Another Teachable Moment from the Return of the Trillion Dollar Coin

Here at FEASTA we believe in recycling. And we have occasionally recycled (republished) old blogs when history repeats itself or comes close enough.

In this case, the “debt ceiling” debate (or game of chicken, or brinksmanship) has resurfaced in the U.S. after 10 years, so here are some excerpts of three blogs I wrote (here, here, and here) in January 2013 (on the HuffPost Contributor portal) about the Trillion Dollar Coin and its implications as a teachable moment for monetary reform. Enjoy!

What is the debt ceiling, and why is it back again?

The U.S. Federal government has a self-imposed debt ceiling that must be raised by Congress periodically in order to continue to pay its bills. Upon gaining majorities in Congress after the 2012, and now, 2022 election, Republicans threatened to refuse to raise the debt ceiling and created what the media referred to as a “fiscal cliff.”  Their strategy was/is to attempt to achieve concessions regarding cuts to government spending by blocking the federal government’s ability to continue to finance its operations.  However, economists warn that the U.S. defaulting on its national debt payments could throw the international economic system into disarray and cause a global depression.

In 2012 Republicans hoped that President Obama and Congress would agree to a “grand bargain,” by which they mean a bipartisan agreement on a fiscal package that includes deficit reduction. Fiscal conservatives on the right looked at the deal as an opportunity to impose austerity on the federal budget and curtail social programs while preserving military spending. Progressives were worried that the deal would be a “great betrayal” involving cuts to Medicare and Social Security.  When the Republicans captured the House of Representatives in November 2022, the timing was again ripe for this sort of “negotiation” (or “blackmail” depending on your perspective).

What does this have to do with the Trillion Dollar Coin?

During the 2012-2013 debt ceiling debate, the “Trillion Dollar Platinum Coin” entered the public lexicon. It sounds jaunty and paradoxical, but it is a surprisingly serious proposal.

Here’s a summary of the Trillion Dollar Coin proposal:

A legal loophole allows the U.S. Treasury to mint a high value (trillion dollar) coin, and deposit it at the Federal Reserve, where the Treasury’s account would be credited, thus allowing government borrowing to continue.

The Trillion Dollar Coin is interesting because it reveals hidden truths about how money is created, how government budgets work, and about prospects for monetary reform.

The politics of the Coin run parallel to the debate about stimulus (abundance) versus austerity (scarcity).  To Coin supporters, such as Keynesians and followers of Modern Monetary Theory (MMT), the Coin provides an end-run around Parliamentary trickery to support the social safety net and offers the prospect of creating new and important government programs to address major societal problems (for instance, basic income or climate change).

For opponents of the Coin, such as the people who profit from the current monetary system, Wall Street, the financial industry, bond holders, conventionally-trained economists who subscribe to the “Austrian” school of economics, the Federal Reserve and its member banks, many former Treasury Secretaries, fiscal conservatives, and “deficit hawks,” the Coin undermines their arguments for austerity politics and their justifications for cutting programs “because they had no other choice.” They want to claim there is no money available and the debt is overwhelming, but the Coin calls that assertion into question.

The situation in 2023 differs from that of 2013 because the Republicans went from Tea Party to Trump, and many now seem to believe almost any outlandish idea as long as it seems to imply that Democrats are criminals or worse. So it will be interesting to see where believers in the more bizarre new conspiracy theories as well as bitcoin and crypto enthusiasts who come from a variety of ideological backgrounds fall in terms of the Trillion Dollar Coin.  Progressives are also more assertive after several successful rounds of covid stimulus (although the recent inflation may have tamed that a little).

What does the Coin teach us about monetary reform?

The very concept of a deficit is troubling to deficit hawks held captive to the common but incorrect metaphor that the federal government budget has the same rules as household budgets. It doesn’t. Another argument is that deficits are financed by China, putting U.S. national security at risk. This is also false.

Incorrectly comparing the federal budget to a business or family budget, they imply that the government has no money, needs to borrow it (from the big banks and China), and leaves a legacy of debt shouldered by future generations. This is all refuted by the Coin. The Coin’s message is that actually the U.S. is a sovereign nation, the government can issue its own currency unlike a household or small business, and the national debt can be solved with a few benign changes to the monetary system (see below for some examples).

Critics of the Coin are often using gold-standard thinking in a fiat currency world. Banking interests and conservative “deficit hawks” want to scare Americans into rolling back entitlement programs, focus the tax burden on the lower classes, and preserve the banking industry’s profits. The Coin has other ideas. It is telling us that we can afford government programs, whether it is Social Security, rebuilding crumbling infrastructure, or protecting the population from climate change.

Second, the Coin illustrates the distinction between debt-backed versus debt-free money, and interest-accumulating versus interest-free money, for both federal budgeting and the entire economy. In 1913, the U.S. government outsourced the money creation power to the Federal Reserve, which is comprised of a cartel of banks. Federal Reserve Notes are created through bank loans and accumulate compound interest that must be paid back over time to the lending banks. Those interest payments mean that everyone, including the Federal Government, pays rent on money created by the Federal Reserve System. Unlike the Federal Reserve Notes, the Trillion Dollar Coin is debt-free and interest-free. The government has disempowered itself of the benefits of “seignorage,” but the Coin offers to reinstate that power.

A hidden truth of the money system is that money is debt.  The national “debt” is actually just an accounting mechanism for how much money is in circulation (i.e. savings). But when it is combined with the false “household budgets” metaphor, it looks like a big problem that needs to be solved through harsh austerity and cutting of the social safety net.

What can we do about it?

In the narrowest strategic reading, minting the Coin could buy the President time to reach an agreement with Congress on the debt ceiling. Similarly, the President could threaten to use the Coin unless Congress gives the President the authority to unilaterally raise the debt ceiling. In return, Congress could revoke the ability to mint future Trillion Dollar Coins. In these scenarios, the Coin makes a one-time appearance, and the status quo is preserved, and no major changes are implied to the existing monetary system.

But if we want to avoid debt ceiling debates in the future, it is possible to change monetary policy to allow the Federal Reserve to retire Treasury securities when it purchases them from private banks as part of its monetary operations instead of letting interest on the debt accumulate. This could result in an enormous reduction in the national debt with no need for painful austerity measures from budget cuts.

Congress could repeal the mandate for the Treasury to issue debt when it deficit spends. Instead, the Treasury could be allowed to spend money into circulation directly, or use debt-free instruments (of which the coin is one example) in its money creation process (with or without the Federal Reserve).  This has some similarity to what the group Positive Money in the UK has been advocating for the Bank of England.

In the transition to a new interest-free new monetary system, we could press the “reset” button by canceling (a financial term for this is “winding down”) all debts following the Biblical tradition of the Debt Jubilee. You can already hear the college graduates cheering, and the Wall Street Banks writing checks to their lobbyists to block it.  Here is a recent podcast from World Basic Income about debt justice.

Could monetary reform help solve climate change?  You betcha!

One possibility would be for the Government to convene a study group or commission to investigate using carbon emissions permits under a declining cap as a “backing” for the future currency. In a world of increasingly restricted carbon emissions, the ability to emit may become one of the most valuable commodities on the planet. Some analysts believe that this linkage between carbon and money is already implicit in the current petro-dollar cycle, and that fluctuating and escalating oil prices will be a major factor driving the economy’s boom and bust cycle for decades to come. So it is worth investigating whether backing money with carbon along the lines of the Energy-backed currency unit proposal floated by one of FEASTA’s founders Richard Douthwaite in 2006 could help to create a new currency regime as industrial economies decarbonize (although there may be drawbacks to backing a currency with something – emissions – that we actually want to eliminate).

In any case, monetary reform combined with a cap and phase out of the fossil fuel supply would definitely help to smooth the energy transition for millions of people, while also ensuring that the issuance of new money is not necessarily associated with increased emissions.

Finally, once the Trillion Dollar Coin’s work is done in the debt ceiling debate, it could be “spent” into circulation as a “citizen’s dividend,” as the first installment of the people’s new seignorage royalties from the money commons. At 311 million Americans, that would be about $3,200 per person. Obviously, the new-found power of money creation has its limits, and safeguards should be built in to prevent inflationary spending that could follow the end of the type of debt deflation we saw from 2013-2021.

The Trillion Dollar Coin is a powerful meme because it is grounded in an understanding of how the monetary system actually works. Even Coin detractors were often forced to recognize the validity of the Coin’s premise, if not its broader promise.

In 2013, a strange idea, the Trillion Dollar Coin, with a catchy Twitter hashtag (#mintthecoin) caused a ripple in the government economic policy establishment, but was not able to topple a debt-austerity financial system that pays trillions of dollars in interest to the world’s richest people (Wall Street).  But it’s 2023 now, and we are presented with another teachable moment.

The Coin presents a rare opportunity to have a public discussion about the nature of money, something very few people understand. If advocates play their cards (and coins) right, it could even result in the creation of a new and more sustainable monetary system.  So watch out: As the Vatican learned with Galileo, the truth has a way of resurfacing. Be on the lookout for debt-free, interest-free money, coming soon to a country-needlessly-plunged-into-recession-by-austerity near you.

 
Featured image by micheile dot com on Unsplash.