As the nation surveys the damage from Hurricane Harvey, another potential economic disaster is brewing in Washington: the return of the so-called “debt ceiling.” An abstraction has become an ideological litmus test for “burn the house down” Members of Congress. Yet a big lemon can be turned into lemonade (assuming the United States Government does not in fact default on its debts) if the debate can turned into a teachable moment regarding how the government finances its operations, how the money system works, and how it could be changed for the better.
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. If Congress refuses to raise the debt ceiling, there is a potential for the government to default on its debt. The “Defaulters” (who ironically consider themselves bastions of fiscal responsibility) hope to take advantage of the ensuing economic chaos in order to cut government spending. However, economists from the Modern Monetary Theory school of thought have proposed a legal loophole that 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, this allowing government borrowing to continue. The coin would circumvent the austerity mindset, and has the potential to expose the public to interesting ideas for monetary reform.
Back in 2013, the trillion dollar coin was part of the most stressful moment President Obama’s presidency. Now its twitter hashtag #MinttheCoin is trending again. This time brings new riffs on the idea for 2017. For example:
Put trumps face on the trillion dollar coin, this ends fast.
Let’s #mintthecoin with melted down Confederate statues.
The trillion dollar coin is a silly idea on its face (doubly so if the joke above becomes reality), but it reveals some important differences between most people’s understanding of the how the money system actually works.
The Money System as a Commons
In 1913, the U.S. government delegated the power of money creation to the Federal Reserve, which sounds like a government agency, but is actually comprised of private banks (except for a few members of the Board who must be appointed and confirmed by the Government). Federal Reserve Notes are created through private 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. The money system is a Commons that relies on the trust of economic actors who produce real value and are willing to sell in exchange for the currency. Who owns the system? We all do. In a fairer world, we would all share in the value created by it, for example, by distributing a citizen’s dividend, partially paid for by the profits of “seignorage” (the difference between the cost of creating the money and its value).
The Government Can Print Money, But Households Can’t
Some people believe the national debt is a serious problem. They argue that we are spending beyond our means and leaving unacceptably high bills to be paid by our grandchildren. But this is based on an incorrect metaphor. A sovereign nation is not a household. Because we have a debt-based money system, 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 (a major policy goal of fiscal conservatives). In fact, paying down and retiring the national debt would take money out of circulation, causing an economic contraction and impoverishing people.
Sustainable Monetary Reform
Many monetary reforms proposals are based in political ideology. Gold bugs who want a return to the anachronistic Gold Standard, want austerity, and only want the existing 1% to thrive. A monetary policy for the 99%, on the other hand, would allow for spreading the wealth beyond just those who own gold mines. What type of monetary reforms can reflect a world of abundance, where there is enough for everyone, where equality and democracy are good, and inequality is bad?
The current Chair of the Federal Reserve, Janet Yellen, has a few months left before her term expires. She could make those last months count by implementing much needed reforms. For example, the Federal Reserve could change its policies to retire Treasury bonds when it purchases them from private banks as part of its monetary operations. This could result in an enormous reduction in the national debt with no need for painful austerity measures from budget cuts.
Yellen could implement, or at least propose, QE for the people, providing the citizen’s dividend mentioned above to people rather than the previous rounds of Quantitative Easing that only lined Wall Street’s pockets. She could convene study groups to assess proposals by the group Positive Money, which advocates for government to issue money, instead of private banks. The trillion dollar coin is a fanciful representation of this approach. Unlike the Federal Reserve Notes, the trillion dollar coin is debt-free and interest-free.
The trillion dollar coin even provides a window into a more sustainable global economy. The existing debt-based monetary system is not compatible with a carbon-limited economy. The positive interest rate requires continuous growth in order to repay the lending banks. Stopping the growth even briefly (such as slowing down fossil fuel development) can lead to recession or depression. The late economist Richard Douthwaite proposed a different type of system in his book The Ecology of Money. Douthwaite noted that in a world of increasingly restricted carbon emissions, the ability to emit may become one of the most valuable commodities on the planet. A Global Climate Trust could issue an energy-backed currency tied to a global cap on carbon (set, for example, around the goals of the Paris Climate Accords). Tradable permits representing emissions under an economy-wide cap could be sold to fossil fuel companies. The revenues generated could be returned to people as a climate dividend. This could be the first part of a universal basic income.
The current divisive political environment does not lend itself toward optimistic visions of innovators focused on the public good. A best case scenario is to turn the lemon of the debt ceiling into the lemonade of an opportunity to educate the public. The more that people hear about the trillion dollar coin, the more likely it is that the next time an opportunity arises, more people will demand a system that spreads abundance, reduces inequality, and supports environmental sustainability.
Find out more about sustainable monetary reform at these upcoming events:
September 16 - Strike Debt Meeting in Oakland, California.
September 21 - MMT Conference in Kansas City, Missouri.