No One is Talking about the Bottom Line with the Platinum Coin
Written by John Lounsbury
The bottom line is that the Trillion Dollar Coin removes profit the financial system makes on the interest payments to holders of the Treasuries – this reduces the cost to government (and its citizens) for operations. It would be logical to think that the financial system oligarchy would oppose loss of this profit.
To be fair, I have to say almost no one is talking about the basic tenet of the seigniorage proposal. Warren Mosler mentioned it this week, but it probably went right over the head of all but the most serious students of the platinum coin idea and serious academics specializing in money and banking (if any have considered the idea). The basic tenet is a significant threat to the global financial system, as I will explain in detail.
The proposal that has been present in the blogosphere since 2010 has recently broken into the mainstream media as part of the discussion about the upcoming national debt limit debate. The essence of the idea is that federal law authorizing coin seigniorage specifically using platinum could be used to create credit at the Federal Reserve that would allow the government to spend on items authorized by Congressional appropriation without adding to the national debt. See the work of Joe Firestone for a most complete review of what has been discussed regarding the platinum coin. For a one article summary of the proposal see this by attorney Carlos Mucha (who blogs as beowulf), the originator of the platinum coin seigniorage proposal.
Many of the people ridiculing the platinum coin idea (for examples see here, here and here) not only don’t show any appreciation for the bottom line of this proposal, but many show amazing ignorance of what has been proposed, its implications and its potential effects. Some don’t even recognize that seigniorage is involved and waste time on discussion about whether enough platinum is available to mint platinum coin(s) of value(s) totaling trillions of dollars.
After I wrote the material above and then left for a while, I came back to find the Joe Wiesenthal had posted a new article that updates some of the above. Read this article before you continue.
The Bottom Line
As good as the comprehensive work of Joe Firestone is and as helpful as the article just posted by Joe Wiesenthal, Warren Mosler made the most single most significant one line statement about the platinum coin:
And all the coin does is shift interest expense from the Treasury to the Fed.
That is close to a shorthand note for the full statement of the bottom line.
I. The government debt funding of deficit spending.
This is the current process by which money is created to fund the difference between government revenue and government spending (the deficit). The government issues Treasury bonds which are bought by primary dealers (as required by law) with money provided by the Federal Reserve. This is a three step process whereby the government spends more money into the economy than it withdraws by taxation:
1. The Treasury issues the bonds, bills or notes.
2. The primary dealers provide the money to the government to buy the bonds.
3. The Federal Reserve increases the reserves of the primary dealers to cover their money transfer to the government.
The net result? The Fed “prints” (technically creates additional bank credits) the money that the government then spends.
What happens to the bonds, bills and notes (in the absence of quantitative easing)? They end up being assets held by the private sector who have need (or a preference) for no-risk holdings. These include individual investors, corporations, global trading partners, pension plans and, most importantly for this discussion, banks.
There is a cost to the U.S. government of this process of funding deficit spending: interest payments.
II. The Funding of Deficits with Platinum Coin Seigniorage.
Warren Mosler identified why the financial oligarchy opposes this seigniorage proposal. I would hazard that most of those ridiculing the proposal are blind to how money is being created in the current monetary system. I apologize in advance to those who actually do understand money and banking.
The reason Mosler’s one-liner is so significant is that, once discovered that it is no longer necessary for private banking to create the credit to pay for government appropriations when they exceed tax revenues, the banks have lost their umbilical cord to the federal government. The government will have demonstrated that private banking is not necessary to fund government operations.
A primal fear of private banking: The government might discover that public finance and private finance can be divorced. An entitlement can be ended: the need for government of pay interest to private institutions to finance operations would be no more.
As asked in an editorial comment in a GEI News article:
Is it time to wean the banks from the public teat?
I would say that an end to the privatization of gains and the socialization of losses would be a great outcome from the creation of debt-free money. That is the monster in the room for banking with the use of the platinum seigniorage action. Private banking would have to return to free enterprise operations and no longer have government dependancy adding to the TBTG (too big to fail) aura of recent decades.
III. The Effects of Quantitative Easing
The use of platinum coin seigniorage is actually a logical extension of the QE operations involving Treasury securities. This amounts to a near equivalence to the issuance of debt-free money (as long as it (QE) continues).
If you follow the process in section I. and then add the step of QE purchase of Treasuries by the Fed for newly created Federal Reserve bank credits you have the equivalent of the Treasury creating debt-free bank credits directly.
Why? Doesn’t the government still have to pay interest on the Treasury securities held by the Fed?
Yes, but that accrues to the income of the Fed and all Fed income (after expenses) is paid to the Treasury. Thus the Treasury is paying interest to itself with a minor skimming of operational costs, dividends and interest payments currently going to the member banks (at 0.25% per annum) for excess reserves held by the Fed. In 2011 the payments by the Fed to the Treasury totaled $78.9 billion. The 2012 payment will be announced any day now and likely will exceed that for 2011.
The platinum coin process (or any other issuance of debt-free money by the U.S. Treasury) accomplishes essentially the same thing, but makes the current charade described above unnecessary.
Separate Public Finance from Private Finance
The seignorage process, or any other direct issuance of fiat money, provides a much needed separation of private enterprise from public economic management. The determination of public interest would no longer be compromised by the interests of private profit.
The government could still issue government securities in amounts needed for private saving and for the accounts of global trading partners. The government would no longer be forced to issue securities to obtain funds necessary to pay for legislated appropriations.
Of course the bailout economy that the confusion of public and private interests has produced over recent decades would be ended. Private enterprise would stand on its own merits and true capitalism, with all its successes and failures, could be enabled to operate without siphoning away money that could well remain with taxpayers (lower taxes) or be used to spend or invest with public purpose.
Crony capitalism-government entanglements would be eliminated. It could lead to the slaying of Matt Taibbi’s giant blood sucking vampire squid and other oligarchy monstrosities that are enabled by being on the public dole.
And that is what is dangerous about the trillion dollar platinum coin idea. It is dangerous to the continuation of a broken financial system and terrifying to the banks.
It is time to remove private banking from its public dole entitlement.
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