Fake Money

No one likes fake money, in fact, Jonathan Swift, as a sort of warm-up to Gulliver’s Travels and the rest of the satires, made his reputation making fun of the whole idea – the Brits weren’t going to fix Ireland’s economic woes by issuing a flood of what were essentially toy coins there, no matter what face-value was stamped on them. Swift’s deeply ironic prose was so devastating that the British government just gave up on the whole idea, making Swift a hero to the Irish to this day. Yes, deftly wielded satire can change the world, stopping foolishness in its tracks – although Stewart and Colbert over at Comedy Central have had little success at that so far, probably because the world has become far more satire-resistant since the early eighteenth century. No one even knows what’s foolish anymore. The hero in the movie or the television show turns to his nerdy sidekick and says, you know, that idea’s so crazy it just might work – and then it does. The bad guy gets what’s coming to him and the world is saved, and the audience cheers. No one considers the odds. It could be that that idea is so crazy precisely because it is so crazy – whatever the plan is it would never work in anything like real life. Still we love to believe that’s not so, that something wild and off-the-wall just might work.

That’s a product of desperation of course. When the world’s a mess and things are falling apart, when all sensible ways of solving the problem at hand have been exhausted, or are unavailable given the intractable positions of the parties involved, all that may be left is something that’s so crazy it just might work. And, in Washington, we may be there now. On New Year’s Eve and New Year’s Day we managed to avoid that fiscal cliff thing. The matter of who will be taxed at which rate is settled, for now, and those absurd automatic across-the-board spending cuts that had been set up to scare every legislator into doing something, anything, to make sense of what the government does, were postponed for two months. So taxes did not jump up as the Bush tax cuts expired and the country did not shut down, and the markets soared and all was right with the world. Things had been settled on the revenue side with the notion that work on the spending side of things would come next.

The Republicans were none too happy with any of this. They felt they’d been rolled – they failed to protect the very wealthy from having to go back to paying what they used to pay, and benefits for the long-term unemployed would be extended for a full year, without offsetting spending cuts to cover the thirty billion or so that would cost, and child-tax-credits stayed, as did special deductions to help the poor and middle class pay for college tuition. There would also be no deep cuts in Social Security benefits, or to Medicare and Medicaid. But the deed was done.

The problem was that this led to three distinct new problems. Those absurd automatic across-the-board spending cuts, which are quite massive and devastating, intentionally and foolishly set up to scare every legislator into doing something or other, will have to be made to disappear. The Republicans will play hardball on this. They’ll tell Obama to cut all his favorite social programs to the bone, or else everything will be cut, pretty much shutting down the government. Americans love their Social Security benefits and Medicare coverage, and now Obama will have to tell America he’s cutting back all that stuff – and the Republicans can sit back and smile while he makes his announcements. They didn’t do that. Obama did. All they did was force his hand. Obama will take the heat.

That must be done by early March, but at the same time Congress will have to pass a budget or at least a continuing resolution to keep the government running. Authorization to pay federal employees, and the military, will expire. They can refuse to pass a budget or a continuing resolution and shut down the government unless Obama does what they want here too. Newt Gingrich did that back in the nineties and the nation decided he was a fool and a bully, but the thought is that this time America will applaud the Republicans for simply shutting down the government, as everyone despises Obama. They do, so that must be true. This should be interesting.

The third new crisis is the debt limit thing. Yes, congressional Republicans do want to use the upcoming expiration of federal borrowing authority to force spending cuts. Unless Obama does what they want they won’t vote to raise the debt limit, which would, among other things, then disrupt or end payments on all existing debt, which would in turn convince investors that the United States is no longer a serious and responsible country, with nasty consequences. No one knows what a default would do to the world financial system, which is built on the presumption that our government debt is the ultimate safe asset – the Chinese buy a ton of it for example. Failure to raise the debt limit would also force the government to make drastic and immediate spending cuts on a scale no one has ever seen before – we’d have instant severe austerity at a time when the economy is still profoundly depressed, destroying hundreds of thousands or maybe millions of jobs. That’s the threat, although the Republicans argue this might be a good thing – the world would see that we’re serious about not racking up any new debt, pleased that we now refuse to pay them what we owe them – just as you yourself refusing to pay all your bills convinces your creditors that you’re responsible and reliable.

No, wait – that can’t be right. But that’s the fight right now. Of the three upcoming crises that’s the big one, the threat to ruin the world’s economy and plunge everyone into total misery for three or four generations, at best.

Jonathan Bernstein explains Obama’s dilemma here:

At some point, Barack Obama will, if Congress does not act, be faced with an impossible choice. He will have clear, conflicting imperatives. Congress will have obligated him to spend money; not spending money that Congress has appropriated is an impeachable offense. The government will also be obligated to make good payments on current debts; he’s clearly required to do that, as well. However he also will be without money to do those things, not have the authority to borrow any more, thanks to the debt limit.

So he will have to choose to have the government violate one of those legally binding commitments.

There are no good choices:

The White House is maintaining that they will “not bargain” over the debt limit, which is a sort of tough-sounding nonentity of a position… unless they are prepared to take it all the way, which only makes sense if they’re certain that House Republicans would cave and pass a clean debt limit increase, or if the president is prepared to blast through the debt limit in the even that there’s no increase – in which case you get into all sorts of questions about best negotiation tactics. Should the White House announce, publicly, that it intends to blast through it? Do they just say it privately in negotiations? Keep it secret? The answer to that is going to depend on the bargaining situation and what they  think the other side will do – and the answer to which method of going through the debt limit is best may depend on how they intend to use it before the deadline.

Kevin Drum puts it this way:

There are several legal arguments about ways that Obama could evade the debt limit, and I’m actually pretty sympathetic to some of them. To me, the strongest is the simple argument that if the debt limit isn’t raised, Congress is forcing Obama to do something illegal. He has to either withhold funds that he’s obligated to spend (illegal) or he has to break through the debt limit (also illegal). Given that, he could simply decide that breaking through the debt limit is the least illegal of the options open to him, and order Treasury to continue issuing debt.

Ah, but there’s always that idea that’s so crazy that it just might work, and Jonathan Swift is dead and gone and won’t make a fuss, so, as Paul Krugman explains, the solution might be fake money:

First of all, we have the weird and destructive institution of the debt ceiling; this lets Congress approve tax and spending bills that imply a large budget deficit – tax and spending bills the president is legally required to implement – and then lets Congress refuse to grant the president authority to borrow, preventing him from carrying out his legal duties and provoking a possibly catastrophic default.

And Republicans are openly threatening to use that potential for catastrophe to blackmail the president into implementing policies they can’t pass through normal constitutional processes.

Enter the platinum coin. There’s a legal loophole allowing the Treasury to mint platinum coins in any denomination the secretary chooses. Yes, it was intended to allow commemorative collector’s items — but that’s not what the letter of the law says. And by minting a $1 trillion coin, then depositing it at the Fed, the Treasury could acquire enough cash to sidestep the debt ceiling – while doing no economic harm at all.

For Swift it was the Wood’s Coinage Issue – a slew of useless copper discs – but here we’re talking about a single odd coin with the ultimate arbitrary face value, and Krugman argues there’s nothing all that odd here:

First, as a legal matter the Federal government can’t just print money to pay its bills, with one peculiar exception. Instead, money has to be created by the Federal Reserve, which then puts it into circulation by buying Federal debt. You may say that this is an artificial distinction, because the Fed is effectively part of the government; but legally, the distinction matters, and the debt bought by the Fed counts against the debt ceiling.

The peculiar exception is that clause allowing the Treasury to mint platinum coins in any denomination it chooses. Of course this was intended as a way to issue commemorative coins and stuff, not as a fiscal measure; but at least as I understand it, the letter of the law would allow Treasury to stamp out a platinum coin, say it’s worth a trillion dollars, and deposit it at the Fed – thereby avoiding the need to issue debt.

In reality, to pursue the thought further, the coin really would be as much a Federal debt as the T-bills the Fed owns, since eventually Treasury would want to buy it back. So this is all a gimmick – but since the debt ceiling itself is crazy, allowing Congress to tell the president to spend money then tell him that he can’t raise the money he’s supposed to spend, there’s a pretty good case for using whatever gimmicks come to hand.

Krugman, who has his Nobel Prize in Economics, says this isn’t that crazy:

It’s easy to make sententious remarks to the effect that we shouldn’t look for gimmicks – we should sit down like serious people and deal with our problems realistically. That may sound reasonable – if you’ve been living in a cave for the past four years. Given the realities of our political situation, and in particular the mixture of ruthlessness and craziness that now characterizes House Republicans, it’s just ridiculous – far more ridiculous than the notion of the coin.

So if the 14th amendment solution – simply declaring that the debt ceiling is unconstitutional – isn’t workable, go with the coin.

Yes, the Fourteenth Amendment says that the full faith and credit of the United States government shall not be questioned, but Obama has been reluctant to play that card. A long court fight over what those words mean settles nothing fast enough.

Now the fun begins, as Kevin Drum doubts that the coin thing would work:

There is, apparently, a widespread belief that courts will uphold a literal, hyper-technical reading of legislative language regardless of its obvious intent, but I’m quite certain this isn’t true. Courts are expected to rule based on the most sensible interpretation of a law, not its most tortured possible construction. I don’t think there’s even a remote chance that any court in the country would uphold a Treasury reading of this law that used it as a pretense for minting a $1 trillion coin.

On the other hand, over at the Economist, Will Wilkinson is offers this:

The fancy of a $1 trillion platinum coin is so tantalizing in part because it puts a monetary option in play. The larger attraction, though, is that it does so in a way that honors democracy by sticking to the letter of democratic legislation, yet also flirts with the heady unilateral decisiveness of fascism. This is, I’m afraid, a combination powerfully intoxicating to the pundit id. We’d be better served, however, if the commentariat would rein in its id, stop its idle chatter about exotic, coin-based, presidential monetary policy, and begin seriously to consider the more probable but less glittering eventuality of a Greek-style default.

Maybe so, but unlike Greece, we have our own currency, and thus our own monetary policy. We can do this if we choose.

Lizardbreath, at Unfogged, who is actually a lawyer in New York, offers this:

I don’t think a court would stop it, and I’m sure that a court that did stop it would be acting unusually and for politically motivated reasons. Courts are expected to do what legislatures say, not what they mean: “legislative intent” can only be considered where there’s an ambiguity in the law. Even if what the legislature said is obviously not what they meant, courts are still expected to follow the letter of the statute. And the platinum coin statute isn’t ambiguous (unless there’s something in the wording I’m missing): the treasury can mint platinum coins, and they’re real money.

Another economist however, Felix Salmon, argues here that the platinum coin option is simply reckless:

It would effectively mark the demise of the three-branch system of government, by allowing the executive branch to simply steamroller the rights and privileges of the legislative branch. Yes, the legislature is behaving like a bunch of utter morons if they think that driving the US government into default is a good idea. But it’s their right to behave like a bunch of utter morons. If the executive branch failed to respect that right, it would effectively be defying the exact same authority by which the president himself governs. The result would be a governance crisis which would make the last debt-ceiling fiasco look positively benign in comparison.

Okay, one should deal with utter morons, not sidestep their foolishness. Perhaps that’s a valid point of view, if you’re not facing disaster, but Meagan McArdle sees other consequences:

I think – and I assume the White House does as well – -that there’s a substantial risk that this sort of nominally-legal-but-obviously-tendentious reading of the law would trigger a selloff in US bonds. Minting a $1 trillion coin neatly end-runs GOP obstructionists, but only by proving that the president himself has little respect for the institutional restraints on his office. So while the pundit in me is eager to see how this would play out, the US citizen in me is afraid of the effect that this would have on my country. I assume that our president shares these sorts of concerns.

Yes, and Tyler Cowen argues here that using this platinum coin loophole would, oddly enough, be great for the Republicans and nothing but trouble for Obama:

Let’s say that – somehow – the whole thing miraculously worked out well from start to finish. The testier Republicans would in fact get exactly what they want. They would receive isolation from any negative consequences from brinksmanship, and a new narrative about how President Obama is a fascist incarnate.

Michael Tomasky says, really, everyone would laugh:

Can you imagine a president giving a prime-time, Oval Office address and saying, what we’re gonna do, people, is mint a coin worth $1 trillion. That just doesn’t pass any laugh test I can conceive of. I’d bet Obama would drop 12 points in the polls within five days of making such an announcement.

Josh Barro isn’t so sure about that:

We need to compare the platinum coin option against others on the table. For example, we could hit the debt ceiling and the government could start leaving about 40 percent of its bills unpaid. The president could accede to Republican demands for near-term spending cuts (of an as-yet-unspecified nature) in addition to the amounts from the Budget Control Act sequesters, which would cause another recession. Or he could assert authority under the 14th Amendment to continue issuing debt, notwithstanding the debt ceiling, which would then lead to court battles and probably impeachment. (The 14th Amendment play sounds less “silly” than the platinum coin, but it’s actually on much shakier legal ground.) Minting the platinum coin would be less economically damaging than any of the above options, which is why Obama should announce he will pursue it if the debt ceiling is not raised.

Out here at UCLA, Mark Kleiman simply asks a question:

If we imagine a situation where the Congress doesn’t lift the debt limit, and the President has to choose between the Coin and default, would default really be the better option? If default is preferred, on what principle should the President choose which bills to pay and which to refuse to pay? And by what authority would he make that choice? If you’re sworn to execute the laws, and your choice is between The Coin and not executing some of the laws, aren’t you pretty much stuck with the Coin?

Yeah, who gets paid and who doesn’t? Josh Barro covers that too:

It would be impossible to give certainty to people and entities owed money by the federal government about when and whether they would be paid; they would have to wait and see how much money the government could come up with on any given day. For example, it might be possible to pay Social Security recipients on most days, but not on certain days when few revenues come in or lots of payments are scheduled to go out. There are even a handful of days each year when a very large amount of bond interest comes due, so much that it exceeds that day’s receipts. February 15 is expected to be one such day. That means a prioritization strategy would not necessarily avoid bond default, even if bond interest was placed first in payment priority.

There are other problems with prioritization – it’s probably legal, but we don’t know for sure, and people who don’t get paid would sue; we also don’t know whether Treasury has the logistical capability to prioritize payments effectively. But the size and uncertain nature of the spending cuts alone make it an unworkable debt ceiling option.

We’re stuck, and now the White House is hinting that it might just mint that one special coin – as a last option. Hey, that idea’s so crazy it just might work!

Things are coming to a head here, and obviously what the Republicans need is another Jonathan Swift, to mercilessly mock the whole notion of quite odd coins that fool no one, or in this case one such coin. But that’s hopeless. They don’t get satire. Most of them actually believe Stephen Colbert is one of them, on their side. And satire itself is dead anyway. No one even knows what’s foolish anymore. Mint the coin.


About Alan

The editor is a former systems manager for a large California-based HMO, and a former senior systems manager for Northrop, Hughes-Raytheon, Computer Sciences Corporation, Perot Systems and other such organizations. One position was managing the financial and payroll systems for a large hospital chain. And somewhere in there was a two-year stint in Canada running the systems shop at a General Motors locomotive factory - in London, Ontario. That explains Canadian matters scattered through these pages. Otherwise, think large-scale HR, payroll, financial and manufacturing systems. A résumé is available if you wish. The editor has a graduate degree in Eighteenth-Century British Literature from Duke University where he was a National Woodrow Wilson Fellow, and taught English and music in upstate New York in the seventies, and then in the early eighties moved to California and left teaching. The editor currently resides in Hollywood California, a block north of the Sunset Strip.
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One Response to Fake Money

  1. Rick says:

    This Republican constitutional trap reminds me of something from my own experience in my early days at CNN:

    Back in 1980, just before the network went on the air for the first time, the CNN accounting department, for the purpose of coming up with a budget, asked all department heads to submit what they thought might be the ongoing expenditures for their areas, and as Director of Satellites & Circuits, I complied. So about a week after we went on the air, my accounting rep came to me to tell me I was way over budget, especially on leased landlines, and would have to cut back.

    First of all, I told her, although I have a huge budget, the spending was not at my discretion; almost all satellite and landline circuit orders were based on what the news assignment desk and show producers decided to cover. But secondly, I asked, I was curious: by how much was I over-budget?

    She said she couldn’t tell me. Why not? Company policy: department heads were not allowed to know their budgets.

    I laughed, of course. But it did no good for me to point out the absurdity of asking someone to stick to a budget figure that (a) was unknown to them, and (b) was outside their control anyway.

    And what about all those landline charges? After repeatedly asking her what figure they had budgeted for, she conferred with her bosses and came back and told me:


    Zero? But, I said, I had originally requested hundreds of thousands of dollars on landlines! Yes, she told me, but those were all (secretly, of course) denied! On what grounds? “Because management had decided that CNN would not be a ‘landline’ network, it would be a ‘satellite’ network”, and therefore, we would have no need for landlines. (Never mind, of course, that oftener than not, the only way to get our video signal to a satellite uplink was through an AT&T landline.)

    But in fact, I suspect they knew all that, but didn’t care; since they didn’t have enough money anywhere in the budget back in the beginning to run the network anyway, they were just faking it — playing it all by ear until the company became solvent.

    I eventually found out that the guy behind all this “over budget” stuff was CNN’s Executive VP, second in command of the company at the time. I told the accounting rep to tell him there was nothing I could do about any of this, and if he wanted to talk to me about it, to give me a call. I later heard he just dropped the matter, apparently realizing discussing it would only stir up trouble. My friends in accounting were terrified that I’d get fired over this, but that never happened.

    So the fact that Obama’s not spending congressional allocations may be an “impeachable offense” seems, in practice, absolutely silly. I guess I’d like to see the House even contemplate impeaching Obama for not spending money they themselves refuse to allow to be raised. Not only would they get nowhere with that, the Republicans would seal their fate as minor-party pariahs forever.

    But as for the coin actually helping the Republicans and hurting Obama? I doubt that. For one thing, it would remind everyone that Republicans want to hurt us, and that Obama will do everything in his power to protect the country from the Republicans.

    It’s also hard to believe there would be a sell-off of bonds, since people and countries buy our bonds because they believe we will succeed — at least more than other places they might park their money — and so they want us to succeed, and would likely view this coin trick as a way of avoiding failure. After all, can you imagine Japan, for example, with its own 230% of GDP debt-level, selling off US Treasuries to put the money in — I don’t know, where else is as safe? Maybe the Isle of Man, with its AAA rating?

    As for this being fascism vs democracy, with one branch negating the power of another? No. After all, what is “checks and balances” supposed to apply to if not a case of the legislative branch trying to trap the executive branch by demanding it spend money they refuse to allow it to have?

    I’m still a bit confused as to on what specific authority Treasury is allowed to mint this coin: If it’s by statute, I would think Congress could try to just pass a new law making this illegal (although getting it passed, much less past a presidential veto, might be a problem for them), while if it’s according to the Constitution, that might be a bit harder for them to fuss with. But based on what Kevin Drum says, I guess it’s the former.

    Also, I’d think minting several coins that add up to a trillion might be a better idea, since that would allow Treasury the flexibility to buy them back in increments, if needed. I wonder why they don’t do this.

    So yes, I see problems with this coin trick, but not as many as the 14th amendment trick, and certainly not as much as default.


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