Forcing Democratic Spending Cuts

The resolution of the fiscal cliff did little to address the primary issue of governmental spending and increasing shortcomings. The end result was an easy sound bite for the President, "I promised not to raise taxes on working Americans, continued the extended unemployment program and forced the wealthy to pay their fair share." I was surprised the republicans gave in so easily as I read the details of the resolution, primarily because the sequester and debt ceiling issues were completely sidestepped in the negotiations. I just assumed it was politics as usual and that means kicking the can down the road as long as possible.

Current estimates are that we'll hit the debt ceiling around March 1st, give or take two weeks. Congress' inability to hash out an agreement on the last debt ceiling increase was a primary cause for the first credit downgrade in US history by ratings agency Standard & Poors. It now appears that the Republican Party committed the fiscal cliff battle in an attempt to win the debt ceiling war. The Republican mantra through the fiscal cliff discussions focused on a Dollar for Dollar balance of spending cuts vs. Tax hikes. Their concession to the final deal kept them from becoming the scapegoat in a game of political brinksmanship.

This round of debt ceiling talks promises to be all out war between the President and the Republican Party. The sequester will automatically kick in if the debt ceiling is not raised and this appears to be the Republican strategy for getting the spending cuts that they wanted in the fiscal cliff negotiations. It's important to remember that President Obama signed the sequester bill into law as part of the 2011 Budget Control Act. At some point, the Democratic Party must realize that it can not continue to buy votes through endless entitlements. The Republican Party appears to have already come to grips with this, as sequestration would immediately trim more than $ 54 billion dollars in defense spending for 2013.

The political gamesmanship taking place appears to have now put the pressure back on the Democrats. Odds are, the President assumed that the Republican Party would call for a replacement of the sequester to avoid the defense spending cuts associated with its implementation. The President would then use this to leverage his domestic spending desires. However, Republican silence on replacing the sequester shows that the Republican Party may have more support from its constituents than initially assumed. House Speaker, John Boehner has indicated that he has significant support, going so far as to say, "I got that in my back pocket," referring to the support of Republican defense hawks.

The Republican Party's ability to finally form a consensus now forces the Democrats to come to the table with their own domestic spending cuts. The reasoning is that the Democrats would rather pick and choose which programs get cut and by how much as opposed to the blank cuts imposed by sequestration. Meanwhile, the Republicans appear to have accepted that the sequester may be the only way to cut spending. This implies that they'll be less likely to concede the debt ceiling negotiations as easily as they did the fiscal cliff.

This brings us to Democratic wiggle room and the technical loophole of, "seigniorage." Seigniorage is the difference between the physical cost of producing currency and the face value of the currency itself. Therefore, if it costs the government $ .02 to produce a nickel, a $ .03 profit is made by the Treasury through seigniorage. The President can use this to avoid the debt ceiling discussions while while the Federal Reserve and the Treasury Department quietly work behind the scenes in an attempt to keep our country afloat.

This started out simply enough in the 1997 legislation that authorized the production of the 50 state quarters. According to Public Law 104-208, "The Secretary may mint and issue bullion and proof platinum coins in accordance with such specifications, designs, varieties, amounts, denominations, and inscriptions as the Secretary, in the Secretary's discretion, may prescribe from time to Time. " The unintended consequence is that it technically provides the Secretary of the Treasury, Timothy Geithner with the ability to produce a platinum coin and assign it any face value he chooses.

We'll wrap this up with this dramatic scenario. Tim Geithner has owed to do everything within his power to ensure the US economy continues operate as the most liquid and transparent depository in the world. The speculation is that he could mint a $ 1 trillion dollar platinum coin and deposit it with the Federal Reserve so that the Treasury could continue to make the payments it's already owed to. These would include Social Security, Medicare, Medicaid, education, air traffic controllers, national parks, food stamps, etc. These payments are already present in the government computers and systems to go out as usual. A failure to reach a decision on the debt ceiling would force every one of these protocols to be re-written and choices to be made regarding who gets paid and who does not. Those seeking to collect would also include foreign holders of our Treasuries. Can you imagine the public outrage if the government chose to repay Chinese debts over Social Security funding? Can you imagine the global economic crisis that would ensue if we chose to fund Social Security over Chinese debt?

Finally, the argument that this would be hyper inflationary is simply ignorant. The coin would be deposited at the Federal Reserve. The Fed would instantly use it to buy US Treasuries thus, sterilizing the $ 1 trillion Dollar coin economically. The primary point is that we are straddling the political and economic fence between hapless and malevolent. Hopefully, the fence pikes will be uncomfortably enough to force a resolution.