Just Another Domino (image: DonkeyHotey)

The President of the United States threatened Social Security beneficiaries, the old, the weak and the disabled, saying that if Congress can’t manage to fix the debt ceiling, he won’t promise to pay them, and veterans, among others. We know he doesn’t see the difference between the government of a Sovereign Nation in control of its own currency, and a family living on $40,000 in a rented apartment, worrying about bills. That ignorant Republican talking point is now being wielded as a threat to the old and the disabled, and to veterans, among others.

There is an obvious solution to this part of the puzzle. The Social Security Trust Fund holds trillions in debt securities, subject to the debt ceiling. The Treasury can issue checks to Social Security beneficiaries (actually, this is mostly done by transfer directly to bank accounts of beneficiaries). The Fed will honor the payments. The Treasury can balance its accounts by issuing some new Treasury bonds to the Fed, and cancelling an equal amount of securities in the Trust Fund. The parties could contract to do this, if that matters, which it doesn’t. Or, the Treasury could simply do nothing. The money will still be in the bank accounts of the beneficiaries.

We know that in the US, we don’t rely on Treasury to create money. That is left to the banking system, through a process called fractional-reserve banking. Briefly, when a bank makes a loan, it simply creates an account for a borrower that has money in it. The bank is required to set aside as reserves a percentage, currently 10%, of the loan. The other 90% is new money that wasn’t there before. The bank can lend that out, and create some more money. That is where almost all of the money in the economy comes from. It is not printed, in fact, most of the money moving in the economy is just electronic notations to the books of the parties.

The lesson becomes really clear if the Treasury mints a new coin, say, a trillion dollar coin. Scott Fullwiler gives a detailed and clear explanation at New Economic Perspectives, cross-posted at Naked Capitalism. Amazingly enough, Zeke Miller at the Business Insider agrees that this kind of thingisn’t a problem. I love the headline: BUSTED: Obama Full Of Crap About How Social Security Payments Will Be Delayed If Debt-Deadline Missed. Of course, we don’t talk like that at the Lake.

It’s true that in some circumstances creating money leads to inflation. That won’t be a problem now, because bank lending is down, and there isn’t as much money in the economy as there would be if banks were creating money. In fact, most of us could use some more money.

If the Treasury takes this simple step, it can pay Social Security indefinitely. Congress can’t complain. It has already authorized payments. Generally, the President is free to make decisions about how to carry out the intent of Congress, unless Congress has placed limits on means and methods. That hasn’t happened, and the President is free to act as he must to comply with the statutory law.

Even better, it will be a learning moment for those people who can’t understand that Sovereign Nations are not the same as households. No household is sitting on $2.65 trillion of assets that it can’t use for its intended purpose of paying bills. No household can just write checks that will be honored regardless of the amount on deposit. And no household can issue debt as it sees fit. When the world doesn’t end, maybe they will take notice of economic reality.

The best lesson would be learned if the Treasury treated all of its obligations like this. The Fed would honor the checks, and the money would go into the economy. The Treasury wouldn’t issue more debt. Congress could suck eggs. It would be a winner for Democrats. All it takes is a President who is willing to act on the fact that the Republicans have irretrievably broken the old political system. It takes a President ready to act in the new world the crazy party has created, instead of clinging to a dead past.