There's a Solution to the Debt Fight That Could Avert Catastrophe -- Why Is Everyone Ignoring It?
Stay up to date with the latest headlines via email.
Another day, another round of leaks about a potential debt ceiling deal in the making. Yet this ludicrous standoff could be brought to a conclusion tomorrow, without concessions or the specter of legal challenges. It wouldn't require Congress to take any votes, or a “Gang of Six” to haggle over any backroom deals.
But here's an interesting thing: while it is now considered within the “mainstream” that a small group of intractable reactionaries might hold the economy hostage by threatening not to pay the tab that Congress itself ran up, ending the theatrics by creative but legal means isn't. It's a telling example of how our discourse is narrowed, policed by the Very Serious People who populate the Beltway media.
The escape hatch nobody at the Washington Post or the New York Times is talking about is called coin seignorage. It's based on Title 31 of the U.S. code, which authorizes Treasury Secretary Tim Geithner to “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.”
So tomorrow, Geithner could order the mint to manufacture a couple of trillion-dollar platinum coins and swap them for public debt now held by the Federal Reserve. The coins, unlike the bonds held by the Fed, don't count as debt, so the transaction would bring us $2 trillion below the debt ceiling and the manufactured “crisis” would be averted.
Some Democratic senators – and former president Bill Clinton – have kicked around what they're calling the “Constitutional option” for avoiding catastrophe. Obama would cite Section 4 of the 14th Amendment (“the validity of the public debt, duly authorized by Congress, shall not be questioned”), declare the debt ceiling unconstitutional and order the Treasury to continue issuing bonds. While it may provide a way out of the mess, it's a legal theory that has never been tested in court, and would potentially create a crisis between the executive branch and Congress. Several Republicans have promised to attempt to impeach Obama if he uses the maneuver. Coin seignorage, on the other hand, leaves the debt ceiling intact, and simply steers around it (much more detail on coin seignorage is available here).
The idea has bubbled up within the blogosphere in recent months. Economist Warren Mosler writes that “it does work operationally...the US Treasury is already legally empowered to simply mint its own platinum coin in any denomination it wants and effectively deposit it in its Fed account, rather than sell bonds to the public to fund its Fed account.”
This process doesn’t change actual government spending, so doing it this way doesn’t add to inflation, nor does it change the fact that govt deficit spending adds income and net financial assets to the other, non government sectors. It’s just that the new financial assets will simply be new reserve balances at the Fed, rather than new Treasury securities (which are also simply accounts at the Fed).
Given that Congress is hurtling at breakneck speed toward the cliff of default, one might imagine that a neat accounting trick with the potential to avert an economic catastrophe would get some attention in the corporate media. But as of this writing, none of the country's leading media outlets have touched it.
It has gotten a little mainstream attention on a few news outlets' blogs. Marketwatch called it “the wacky talking point of the day,” and said it sounded “crazy,” even as the post's author acknowledged that “the proposal has got it right that the U.S., as issuer of a fiat currency, can create any amount of cash it wants and doesn’t really need to borrow money to spend it.”