Wednesday, August 10, 2011

Wow! Was that dumb, or what?


So. I found this really great deal on some new stereo equipment, what do they call it, "home theater" or something. I'm giddy as a schoolboy. Only thing is, it's expensive. I worked it out. I need sixteen paychecks to cover it.

I went to the bank, walked up to the hot teller, and said, "I'd like to withdraw my last sixteen paychecks, please."

She gave me a confused look, then turned to her computer. After a moment she turned back to me: "Sir, you spent that money already."

Now I was confused. "But I've been putting my paychecks into this bank for years," I said, "and I never once took one of them out. Now I need sixteen, please."

She giggled. She turned and whispered something to the next teller, and he laughed out loud. They both looked at me like I was crazy.

Then it hit me: I already spent the money. Wow! Was that dumb, or what?


At New Economic Perspectives, Scott Fullwiler discusses the trillion-dollar beowulf coins and why they are not inflationary:

So, why won’t coin seigniorage, using very large face value coins, be inflationary? Here are the reasons:
The coin(s) would never circulate among the public. It (they) would always remain on the asset side of the Fed’s balance sheet, and would always rest in a vault at the Fed. Since the platinum coin(s) never circulate(s), minting and depositing the coins at the Fed cannot possibly be inflationary.

Not inflationary, because the coins never circulate. So how does it work, exactly?

Depositing the coin into the Treasury’s account at the Fed will provide the Treasury with an account balance nearly equal to the stamped value of the coin(s), but this is not inflationary, either...

"Not inflationary." Yeah, I get that part. But the rest of it...

Scott Fullwiler provides a rather lengthy list of reasons why the coin is not inflationary. Here is the first item on his list:

The Treasury can never legally spend any more than what has been appropriated by Congress. Congress still retains the “power of the purse,” actually the “power of the purse strings.” So, the coin(s) will never add to the government’s spending...

In other words, it isn't the coin that causes inflation. It's the spending authorized by Congress. Okay. It's a petty argument, but okay. It is always spending, never printing -- or "minting" as Fullwiler rhymes -- that causes inflation. This is certainly true, and it is often an important point.

But it is not the authorization of spending that contributes to inflation. It is the spending itself, the actual demand or effectual or effective demand created by that spending, that contributes to inflation.

If *not* minting the coin *prevents* spending that has been authorized, then minting the coin permits the spending. So the coin *is* inflationary.

Number two on Fullwiler's list:

The balances in the Treasury’s account could simply be used to retire the debt owed to the Fed. As of July 28, this is $1.635 trillion. So, the Mint stamps a coin or coins worth $1.635 trillion, the profits ... end up in the Treasury’s account, and the Treasury then pays down the debt...

Number three:

In addition to retiring debt held by the Fed, a coin or coins could be minted to retire the more than $4.5 trillion held by trust funds and government agencies...

At any rate, the Treasury could simply mint another $4.5 trillion coin, or just one coin for a bit over $6.1 trillion to cover debt owed to both the Fed and the trust funds. Just as with paying off debt held by the Fed, the coin(s) would not circulate....

As with retiring debt owned by the Fed, retiring debt owned by the trust funds would similarly not be inflationary.

Nothing would change, except there is an extra $6.1 trillion that we couldn't spend before, and now we can. By proclamation, this doesn't cause inflation.

This notion that the coin isn't inflationary because it doesn't circulate, this is as foolish as me thinking all my paychecks are still in the bank. Those paychecks don't circulate, either. Same thing.

From Fullwiler's conclusion:

What I've shown above is that there's no reason to believe that using proof-platinum coin seigniorage will cause either significant demand-pull or cost-push inflation, regardless of the denomination, whether it be $ 1 trillion or $60 trillion, of the coin used to fill the federal purse.

Whether it be $ 1 trillion or $60 trillion. And none of this is inflationary, according to Scott Fullwiler, because the coins never circulate.

This is a man who gets too much uncritical attention.

11 comments:

jim said...

The Treasury can never legally spend any more than what has been appropriated by Congress. Congress still retains the “power of the purse,” actually the “power of the purse strings.” So, the coin(s) will never add to the government’s spending...
*************************

I think your response to this is a bit unfair. I assume the coin thing was mostly a response to the debt ceiling politics which is a way to appropriate spending and then make the executive branch beg for the funds.
Now that is over so the platinum coin is no longer very relevant.

Back to the subject of debt:
Did you notice the consumer credit increased in June for the first time since before the crash?
It appears that we have for the first time since the meltdown a tiny uptick in TCMDO-GovDebt in Q1 2011

My thinking is that this is really what the debt ceiling Brouhaha was all about. There was a temporary slowing of federal money entering the economy from the beginning of the year up to Aug from the TSY belt tightening to stay under the ceiling. This caused some new demand for funds in the private sector (short term loans to get by wherever federal money spigot had been throttled)

Presumably Washington thinks if they can compel borrowing of any sort it will become contagious.

Seems like a doubtful theory to me and now we will see a relapse - a new decline in private sector borrowing after Aug.

Clonal said...

Art,

The problem is that if the Government (The Secretary of the Treasury) does not make money available for Congressional appropriations, it is in violation of the law, and the Treasury secretary can be prosecuted. Further, If the President continues not to spend what has been appropriated by the Congress, he can be impeached. It becomes a catch-22 - all because of the existence on the books of two laws one dating back to the civil war, and the other to 1917. The platinum coin act was put into place in 1996, and it allows the Treasury to get out of the catch-22.

Once, the Congress appropriates the money by passing the budget, legally that money has to be made available to be spent! That is legally binding on the President, and from there to the Secretary of the Treasury. If the congress wants to defund programs it can do so, but only after the passage of supplemental budgetary laws.

The platinum coin allows the President to fulfill his duties, and avoid impeachment. Do you think that if the Debt Ceiling had not been raised, and the Government began cutting spending that had been duly appropriated by the Congress, that impeachment would not have been on that table?

You are confusing the politics and legal strictures with economic issues - they should not be confused.

Clonal said...

Also,

The question for you is - If you have a million dollars under your pillow, and you choose not to spend it, is that inflationary. Obviously it is not. But some people insist that the very existence of that million dollars is inflationary [because it sets up expectations in people's minds ;)]

That was where Fullwiller's argument was aimed at. Government money does not come into existence until it has been spent.

STF said...

As the others have suggested here, I think you've completely missed the point. Let me take your key criticisms on here:

"If *not* minting the coin *prevents* spending that has been authorized, then minting the coin permits the spending. So the coin *is* inflationary."

If you're talking about getting around a debt ceiling vs. not getting around a debt ceiling, then I agree, as not lifting the ceiling and enforcing it would have resulted in tremendous cuts in spending. In that case, yes, the coin seigniorage would have resulted in more inflation than otherwise. But absent the debt ceiling, there's no more spending with the coin than without--that was my point.

"Nothing would change, except there is an extra $6.1 trillion that we couldn't spend before, and now we can. By proclamation, this doesn't cause inflation."

Again, only if you're forcing spending to stay below the debt ceiling and comparing coin seigniorage to that.

My point is that the coin seigniorage is no more inflationary than spending without the coin seigniorage--I was addressing the hysteria regarding "printing" money here, specifically, and whether all other things equal the coin seigniorage is more inflationary than no seigniorage. Seems to me the others commenting here understood this, along with everyone else that I have seen comment in the various places this has been posted--somehow you are the only one I've seen miss that point.

"This notion that the coin isn't inflationary because it doesn't circulate, this is as foolish as me thinking all my paychecks are still in the bank. Those paychecks don't circulate, either. Same thing."

Invalid analogy. As you already admitted, you'd spent that money. I'm describing a case in which spending is the same with or without coin seigniorage. Again, the others here understood that.

"This is a man who gets too much uncritical attention."

Ouch. If only it were true.

Best,
Scott Fullwiler

Letsgetitdone said...

I agree with the comments by clonal and Scott Fullwiler. But I also wanted to focus specifically on this:

"If *not* minting the coin *prevents* spending that has been authorized, then minting the coin permits the spending. So the coin *is* inflationary."

But, the failure to mint platinum coins in the past hasn't stopped spending or the relatively low rates of inflation we've seen since the 1980s. So, clearly the absence of seigniorage doesn't stop spending, any more than its presence would cause inflation. But the real question is if coin seigniorage is not used, then how will deficit spending be "funded." We all know what the answer to that question is. It is more debt.

So, the key point is that platinum coin seigniorage will not cause inflation, but if used in the right way, it will lead to complete elimination of the national debt, and to closing the gap between taxes and revenues when revenues are higher than taxes.

In addition, to can put an end to all manner of myths that are preventing the US from solving grave national problems. See: http://bit.ly/pYgpda

http://bit.ly/qTGJEb

and

http://bit.ly/pHtBxu

The Arthurian said...

Where to begin...

jim: "I assume the coin thing was mostly a response to the debt ceiling politics..."
I agree. And debt ceiling economics. For me (as always) the economics is more important.

Clonal: "If you have a million dollars under your pillow, and you choose not to spend it, is that inflationary. Obviously it is not."
I agree. But the reason for creating the coin is to have money to spend. It's not like the Treasury is going to deposit the coin with the Fed and then *not* spend the money. STF says the coin does not circulate. But the $1.635 trillion circulates. The $6.1 trillion circulates. The $60 trillion circulates. The whole point of creating the coins is that the Federal government can spend.

STF: "But absent the debt ceiling, there's no more spending with the coin than without--that was my point...
Again, only if you're forcing spending to stay below the debt ceiling and comparing coin seigniorage to that...
My point is that the coin seigniorage is no more inflationary than spending without the coin seigniorage...
I'm describing a case in which spending is the same with or without coin seigniorage."


Absent the debt ceiling?

Sir, the opening words of your post establish the topic for me: "Solving the debt-ceiling issue via proof platinum coin seigniorage..." The coin was a way to get around the debt ceiling and let the Federal government spend. To assume that the government would spend just the same anyway (without the coin and without an increased debt ceiling) makes no sense. If that was the point you were making, no wonder I missed it.

Now that the drama is over, Federal spending cuts have been agreed upon. Therefore, spending is *not* the same. The debt ceiling politics was effective.

Here it is, buried in Item 5 of your post: "Again, then, using coin seigniorage to go beyond retiring debt and in addition (or instead) use it to finance spending does not add to inflationary pressures besides those already in place as a result of the deficit the government would have incurred anyway. "

But you see, because of the debt ceiling politics, and without the coin, "the deficit the government would have incurred anyway" has changed. It is less. The effect on inflation must therefore be less. Your assumption -- "incurred anyway" -- is false.

LetsGetItDone: "But, the failure to mint platinum coins in the past hasn't stopped spending ... since the 1980s. So, clearly the absence of seigniorage doesn't stop spending..."

Hi, LGID. Sorry, your timeline doesn't make sense to me.

The Arthurian said...
This comment has been removed by the author.
Greg said...

Art

The point of the coin (I wish they'd make it a 100 trillion dollar coin) is to say "we can never run out of money". Spending is already debated every year in Congress and its wrong when they agree to a budget in January and then come back in August and renege because of a self imposed "debt ceiling". Money is ALL a useful fiction and the coin idea would just expose it for what it is. Its time for the people to get a grip. The debt ceiling has to go. The coin was a brilliant (and completely legal) way around it.

STF said...
This comment has been removed by the author.
STF said...

ou are still misrepresenting my argument.

Yes, if you enforce a debt ceiling and then reduce govt spending by 10% of GDP as a result, obviously that is less inflationary than spending the 10% of GDP. That's completely obvious and uninteresting. As a result, I didn't say that in the post because it goes without saying (i.e., any idiot should know that already--though your "i already spent the paychecks" example was so ridiculous that I very likely stand corrected on that point; my mistake). So I do not consider that to be in any way a relevant argument against my post.

Similarly, if you cut spending in order to create a deal to raise the debt ceiling, that will be less inflationary than if you had instead not cut the spending. That's again obvious and uninteresting (again, my mistake for not recognizing this wouldn't be so obvious to somebody that it should go without saying).

After all, the point of the coin seigniorage proposal was to avoid the debt ceiling and to avoid making some sort of deal that would reduce current or future spending (or raise taxes for that matter). Again, my mistake for not realizing this wouldn't be obvious to at least one particular reader.

Beyond that, GIVEN WHATEVER SPENDING IS HAPPENING AT ANY POINT IN TIME, COIN SEIGNIORAGE DOES NOT CREATE MORE INFLATION AS A RESULT OF THAT SPENDING THAN WITHOUT COIN SEIGNIORAGE. In other words, if you cut future spending by $2 trillion, using coin seigniorage to "finance" the total spending that is now reduced by $2 trillion is not more inflationary than not using coin seigniorage to "finance" that spending.

The Arthurian said...

STF:

You seem to be saying that my view is so obvious and uninteresting that I must be an "idiot" and that my remarks are "ridiculous". That's funny to me because, to me, the concept that you put into uppercase is obvious and uninteresting. It is obvious and uninteresting that if coin seigniorage does not affect spending, then it does not affect inflation. Obvious and uninteresting, and irrelevant because the premise -- if coin seigniorage does not affect spending -- is false.

I am perfectly aware and I do agree that, as you say, "the point of the coin seigniorage proposal was to avoid the debt ceiling and to avoid making some sort of deal that would reduce current or future spending (or raise taxes for that matter)." As I said in my earlier comment, "The coin was a way to get around the debt ceiling and let the Federal government spend." You have done a good job of re-stating my view. Your mistake is *not* in "not realizing this wouldn't be obvious" to an "idiot" like me.

Your mistake is in offering the false premise. Your mistake is "describing a case in which spending is the same with or without coin seigniorage."

I am neither presenting nor representing, nor misrepresenting your argument. I am quoting your words and evaluating them, I think politely. It seems we agree on what causes and what does not cause inflation. It seems we agree that the point of the coin was to avoid having Federal spending restricted by the failure to increase the debt ceiling. But it seems we disagree on the significance of your false conditional statement.

By the way, I happen to agree with Greg that the beowulf coin was a brilliant idea.