limit: Congress can pay its bills or it can fail to act and put the nation into default. When Congressional Republicans played politics with this issue last time, putting us at the edge of default, it was a blow to our economic recovery, causing our nation’s credit rating to be downgraded. The President and the American people won’t tolerate Congressional Republicans holding the American economy hostage again simply so they can force disastrous cuts to Medicare and other programs the middle class depend on while protecting the wealthy. Congress needs to do its job.”
My emphasis. The war on the English language continues. End update

However, there is some news here about the long-run chance of US default. I started this whole blog with my previous view that the US can always print its way out of fiscal trouble. While we might have inflation, a nation that borrows in its own currency should always be able avoid the costs of explicit default.

Now it's not so clear. The laws limiting spending by money-printing in the face of a debt limit are surprisingly effective.  Faced with really disastrous spending cuts - and a trillion per year is more than just farm price supports and windmill subsidies -- and not being able to print money, our government might in fact be tempted to default. Not in a big way, but in the usual muddle that governments do. It could delay interest payments for example, or force exchange of maturing debt for new longer-term debt. But Krugman's right, such shenanigans would seriously impact the stature of US debt in financial markets, which tolerate inflation but do not tolerate explicit default.

Moreover, let's think about what happens when the "debt limit" is not imposed by Congressional action, but by bond markets refusing to lend anymore. I had always thought this would mean monetization and inflation. But the chance it could mean default, truly Greek-style, is raised, at least up from zero, by these limits on monetization.

These are far-off low-probability scenarios. Still, the possibility of explicit default -- not now, not next year, but once things get really bad -- is not as remote as I had thought.

Which, by the way, is not necessarily a bad thing. Governments who really cannot monetize their debts but must repay them or face the horrible costs of default tend to figure out how to balance their budgets, and they get better interest rates.

IV A better ceiling? 

These occasional battles over the debt ceiling are pretty obviously not an ideal way to run fiscal policy. But they do have an important function in the political battle to limit spending.

Such devices are important. Though we hear repeated over and over that the debt limit just finances the same spending that Congress passes, any household knows that a budget is a good idea. When one spouse wants to go get another six pack, the other one may be able to point to a budget and enforce spending priorities.

And for Congress too, a budget would be a useful and  better way to limit spending. Lay out both taxing and spending, preferably over a number of years, and then stick to it. The budget then takes on the force of an overall constraint; Congress can say to a worthy petitioner, "We would love to help, but if we give it to you we have to take it from someone else; the budget won't let us do it."

However, the law requiring Congress to pass a budget seems not to have the same force as this set of laws governing the debt ceiling. (Ironic tone). Also, budget numbers are so full of accounting tricks and gimmicks, that even passing a budget can fail to have the strong force limiting spending that one would hope. It was budget rules that gave us "temporary" Bush tax rate changes in the first place.  

By contrast, the actual amount that the government has to go out and borrow is a hard number, and it seems to pose a stronger constraint than the budget act. That makes it a blunt instrument, but a more useful instrument than the fine instrument that seems not to work.

But occasional crises are obviously not a good way to impose a bit of discipline. So, herewith a modest proposal in two parts:

First, fix the remaining loopholes. No platinum coins.  Federal "debt" should include Federal Reserve liabilities (cash and reserves) net of Treasury debt held by the Fed. Harvest the creative work of the blogosphere from the past few months, and reinforce the ceiling.

Second, in place of a single ceiling, that is then periodically raised by a few trillion after a big fight, put in a ceiling path. If $1 trillion deficits ($80 billion per month) seem like a lot, renew the debt ceiling at $50 billion per month this year, and $40 billion per month next year.

So, the law reads, "the debt ceiling shall be $16,050 billion on March 1 2013, $16,100 on April 1 2013, $16,150 on May 1 2013..."  (I'm obviously simplifying)  This is a constraint on spending that would not cause a periodic game of chicken, and might actually have some force. 


  1. I'm hesitant to think of the debt ceiling as a "budget" in the way we use the word for households. This is fairly common among conservatives who want to use the debt ceiling as a bargaining chip; they refer to it using analogies from household life that may appeal to lots of people but don't actually hold up.

    The debt ceiling might be a useful budgeting device if it bound the actions of Congress rather than Treasury. As it stands, it allows Congress to make rules about Treasury's debt issuance that are inconsistent with Congress' own taxing and spending decisions. So I endorse your recommendation, except that it should apply to Congress instead of Treasury.

    1. I did say it was a blunt instrument! But it does seem to be, in practice, the focal point in discussions between congress and the administration (and hence, different parts of congress) over spending. The last debt ceiling was resolved by the super committee which was supposed to find spending cuts, and the fiscal cliff which was supposed to impose them if the super committee failed. So it is acting as a rough and ready budget tool.

    2. "So, as long as the Fed buys only Treasury bills, the debt limit does, in fact, stop the government as a whole from "printing money" (creating reserves) to pay bills. To do so, the Treasury has to issue debt, borrowing the money, pay its bills, and then get the Fed to buy the debt, so that in the end there is more money outstanding. But a debt limit stops this operation."

      Apparently no one has yet figured out that the federal government can sell equity just as easily as it can sell debt.

      See Fisher's separation theorem - for monopoly enterprises (like the federal government) the spending decision is independent of the financing decision.

      If the government wants to cut spending - it cuts spending.
      If the government wants to raise taxes - it raises taxes.
      If the government wants to sell less debt - it sells equity instead.

  2. Professor Cochrane:

    Being a bank lawyer, your explanation of why the Treasury cannot mint coins is not correct, legally.

    The Treasury can issue money directly, not using the Fed, but the amounts of currency that can be directly issued is limited.

    I don't believe there are any limits on the amount of coinage, regardless of the metal used. There clearly is no limit on the amount of platinum coinage the government can issue.

    The Treasury could mint the coins in any denomination and deposit them with any bank, or it could simply send them in the mail to creditors and let them deposit such or circulate such, as people wished.

    Such is besides the point, for doing such under present circumstances is a bad idea.

    Obama, hopefully, has finally come to realize that the only way forward for our Country is the destruction of the modern GOP and that the device for that destruction is their own madness.

    If Obama was smart, he would stop all interim measures and force the issue, now.

    Obama has also come to realize that a great deal of our problems lie with the Senate Democrats who are such cowards that they do not want to vote for increasing the debt ceiling.

    In fact, the Senate has reached a scale of dysfunctionality exceeded only twice in History of Senates.

    First, when the Senate in Rome created the conditions giving rise to Caesar crossing the Rubicon.

    Second, in the year 40 years leading to the Civil War when it wholly failed to end Slavery.

    Reid and the other Democratic Senators need to change the rules and take on the risk of governing.

    The keeping the filibuster rule is the last refuge of cowards.

    1. Anonymous,

      "The Treasury could mint the coins in any denomination and deposit them with any bank, or it could simply send them in the mail to creditors and let them deposit such or circulate such, as people wished."

      Yes the Treasury could mint coins in any denomination and yes any bank could buy them, BUT Congress is not obligated to buy them back at face value. All expenditures must be authorized by Congress, and so if Congress decides not to buy them back, that is of their choosing.

      How many banks do you think would buy the coins knowing that they might not get their money back?

    2. Restly:

      The coins are legal tender.

      They are just like the paper money.

      The banks can use the coins to pay off their depositors, pay their workers, or give them to their shareholders to spend.

      The lawyer is right. It is legally possible to fund all the spending the government wants by issuing dollar coins (or quarters.)

      A trillion dollar platinum coin is cheaper to make per dollar. (Just one coin would probably be a bit expensive to make per unit, and the platinum for a one ounce coin is $1500, but even if set up costs were $100,000, it would be trivial compared to $1 trillion.)

      Dollar coins cost about 21 cents to make, so using those to finance government would be quite expensive.

      Printing paper money is cheaper, especially in high denominations.

    3. Bill,

      "The coins are legal tender."

      Here is where I was a bit hazy, but Fat Man below clarified things. The statute in question indicates that the Treasury can sell platinum bullion coins. A bullion coin is one that is sold for the face value of the metal it contains (as opposed to a penny, nickle, dime, or quarter).

      "Printing paper money is cheaper, especially in high denominations."

      Cheaper than what? If you are able to create money out of thin air, then how do you measure your cost to create money?

  3. The only thing Paul Krugman heard from this entire post: ...But Krugman's right...

  4. Several things to observe:

    Apparently Treaury and the Fed have killed the the platinum coin idea. Which is a good thing, because there was no statutory support for it. The statute is question is 31USC5112(k): "may mint and issue platinum bullion coins". A bullion coin is one that is sold for the value of the metal it contains. The American Eagle, the gold bullion coin bears a nominal face value of $50, but Treasury sells it for ~$1,700 because it contains one ounce of gold which sells at that price in the market. Platinum sells for ~$1,636, so 1T$ of that metal would weigh about 185,000 metric tons. A Nimitz class carrier weighs ~100,000 tons fully loaded.

    Second, I have heard a number of people, including Secretary of the Treasury Turbo Tax Timmy, claim that the US has never defaulted on a bond. That is not true. When FDR made gold ownership illegal and devalued the dollar from $20.33 to $35/oz, the US paid the outstanding bonds from WWI in paper money, not the gold stipulated by the bond. It was a 41% haircut and a clear default and a cramdown.

    Third, it is wrong to claim that social security checks might not be issued if the debt limit were not raised. The trustees of Social security hold ~4T$ of bonds. If current FICA revenues are not sufficient to pay benefits, they must sell some of those bonds to pay the benefits. Given that the gap between monthly collections and monthly payments is fairly small in comparison to the amount of bonds owned by social security. They could go several years without missing a payment.

    Fourth one constraint on banks in general, that does not seem to bother the Fed in practice, is its capital. The Fed had been running a more than 50:1 liabilities to capital ratio on its balance sheet for some time. If the Fed were a bank that it regulates, it would be forced to sell assets or raise capital until it got back under a more reasonable number like 12.

    This capital shortage is partially mitigated by the Fed's gold holdings. The Fed carries its gold holdings on its balance sheet at $42.22/oz or 11G$. Since the market price of gold is about 40 times that figure, the Fed has another ~400G$ it could add to its capital.

    Finally, if "Federal 'debt' should include Federal Reserve liabilities (cash and reserves) net of Treasury debt held by the Fed", then Federal debt should also include the securities issued by Fannie and Freddie. Indeed, the CBO has said for the last couple of years that they think this should be done. Unfortunately, since there are about 5T$ of GSE debt outstanding. That would blow all of the debt limits and debt/GDP ratios out of the water. OMB, which gets to make the call has elected to play ostrich on the issue.

    1. While I don't agree with a policy of minting coins to avoid the debt ceiling, lets at least read the law without legal casuistry

      Why do certain people always misread and mislead?

      31USC 5111 gives the Secretary the power to mint all the coins he wants

      (a) The Secretary of the Treasury—

      (1) shall mint and issue coins described in section 5112 of this title in amounts the Secretary decides are necessary to meet the needs of the United States;

      The reason the Secretary isn't using his power is that a trillion in dollar coins is too much for the mint to stamp out.

      31 USC 5112 reads in part

      (h) The coins issued under this title shall be legal tender as provided in section 5103 of this title.

      The secretary may mint platinum proof coins in any denomination

      (k) The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.

      BTW, here is the statute that permits the Secretary to print currency, up to $300 million

      31 usc 5115

      (a) The Secretary of the Treasury may issue United States currency notes. The notes—
      (1) are payable to bearer; and
      (2) shall be in a form and in denominations of at least one dollar that the Secretary prescribes.
      (b) The amount of United States currency notes outstanding and in circulation—
      (1) may not be more than $300,000,000; and
      (2) may not be held or used for a reserve.

      And so, the Treasury can issue its own currency, just not enough

      And, the Treasury can mint all the coins its desires

    2. "legal casuistry"

      How delightfully ambiguous. Love it.

    3. "bullion" coins. A bullion coin is worth the metal it is made out of.

    4. Are you so certain that we have those gold reserves? When was the last time they were audited.

      Call me cynical but NO, I do not think that we have that much gold on hand. I cannot believe that the crooks we have had in charge for the last 80 years have not dipped into it.

    5. I slipped a couple of zeros there. It should have been 18,550 metric tons, which is about two USN destroyers.

    6. Fat Man states, "The trustees of Social security hold ~4T$ of bonds. If current FICA revenues are not sufficient to pay benefits, they must sell some of those bonds to pay the benefits."
      Not really. Since 1980, the SS "trust fund" has only purchased special non-marketable obligation bonds from the Treasury. So, they couldn't just "sell" the bonds, they would have get the funds from the Treasury.

  5. You say that the Fed could just soak up the cash by selling $1T in treasury securities. And the bond market would do what with an inflow of that much? And when the Treasury had to roll over old debt they would be borrowing at what kind of interest rates?

    Do you really think that a floating debt ceiling (which is not really a ceiling since all of the ceilings I've ever seen don't constantly rise - maybe we could call it the debt dirigible) would prevent debt ceiling fights? This is like giving whiskey and car keys to teenage boys. Congress would bump up against whatever limits were set and instead of fighting over what the ceiling should be they'd fight over at what rate it should rise. As an owner of a lot of physical gold, I can't begin to tell you how happy I would be with a constantly rising debt ceiling - and with the guarantee that it would always rise!

    The coin business demonstrates the intellectual bankruptcy of the concept that double-entry bookkeeping is the same thing as the system it describes. In essence, Treasury creates a monetary asset that it assigns an arbitrary value of $1T without creating any commensurate wealth to go with it and receives $1T in IOUs (dollars) in exchange. $1T in debt has thus been created with no matching collateral. But on the books it's all good.

  6. The debt ceiling does not affect Social Security payments unless the administration wants to divert those payments to another purpose which is probably illegal. The non-marketable debt in the Social Security Trust Fund is included in the overall stock of debt. So if the payments out of the Social Security system exceed the payments into the system, Treasury borrows and replaces a non-marketable security with a security that is marketable. So it is a wash as far as the stock of debt is concerned.

    This was pointed out during the last debt ceiling soap opera by one of the trustees of the Social Security system.

    1. This is a very good point. However, I don't think that it is dispositive of the issue of whether the government is required, as a Constitutional matter, to make good on its interest and principal with respect to the non-marketable securities held by the trust fund.

      The Constitution says (Article XIV, section 4): "The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned."

      The context of the discussion over "default" is whether non-payment of certain "obligations" (to use a broad and imprecise term) would constitute a breach of the above-referenced language. It is not clear that these non-marketable securities would constitute "public debt" within the meaning of Article XIV. The better view would appear to be "no".

      That said, the point you raise is an important practical one: Treasury can make good on any required *principal* payments to the Social Security Trust Fund by issuing new marketable securities and this would be a wash as far as the debt limit ceiling is concerned (note; however, that this does rationale not apply to interest, because non-accrued interest is not yet part of the overall debt). That's a powerful argument for prioritizing the payments to the trust fund, even if not doing so would not constitute a "default" in the Constitutional sense.

    2. Vivian - if the Government does not pay Boeing or Lockheed for stuff they have already manufactured for the Government, or does not pay doctors and hospitals for medicare billings then I don't think the markets are going to care very much whether that raises a constitutional issue.

    3. It's funny. I had no recollection of addressing what might happen if the government does not pay Boeing or Lockheed. My comment was with respect to the misleading statements that are being made about why failing to increase the debt limit would result in social security payments not being made. Nobody that I am aware of, and especially not me, wants to see the issue unresolved such that the government has to delay payments that are due to anyone. But, any discussion about this issue and the potential consequences should be grounded in fact----not misleading political rhetoric.

    4. "But, any discussion about this issue and the potential consequences should be grounded in fact----not misleading political rhetoric."

      I agree with that. The reality of the debt ceiling appears to be that legal obligations will be breached even if Treasury bills are paid on time. The reaction time of the economy to a failure to pay Treasury bills is likely to be measured in seconds where the reaction time of the rest of the economy might be measured in hours or days.

  7. We can define "default" narrowly to mean only non-payment of Treasury debt, or more broadly to include non-payment of other legal obligations which are due and payable (Medicare re-imbursements, military pensions, etc.). I think that lawyers would generally agree that non-payment of debts, other than Treasuries, which are due and payable would fairly be characterized as "default".

    If the United States government defaults in the broader sense I predict that the financial markets will react very negatively even if there is no default on Treasuries. The Administration could try to stop the ongoing accrual of obligations by sending employees home and suspending procurement. If the Administration does not default in the legal sense but simply shuts down large sections of government, I still predict a strong negative market reaction.

  8. @ Bob Rosanna:

    By law:

    1. SS is considered "intra-governmental debt" and thus it is included in total debt (

    2. SS is off-budget (EXCLUSION OF SOCIAL SECURITY FROM ALL BUDGETS Pub. L. 101-508, title XIII, Sec. 13301(a), Nov. 5, 1990, 104Stat. 1388-623)

    3. The Trust can only invest in special non-marketable securities backed by the federal government. As I understand it when the Trust needs money it presents these securities to the Treasury, which then borrows money to pay the Trust. This is a wash in terms of total debt since the SS notes are being retired for new Treasury bonds.

    The Trust currently owns about $3T of these notes. I don't know where those securities rank on the debt totem pole - higher priority than interest payments on bonds? Lower?

    By having the SS debt count towards the national debt but not be on the budget it looks like we have yet another mess-in-evolution.

  9. "Social security checks might stop..."

    Using the term "might" instead of "will" actually puts this statement on the nanoside of true. In 2011, the OASI program paid $603.8 billion in benefits. Of that, only $87.8 billion was funded through general revenues. The situation will get much worse in the future; however, as it now stands the social security benefits are overwhelmingly paid out of current payroll taxes. Social Security would still be able to "send out checks". In the unlikely event someone in government *might* decide that they would rather fund some other category of spending than the amount needed to make social security checks whole, the worst that would happen would be that social security recipients would get a relatively small reduction in their checks, not that such checks "might stop".

    And, once again, we encounter an assault on language with that term "loophole". It appears that Professor Cochrane intends to use it correctly, but this again seems to be a miss, or perhaps I'm misunderstanding what he has identified as a "loophole". The idea that the Treasury could print a $1 trillion platinum coin to get around the debt ceiling limit was the product of the "creative work" (rather *too* creative) of the blogosphere in the first place. The rather more serious and capable, albeit arguably less creative, lawyers at the Federal Reserve and the Treasury Department (and elsewhere) have already opined that *it is not legal* and therefore it doesn't work, full stop. In addition, they've concluded it would not be wise, even if legal, but that's another story. The fact that it is not legal *and* not wise was spelled out in the Treasury statement:

    ”Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit,”

    Note well: "can or should be".

    A lot of kooks also believe that the federal income tax is unconstitutional and therefore voluntary. Or, maybe they don't believe it but just want to come up with a creative idea that serves to rationalize an outcome they rather selfishly favor. Either way, that doesn't mean the Constitution (or here a federal statute) has a "loophole" that needs to be closed to satisfy a few deranged and ultimately criminal minds. A "loophole" is not only something that was not intended by Congress; it is something that someone can legally rely on and get away with.

    There have been noises from Congress that the commemorative coin statute will be amended to make it more clear than it is now; however, such an amendment would not be an admission that the law currently allows the trillion dollar coin trick. It would simply be a deterrent to those who are too "creative" for their own good.

    1. "the worst that would happen would be that social security recipients would get a relatively small reduction in their checks, not that such checks "might stop"

      No, the government payments systems is not akin to a large spread sheet where someone can simply enter a ~70 cents on the dollar payment scale. The only way, in the short term, to reduce outlays is to delay them. So come check day no check, at least not until some weeks later.

      I think that qualifies as a 'stop', and not just by a nano.

    2. Falstaff,

      The GAO has opined that the Treasury can prioritize payments.

      The only way that the social security checks would "stop" is that the Treasury would decide not to prioritize those payments. Also, as noted elsewhere here, the IOU's held by the trust fund would be redeemed without any immediate effect on the debt limit. The latter does not even involved prioritization.

      If the social security checks "stop" it would only be because Treasury decided to do that unnecessarily.

  10. "f anything, the law is pretty clear that interest payments on the debt are the last thing the government can stop paying, not the first."

    Where is this law? There was a non-binding 1-page GAO report from the 1980s - is that your basis?

  11. "If anything, the law is pretty clear that interest payments on the debt are the last thing the government can stop paying, not the first."

    What's the legal basis for this? The law is, apparently, pretty clear. That's news to me.

    1. Read the 14th Amendment to the Constitution:

      "The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned."

      Also, see Perry versus United States:

      "The contention necessarily imports that the Congress can disregard the obligations of the government at its discretion, and that, when the government borrows money, the credit of the United States is an illusory pledge."

      "We do not so read the Constitution. There is a clear distinction between the power of the Congress to control or interdict the contracts of private parties when they interfere with the exercise of its constitutional authority and the power of the Congress to alter or repudiate the substance of its own engagements when it has borrowed money under the authority which the Constitution confers. In authorizing the Congress to borrow money, the Constitution empowers the Congress to fix the amount to be borrowed and the terms of payment. By virtue of the power to borrow money 'on the credit of the United States,' the Congress is authorized to pledge that credit as an assurance of payment as stipulated, as the highest assurance the government can give, its plighted faith. To say that the Congress may withdraw or ignore that pledge is to assume that the Constitution contemplates a vain promise; a pledge having no other sanction than the pleasure and convenience of the pledgor. This Court has given no sanction to such a conception of the obligations of our government."

  12. A periodic debt-ceiling debate is a good thing. It is a completely artificial mechanism to focus attention on how much we really spend. I don't like the hystrionics that are associated with these debates, but the quality of the converstation that comes out of DC is pretty low for some time now.

    Regarding a floating debt ceiling -- an intersting concept for these strained times. However, what is a reasonable rate of rise? With the deficit as high as it is, we would still be having frequent debt ceiling talks.

    However, as the occaisional debate about the debt ceiling is a good thing, we should have a debt ceiling discussion every few years, even if we have room below the rising ceiling. So, a deal that raises the cap 5% this year and 3% the next, and 1% the year following may be a plausible structure.

  13. Also the revenues coming in daily are lumpy in such a way that it may not be easy to prioritize payments going out, so there is a non-trivial chance that even with prioritization - which there is no legal basis for, which thus risks impeachment and a constitutional crisis - there could be a missed interest payment. See the BPC for analysis on this if you are interested in learning about it.

  14. John,

    "It could delay interest payments for example, or force exchange of maturing debt for new longer-term debt."

    Swapping maturing debt for new longer-term debt will have absolutely no effect or make matters worse UNLESS the Treasury department switches from issuing coupon securities to accrual securities. With coupon securities the interest payments are due every six months and put a strain on tax revenue. With accrual securities interest payments are not made until the bond reaches maturity.

  15. The problem is, you assume that in the case the debt ceiling isn't raised, the treasury will be able to successfully prioritize all the payments without causing a total catastrophe. But why is this assumption warranted? Another question, what if Obama follows through on his promise to not negotiate over the debt ceiling and gears up his political machine to place blame on congressional Republicans successfully ?

    It seems to me this strategy is like picking up quarters in front of a bulldozer for all sides involved and the world economy

  16. Failure to raise the debt ceiling will not cause an immediate default on US Debt, but won't it force the Treasury to stop paying its bills? Congress appropriated funds -- which is an order to pay those moneys. In that sense, we are defaulting on the obligation imposed by Congress on the Treasury.

    Also, won't the long term consequence of continued failure to pay bills result in some impact on bond prices? Unless the debt ceiling is raised, the treasury will be in a massive quandary, which I document here.

    Sensational Sonnets

  17. I fall into the camp (most Market Monetarists do) that say, fine, balance the federal budget and then print lots of money. The Fed can print all the money it wants; only the Treasury cannot borrow more than the debt limit.

    We may need more than five years, and several trillion dollars of QE to avoid the sort of perma-zero-bound recession that defines Japan.

    Japan, in fact tried QE from 2001 through 2006 (and got rave reviews from John Taylor.) Then the BoJ stopped QE, and went back into zero=bound perma-gloom.

    So the real question is not the debt ceiling (btw, most borrowing hitherto has been caused not by the entitlement, which are largely funded by parole taxes, but but agency spending).

    The real question is, "Is the Fed flexible enough an institution to engage in 10 years of hard and heavy QE?' Or too hidebound?

    And what will 10 years of QE do the national debt?

    And should then the Fed be a part of a Treasury Department (as Reaganites suggested when Volcker was Volcker)?

    The debt ceiling is not that important. We should running balanced federal budgets anyway.

  18. "And there's still $2.5 trillion of tax revenue coming in. That's plenty to cover interest payments. If anything, the law is pretty clear that interest payments on the debt are the last thing the government can stop paying, not the first."

    Ezra Klein would beg to differ:

  19. When the Federal Reserve was founded, it was supposed to issue paper money by making loans to commerical banks. These loans were supposed to be secured by short term loans that the commercial banks made to business. The short term loans were supposed to be secured by inventories of products. That is why they were called "real bills."

    That it is only "monetary policy" if the Fed is buying government bonds, is absurd. If the Fed is creating money, it is monetary policy. What assets the Fed buys, whether government bonds are something else surely matters, but to claim that it is "fiscal policy" for the Fed to purchase nongovernmental assets is wrongheaded. Really, it is normative.

    By the way, the Bank of England was a private bank when it became a central bank.

    As explained by others, the Treasury issues all the coins. Dollar coins have a 79 cent seniorage. The Treasury can issue all the dollar coins it wants to finance spending. The Treasury doesn't do this, but rather mints them at the request of the Fed. When banks want coins, they ask the Fed for them. The Fed buys them from the Treasury. But, there is no law that the Treasury has to do it this way. The Treasury could mint them based on what it wants to spend rather than based upon the Fed's request.

    The simplest solution would be for the coins to count as debt according to their face values.

    The current system, where the Fed's liabilities are not counted as government debt puts a limit on what the Treasury can borrow. When the Fed creates money by making loans to banks or purchasing private securities, it has private assets to match the liabilities. Future taxpayers are not on the hook to pay off all of the Fed's liabilities. (Or rather, only to the degree the Fed makes bad loans.)

    Do we count all of the commercial banking system's deposits under the national debt limit because of deposit insurance?

    In my view, there is a difference--if the goal is to contrain debt funded government spending.

  20. Tom Saving had the best analysis I've seen of the "Social security checks might stop" issue.

  21. People are saying that this or that special case could be prioritized. OK. If the debt ceiling is not raised spending has to be cut by about $100 billion per month immediately. Some payments may be delayed but without an increase in the debt ceiling people who are being paid now, will not be paid then. If they are not being paid they will pretty quickly stop providing goods and services.

    As we take interest and social security off the table, we narrow down where the ax can fall.

    So how about a prioritized list of $100 billion per month of spending that will never be paid?

  22. As Ezra Klein observes, " . . . an odd two-step has emerged. On the one hand, Republicans argue that the president will have to negotiate over the debt ceiling, as the consequences of holding back will be disastrous. On the other hand, they [and a certain humorous free-market professor] argue that breaching the debt ceiling really wouldn’t be that bad. So long as we keep paying our bondholders back, the financial markets should remain calm. All we’d see is a government shutdown."

    It's a bit strange that those who've bemoaned "uncertainty" as an impediment to economic growth now seem perfectly willing to invite confusion, to throw caution to the wind. Odd too that anyone would take seriously those in our current economic crisis whose interest rate predictions have been consistently wrong. It's as though, since we haven't become Greece yet as they've been predicting, these folks want to pull the rug out from under the American economy and see if that does the trick.

    1. John,
      May be it sound a bit simple and I would say fantastic.
      How do you think about probability of:
      a) swapping coins for debt (Treasury issues coins - Fed, as usually, money) for the period for budget wrap up with some profit margin on Fed side;
      b) considering almost no infl. preasuure - direct writte-off of some part of outstanding T-bonds via "matching" Fed`s assets "U.S. Treasury securities" and liabilities "Federal Reserve notes outstanding, net" (or simply, printed money)


    2. Funny, "as Ezra Klein observes..." has the same effect on me as someone writing "as Daffy Duck observes..."

      Fortunately, for Christmas I got this nifty new putty that makes it very easy to clean the keyboard.

    3. Okay, but , even funnier, it looks like events are bearing out Ezra's take on the Republicans' discomfiture.

    4. Yes, Ezra Klein is not the daffy one here. I hope the "nifty new putty" removes egg.

  23. The Treasury could (maybe) issue state contingent debt. In Argentina we issued debt linked to the growth rate of GDP and by accounting rules (which probably apply in the US too) it is not counted as "debt".

    1. Alejandro,

      Several US economists have been looking at various methods of US deficit funding.

      Bob Shiller recommends Trills which are similar to what you mention.


      1. Are the liabilities issued by Argentina coupon securities (make cash payments every 3 months, 6 months, etc.) or are they accrual securities (make cash payment at maturity)? Are they fixed duration or pertetual?

      2. How is the rate of return set - by private market, by government, by monetary authority, or some combination of the three?

      3. If the rate of return is set by government / monetary authority, is it set based upon some measure of output gap or prior year / period GDP?


Comments are welcome. Keep it short, polite, and on topic.

Thanks to a few abusers I am now moderating comments. I welcome thoughtful disagreement. I will block comments with insulting or abusive language. I'm also blocking totally inane comments. Try to make some sense. I am much more likely to allow critical comments if you have the honesty and courage to use your real name.