The Power and the Money

The trillion dollar coin

The trillion-dollar coin ideas seems completely irresponsible on its face. Here you have a law that lets the U.S. Treasury mint commemorative platinum coins with whatever face value that it wants. So let’s have the Treasury mint a coin with “One Trillion Dollars” stamped on it and use that to finance the federal government if Congress refuses to raise the debt limit.

Uh … okay? That seems inflationary and rather banana-republic like. Crazy, actually.

But weirdly, it’s not crazy. There are two ways that the government can use the trillion-dollar coin to get around the debt limit without affecting inflation at all. One involves the active cooperation of the Federal Reserve; the other does not.

Here’s how it works. Start with the fact that the Federal Reserve (the “Fed”) has a balance sheet. Cash in circulation and bank deposits held at the Federal Reserve are liabilities of the Fed. Why is cash a liability? Well, at some point in the past the Fed printed it up and used it to purchase assets or reduce other liability accounts. So in accounting terms, it’s a liability.

More intuitively, cash is to the Fed what writing an IOU is to me. If I write an IOU and give it to you, it’s a liability. The IOU isn’t enforceable, though. (Well, unless you’re my brother and I’m 12 years old, in which case, yeah, it is.) So it’s a liability I don’t have to pay off unless I choose to. And if I do, say, sell an asset of mine to somebody in return for that IOU, I just throw the IOU in trash. A IOU to someone that I wrote isn’t an asset to me; what, I owe resources to myself?

So let’s start with the Fed’s balance sheet from September 30, 2021:

STEP ZERO:

ASSETS		LIABILITIES
U.S. Treasury securities	5,431,056	2,197,401	Currency in circulation
Federal agency debt securities	2,347	1,702,347	Repo agreements
Mortgage-backed securities	2,494,684	4,524,350	Deposits from banks
Mark-to-market adjustment	338,797	27,447	Treasury accounts
Loans	105,509	45,866	Other liabilities and capital
Foreign exchange	26,421
Other assets	35,704
Gold	11,041
Coins and treasury currency	50,853
TOTAL	8,496,412	8,496,412

On the liability side, we have the federal government’s deposit account. The federal government basically uses the Fed as its bank. (It would be so damn much easier to teach this to undergraduates if the United States would just call its central bank “The Central Bank of the United States” instead of the “Federal Reserve.”) Look at the two bold-faced categories. The Fed’s biggest asset is debt issued by the federal government: $5.4 trillion worth. It also holds reserves of coins and what is called “treasury currency”: i.e., old-fashioned dollar bills issued by the U.S. Treasury instead of the  Federal Reserve. The Fed is legally obligated to accept these when the U.S. government deposits them in its accounts at the Fed.

In other words, if the Treasury minted up a trillion-dollar coin, it could then go down to the Federal Reserve and deposit said coin into it’s deposit account. The balance sheet of the Federal Reserve would then look like this:

STEP ONE: Deposit the trillion-dollar coin

ASSETS		LIABILITIES
U.S. Treasury securities	5,431,056	2,197,401	Currency in circulation
Federal agency debt securities	2,347	1,702,347	Repo agreements
Mortgage-backed securities	2,494,684	4,524,350	Deposits from banks
Mark-to-market adjustment	338,797	1,027,447	Treasury accounts
Loans	105,509	45,864	Other liabilities and capital
Foreign exchange	26,421
Other assets	35,704
Gold	11,041
Coins and treasury currency	1,050,853
TOTAL	9,496,412	9,496,410

STEP TWO: Spend the money in the Treasury’s account

The federal government now has a trillion dollars deposited at the Fed, and the Fed has a trillion-dollar coin sitting in a vault somewhere. The federal government, of course, now wants to spend the money sitting in its deposit account. So it will! Presumably its spending will wind up in the checking accounts of recipients (although some will likely end up as cash in circulation) so for simplicity’s sake I’ve moved the liabilities from the Treasury’s account at the Fed to the deposit accounts that banks keep at the Federal Reserve.

ASSETS		LIABILITIES
U.S. Treasury securities	5,431,056	2,197,401	Currency in circulation
Federal agency debt securities	2,347	1,702,347	Repo agreements
Mortgage-backed securities	2,494,684	5,524,350	Deposits from banks
Mark-to-market adjustment	338,797	27,447	Treasury accounts
Loans	105,509	45,864	Other liabilities and capital
Foreign exchange	26,421
Other assets	35,704
Gold	11,041
Coins and treasury currency	1,050,853
TOTAL	9,496,412	9,496,410

Isn’t that inflationary?

Well, by itself, no. And not just because (as we’ve discovered over the past 13 years) printing money isn’t always inflationary.

STEP THREE: Fed open-market operations counteract increases in the monetary base

The move will not be inflationary because the Federal Reserve can simply sell its holdings of Treasury securities. People will buy those holdings for cash. I’ve assumed here that they will buy those holdings using deposit accounts at various banks, which will ultimately lead those banks to hold fewer deposits at the Fed, but it could show up as a reduction in any of the Fed’s liabilities.

And voila! We are back more-or-less where we started. 

ASSETS		LIABILITIES
U.S. Treasury securities	4,431,056	2,197,401	Currency in circulation
Federal agency debt securities	2,347	1,702,347	Repo agreements
Mortgage-backed securities	2,494,684	4,524,350	Deposits from banks
Mark-to-market adjustment	338,797	27,447	Treasury accounts
Loans	105,509	45,864	Other liabilities and capital
Foreign exchange	26,421
Other Federal Reserve assets	35,704
Gold	11,041
Coins and treasury currency	1,050,853
TOTAL	8,496,412	8,496,410

But now all the Argentines reading this are screaming. We’ve discovered is a way to subvert the independence of the Federal Reserve and force it to finance federal spending by printing money! Isn’t that a problem?

STEP FOUR: Replace the coin with new debt

Well, I can understand that we might not want to set a precedent here. Congress can get it’s act together after-the-fact, abolish the debt ceiling, ban the minting of new trillion-dollar coins, and issue one trillion in federal debt to make up for the coin-based spending. It can then order the Treasury to hand over the newly issued trillion-dollars in debt to the Fed in return for the coin, which can then be melted down (or, preferably, demonetized and put in the American History Museum at the Smithsonian).

ASSETS		LIABILITIES
U.S. Treasury securities	5,431,056	2,197,401	Currency in circulation
Federal agency debt securities	2,347	1,702,347	Repo agreements
Mortgage-backed securities	2,494,684	4,524,350	Deposits from banks
Mark-to-market adjustment	338,797	27,447	Treasury accounts
Loans	105,509	45,864	Other liabilities and capital
Foreign exchange	26,421
Other Federal Reserve assets	35,704
Gold	11,041
Coins and treasury currency	50,853
TOTAL	8,496,412	8,496,410

There is an alternate path that solves the inflation worries, although it sets an even spookier precedent. If the Federal Reserve agrees, we could just jump straight to Step 3, except instead of selling Treasury securities on the open market the Fed sells $1,000,000,000,000 worth of federal debt back to the U.S. government in exchange for the trillion-dollar coin. Poof, $1 trillion in debt is wiped out and the U.S. government finds itself back below the debt limit, with no worries about money creation.

What are the counterarguments? Well, it would set a lousy precedent, but as we explained above, Congress can easily close the loophole if it wanted to.

Minting a trillion-dollar coin does represent yet another transfer of authority from the legislature to the executive, but the United States has had a dysfunctional legislature (at least on some things) for quite a long time—and playing chicken with the debt ceiling represents a particularly dangerous kind of legislative dysfunction. 

(Senatus delenda est. Senatus delendus est.)

The real worry is that Congress won’t do anything and we will wind up paying off more and more of the federal debt with trillion-dollar coins. That seems unlikely to me, but I think everything about the present-day U.S. Congress — particularly the Senate’s advanced state of decay — would have seemed unlikely to me back in 1990.

I suspect that it won’t come to this. I fear, however, that it will come to what I consider a more dangerous route: the Biden administration simply declares that the debt ceiling violates the sentence in the 14th Amendment that reads, “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”

The legal argument is that Congress authorized the issuance of debt when it passed the budget, so the debt ceiling therefore questions the validity of the debt. I am not a lawyer, but I don’t find that convincing. The last thing the country needs is more executive aggrandizement.

Unless the alternative is chaos.

Dammit.

Observatorio argentino 50: Déjense de jod ...

Watching the Argentine mess is fun! These posters have recently gone up all over the capital city:

It shows Perón himself saying, “Stop fucking around. First the country, then the movement, and only then individuals.”

Right now, the issue seems to be that CFK seems willing to blow up the entire Peronist movement in order to control it. My analysis wasn’t quite right. It isn’t that she thinks she is Plutarco Calles. It’s that she thinks this is her opportunity to become Plutarco Calles. She is mounting what the British might call a parliamentary coup.

Here is what to watch for. President Fernández already seems to have agreed to let Santiago Cafiero go as chief of staff. Cafiero is the President’s right-hand-man, so that is no small olive branch to CFK. But there is also talk of letting go of some of CFK’s people, like Eduardo “Wado” de Pedro, the interior minister and a CFK loyalist. 

Watch to see what happens to Sergio Massa, the speaker of the lower house. If moves into the cabinet, then CFK has won. 

And that matters, even if the Frente loses Congress in November, simply because the Argentine president is just so damned powerful. 

Observatorio argentino 49: Post-election roundup

The left-wing ruling party in Argentina appears to be in the middle of a complete collapse.

Background

The party, called the Frente de Todos (or “Everyone Front” or “Front for All” both of which sound as clunky in English as it does in Spanish so don’t ask me to explain the name choice) is a coalition of all the old Peronist parties. Peronism is a big tent without much coherence, but it would not be inaccurate to say it is currently divided between moderates and a more radical faction led by Vice-President Cristina Fernández de Kirchner, aka “CFK.”

CFK and her followers are genuinely radical — a long time ago I met the current Governor of Buenos Aires province, Axel Kicillof. He seemed to be the real deal and I have to admit that I have some respect for the way he dealt with the country’s foreign creditors.

But CFK herself is also spectacularly corrupt. She’s under a legal cloud, protected by her position as Vice-President.

The current president, Alberto Fernández (no relation) is a moderate. Rather than fight it out with him for the nomination in the 2019 primary — and thereby risk losing, and thereby risk jail time — she joined him on the ticket as Veep.

The Election

So, as you know, the Frente got hammered in Sunday’s primary elections. The opposition held some actual primaries; the Frente for the most part did not. What the election was for the Frente was a preview of what the real election in November will look like, and it was bad.

For a good overview of the election (well, besides mine, ahem) see Maia here. I like her take on Javier Milei, a seriously batshit insane libertarian candidate for Congress. Seriously, watching the stunned look on an Argentine reporter’s face as he discovers that a woman in one of the capital’s poorest neighborhoods voted for Milei is priceless.

Votante de Javier Milei en la Villa 31 pide que se terminen los planes sociales, "le sacan al que está en blanco para darle a gente que no quiere laburar". Estamos frente a un evento histórico.pic.twitter.com/33OxJIqbth

— Pregonero 🗽 (@PregoneroL) September 15, 2021

But Milei is an aside, at least for now. The key question here is why the Frente did so badly.

For the answer to that question, you can really begin and end with Covid. Massive lockdowns failed to prevent its spread — Argentina did not become Australia. The economy failed. Then the government botched the vaccination rollout, getting into a food fight with Pfizer over legal immunity. Finally, President Fernández got into some Gavin-Newsom-level bad optics for flouting his own rules. Leticia Abad and I are going to try to write a more rigorous paper about the election, but Maia has a great overview.

The Normal Reaction

As I expected, the Frente immediately rolled out a slew of populist economic policies intended to provoke an electoral recovery by November. Minimum wage up 10%. Zero-percent government loans to wage laborers. A US$32 bonus to senior citizens. One that really annoys me: natural gas subsidies between 30% and 50%. One that doesn’t: lots of construction. (See right for a picture of a commuter rail line they rolled out in 2019 at a speed that would impress China and makes the U.S. look very very sad.)

Argentina also has a small universal basic income (IFE) put in place during the Covid recession. The government will now means-test it but also make it bigger for poor families.

And from where will come the cash? First, they intend to go tell the IMF to screw off and forget about getting principal payments for a while. (Interest will be paid, so no default, and honestly the IMF has rolled over for greater demands in the past.) Second, they’ll keep on printing more money and transferring it to the Treasury:

Hey, it could staunch the bleeding by November, and to be honest the economic cost probably won’t be that high.

The Crazy Reaction

Only, well.

CFK seems to think she’s actually running the administration from behind the scenes. She demanded that the actual President fire a whole bunch of his cabinet and put a bunch of her people in place.

And then CFK’s achichincles started yelling that the President is actually a “squatter” in the Casa Rosada. One congresswomen put it this way. “He’s renting the office, he doesn’t understand that he’s renting. The owner of the votes, the legitimate owner, the owner of popular support, the owner of the base that sustains this government and one that put him there is Cristina! Alberto Fernández couldn’t dream of even being an alderman.”

You’re not supposed to make the subtext into text when you’re trying to run things from behind the scenes!

If CFK was really pulling strings the way that, say, Plutarco Calles did back in the day in Mexico, well, then she wouldn’t need to send messages telling the nominal President to fire people. She would just wave a finger somehow and the people would get fired.

But although she is many things but she is not a Plutarco Calles. President Fernández isn’t going to quietly back down, because CFK isn’t really in control and she has given him no graceful way to give her what she wants. All she is managing to do is make the Peronists look really really bad to swing voters.

It is possible seeing try to CFK bludgeon her way back into the driver’s seat will inspire Peronists who stayed home this Sunday to make their way to polls to support the Frente in November.

But how likely is that? First, as I mentioned, you can’t replace candidates now: unless enough the Frente candidates on enough slates proclaim their loyalty to Cristina, any votes for the Frente will be votes for Alberto’s people. “Vote for Alberto’s useless incompetents because you need to do that in order to vote for Cristina” is not an inspiring message.

And are there really all these uninspired Peronists sitting out there? It is true that turnout collapsed during the primary. But … Covid, maybe? And maybe people are realizing that PASO isn’t a real election?

In short, I’m not seeing much here that makes it look like November will be any better for the Frente and I am seeing a lot of things that could make it look much much worse for them. Shiny new infrastructure notwithstanding.

Observatorio argentino 48: the circular firing squad forms up!

This post was going to be about all the populist measures the Fernández administration has rolled out in the last few days, but instead it’s going to be about the circular firing squads forming up in the cabinet.

Short version: The Argentine administration is divided between moderate supporters of the President and more radical (and sometimes more corrupt) supporters of the Vice-President, Cristina Fernández de Kirchner (CFK), who also happens to be a former President.

After the election, CFK demanded that President Fernández (no relation) fire his moderate cabinet ministers — including the Economy Minister. And since everything in Argentine politics ultimately revolves around the economy, that would be a BFD.

The thinking is that the government needs to go more radical to win in November. The President said no. So CFK got her ministers to offer their resignations to the President. We’ll see if he accepts them ... but rumors are floating that the Speaker of the House, Sergio Massa, will resign if the President refuses.

The Frente can’t win without CFK’s support. But if he gives in then he will be seen as a puppet. Only if she goes to the mattresses then he loses an election … but she risks going to jail.

It’s a game of chicken.

And there’s an international component.  

The new regional manager of the IMF is very orthodox. Ilan Goldfajn was the former boss of the Banco de Brasil when Brazilian inflation was running well below target. He is not going to be an easy man for a heterodox Argentine government to talk to. So even if CFK wins, the administration could be dashed on the rocks of the people at 700 Nineteenth Street Northwest.

Anyway, this ongoing. Go find your favorite source of Argentine news and follow it. I recommend here. CFK supporters are heading into the Casa Rosada right now. Watch Moyano, the union leader, says Leticia Arroyo Abad. 

Observatorio argentino 46: All this will PASO

Argentina has a weird two-stage electoral system. The first stage is called the PASO, for Primaria Abierta Simultánea y Obligatoria. Everyone has to vote in the primary, therefore “Obligatoria.” (Although the fine is currently running only around 50¢, U.S.) All parties are on the ballot, thus “Simultánea.” Any voter can vote for any party, thus “Abierta.”

Yesterday was the PASO! All votes have been hand-counted and the results are in, which should make all Americans slightly ashamed. 

In the senatorial PASO, each party puts up two candidates in each province. If a party has internal competition, then it puts up more than one slate. (Most parties put up only one slate.) If you get more than 1.5% of the vote in the PASO and beat the competing slates within your party (if any), then your slate gets on the ballot for the general election. When the general election comes along, the party with a plurality of votes will win two Senate seats for the province and the runner-up will get one. If that seems like a stupid system to you, that is because it is, although stupidity is a general characteristic of most senates around the world.

The PASO for the lower house runs similarly. Each party puts up a list of candidates, ranked in order. The lower house of Congress is based on proportional representation, so if a province has (say) 35 seats, then the party needs to put up a list of 35 candidates in the order in which they will take their seats. In the PASO, a slate has to clear 1.5% of the vote and beat any competing slates in order to get on the general election ballot. When the general election rolls around, seats will then be distributed to the winning party based on their vote share. So if you win, for example, 15% of the vote share in Buenos Aires in the general election, then the first 5 names on your party list get to go to Congress.

What is voting like? Well. You go into a polling station. There you wait in line, match your name to a voter registration list, and get a ballot. Which looks like this for the lower house in Buenos Aires province:

I told you that there were a lot of parties here. The photo (if there is one) is of the headliner(s): that is, the first person on each party list. You can see that Juntos por el Cambio (Together for Change) and the Frente Unión por el Futuro (United Future Front) conducted a genuine primary. For the former, you had to pick between the slate led by Diego Santilli and the slate led by Facundo Manes. 

The rest of the parties fielded only one slate, so the only thing that they had to do was clear 1.5%. 

You might ask upon seeing this ballot, “WTF?” I certainly did back in 2019, when I visited a polling place in San Isidro, B.A. Well, here is the F. Polling officials give you a pair of scissors. You go into a little private booth. You then cut out your preferred party list, stuff into an envelope, properly seal the envelope, and then put the envelope into the ballot box. 

In general, the PASO is nothing more than a government-sanctioned obligatory poll. The parties do not have to allow for competing slates if they do not want to. Juntos wound up fielding two slates because it is not really a party. Rather, it is a coalition between two parties who usually hate each other: the Radical Civic Union (UCR), which has long historic roots, and the Republican Proposal, which dates back only to 2010 and started as a personal vehicle for Mauricio Macri.

(As for the Frente Unión por el Futuro, well, I have no idea why they fielded two slates. Neither one cleared 1.5%.)

Anyway, as a government-sanctioned obligatory poll, which is highly correlated with the general election results, the PASO has the ability to move markets and break careers. So what happened yesterday? Well, you will have to either go to any other news source of the hundreds available to you ... or wait until tomorrow. 

Observatorio argentino 47: Esto PASO de castaño oscuro

And the results are in! Or were in, since the voting took place on Sunday.

On one hand, the result is a massacre for the government. Juntos won 42% of the votes for the lower house, against 32% for the government. Considering as Frente took 45% of the congressional vote in 2019, this is pretty bad. Frente lost badly in Buenos Aires province, its stronghold. It also got slammed in Cristina’s home province of Santa Cruz, along with Chaco, La Pampa, and Chubut. This was not expected either.

Markets were happy … ish. The blue market rate for the dollar dropped a bit right before the election, because reasons, but recovered once the results came in.

The stock market jumped 17% the day after the PASO, but that also doesn’t look so great in context. If you look at the Merval index in dollars, you get a little bump coming at the end of a months-long rally.

If the Frente de Todos is so bad, why were the markets so meh? Well, one possibility is that Frente de Todos isn’t really that bad for the economy. Which is not to say that Covid hasn’t hammered the Argentine economy. President Fernández managed to get into the worst of all possible worlds: an economy wrecked by lockdowns and a virus running unchecked. It is to say that maybe the markets don’t think giving the keys to the conservatives will make all that much difference.

A better possibility is that the markets realize that the voters haven’t really handed over the keys! First, this was just a dry run for the real election, unless you’re particularly vested in the Santilli-Manes pissing contest in B.A. You think the Frente isn’t going to respond by going all out to win votes? They’re first reaction was to roll out massive street paving programs with crazy speed. Watch this space for what is going to follow.

Second, even if these results hold in November, the change will be muted. Argentine elections are staggered, so only half of the lower house and a third of the Senate was up for grabs. In addition, while the lower house is elected by proportional representation, each province is a district, which in practice further mutes national vote swings.

If the PASO results hold in November, a big if, Frente de Todos will lose its Senate majority, going from 41-29 (out of 72 seats) to 35-34, with smaller parties holding the balance. In the Chamber, the Frente de Todos will go from 120 seats (out of 257) to 111. Its allies, with 8 seats, will be unchanged, more or less. Juntos and allies will go from 115 to 120. Basically, it will go from no governing majority (but tilting towards the Frente) to no governing majority (but tilting towards Juntos).

Since smaller parties can be bought, the Frente could cobble together a governing majority. In addition, the Argentine president is incredibly powerful.

Plus, well, the Frente can do a lot in the next few months. Watch this space.