Let’s Call Their Bluff on the Hyped-Up Fiscal Cliff!
Continued from previous page
Ed Harrison summarized the proposal at Credit Writedowns like this:
- The Treasury mints a $1 trillion coin, or whatever amount is desired.
- The Treasury deposits the coin into the Treasury’s account at the Fed.
- The Treasury buys back bonds.
- The retirement of bonds is an asset swap, no different from QE2.
- The increase in reserve balances is not inflationary, as Credit Easing 1.0, QE 1.0, and QE 2.0 already have shown.
- These operations by the Treasury create no new net financial assets for the non-government sector.
- The debt ceiling crisis is averted.
Plumer cites Yale Law School Professor Jack Balkin, confirming the ploy is legal. He also cites Joseph Gagnon of the Peterson Institute for International Economics, stating, “I like it. There’s nothing that’s obviously economically problematic about it.”
To the objection that it is a legal trick that makes a mockery of the law, Paul Krugman responded, “These things sound ridiculous — but so is the behavior of Congressional Republicans. So why not fight back using legal tricks?”
3. Declare the debt ceiling unconstitutional. The 14th Amendment to the Constitution mandates that Congress shall pay its debts on time and in full, and Congress does not know how much it will collect in taxes until after the bills have been incurred. The debt ceiling was imposed by a statute first passed in 1917 and revised multiple times since. The Constitution trumps it and should rule.
4. Borrow interest-free from the government’s own central bank. If the government refinanced its entire debt through the Federal Reserve, it could save nearly half a trillion dollars annually in interest, since the Fed rebates its profits to the government. The Fed’s newly-announced QE4 adds $45 billion monthly in government securities purchases to the $40 billion for mortgaged-backed securities declared in QE3, and no time limit has been designated for ending the program. Forty-five billion dollars monthly is over half a trillion yearly. Added to the federal debt already held by the Fed, the whole $16 trillion federal debt could be bought back in 28 years.
This is not a wild, untested idea. Borrowing interest-free from its central bank was done by Canada from 1939 to 1974, by France from 1946 to 1973, and by Australia and New Zealand in the first half of the 20th century, to excellent effect and without creating price inflation.
5. Decommission some portion of the military. When past costs are factored in, nearly half the federal budget goes to the military. The data speaks for itself.
6. Debt forgiveness. Economists Michael Hudson and Steve Keen maintain that the only way out of debt deflation is debt forgiveness. That could be achieved by the Fed by buying up $2 trillion in student debt and other asset-back securities and either ripping them up or refinancing the debts interest-free or at very low interest. If the banks can borrow at 0.25%, why not the people?
7. Publicly-owned state and local banks. Municipal governments are facing cliffs of their own. Ann Larson, writing in Dissent Magazine, blames predatory Wall Street lending practices. Debt financing of U.S. cities and towns by Wall Street, she says, has inflicted deep and growing suffering on communities across the country.
Predatory Wall Street practices can be avoided by establishing publicly-owned state and local banks, which leverage the public’s funds for the benefit of the public. The profits are returned as dividends to the local government. German researcher Margrit Kennedy calculates that a whopping 40% of the cost of public projects, on average, goes to interest. Publicly-owned banks slash borrowing costs by returning this interest to the government, along with many other advantages, detailed here.