Monday, January 14, 2013

Why the Whitehouse was right to reject the platinum coin

Mosler is concerned that the White House rejecting the platinum coin idea will hurt the economy, because it makes it more likely that the debt ceiling will remain in place, and therefore the non-US Govt sector will not be able to accumulate the additional savings it desires.
The economy hitting the debt ceiling and going cold turkey to a balanced budget is a far more catastrophic event than even going over the full cliff would have been, as it disables the ‘automatic fiscal stabilizers’ and instead triggers a pro cyclical downward spiral in output and employment. That is, when the $25 billion/week spending cuts kick in and the economy slows, the falling tax revenues mean spending has to be cut more, nor can total spending on unemployment ‘automatically’ go up, etc. 
Nevertheless, the White House rejected the idea because 1) fundamentally, the world continues to be out-of-paradigm and the Fed, Treasury, Harvard, and Princeton economics departments believe that the Govt needs to be able to tax or borrow in order to spend, and does not understand that spending is what creates the net financial assets which can then be taxed back or spent on bonds in the first place, and 2) the Treasury and Fed are responsible, stable Government entities with well established working relationships and procedures with each other, and will fundamentally not risk this to appease some transient executive. And the executive branch is always very transient (see the Crossman Diaries).

Update: Megan's surprised that it was the agencies which put their foot down on this. I am not.

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