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Trillion Dollar Baby?

There is a deep flaw in the $1 trillion coin scheme of the modern monetary theorists: and I think the flaw dooms modern monetary theory (MMT) entirely. For those who are unfamiliar with the $1 trillion coin scheme, this is a brief statement of the logic:

— Congress has provided the authority, in legislation passed during the 1990s, for the US Mint to create platinum proof coins with arbitrary fiat face value having no relationship to the value of the platinum used in these coins. The US code also provides for the Treasury periodically sweeping the Mint’s account at the Federal Reserve Bank for profits earned from coin seigniorage generally. These profits are then booked as miscellaneous receipts (revenue) to the Treasury and go into the TGA, closing the revenue gap between spending and tax revenues. Platinum coins with huge face values e.g. $2 Trillion, would close the revenue gap entirely, and technically end deficit spending, while still retaining the gap between tax revenues and spending. If used routinely to close the revenue gap, such jumbo coin seigniorage would reduce the national debt to zero, and remove it as an issue in US politics. In addition, the existence of jumbo coin seigniorage as an option, removes the tension between the mandated debt ceiling and the 14th Amendment. It is the countervailing factor I mentioned earlier, because it provides a way to spend Congressional appropriations without issuing further debt.

The post provides lots of additional links to the thinking of the small group of non-mainstream economists who support the idea and are actively trying to educate the public on its implications.

The implications of this scheme appear to be truly significant: if the reasoning outlined in their writings are correct, the theorists of the modern monetary school have shown, not just in theory, but as a simple practical operation, that the Fascist State effectively has nearly unlimited capacity to fund its operations without taxes or other sources of revenue, and without driving the nation deeper into debt.

While some on the Left will welcome this argument as a solution to funding social safety net programs in a time of increasingly fiscally conservative public opinion, those who are committed to an anti-statist program will immediately recognize the grave implications of this argument: MMTers are arguing that the state has almost unlimited money capacity to divert social resources to wholly unproductive uses, like wars of aggression and global dominance, through its monopoly over the issue of currency.

The MMTers, however, are trying to solve the wrong problem: they are trying to figure out how to finance the Fascist State at a time when there is growing concern about deficit spending. But, the problem of Fascist State deficits has nothing to do with financing state expenditures; rather, the expenditures themselves are driven by the need to stabilize a world economy suffering chronic global overproduction. And, those expenditures necessary for stabilizing interventions are entirely financed by capital itself out of the surplus value it squeezes from the working class.

Simply stated: the problem is not lack of means for Fascist State spending, it is lack of outlets for profitable investment — a surfeit of capital. Fascist State expenditures don’t inject “money-demand” into the economy, the spending removes excess capital from the economy. This excess capital is squandered, consumed unproductively on things like military build-ups, etc. It really does not matter what the capital is wasted on, so long as it does not increase wages or investment.

MMT provides an answer to Fascist State revenue by creating money ex nihilo, but this leaves the excess capital in circulation. Over-investment is not curtailed, but additional money-demand appears out of nowhere — this actually exacerbates the over-production.

The result: the excess money-demand causes inflation, while the over-production creates a deepening stagnation. Much like the Great Stagflation of the 1970s depression, you end up with excess money-demand side by side with excess capital, generating both rising prices and falling investment.

MMT only looks at the consumption side, while ignoring excess capital. And, superficially, this appears to makes sense, because there is no excess capital in an absolute sense — that is, there is need for more investment to satisfy human needs. There is poverty, and this poverty implies a shortage of all the things society needs to meet its basic needs. There is unemployment, and a mass of labor power made idle through no fault of its own.

The problem, however, is not the excess means of production, and means of consumption, nor even the surplus population of workers, but that this surfeit of means and labor power cannot function as capital — cannot be employed profitably, hence the excess is absolute only in relation to profitable investment opportunities.

My hypothesis suggests stagflation of the 1970s was suppressed by the Reagan deficits of the 1980s — which began the Great Moderation. The Reagan deficits added the missing component to money printing, by removing much of the excess capital and consuming it unproductively.

More significantly, my hypothesis suggests, and reinforces my belief, that, from the standpoint of the capitalist mode of production there is not too much debt, but too little. That, to “fix” the current crisis and depression, more, not less debt is necessary.

Moreover, this new debt must be in dollars, and can only take this form, because it is the only currency universally recognized as money. This hypothesis predicts, in other words, an oncoming global currency crisis and the eventual replacement of all currencies by the dollar.

If the Tea Party is successful in capping or significantly slowing federal deficit, and consumer debt does not significantly increase, the result will be a collapse in more or less rapid succession of existing currencies and a rescue attempt by the Federal Reserve. The Fed will have to begin purchasing non-dollar denominated assets in some new “Mother of all QEs”.

The key to realizing this problem with MMT was the acknowledgement by its theorists that some form of sterilization had to happen. Money had to be removed from the system even as it was being pumped in by government spending. They proposed a reverse QE program where the Fed would sell the assets it has already purchased in QE and QE2.

The problem with this is:

  1. these assets are limited, and,
  2. these assets were bought at prices well above mark to market.

The Fed could sell the assets, but it would have to take a massive haircut on them, and interest rates would rise, I think. Moreover, that would only solve the problem until 2013 or so.

There was always an inherent danger in quantitative easing that the Fed had to exit sooner or later and would take a loss on these assets. QE was a gamble that the value of the assets would recover with improving economic conditions, particularly home prices. The assets themselves are entirely fictitious — they are claims on profits which may never materialize. Without a genuine recovery of profits, these claims are worthless.

So, from the standpoint of the Fascist State and the need to prop up the existing relations of production, not only must the debt ceiling be raised, there can be no significant slowing of Washington deficits — and even these two are not enough. There is a crying need for dollar denominated debt over that which is currently being created by Washington. The more Washington debt creation is slowed, the more urgent dollar denominated debt creation elsewhere becomes.

  1. June 24, 2013 at 1:53 am

    I am a student of MMT, and I initially supported the $1Trillion coin idea as a way to cancel the national debt at the Fed. But before it was even rejected by the Fed, I thought it was illegal and unnecessary. Suppose the Fed had already redeemed the government’s debts to the banks. Then trying to buy those securities that already represented a cancelled debt would not be authorized by Congress. Congress does not authorize paying a debt twice.

    I further realized that the Fed may be paying off the debts of the government to the banks as they arise. It does this when the securities the banks bought from Treasury matured were put up for sale again at the public auction where securities are sold. The Fed then may buy them (to restore the bank’s reserves) with money it creates out of nothing on the spot by a few digital entries in spreadsheets for the Fed’s reserves and the bank’s reserves.
    The Fed gets the securities, the bank gets the money. The government’s debt to the banks is redeemed. Now the question is whether the Fed is now owed for the securities like it was another bank? Keep in mind the Fed is a government entity as far as the open market operations are concerned in the sale and buying of government securities. I thought the claim that the Fed is owed the full value for the securities was like a bank clerk claiming to be owed for the values of the securities it bought with bank money from bank customers for the bank. The clerk is just an agent of the bank for handling money and securities. It has no claims for the money value of the securities it buys.

    Still that seemed not convincing to people at the Fed or the Treasury. They needed the securities to manage the money supply. They would sell them to banks to drain money from their reserves to fight inflation by constraining the banks’ ability to lend. They would buy securities to put new money into the economy. To declare that the debt on the security was paid would extinguish the securities so they could not be sold.

    Then I learned that Treasury and the Fed regard securities as assets with debt obligations in the liability column. So, how long does the debt obligation last and to whom is it owed?
    Surely it could not be owed to the Fed merely because it bought them. It is agent of the government. It redeemed the government’s debt.

    Then I learned that the Fed swaps mature securities for new securities with the Treasury.
    The Treasury could acquire a mature security in the swap whose debt to the banks had been paid by the Fed, and extinguish it. The Fed in turn would have a new security to sell. But if the security landed in the pile of immature securities at the Fed, who is owed the debt obligation on them if no one has yet bought them with money already in circulation? Why are they listed as part of the public debt by Congress? (Congress screws up occasionally). The Fed as agent of government does not owe itself (the government). Perhaps, I thought, the Fed needs to acknowledge that until it sells them the securities it has are not activated.
    The debt obligation of the security is only potential, latent and not in force. Then there is no debt at the Fed in its pile of securities it has yet to sell. There is debt to repay banks and investors for securities it has sold them from its pile. But those will be paid by simply transferring money in the account of the security holder to the security holder’s checking account at the Fed. Any additional interest could be created by the Fed and added to the repayment.

    The only thing the Fed is owed on the securities is a 6% of the interest on the security it has made a transaction on, to be paid by the government. That’s not the full value of the security and only a small part of its full value.

    But then I learned the government is continually paying interest to the Fed for the securities it holds? That puzzles me? Why can it pay interest on a security to the Fed as government entity? If the Fed has inactivated but not extinguished a security, why is anyone continually owed for it? This is continuing the pay on a debt already redeemed.

    There is no real national debt in the pile of securities at the Fed.

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