Coins, debt-based money and the national debt ceiling

Overdate

Several recent articles like this one raise the possibility that Congress may refuse to pass an increase in the national debt ceiling next year. In theory, this would lead to huge cuts in government spending and could even shut down some government agencies.

However, the national debt ceiling limits borrowing, not spending. At the moment, both borrowing and spending are tied together because virtually all paper (and electronic) money in circulation is debt based. (Coins are not, but they are a tiny fraction of the total number of dollars in existence.)

My question is, could the government continue deficit spending by creating large amounts of totally unbacked dollars, without a corresponding debt obligation? If the U.S. were to begin funding its deficit with new unbacked cash instead of an equal dollar amount of new Treasury bonds, would the economic consequences be different?

Buffalode

If the debt ceiling is not raised, I think it is likely that temporary funding authorizations would keep at least most Government operations funded. I could see the debt ceiling being used as a "bargaining chip" to get agreement on spending cuts but I don't know how realistic or politically viable it would be to completely eliminate deficit spending immediately. If I remember the Treaury report numbers right, deficit spending was almost 38% of Federal spending in the last fiscal year so we have a system that is heavily dependent on it to the point of addiction. I think it is doubtful that addiction will be ended overnight. As far as funding operations by minting massive numbers of dollar coins, I don't know the answers but I have two questions. First, could the Mint actually produce them in that large a quantity and second, would they have any real value until they were transferred to the banking system? According to the Mint:

"Revenues
Circulating Coinage: P.L. 104-52, establishing the PEF, provides for the sale of circulating coinage at face value
to the Federal Reserve System. Revenue from circulating coinage is recognized when the product is
shipped to the Federal Reserve Banks"

So if the Mint did produce a triilion or so dollar coins, it appears they would still have to be purchased by the Federal Reserve to have any real value to the Government. I can't see any legitimate reason the Fed would purchase dollar coins in that kind of quantity so it seems to me it would be a pretty transparent "back door" method to fund the Government's spending.

Overdate

I was thinking more along the lines of printing unbacked paper money and its electronic equivalents, bypassing the Federal Reserve entirely. There already is a precedent for this - U.S. notes (red seal $2, $5 and $100) are direct U.S. obligations and have nothing to do with the Federal Reserve. However, they are still debt-based money.

Totally unbacked paper money would mean that a $20 bill would actually be twenty dollars, not a "note" of some kind. If the government were to issue a trillion dollars in new money over the next year, it would increase the estimated M3 money supply by about 7.5 percent, implying an inflation rate around the same percentage. This is not a good thing, but we've seen worse before. If the new Congress could gradually bring spending down, the deficit would decline over time, and so would the inflationary issuance of new money.

mhammerman

The raising of the debt ceiling is the next great battle and likely one of the first ones for the newly minted congresspersons. The battle will be very high profile, very much in the media, and very bloody. One would think that Mr Boehner would likely lay this chip on the table early on to get those from the other side of the aisle to pull up a chair. There is the possibility that there could be some playing with the rules to by-pass this scenario but it seems doubtful that the new guys will let it happen, they will howl to the media and make a rotten stink if the admin doesn't act in a very inclusive and above board way with the newbies. They will name names and pull the cloak off of the backroom processes...could be good, could be bad, we'll see how it plays.

A lot of chips and favors owed each other in the old guard were negated by pulling so many of them off of the teat with this recent voter purge. It will be interesting to see if the old alliances can still run the show or if the new guys will demand a chance to be heard and an opportunity to change the status quo which at this point is untenable. Methinks that Mr Boehner will be a father-like guide for the newbies but he has a strong hand and plenty of experience in the ways of the hill. It is noteable that the big O was attacking him by name well before the elections...almost like he was reading the tea leaves well before the main event. Let's play ball.

This would seem like an excellent opportunity to at least introduce or even begin the approval process for a budget or something that stands for one and this is where the rubber will meet the road. Interesting that QEII is a reality before the new congress is seated. If the big O thinks the old game is going to keep playing, he is probably mistaken as people are pissed and that's why the new guys are in town with their budget axes. There have been a bunch of new commissions and czars that have been created by this admin and surely they have big bullseyes on them right now. It also looks that the new guys will be stopping earmarks immediately so there won't be any of this goosing the bills with little specialty add-ons in the new legislation. Over all, I'm optimistic as we have folks with the will to at least make the playing field level...we'll see if they can do anything about it.

There is also the possibility of a wild card being played, namely China telling us to cut our budget by 20% right now or they are cashing treasuries tomorrow. This will put some backbone in efforts to diminish the size and scope of the govt but it could also hearken to big taxes on everything that moves; the answer likely lies somewhere in the middle. The problem I see right now is that the $250,000 people that seem to be targeted for big tax increases are all the small business people. If we decide to trash small business for the good of the country by taxing them into oblivion then that's pretty much it for employment growth. China may have something to say about this too. It seems that we are in increasingly smaller orbits around each other.

Push is about to come to shove...we shall see.

Wolf359

No, I think the ultimate solution will not rest with Congress. A body of 435 people contains too many cowards to shut things down that way. They'll raise the debt and print money out of perceived necessity, then fear, and finally outright terror of what would happen if they stop.

Buffalode

<< <i>I was thinking more along the lines of printing unbacked paper money and its electronic equivalents, bypassing the Federal Reserve entirely. There already is a precedent for this - U.S. notes (red seal $2, $5 and $100) are direct U.S. obligations and have nothing to do with the Federal Reserve. However, they are still debt-based money.

Totally unbacked paper money would mean that a $20 bill would actually be twenty dollars, not a "note" of some kind. If the government were to issue a trillion dollars in new money over the next year, it would increase the estimated M3 money supply by about 7.5 percent, implying an inflation rate around the same percentage. This is not a good thing, but we've seen worse before. If the new Congress could gradually bring spending down, the deficit would decline over time, and so would the inflationary issuance of new money. >>



Does the Government still have the authority to produce bills like this or in this large a quantity? I don't know much about this subject but I found one reference that a requirement to maintain a little over $346,000,000 in them "in circulation" was eliminated in 1986. If creating them required new legislation, I doubt that would pass as an alternative if raising the debt ceiling was defeated. My thought is that it would tend to be more inflationary than QE by the Fed. The Fed's manipulation of the dollar at least allows the Government to keep proclaiming their "strong dollar" rhetoric. If the Government was printing it directly, even Trichet would probably change his opinion. It will be interesting to see what happens. Not to get too political, but personally I think a lot of people are still in denial of part of the message sent by the voters so it remains to be seen where compromises will be reached.

edited to correct number I typed wrong.

renman95

<< <i>No, I think the ultimate solution will not rest with Congress. A body of 435 people contains too many cowards to shut things down that way. They'll raise the debt and print money out of perceived necessity, then fear, and finally outright terror of what would happen if they stop. >>



That's the line in the sand. We may have to wait until 2012 to fire some more cowards...if we can last that long.

jmski52

I don't know much about this subject but I found one reference that a requirement to maintain a little over $346,000,000 in them "in circulation" was eliminated in 1986. If creating them required new legislation, I doubt that would pass as an alternative if raising the debt ceiling was defeated. My thought is that it would tend to be more inflationary than QE by the Fed.

I vaguely remember that they eliminated US Notes (I think that's what they were) but I don't remember when. I agree with you - my suspicion is that such an issue would add to inflation more directly and more quickly as a result.

roadrunner

My question is, could the government continue deficit spending by creating large amounts of totally unbacked dollars, without a corresponding debt obligation?

Between the FED/Treasury/Govt/major banks I think this is already being done. Liquidity is being created but it is not showing up on the usual books (ie off balance sheet). Congress is probably not authorizing this and J6P taxpayer is on the hook for it in the end.

roadrunner

jmski52

roadrunner, it seems that each time they do something like this, once it becomes public knowledge and the criticism filters in, they simply turn right around and create another way to cut themselves into a sweet deal while creating money out of nothing.

I think they're running out of options. These guys are bad.

rpw

My question is, could the government continue deficit spending by creating large amounts of totally unbacked dollars, without a corresponding debt obligation?


Hi! It's me. I'm back.

Overdate

<< <i>My question is, could the government continue deficit spending by creating large amounts of totally unbacked dollars, without a corresponding debt obligation?


Hi! It's me. I'm back. >>


Nope, that's a debt obligation - "United States Note", "will pay to the bearer on demand" and all that.

I'm thinking more along the lines of "National Currency", but without the bond backing of the 1929 notes.

Bear

OK, we can raise the ceiling, but will someone please

tell the Government, that the basement and the first

10 floors of the building ,seem to be missing.