Bill Mitchell vs. Tim Duy on Necessary Fiscal Illusions

     Bill Mitchell here with the MMT view on fiscal matters regarding the Treasury and public debt. Here he speaks of the platinum coin:

     "I won’t mention the Trillion Dollar coin option, which was introduced by those sympathetic to Modern Monetary Theory (MMT) – follow the trail from HERE. This option seems to have been kidnapped by others who are seeking to claim glory for the idea as well as others who are apoplectic about the idea (Austrian schoolers, New Monetarists, etc)."

     "But that obvious option aside, the students would have been better introduced to the intrinsic nature of the fiat monetary system that operates in the US and then the institutional overlays that have been put over the basic monetary system."

     "An understanding of the former (without the institutional constraints) leads to the conclusion that the US government is never revenue constrained because it is the monopoly issuer of the currency.
For many reasons, none of which have any solid rationale in terms of contributing to the effectiveness of the government mission in advancing public purpose, the US legislators have chosen to place a series of voluntary constraints on their governments. The constraints create labyrinthine accounting structures which force the sovereign government to issue bits of paper (treasury bonds) to the private sector, which then lead to bank entries, that are subsequently reversed when the government spends.
The fact that the funds to purchase the bonds came from the government anyway via past deficits – meaning that the government is just borrowing back a portion of its own spending and then spending it again – seems to escape most commentators."

      "Further, in the recent period, the US federal reserve has been buying those bonds in huge quantities anyway (quantitative easing), which just goes to show how ridiculous the elaborate institutional machinery is."

     "A decomposition of the federal budget in those terms would have served to demystify the appearance of financial constraints and to reveal that they are voluntary in nature and mostly irrelevant hang-overs from when the US participated in the Bretton Woods system of fixed exchange rates (the so-called “gold standard”). That monetary system was abandoned in August 1971, when the US suspended gold convertibility (with the US dollar)."

     "The reason that these meaningless constraints – from a financial perspective – have remained is because they serve the ideological agenda of those who have been able to influence the design of public policy and administrative practice since then. If you go back through the documentation in various nations you will find references to “the need to impose fiscal discipline” etc"

   The conservatives knew that by forcing these unnecessary constraints – in particular, by forcing governments to match their net spending positions (deficits) with bond-issuance ($-for-$) to the private sector, they would then be able to construct the fiscal position in terms of debt. The next devious step is to conflate public debt with private debt, and the household budget with the government budget.

     http://bilbo.economicoutlook.net/blog/?p=6891

     This all sounds very similar to something Tim Duy wrote during the platinum debates. Here we put to one side that politically speaking Obama was right to dismiss it.

     "This realization hit me this morning, working on my last piece. Begin with the effectiveness of monetary policy at the zero bound. Or, more accurately, the lack of effectiveness as the Federal Reserve is swapping one zero-interest asset for another. Rarely do we take this to its logical conclusion for fiscal policy: If there is no difference between cash and Treasury bonds, why should we issue bonds at all? Why not simply issue cash? In other words, at the zero bound, what is the argument against monetizing deficit spending?"

     "And then we come to the platinum coin, which threatened to expose the illusion that cash and debt are different at the zero bound. By extension, the platinum coin threatened to expose as folly any near-term deficit reduction plan. If you could issue a coin to support near term spending without inflationary consequences, what exactly is the rational for tighter policy now? There is none - but that would run directly contrary to the conventional wisdom among Very Serious People on both sides of the aisle that the debt needs to be addressed right now."

    "And just think about what it would mean for the Fed if it became evident that, even if only temporarily at the zero bound, deficit spending could be monetized with no impact on inflation. The lines between monetary and fiscal policy would blur further, threatening the existing state of affairs in Washington. Monetary policymakers would face an increasingly hard time defending their need for independence as akin to an Eleventh Commandment."

     http://diaryofarepublicanhater.blogspot.com/2013/01/the-platinum-coin-debates.html
     Here he sounds just as skeptical about the supposed problematic nature of the coin. Yet he concludes that we must maintain it as a necessary fiction:

        "Ultimately, I don't believe deficit spending should be directly monetized as I believe that Paul Krugman is correct - at some point in the future, the US economy will hopefully exit the zero bound, and at that point cash and government debt will not longer be perfect substitutes. Note that Greg Ip disagreed with this point:

I disagree. The Fed does not have to sell its bonds, or the $1 trillion coin, to control inflation (though it may do so anyway). It only needs to retain control of interest rates, and that does not depend on the size of its balance sheet
 

      The difference is that Duy seems to think that there is a benefit in continuing to act as if this fiscal restraint exists.