An Alternative to Debt Ceiling Terrorism

[JohnfrmClevelan]

When the principle on Fed held treasuries is paid money goes out of existence.

....and then the Fed just buys more debt, putting themselves in exactly the same position as they were before the bond matured. With a coin, they wouldn't need to bother. Anyway, money doesn't disappear from the economy when Fed-held bonds mature, it just disappears from Treasury's account at the Fed, while the Fed's balance sheet shrinks.

The Coin is no more permanent than treasuries; If they wanted to, or needed to, Treasury could buy it back from the Fed, with more treasuries. As long as the debt ceiling wasn't standing in their way.

Not so with a 1 trillion dollar coin, and who is to say what the Fed would do with such a coin, they may buy anything with it.

There's nothing the Fed can buy except debt instruments and other such assets to hold against their liabilities. Who would take a $1 trillion coin - that doesn't pay interest - in payment, anyway?

C'mon. This works on all levels. Get on board.

 

[Kushinator]

I will say...the Fed is NOT going to buy a $1 trillion coin from the Treasury when they are actively raising interest rates and allowing their balance sheet to shrink (quantitative tightening).

 

[JohnfrmClevelan]

I will say...the Fed is NOT going to buy a $1 trillion coin from the Treasury when they are actively raising interest rates and allowing their balance sheet to shrink (quantitative tightening).

Do they have the legal authority to refuse?

 

[Kushinator]

Do they have the legal authority to refuse?

I'm pretty sure the only body with the authority to give them such power would be the House... and that's not going to happen at this point.

 

[OrphanSlug]

I'm pretty sure the only body with the authority to give them such power would be the House... and that's not going to happen at this point.

The House... under Republican control... you are talking away above their pay grade.

 

[Kushinator]

The House... under Republican control... you are talking away above their pay grade.

Not to mention, it would have to withstand a filibuster.

 

[JohnfrmClevelan]

Not to mention, it would have to withstand a filibuster.

I don't think the House has anything to say about it. The Fed is ostensibly independent, but the president is the boss's boss, and the mission is to be the government's bank and do their bidding. Accept legal tender in payment, or get replaced.

 

[Kushinator]

I don't think the House has anything to say about it.

Here's Yellen's take:

"The platinum coin is equivalent to asking the Federal Reserve to print money to cover deficits that Congress is unwilling to cover by issuing debt, it compromises the independence of the Fed conflating monetary and fiscal policy, and instead of showing that Congress and the administration can be trusted to pay, to pay the country’s bills, it really does the opposite"

WH Press Secretary Jen Psaki went a step further:

"We obviously look at a range of options, and none of those options were viable, either because they wouldn’t be accepted by the Federal Reserve, by the guidance of our treasury secretary, or just by legal restrictions"

I would assume it would take an act of Congress to give the Fed the power to do this.

 

[JohnfrmClevelan]

Here's Yellen's take:

"The platinum coin is equivalent to asking the Federal Reserve to print money to cover deficits that Congress is unwilling to cover by issuing debt, it compromises the independence of the Fed conflating monetary and fiscal policy, and instead of showing that Congress and the administration can be trusted to pay, to pay the country’s bills, it really does the opposite"

WH Press Secretary Jen Psaki went a step further:

"We obviously look at a range of options, and none of those options were viable, either because they wouldn’t be accepted by the Federal Reserve, by the guidance of our treasury secretary, or just by legal restrictions"

I would assume it would take an act of Congress to give the Fed the power to do this.

Or a different Fed chair. Those weren't legal arguments she made. If Yellen was smarter, a clear indication from her that the Coin was an acceptable option might have killed any debt ceiling problem in the crib.

The MMT people who are pushing for The Coin, including some lawyers, have already made arguments why it should, or must, be accepted under present law. At worst, it's an open question, because these things don't come up very often to get settled in the courts.

It's a bit amazing just how many issues at the highest levels of government are still open questions.

 

[Kushinator]

Or a different Fed chair.

Not going to happen.

Those weren't legal arguments she made.

I mean, she isn't a Constitutional schollar. However, she did chair the Federal Reserve, and so her opinion is surely of great importance on the matter.

If Yellen was smarter, a clear indication from her that the Coin was an acceptable option might have killed any debt ceiling problem in the crib.

Again, i don't believe it's legally viable and something that's just as bad as the GQP pushing to default. It sends a signal to markets that our government is unstable and thereby reduces the appeal to future sovereign debt from the U.S. federal government. Fixed income markets would likely grind to a halt.

The MMT people who are pushing for The Coin, including some lawyers, have already made arguments why it should, or must, be accepted under present law.

I'm sure there are people who will make the case to mint trillion dollar coins with or without a fiscal need.

 

[JohnfrmClevelan]

Again, i don't believe it's legally viable and something that's just as bad as the GQP pushing to default. It sends a signal to markets that our government is unstable and thereby reduces the appeal to future sovereign debt from the U.S. federal government. Fixed income markets would likely grind to a halt.

I don't get the market signaling reasoning. If anything, a willingness to bypass debt ceiling crises (the only thing that seems to affect our credit rating) in order to pay our obligations should make our debt more attractive.

Whatever amount the Fed holds in treasuries, they can replace that much with coins without affecting anything else. To the outside world, it shouldn't matter what the Fed holds for assets - bonds, coins, or nothing at all - because none of those things give reserves their value.

 

[Kushinator]

I don't get the market signaling reasoning. If anything, a willingness to bypass debt ceiling crises (the only thing that seems to affect our credit rating) in order to pay our obligations should make our debt more attractive.

It shows dysfunction which increases risk... fixed income markets do not take heterodox approaches with acceptance. The Treasury market is already having minor aches and pains now that the Fed is tightening.

Whatever amount the Fed holds in treasuries, they can replace that much with coins without affecting anything else.

Not sure what you're getting at.

Nevertheless, the Fed doesn't typically ease credit conditions unless there is a reason to do so. At this moment, they are aggressively engaging in monetary tightening.

To the outside world, it shouldn't matter what the Fed holds for assets - bonds, coins, or nothing at all - because none of those things give reserves their value.

It will matter to financial markets if the Treasury suddenly begins bypassing conventional auctioning of sovereign debt. It's not a good look.

If shit does begin to hit the fan, it's less extreme if the Biden administration were to declare the debt ceiling unconstitutional by invoking section 4 of the 14th amendment. That way, Treasury markets function normally, where broker dealers directly bid on debt issuance.

Direct monetization of U.S. debt would be an absolute disaster IMO.

 

[j brown's body]

Other nations don't have a "debt ceiling," because they understand that they should simply pay for their spending.

Things become clearer once you step outside of the Ameribubble for a minute.

They generally pay more in taxes and don't have a military-industrial complex with an insatiable appetite.

 

[j brown's body]

Like the way Democrats do the very same things? How much time did they have to make deals?

https://www.manhattan-institute.org/the-omnibus-spending-bill-is-symptomatic-of-a-broken-congress

All of a sudden you liberals want to go all pissy & whiny about real democracy?

How quickly we forget the infrastructure bill.

 

[OrphanSlug]

I don't get the market signaling reasoning. If anything, a willingness to bypass debt ceiling crises (the only thing that seems to affect our credit rating) in order to pay our obligations should make our debt more attractive.

Whatever amount the Fed holds in treasuries, they can replace that much with coins without affecting anything else. To the outside world, it shouldn't matter what the Fed holds for assets - bonds, coins, or nothing at all - because none of those things give reserves their value.

It will matter to financial markets if the Treasury suddenly begins bypassing conventional auctioning of sovereign debt. It's not a good look.

Direct monetization of U.S. debt would be an absolute disaster IMO.

Only if the US Dollar starts to falter in competition against the international basket of currencies, but until that happens I am struggling to see how holding US debt ends up devalued because the assets are in the form of bonds, special coins, some other asset.

IMO, the determination of value, or interest in holding the asset, comes down to performance of the dollar in relation to resources.

Assuming we do not find ourselves in a condition of too many dollars for too few resources, which would cause the dollar competition to others to fall very quickly, then what difference would it make if it is just more bonds or some very special coin?

(For the sake of transparency, my concern with the very special coin idea is the concern of it becoming a political toy. Visibility over substance, which goes to my question.)

 

[Kushinator]

Only if the US Dollar starts to falter in competition against the international basket of currencies, but until that happens I am struggling to see how holding US debt ends up devalued because the assets are in the form of bonds, special coins, some other asset.

It's an act of direct monetization that proves Congress won't pay it's obligations... fixed income markets would freak out.

IMO, the determination of value, or interest in holding the asset, comes down to performance of the dollar in relation to resources.

We don't know how forex markets would react. I would expect them to instantly back away from current valuations in the event that the U.S. instantly monetizes.

Assuming we do not find ourselves in a condition of too many dollars for too few resources, which would cause the dollar competition to others to fall very quickly, then what difference would it make if it is just more bonds or some very special coin?

Brokers bid on debt and then sell it, use it as collateral, etc... on secondary markets. Its all based on faith. Yellen is already on the record for saying it's a no-go.

(For the sake of transparency, my concern with the very special coin idea is the concern of it becoming a political toy. Visibility over substance, which goes to my question.)

We would be crossing the Rubicon. Given that Republicans have used the term printing money to refer to any time Democrats enact deficit spending, the term will have lost some of is political luster. There is also the risk it becomes a political issue that galvanizes the GOP much in the way that abortion did for Democrats in 2022.

 

[craig]

Exactly where Democrats wish to take the nation. No debt limits, so no need or reason or need to control spending.
This akin to giving a teenager a no limit credit card.

That'd be all fine and good, until the day that the rest of the world starts baulking at lending the US federal government money, or laying on punitive interest rates to offset the lack of credibility (rooted in credit), and then comes the crash of not only the US financial house of cards which was built, but taking the world's financial systems along with it.

How about curbing US federal government spending before we find ourselves in that dire situation?

The Constitution requires that the House manage the budget through appropriations and raising revenue. Why is the leadership not sanctioned for not doing it?

 

[JohnfrmClevelan]

Not sure what you're getting at.

I mean that, to the outside world, there is no measurable, meaningful difference between the Fed holding bonds and the Fed holding a coin, so what they hold should have no bearing on what the market does.

Direct monetization of U.S. debt would be an absolute disaster IMO.

This is another point where I don't get the markets' reasoning. There is no difference, in the final equation, between the Fed acquiring debt or acquiring a coin, even if the debt passes through the private sector momentarily. When the Fed buys a bond, the debt is partially monetized anyway. It's not as if the Fed was taking tons of treasuries away from the private sector, it's just normal Fed stuff.

 

[Kushinator]

I mean that, to the outside world, there is no measurable, meaningful difference between the Fed holding bonds and the Fed holding a coin

For investment level financial institutions, it is a VERY meaningful difference. When the Fed is easing monetary policy, they are purchasing debt from broker dealers (on rare occasions they have a more broad approach known as liquidity facilities), whose reserve accounts are credited by way of the Fed's purchase / repurchase contract, which directly increase bank reserves. Once the debt instrument has matured, the Treasury will repay that amount to the Fed by way of Treasury revenue / additional debt issuance. The system is check. At this point in time, the Fed is reducing its balance sheet which is contractionary monetary policy.

By going the rout you've been describing, the Fed is foregoing their independence in monetary policy by allowing the Treasury to bypass the systems in place in order to monetize. Again... this is a very bad look.

so what they hold should have no bearing on what the market does.

Fed policy DIRECTLY impacts market sentiment.

This is another point where I don't get the markets' reasoning. There is no difference, in the final equation, between the Fed acquiring debt or acquiring a coin

I've explained it above. You seem to operate on the notion that the Fed is perpetually easing monetary policy. This is currently not the case. Such a shift in policy has a negative impact on their credibility.

When the Fed buys a bond, the debt is partially monetized anyway.

Debt monetization is prohibited by the Banking Act of 1935. The Treasury always repays upon maturity.

It's not as if the Fed was taking tons of treasuries away from the private sector, it's just normal Fed stuff.

We know that their motivation was to remove the supply of Treasury debt from the private sector to force an investment substitution as a means of boosting private domestic investment. It's not normal Fed stuff.

 

[cpwill]

It's hard to believe that's a serious question.

It's more of a statement with a question mark, because the point seemed obvious.

If your contention is that, when a President is presented with the position of a current congress that is not the same as the position of a previous congress, that the President gets to pick between the two, would set up a myriad of such potential conflicts every time any Congress changes any budget measure, ever.

 

[OrphanSlug]

It's an act of direct monetization that proves Congress won't pay it's obligations... fixed income markets would freak out.

We don't know how forex markets would react. I would expect them to instantly back away from current valuations in the event that the U.S. instantly monetizes.

Brokers bid on debt and then sell it, use it as collateral, etc... on secondary markets. Its all based on faith. Yellen is already on the record for saying it's a no-go.

We would be crossing the Rubicon. Given that Republicans have used the term printing money to refer to any time Democrats enact deficit spending, the term will have lost some of is political luster. There is also the risk it becomes a political issue that galvanizes the GOP much in the way that abortion did for Democrats in 2022.

My assumption (please correct me where I am misreading you) is you view the Fed purchasing a special coin as direct monetization, does that mean the Fed purchasing Bonds (or Debt held by the Fed) is indirect monetization? That would mean that some $6.89 trillion is not direct monetization. That does not jive.

The exchange of national currencies is subject to the same supply and demand forces as just about anything else, but more importantly the valuation spot to spot is based on competition. No one currency traded and valued like this operates in a bubble.

The point being that the Fed holding bonds (or other assets) against the Fed holding a special coin is rather meaningless to how a currency is valued trade to trade then day to day. The inner workings of a nations economy with respect to international trade capability tend to impact things far more than what debt a Nation has or what debt a Central Bank is holding. Volatility indicators aside for just a moment, as long as another nation wants to sell in the US or buy from the US then conversely as long as there is demand in the US to buy from another nation or sell to another nation that valuation could not care any less about the nation carrying $31.4 trillion, or the Fed holding $6.89 trillion, etc.

For the purposes of this conversation, it does not matter if the Fed ups that $6.89 trillion will a couple of Trillion dollar special coins. While that $31.4 trillion number will change what will not is demand for the currency as the US is still the #1 overall trade leader of goods and services.

My question is why is "faith" impacted as no one can seem to tell us that faith is really unchanged by US total Debt, Debt held by the Fed, Debt held by the Public, or some other designation?

By index, by trend (as in actuals) the US Dollar is valued higher today than it was 5 years ago.

If debt was a factor, or who holds that debt, or the disposition of that debt, or what is held by the Fed was a factor at all we would not see this behavior in the US Dollar valuation over time.

In fact, the only reason there is a valuation dip at all is because it is recent. As in when Republicans won the House and started threatening debt ceiling shenanigans where we fell from roughly 103 in Oct to 101 in Jan (BTW, in 2018 it was down in the 93 'ish range.)

Total Debt, and a few debt ceilings were smashed in that time... value hit to the US Dollar or demand for its use... crickets. We are doing fine.

What made the real difference? Demand, as in coming out of a global economic hit due to Covid and Russia ****ing up the energy markets... again. The US still wants to trade, and is still #1 in doing so, want for the Dollar is fine.

 

[cpwill]

Until it's not, and shit hits the fan.

Maybe. It's a sclerotic and disfunctional party.

A most recent example was when Senate Republicans refused to confirm Obama's appointees to the Supreme Court, only to flip flop almost 4 years later. That' not to mention what they said about precedent during their nomination hearings.

Applying the Biden Rule wasn't disfunction, but high functioning - and the SCOTUS nominees were clear as they followed Justice Ginsburg's precedent that precedent, while important, was not all-controlling. Resorting to partisan ransacking of things-that-made-me-angry can be cathartic, but, it doesn't actually address the point that giving something to get something is a form of compromise

Theatre in this regard was the nominees saying things that would help those who put them in these positions to hope to retain electoral power. Had voters knew Trump appointees would eventually become the necessary votes to overturn the previous precedent, political elections wouldn't have been the same in 2020.

And had voters known in 2012 what a second Obama term would look like, the 2012 election wouldn't have looked the same. None of us get crystal balls, though, I think the sudden belief that the American populace holds precedent to be sacrosanct in and of itself is a bit odd. I don't recall people making that argument when Obergefell overturned precedent. It seems the left (which celebrated that overturning of precedent) is far more upset at learning that they can lose on social issues at SCOTUS than they are at the idea that precedent would be overturned.

Spending has already been increased. I would assume the ability to incur debt beyond the "limit" would be tied to current legislation.

Things change

Things do change, which does not alter the reality that, in fact, we have compromised on this before, and can do so again.

. We learned in the future that Republican's would vote to grow debt and deficit spending without any remorse. Then we eventually found out a significant portion of the Republican base is downright loony.

While I agree with both of those critiques, neither of those somehow obviate the point.

 

[jpn]

It's more of a statement with a question mark, because the point seemed obvious.

If your contention is that, when a President is presented with the position of a current congress that is not the same as the position of a previous congress, that the President gets to pick between the two, would set up a myriad of such potential conflicts every time any Congress changes any budget measure, ever.

Not at all. And this isn't really a difficult concept, which is why I said it was difficult for me to believe that you were being serious.

My contention is that two laws are in conflict in a unique way. Which congress passed them, or when they were passed, is immaterial.

One law (last year's budget) mandates the expenditure of federal dollars for specific purposes. Another law (the debt ceiling) prohibits that same spending. Which has precedent?

The courts could get involved to settle this, but there's a wildcard at play as well. The 14th Amendment says that federal debt shall not be questioned. It seems to render any debt ceiling law unconstitutional.

How the Republican political operatives now sitting on the Supreme Court would deal with this matter is also a wildcard.

 

[eohrnberger]

The Constitution requires that the House manage the budget through appropriations and raising revenue.

I agree. I further think that it should be done with regular order and that appropriations bills should have amendments permitted, something which hasn't been permitted since, what? 2016? That wouldn't happen to be the onset of Pelosi's speakership. would it? (Yeah, I can look both of those up, but it would seem to fall in line).

Why is the leadership not sanctioned for not doing it?

Who would sanction House leadership?

 

[Kushinator]

My assumption (please correct me where I am misreading you) is you view the Fed purchasing a special coin as direct monetization, does that mean the Fed purchasing Bonds (or Debt held by the Fed) is indirect monetization?

I do not. The Fed uses monetary policy as a means of meeting their mandates and not to provide the federal government with a funding lifeline.

That would mean that some $6.89 trillion is not direct monetization. That does not jive.

It's not. Reserve balances are adjusted while the Treasury repays it's upon maturity.

The exchange of national currencies is subject to the same supply and demand forces as just about anything else, but more importantly the valuation spot to spot is based on competition. No one currency traded and valued like this operates in a bubble.

When central banks change policy course, it does impact currency valuation. The most recent rise in dollar valuation is a direct result of increase short term interest rates.

The point being that the Fed holding bonds (or other assets) against the Fed holding a special coin is rather meaningless to how a currency is valued trade to trade then day to day.

I disagree. Markets always get worried about uncertainty, and an abrupt change in how government is financed is sure to spook them. I could be wrong.

For the purposes of this conversation, it does not matter if the Fed ups that $6.89 trillion will a couple of Trillion dollar special coins. While that $31.4 trillion number will change what will not is demand for the currency as the US is still the #1 overall trade leader of goods and services.

The Treasury minting and depositing a coin isn't the same thing as the Fed easing monetary policy, for reasons i have outlined already. In essence, this practice would be the Treasury giving itself $1 trillion and therefore it wouldn't be an increase in debt.

By index, by trend (as in actuals) the US Dollar is valued higher today than it was 5 years ago.

Interest rates are substantially higher than they were 5 years ago, and this has had a direct impact on the value of the dollar.