September 24, 2020

Today’s Economist: Bruce Bartlett: Accounting for a $1 Trillion Platinum Coin


Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

Washington had been buzzing about the idea of minting a $1 trillion platinum coin in the event that Republicans block an increase in the debt limit (as they did in 2011), until the Treasury and the Federal Reserve rejected the idea.

Today’s Economist

Perspectives from expert contributors.

But whether or not creating a $1 trillion coin to avoid defaulting on the debt was reasonable, in accounting terms it would have been no big deal — simply a larger scale of what the Treasury and the Fed do every day.

The United States Mint, a division of the Treasury, would have had to create a $1 trillion coin of platinum — though it would not have had to contain $1 trillion of platinum — to meet the letter of the law, and the Fed would have taken ownership.

The Fed would then have credited the Treasury’s account with $1 trillion of cash that could be used to make payments authorized by the Treasury. The Fed is, in effect, the Treasury’s bank, accepting deposits and clearing payments on a daily basis.

While some people worried aloud that the creation of $1 trillion of cash would be dangerously inflationary, this is nonsense. The coin would not affect monetary policy. The Treasury and Fed constantly coordinate their actions so that tax receipts don’t reduce the money supply and Treasury payments don’t lead to an increase.

If Treasury payments threatened to raise the money supply more than the Fed would like, it would simply sell bonds from its portfolio to absorb the excess liquidity. Possessing close to $3 trillion of Treasury securities, the Fed could easily offset all the cash created by the platinum coin.

In effect, rather than the Treasury selling securities to the public to pay for spending in excess of revenues, the Fed would do so. Bonds in the Fed’s portfolio already count against the debt limit, so that is not a constraint.

Nor would the creation of a $1 trillion coin have led to higher spending. The Treasury could still spend only what has been authorized by Congress.

As a matter of accounting, the Treasury would book the $1 trillion paid by the Fed as “seigniorage.” Technically, that is the difference between the cost of creating coins and their face value. When the Fed obtains coins from the mint to distribute through the banking system, it pays the face value of the coins. According to Table 6-2 in the Analytical Perspectives volume of the 2013 budget, the mint breaks even on coinage, providing no net seigniorage to the government.

In reality, the Treasury gets a lot of revenue from seigniorage, but it shows up in a different part of the budget. Although the Fed pays the face value for coins, that is not the case with bills. The Fed pays the Treasury 5.2 cents a bill for dollar bills to 12.7 cents for $100 bills because they require more security. In 2012, the Fed paid the Treasury $747 million for currency production by the Bureau of Engraving and Printing, which approximately offset its costs of operation.

The difference between the cost of bills and their face value is also seigniorage, but the profit accrues to the Fed. It also gets revenue from the Treasury on its vast holdings of Treasury securities. These securities are a byproduct of monetary policy; when the Fed buys them on the open market – it is prohibited by law from buying them directly from the Treasury – it expands the money supply, and when it sells securities the money supply shrinks.

The Fed makes an enormous profit from interest paid to it by the Treasury, from seigniorage on currency and other services for which it charges banks. By law, the Fed subtracts its costs of operation and, annually, gives the rest back to the Treasury. On Jan. 10, the Fed made its annual payment to the Treasury, of $88.9 billion.

As the chart indicates, this is two or three times the revenue historically received by the Treasury from the Fed. But the Fed’s unprecedented actions, in coping with the financial crisis that began in 2008, led to a vast expansion of its portfolio, which generates much additional interest income.

Data for 2003-11 from annual report of the Board of Governors of the Federal Reserve System

This accounting raises some interesting issues of which even economists are generally unaware. For example, although it is part of the federal government, the Fed is treated as a private bank for the purposes of calculating the gross domestic product. The data can be found in Table 6.16D of the national income and product accounts. They show that in 2011, the Fed generated a profit of $75.9 billion – 18.6 percent of all the profits generated by the financial sector of the United States economy and 5.6 percent of the total profits of all domestic industries.

Since the Fed’s profits come primarily from interest on Treasury securities, its payment to the Treasury in effect offsets much of the net interest portion of the budget. In 2013, net interest is expected to be $229 billion. But actually it is $89 billion less than that because of the Fed payment. It would make more sense, as a matter of accounting, to treat the Fed payment as an “offsetting receipt” that would lower the net interest outlay, rather than as a “miscellaneous receipt” in the budget. This has implications for calculating the burden of the national debt.

With the idea now off the table, we may never be able to assess how the coin would have played out. But most likely it would have been business as usual between the Treasury and the Fed.

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Memo From Germany: Germany’s Success and Advice Anger European Partners

When Chancellor Angela Merkel on Monday described the debt crisis as Europe’s “most difficult hours since World War II,” she was describing something most Germans had only read about in newspapers or watched on television. The German economy once again surprised experts on Tuesday, growing an unexpectedly healthy 0.5 percent in the third quarter and 2.5 percent higher than the year before.

While there were ominous signs that Europe’s slowdown would also strike Germany, its biggest economy — particularly worrisome was a sharp drop in industrial production in September — the pain that euro zone partners have been feeling has yet to arrive here.

With German consumers spending freely, unemployment has reached the lowest level since German reunification more than two decades ago, and it continued falling in October. Tax receipts consistently beat government projections, to the point that Mrs. Merkel’s coalition even has plans to cut taxes by more than $8 billion.

And in a widely noted twist on the accounting surprises that helped cover up Greek debts, Germany recently found its own mistake in the spreadsheets: its obligations were $76 billion lower than previously thought.

Germany’s continued prosperity has helped fuel growing anger in countries like Greece and Spain against what is increasingly viewed as harsh German domination. More and more, Germany is cast in the role of the villain, whether by protesters in the streets of Athens or by exasperated politicians in the halls at the recent Group of 20 meeting in Cannes, France.

“The Germans often don’t sufficiently appreciate how wrenching the economic changes are that they’re prescribing,” said Philip Whyte, a senior research fellow at the Center for European Reform in London.

Germany, Mr. Whyte said, was trying to remake all of Europe after its competitive, export-driven economic model, without understanding the connection between its success and foreign indebtedness in countries like Greece, which for years used borrowed funds to purchase German goods.

“Not everyone can be like Germany,” Mr. Whyte said. “The world as a whole doesn’t trade with the moon.”

European partners have taken notice of the yawning divide between their struggles and Germany’s strength, and of the way German leaders have resisted aggressive measures by the European Central Bank that may have provided some relief, but may also invite what for Germans is the deep dread of inflation.

Greeks in particular have been outraged at demands for change dictated by Berlin that impinge on their sovereignty. Some Greek protesters have even carried blue European Union flags with yellow swastikas in the middle and compare the debt deals to the occupation of Greece during World War II.

The European crisis has often been likened to a morality play — sinful southerners, virtuous northerners — but at times in Germany it has taken the shape of Wagnerian opera, with Germany cast as the dragon guarding its hoard of gold.

Last week, Germany was awash with reports of a proposal floated at the Group of 20 meeting that might have allowed the International Monetary Fund to draw on German gold reserves to bolster Europe’s rescue fund.

The condemnation was swift and disproportionately harsh for a suggestion that was basically doomed from the start. “The German gold reserves must remain untouchable,” said Philipp Rösler, the economy minister and vice chancellor.

A cartoon in the newspaper Süddeutsche Zeitung showed three men trying to crack a bank safe marked “Bundesbank gold and foreign currency reserves,” a reference to the German central bank.

The masked man attacking the safe with a drill had the German abbreviation for the European Central Bank on his back, while the one placing the dynamite bore the letters for the International Monetary Fund. Holding a flashlight was the president of the European Council, Herman Van Rompuy.

Leading politicians here defended the independence of the Bundesbank but also took the opportunity to call for Italy to sell off its own gold reserves, the fourth largest in the world after the United States, Germany and the International Monetary Fund.

“I am of the opinion that a country should do everything in its power to help itself,” said Gunther Krichbaum, chairman of the committee on European affairs in the German Parliament, who spoke in favor of Italy’s selling gold to help with its $2.6 trillion debt, “and in this regard Italy is far from exhausting its options.”

As the overall health of Germany’s economy and its fiscal position widen the rift with Europe’s poorer periphery, Germans have a ready response. They say that they already made the structural changes in work-force rules and pension reforms that they are now recommending for the slow-growth countries, and that, by the way, they actually pay their taxes. So if the laggards want Germany’s money, they have to play by German rules.

“We believe this success is because we have certain criteria around which we organize our economic policies, and these are the criteria we want other countries to comply with if they ask for our money,” said Tanja A. Börzel, a professor of European Union politics at the Free University in Berlin. “When you put national taxpayer money on the line, the people have a say, and that is if we have to eventually pay for the economic sins of others that they at least change their policies if we bail them out.”

Guntram B. Wolff, deputy director at Bruegel, a research group based in Brussels, said that as the focus in the debt crisis had shifted from tiny Greece to the much larger Italy, the need for domestic action versus international bailouts had risen. Mr. Wolff, who formerly worked at both the European Commission and the German Bundesbank, said that Berlin had played a more assertive role in the European crisis in part because the European Commission had not played as active a role as it could have, particularly over Italian indebtedness.

“The shift of power is clear,” Mr. Wolff said, “and you see that it is Berlin that has been gaining power.”

Stefan Pauly contributed reporting.

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High & Low Finance: Learning to Live With Debt

Seldom have those twin realities been as stark as they are now. It was excessive debt brought on by too-easy credit that brought down the American economy and allowed some European countries to borrow money they will never be able to pay back. It is fear of debt that threatens to keep the United States from doing much to prevent a double dip recession.

A considerable part of the current economic strain stems from the fact that the credit overhang continues to haunt borrowers around the world. The lenders may have been bailed out, but the borrowers were not — or at least not enough to return them to health. Millions of Americans remain underwater on mortgage loans. Countries that lack printing presses for their own currency find themselves unable to borrow from private lenders.

In the long run, inflation may be a significant part of the solution, enabling borrowers to pay back dollars and euros that are worth a lot less than the ones they borrowed. The soaring price of gold, now around $1,650 an ounce, makes sense only if you assume something like that is going to happen.

But for now, such inflation is not on the horizon. To get by, the sad reality is that those who can raise capital may need to do so for the benefit of others. Germany has grudgingly moved toward that with the latest bailout of Greece, but the United States — which now pays 2.4 percent to borrow money for 10 years, more than a percentage point less than it paid six months ago — seemingly has no desire to try to save its own economy, let alone anyone else’s.

The effort to slash spending with the possibility of a new recession looming may be foolish. Larry Summers, the economist and former Treasury secretary, pointed out in The Financial Times this week that tax receipts over the next decade would be about $1 trillion lower — and debt that much larger — if economic growth were shaved by half a percentage point a year. That is about the same amount that the bill passed this week claims it will save.

It appears that not much of that saving will be in the next couple of years, although the further cuts promised late this year could change that.

What is needed now is both a willingness to spend to offset the impact of the last debt debacle and a determined effort to ensure it does not happen again. But those efforts are stalling. Banks are lobbying with some success in both the United States and Europe to delay and weaken capital requirements.

And the American government shows no interest in doing anything about the incentives in current law that favor borrowing over equity. If you buy a house with the largest mortgage possible, you will pay lower taxes than if you borrowed less. Companies pay interest on loans out of pretax income, so the more they owe, the less they pay in taxes. But dividends are paid out of after-tax money.

“The U.S. tax system encourages household leverage and bank leverage, even though both are potentially destabilizing,” is the way Narayana Kocherlakota, the president of the Federal Reserve Bank of Minneapolis, put it in a recent speech. He offered a rather modest suggestion: lower the proportion of interest payments that are deductible.

There are, of course, claims that both tax policies produce greater good for the society, by encouraging homeownership and corporate investment. He suggested “replacing the mortgage interest deduction with a tax credit that offsets part of a buyer’s down payment toward a home purchase. Such a tax credit would encourage homeownership without simultaneously providing more incentives for households to accumulate more debt.” And lower corporate income tax rates, he said, could offset reductions in the deductibility of interest “without simultaneously providing incentives for corporations to acquire leverage.”

The fact that those suggestions have virtually no political support reflects one of the great political and economic challenges of this era: Governments now feel a need to encourage economic growth, but don’t want to spend money. Encouraging leverage seems like a good idea.

But it does have major risks. “A financial system with dangerously low capital levels — hence prone to major collapses — creates a nontransparent contingent liability for the federal budget in the United States,” said Simon Johnson, an M.I.T. economist and former chief economist of the International Monetary Fund, in Congressional testimony last week. “This can only lead to further instability, deep recessions, and damage to our fiscal balance sheet, in a version of what the Bank of England refers to as a ‘doom loop.’ ”

In plain English, he means Uncle Sam will get stuck with the debt when banks blow up. The fact that happened in the recent cycle is a major cause of the rising debt that seems so alarming to those who demand immediate cuts in spending totally unrelated to the financial crisis.

To hear banks tell it, every extra dollar of capital that they are forced to hold is one dollar less they can lend, and one dollar less of economic growth that the world desperately needs.

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Economix: Could This Deal Raise Budget Deficits?

“From an accounting point of view, it seems obvious that you would reduce G.D.P. if you cut government spending,” said Randall Kroszner, an economics professor at the University of Chicago and a former Fed governor appointed by Mr. Bush. “But the key is really the impact on consumption and investment. If you reduce government spending and if people think that reduces uncertainty about the tax burden down the line, they may be more comfortable with spending.”



Notions on high and low finance.

It is virtually impossible to think of the impact of the debt deal as doing anything to help the economy. But give Mr. Kroszner credit for trying, in today’s front-page article by Binyamin Appelbaum and Catherine Rampell.

To come up with a rosy scenario, he suggests that uncertainty may somehow be reduced, leading to more consumption and investment. I cannot imagine anyone actually thinking this deal — with its clear potential for another bruising fight and deadlock that will do more to hurt the economy — decreases uncertainty.

In fact, this deal could manage to do the exact opposite of what it promises — raise the deficit.

If that happens, it will be because a major determinant of tax revenue is the health of the economy. Profits and growth bring revenues. This could damage the economy enough to send tax receipts down again. Although you never would have guessed it from the rhetoric, tax receipts are at the lowest level in years, as a percentage of gross domestic product. Get a healthy economy and tax revenues rise while a lot of spending, on such things as unemployment benefits, goes away.

What this has shown is that the Republican Congressional leadership is terrified of the Tea Party and of people like Sarah Palin, who hinted she would support a primary challenge to any Republican who voted to raise the debt ceiling. The leadership knew that not raising the ceiling was unthinkable, but many of the members did not.

The next showdown — assuming Congress passes the deal on Monday — will come directly after the 2012 election, but with the current Congress. So even if these people are thrown out, they have assured themselves one last chance to be totally irresponsible. Then, when the new Congress tries to undo the damage, the ones who are still there can filibuster.

What has been proved by this is that there are a substantial number of members of Congress who basically are opposed to the government and welcome anything that would keep it from functioning. If the Republican leadership again grants them veto power over anything, some of them will think that forcing huge spending cuts at the end of 2012 will have been a triumph, no matter what it does to the economy or to Americans less well off than themselves.

If Mr. Kroszner’s rosy scenario seems unreal, there might still be one. It relies on the fact that fiscal and monetary stimulus work with lags. When recoveries really get going, they can become self-sustaining quickly.

The normal course after recessions before the 1990s was for complaints that nothing was happening to turn overnight to amazement about how fast recovery is taking hold, and then to be followed by complaints that the last round of stimulus was unnecessary.

Is it possible that we have reached an inflection point, and that despite the weak economic numbers there is really no need for more stimulus?

Yes, it is.

Is it likely?

Not so much.

What is clear is that the lessons of the 1930s — that you don’t deal with weakness by cutting back — have been forgotten or were never learned.

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