A key rationale for this blog has been to help, along with many others, to impart basic knowledge about the policy scope available to a government that issues its own flex-rate currency. Leading modern monetary theorists have been plugging away at this task for a couple of decades now, and over time a growing number of people have joined the efforts. Recognition that a currency issuer is not revenue constrained, that it sets the terms on which it issues its own liabilities, that its spending and lending logically precede its taxing and borrowing, and that such policy space does not spell inevitable inflationary problems, is slowly on the increase. Another round of the US debt-ceiling circus has prompted many to re-emphasize these elementary but important points. I did so in my previous couple of posts, here and here. Among more high-profile efforts, however, is a much needed contribution at the New York Times by James Galbraith. Were the gatekeepers sleeping, or is the 0.01 percent getting irritated by the GOP’s antics?
In his article, Government Doesn’t Have to Borrow to Spend (published 2 October 2013), Galbraith makes clear that “the debt ceiling is an anachronism … based on the idea that the government must raise money from elsewhere, before it spends.” As he rightly points out, the government has no such need. For the US and most other national governments (though not the hapless common-currency using governments of the eurozone), there has been no such need since the abandonment of the gold standard.
In the modern world, when the Treasury writes you a check, your bank credits your account. That’s how money creation works. The Treasury then issues bonds to absorb that money.
Upon pointing out the stake banks have in the current arrangement – the additional interest transfer they receive on bonds – Galbraith emphasizes that “there is nothing economically necessary” in the procedure. After all, if this procedure was needed to fund the government’s spending, it would not be possible for the Federal Reserve simply to buy back many of the (supposedly financing) bonds once issued, as it does when engaging in quantitative easing.
Clearly, the Treasury could simply “skip the rigamarole and pay its bills without bonds”. The Fed could still set the short-term interest rate — the actual functional purpose, currently, of bond issuance — by paying the appropriate rate on reserves. In such a setup, there would be no compulsion for the Fed to choose a positive rate, but equally nothing to stop it from doing so if it considered this appropriate. Policy implementation would be much simpler than under present practice, yet would achieve the same economic effects.
So, Galbraith asks, why doesn’t the government just ditch the bond issuance?
One reason, as he notes, is a current self-imposed constraint limiting Treasury “overdrafts” with the Fed. It is a self-imposed constraint that could and should be self-removed. However, so far it has not been removed because
… to do so would expose the “public debt” as a fiction, and the debt ceiling as a sham.
The purpose, in other words, as Galbraith states explicitly in relation to the debt ceiling, “is to fool the rubes”. I don’t know about anyone else, but I’m tired of being taken for a rube. I reckon most of us are just about adult enough by now to face the pleasant and liberating truth. The truth — that a currency-issuing government is not revenue constrained — can set us free.
Even under existing self-imposed constraints, the whole debt-ceiling “sham” (Galbraith’s choice of word, and a good choice) could be circumvented, under present law, by taking the Platinum Coin option. (For the background on this idea, see Joe Firestone’s Origin and Early History of Platinum Coin Seigniorage In the Blogosphere.) Galbraith points out that it would be possible to
… pay off public debt held by the Federal Reserve by issuing a high-value, legal-tender coin – so long as the coin happened to be platinum. A coin is not debt, so that simple exchange would retire the Fed’s debt holdings and lower the total public debt below any given ceiling.
That’s right. The issuance of a single platinum coin would be sufficient to wipe out whatever amount of debt the government desired without any economic consequence whatsoever. It would not result in any additional government spending beyond what Congress has already passed. It would carry no more inflation risk than the same level of government spending under the present procedure of raising the debt ceiling and issuing bonds. The two approaches are economically equivalent in their effects. The Platinum Coin option is merely more transparent in making clear, as Galbraith states, that the public debt is a fiction and the debt ceiling a sham.
It appears that the government already has the capacity to issue such a Platinum Coin.
That’s a gimmick, sure. But so is the debt ceiling! Legally, the president’s officers have the power to use one gimmick to deflate the other. Why don’t they? The answer is again clear: they have been trapped by the bad-faith aura of this bad-faith law.
Paul Krugman similarly concluded in favor of the Platinum Coin in a blog post at the NYT back in January.
Needless to say, it would be better still to dispense with bond issuance, the debt ceiling and gimmicks such as the Platinum Coin, and simply allow spending as and when passed by Congress to add to reserves. But this more obvious approach requires a change in the self-imposed constraints, whereas the Platinum Coin is apparently already an option under existing law.