Brad de Long asks for ideas on Geithner’s options on August 3rd, if the lunatics calling themselves Republicans are still blocking an increase in the debt limit.
Be careful what you pray for, you might get it. So Here’s My Plan.
The Bipartisan Policy Center estimates authorised expenditures at $302bn in August and incoming revenue at $172bn, or 57% of all payments due. The gap is therefore $130bn.
Debt interest is $29bn. Ring-fence that and pay in full, as per the Constitution. So that leaves $143bn in dollars to meet $273bn in payments to everybody else: retirees, hospitals, service members, contractors, federal employees, congressmen and the President. That makes 52.4%.
My proposal is that all these other creditors and lawful claimants, without exception, are paid 52.40 cents on the dollar. For the other 47.60 cents, they should receive a pretty, security-printed certificate like this (with much more more copperplate and squiggles than my primitive DTP skills can manage):
What would happen? And is it legal?
These bits of paper – call them geithners, timothies, or Boehner rubles – will have a market value, underwritten by the promise to accept them in payment of taxes. What happens when retirees show up at WalMart with them in hand of August 5? There are touts on the sidewalk offering 50c on the dollar, but that’s a ripoff for the retirees and a business opportunity for the store. I think WalMart rings up Goldman Sachs for a quotation on $50m of geithners. Goldman can sell them on to rich individuals to meet tax bills and corporations to meet social security payments, for say 90c on the dollar. So Goldman offers WalMart 80c. WalMart offers its customers 75c. Hey presto, we have a market. Initially this would be inefficient and regressive, but would rapidly become less so as arbitrageurs pile in.
One of the practical problems is that geithners come in odd amounts, So anybody – from a libertarian blogger to the University of Chicago to Citigroup – can set up a scheme of depositary receipts. The receipts, also security-printed, would be for convenient amounts like $100.
What you would have is a parallel currency. It’s happened lots of times, in inflation-ridden Latin America, to immediately post-war and and post-communist Eastern Europe. When Ireland had a six-month bank strike in 1970, cheques issued by all sorts of businesses became money. Why should a geithner be less credible than a cheque from O’Malley’s Bar in Skibbereen?
Is it legal? Surely not. But as Jonathan Zasloff wrote about his own proposal, who’s going to sue, and what court will hear the case? The Treasury will be sending out $4bn of geithners every day, and they would be in everyone’s pockets – including those of congressmen and judges.
How about constitutional? It’s a usurpation of power from a failed Congress. But Obama has better lawyers than George Bush, and just as royalist. If the President can get away with murder of American citizens, as he currently claims, he can surely get away with a bit of financial effrontery in the public interest. For once, salus reipublicae suprema lex.
Is printing Monopoly money on this scale inflationary? I doubt it. The geithners partially replace dollars that should have gone out; to the extent they are incomplete substitutes, the effect is contractionary. In terms of the federal balance sheet, one form of near-money (Treasury bills) will be replaced by another (geithners). Geithners are riskier and pay no interest, so the velocity of circulation back to the Treasury will be high.
I’m sure there would be all sorts of untoward effects. But it certainly beats the alternative of sending out the 52.4 cents (more for some means less for others) and a non-tradeable promise to make good at some unspecified time in the future.
[Update 20 July
Mark, in comments, suggests that printing dollars is simpler. Yes; but it would have I think to be actual banknotes, which (I'm guessing) don't necessarily show up on the Fed's balance sheet.
Sending out lots of $10 bills would also serve as a reminder of Hamilton's efforts to increase the US Government debt by taking over the liabilities of the states. Hamilton understood, as today's Republicans do not, that a large pool of low-risk public debt is a good thing for a national economy to have.]
So, if Congress raises taxes instead, or finds some spending it can cut, they get stiffed anyway? What’s with this monomaniacal obsession with borrowing as the only way to address a budget shortfall?
Obviously Brett, somehow throughout this entire process, you have managed to shield yourself from the fact that the debt limit increase is to allow borrowing so as to pay off debts already incurred. If you could somehow to convert your mental insulation into production, I daresay you could help millions of individuals who incur high heating costs in winter. Although from what I have read of your writings here, helping people is not high on your To Do list, anyway.
Call them “GOPers” with a cartoon of a laughing elephant embazened in the middle. Make them funny enough and they will be collected like “Billy Beer” or “The New Coke” were, at least for a while. Get Al Franken to be a consultant on the design. Robert Crumb would be great to execute the finished design. He’s fast, funny and still alive and working somewhere in the south of France.
Brett, the answer to your question is yes, even if Congress were somehow to balance the budget immediately (including retroactively balancing the current budget they passed last year), there would still be a cash shortfall come August 3rd and a need to borrow. A balanced budget over the course of a year doesn’t mean a balanced budget every month or every day. The deficit is bigger than usual in August, but smaller than usual in September because lots of taxes are paid at the end of the quarter.
“What’s with this monomaniacal obsession with borrowing as the only way to address a budget shortfall?” Once you’ve approved a budget where expenditures exceed revenues, you have to borrow money, whether you are calm and sensible, or monomaniacally obsessed.
Those who object to borrowing money, should not approve budgets where expenditures are larger than revenues. What we should do to the people who insisted on the deficit by insisting on revenue cuts, is left as an exercise for the student of poetic justice.
there would still be a cash shortfall come August 3rd and a need to borrow.
And Brett has firmly refused to say what bills he would an would not pay come Aug. 3, thereby demonstrating a complete lackof understanding of what’s going on.
And what’s this about monomania? The Democrats, including Obama, have offered concessions on spending, and want some on taxes. But the GOP won’t give a nickel on taxes. Who are the monomaniacs, exactly? (not to mention that this is a terrible time to cut spending).
“Once you’ve approved a budget where expenditures exceed revenues, you have to borrow money, whether you are calm and sensible, or monomaniacally obsessed.”
Setting aside for the moment the fact that they haven’t passed a budget, but instead a bunch of continuing resolutions and unconnected spending bills… I would say that, once you’ve approved a budget where expenditures exceed revenues, you have to borrow money, or go back and change tax rates and/or spending levels.
Either we have a legally approved budget or we don’t. (For those arriving late—we do. It’s a short-term continuing resolution kludge, but it’s a budget.) The budget requires borrowing in order to pay the authorized expenditures. Obviously Congress can choose to pass a new budget bill, overriding the one that’s in effect now, and obviously that would change things, but that’s just wishing the current problem away. The current problem is that we pay what’s already authorized, or we default.
Sigh. This sis a reasonable discussion thread on the well-rehearsed question whether the debt ceiling should be raised (for the record, again. yes, immediately,without condoitions, and for ever). But it’s not germane to Geithner’s problems come August 3d if it’s not raised, which was the subject of Brad de Long’s question and my amateur, far-out etc etc anawer. What’s yours?
“What’s with this monomaniacal obsession with borrowing as the only way to address a budget shortfall?”
What’s with this monomaniacal obsession with NOT allowing taxing as a way to address a budget shortfall?
James, I take your point.
Creating unauthorized scrip is a cool idea. If we’re going to do that, may as well give it a negative interest rate (as was done in the 1930s with stamp scrip) to encourage people to spend it fast. The velocity of the money isn’t relevant to our default problem, but negative interest would address our other problem (nobody spending their money) as a side effect.
If it were up to me I’d do something a little simpler, like selectively defaulting on bills payable to Republican supporters. It’s not as if the Republicans could hate me any worse than they already do. But your scheme would put physical evidence of the default in front of everybody, Democrats included, and that would have to be useful politically.
“What’s with this monomaniacal obsession with NOT allowing taxing as a way to address a budget shortfall?”
Simple: If there’s no will to control spending, then higher revenues will just result in a deficit at higher absolute levels of spending. Great if what you really want is higher levels of spending, and don’t actually give a damn about deficits.
So the Republican position is, spending cuts, first, to prove the discipline is there. Then we’ll talk revenue.
“So the Republican position is, spending cuts, first, to prove the discipline is there. Then we’ll talk revenue.” I was almost going to take your argument seriously, and then you said this.
This would be the same Republican Party that was in the majority in 2000, when the budget was balanced? And then ran up the biggest deficits in history? They would like to see the Democrats “prove the discipline is there?”
The Republican position is tax cuts for our wealthy contributors, ahead of any other goal.
“So the Republican position is, spending cuts, first, to prove the discipline is there. Then we’ll talk revenue.”
Except that isn’t the Republican position, as the Ryan plan cuts taxes first and does not balance the budget. Where is this proof of discipline? Not with Republicans.
“…..to prove the discipline is there.”
Reading this, the urge to go Godwin is well neigh irresistible.
Why complicate matters? If the scrip is transferable and acceptable in payment of federal taxes, it’s money, dollar for dollar.
Mark: you make a good point. The President could simply order the Comtproller of the Currency toprint banknores, and Geithner’s minions stuff them in the envelopes (for the 42c on the dollar). Logistically difficult for defence contractors, and the greatest opportunity since 1945 Germany for bank robberrs, so I’d stick to scrip for large payments.
I suspect that it has to be banknotes. Cheques are part of the banking system; the Fed as central bank has a balance sheet which has indeed to balance.
Why print banknotes and stuff envelopes” Can’t the Comptroller simply create new money using ones and zeros in a computer somewhere? And then send them to accounts electronically?
I like the idea of selectively placing GOP donors last on the list to get paid.
And come on, Mr. Bellmore. Republicans created the budget shortfall with two middle eastern wars and other oil company subsidies, but “monomanically obsessed” against raising taxes to pay for them. I would in fact accuse them of doing this as part of a plan to gut social programs: drive up deficits and debt with tax cuts and high spending, destroy the economy by deregulation of housing and finance industries (they got the idea from the dot.com bust), and then demand changes to social programs by threatening default. My only question: who was the stone genius who realized in 2005 that a vote to raise the debt ceiling would be the perfect hostage?
These are reminiscent of Zimbabwe’s bearer cheques, which were simply a promise from the government to give real Zim dollars to the bearer in exchange for the cheque.
When they ran out of real dollars, they just printed up more bearer cheques and gave those in exchange.