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January 6, 2012

The American Crisis: To Free a Lender-Owned Nation (Part IV)

By Clifford Johnson

Part IV of IV. Increasingly absurd and brazen tricks miss the point that concealed tax relief does not come not from the Fed.

::::::::

To Free A Lender-Owned Nation

The rich ruleth over the poor, and the borrower is servant to the lender.

Proverbs, 22:7

IV.    Increasingly Absurd Tricks Miss The Point

This is the last of four articles writing up a litigation I filed in federal court in San Francisco on December 28, 2011, against the U.S. Treasury.   Johnson v. Department of the Treasury of the United States, et al., case No. CV11 6684   (NJV).   The suit alleges suppression of the great benefits that would accrue to the government, if United States notes were to replace Federal Reserve notes.

Part I introduces the issues.

Part II explains the scaffolding of facts and law that raises the issues.

Part III summarizes the "Treasury-Fed Coin-Swap Cover-Up," and uncovers the face-value fiat money tax.

Part IV uncovers the full interest relief.

1.   The Suppression Of Interest Relief Per Coin-Swap

Though this be madness, yet there is method in't.

[Shakespeare, Hamlet, Act 2, Scene 2]

Here is how the 1990 report explains its rule that, when a $1 coin is put into circulation and a $1 note is withdrawn from circulation, there is no net gain of interest relief to the taxpayer (page 42):

"Currently, the Treasury receives the Federal Reserve's earnings on assets associated with the outstanding 1-dollar Federal Reserve notes. Generally, the difference between the face value of the notes and the cost of printing and an allocation of Federal Reserve operating costs is used by the Federal Reserve to purchase Treasury securities, which make up the Federal Reserve's portfolio. The Federal Reserve credits Treasury with the earnings received from those investments. If notes are withdrawn from circulation, the portfolio and its earnings are reduced accordingly.   We estimated the average Federal Reserve portfolio earning rate to be 4.61 percent, the same rate we used for the model's discount rate.   We multiplied this rate by the decreased value of l-dollar notes in circulation to calculate the loss in portfolio earnings."

In other words, as later GAO reports more simply put it, for coins that replace a note, there is no net interest relief gain, because the interest relief on a dollar's debt reduction is cancelled by the loss of interest returned by the Fed, from holding a dollar less in government debt.   Thus, the later reports more simply calculate the interest relief using only the count of coins added to the currency.   If the replacement ratio is 1.5, then the interest relief accrues from only the added 50% of circulating dollars.

Once again, the model impertinently presumes government debt.   Government freedom from debt would void the proposition that, when a coin replaces a note, the government must lose the interest returned in Fed profits, on a dollar's worth of government bonds.   There would be no government bonds.   See Part III, footnote 5.   But the rationale is more messed up than that.   It is missing essential details.  

Let's break down the process into simple transactions, for a 1,000 batch of dollar coins.   First from the Treasury's perspective, then from the Fed's.    Only the face-value tax and interest on it are of concern, the production and processing costs being undisputed.   Also, we need to know what fraction of the debt held by the public is held by the Fed. As of November 2011, this fraction was 1,880,000/10,127,031=18.5%. [1]

From the Treasury's perspective:

(i)                    The Treasury delivers 1,000 $1 coins to the Fed, at which time the Fed credits the Treasury's checking account at the Fed with $1,000.  

(ii)                  As soon as convenient, let's say promptly, the Treasury calls off a $1,000 bond sale. The called off sale could not have been directly to the Fed by law, [2] so there's no loss of interest returned, not at once.  

(iii)                 However, the Treasury has unbalanced the money supply by avoiding that sale, to the tune of $1,000, triggering a Fed bond sale.   We'll leave that balancing purchase up to the Fed.

From the Fed's perspective:

(i)                    The Fed retains the 1,000 $1 coins as non-interest bearing assets, until it can put them into circulation in exchange for the 1,000 $1 paper notes that are swapped out. [3]    In the report context, 500 coins are added to the currency at the same time, so that there is no effect on the demand for currency, from this transaction.

(ii)                  But circulation has been increased by $1,000, as above. To maintain the quantitative status quo, [4] the Fed must sell bonds to withdraw money.   The Treasury dollars were checking account money, spent to finance the government. [5]   To maintain the status quo in this case translates into preserving the Fed's share of the debt held by the public. [6]   To do this, per dollar, the Fed can sell no more of that debt than the fraction of $1,000 that is its proportionate share.   This fraction is 1,880,000 / 10,127,031 = 18.5%. [7]

Accordingly, the loss from returned Fed profits is only 18.5% of the loss from a $1,000 bond sale, so that, per coin-swap, 81.5% of the interest relief from the coin payment is retained.

Using figures from page 3 of the 1990 report, the full interest relief of $461 million per year after deducting 6% costs, derived from a 2-1 substitution, half of which was ultimately discounted, but 81.5% of which should have been retained, yields an omitted amount, in millions of dollars per year, of:

{ [ 461 / 94% ] / 2 } * 81.5%    =    $176.5 million dollars per year

The margins of error would not meaningfully affect the order-of-magnitude conclusion.

Applied to the 2011 report, the 81.5% omitted interest relief per coin-swap uses the figures on page 32.   The 1.5 ratio replacement generated $(19.7-10.8) = $8.9 billion extra interest relief, from the 50% added coins.   Thus, from the 100% replaced coins, the amount omitted 2*8.9*81.5% = $14.5 billion over the 30 years

2.    New Tricks To Discount And Delay Counting Tax Miss The Point That 81.5% Is Not From The Fed.

I'll have grounds more relative than this--the play's the thing wherein I'll catch the conscience of the King.

[Shakespeare, Hamlet, Act 2, Scene 2]

In Part III, we saw how the 2011 report updated its trick for not stating the accumulated tax revenue gain as a government benefit, from the guilty underlining of two words in 1990, to the brazen assertion that the Fed is part of the government.   Is the same degeneration evident in the trick for concealing interest relief benefits?   Yes indeed.

Here is how the 1990 report properly explained the moments of tax recognition and actual value (page 50):

"Although the Treasury recognizes seigniorage at the time coins are manufactured, it does not actually obtain value for newly manufactured coins until they are deposited with the Federal Reserve banks."

The accounting example given (quoted at the start of Part III, section 2) made it plain that the Treasury's account at the Fed is credited with $1 per coin, upon delivery to the Fed.  

Here is the equivalent excerpt from the 2011 report (page 27, emphasis added):

"Currently, about 1 billion of the approximately 4 billion $1 coins that the Mint has produced since it started minting the Susan B. Anthony $1 coin in 1979 are stored with the Federal Reserve. We do not count these coins as contributing toward the net benefit to the government because these coins are not being held by the public, and therefore, government wide, there has not been a financial gain. The Mint recognizes the seigniorage as soon as the coins are transferred to the Federal Reserve for initial distribution, even if the coins do not necessarily enter active circulation. However, because the Treasury will not have a reduced need to issue debt until coins are put into public circulation, we treat the actualization of seigniorage as occurring at that time.   It is only when debt issuance is reduced that the benefit of saved interest expense begins to accrue." [8]

This is new, for two reasons.   First, the moments of recognition and actual value are both put back a notch.   The Fed is so sick of looking after coins it can't push, that its model now says that the Treasury cannot cannot acknowledge any benefit until the Fed has purged itself of its non-interest bearing money.

Second, to accomplish this, the Fed is again deemed part of the government.   Until the Fed has got rid of its coins, the government can't possibly have benefited.  

If there were really such a hold on Treasury benefits, there would be no need for the "debt issuance" argument that sets another high watermark for la-la-land insults to public intelligence.   Debt issuance is reduced by $1 whenever the Treasury calls off a bond sale.   The Fed can do its 18.5% bond sale whenever it wants.   Both can happen in sync, before the coin is swapped for a note.

More importantly, except for the new rule that pretends there are no cash Treasury benefits while coins are being stored by the Fed, this trickery is beside the point.   Even assuming that the Treasury and Fed are as indistinguishably locked in governing together as the Fed is privately-owned, dividend-paying, and independent, the error remains.   The government as a whole recovers the omitted 81.5% of interest relief.   It does not come from the Fed.

Coinage is the Fed's Achilles' heel.

Stay tuned.

Occupy Wall Street.

These are the times.



[3] There are other ways to do the withdrawal, but if they lose more money then this way would therefore be better..

[4] Status quo is properly presumed in monetary proportions, et alia, both as the default assumption in economic analysis, and by virtue of the Fed's "stability" mandate.   (It can be overridden by temporary directional policies which average to a norm.)   Note also the Fed's status quo assumption, referenced in the last paragraphs of Part III.

[5] The money is routed through the Mint, which deducts its costs, to the Treasury's General Fund.   See How the Costs and Earnings Associated with Producing Coins and Currency Are Budgeted and Accounted For (April 2004, GAO-04-283 , page 11):

"The Fed pays Treasury the full face value of coins that it buys, and Treasury then allocates the payments to the Mint"All Mint revenues are deposited into its Public Enterprise Fund, including receipts from the Fed from the sale of circulating coins at face value, and all expenses for making coins are paid out of the Public Enterprise Fund...At least once a year, any amount that is determined by the Mint to be in excess of the amount required by the Public Enterprise Fund is to be transferred to Treasury's general fund."

Besides avoiding this, it is easy to see from the cover page why this highly relevant report was not even cited in the 2011 report:  

"However, the Mint is still not explicitly stating whether the retained amounts are in excess of the estimated operating costs for the following year and, if so, it is not explaining how the retained earnings will be used, as required by law."  

In an attached letter, the Treasury tortuously disputed the requirement to say how its excess funds were spent (page 38):

"[T]he GAO is recommending that the Mint provide information on the specific purposes for which retained amounts of earnings will be used. The PEF legislation requires reporting if earnings are retained that exceed the following year's estimated operating costs (i.e., "the amount on deposit in the PEF at the end of the period covered by the report exceeds the estimated operating costs of the PEF for the 1-year period beginning at the end of such period"). 31 U.S.C. - 5134( c)( 5)(B)(ii)."

[6] A less conservative approach (resulting in a slightly higher recovery of interest relief per coin-swap) would adopt the overall or target reserve ratio, instead of this fraction.   And this fraction itself could be better adjusted, e.g. 1990 data should be used.   Whatever adjustment is optimal, the difference would not meaningfully alter the order-of-magnitude conclusion drawn.

[8] Of course it was the 2011 report that first engaged me.   And this core paragraph is what I had to figure out.   I really didn't have a chance.   I had to go through the earlier reports.




Authors Website: commondada.com

Authors Bio:
Clifford Johnson is a semi-academic naturalized Brit. He first entered the U.S. as a rah-rah Harkness Fellow. For theater, language, and also as a questionable ex-Brit, Johnson adopts a Tom Paine II persona. His activist credentials comprise serial terminations of employment and pro se litigations raising public policy questions.

Johnson claims to be the only person who has sued the Comptroller of the Currency for a failure to regulate a national bank -- the Bank of America -- which he did in the early 1980s.

Johnson's 15-minutes of fame came in the mid-1980s. Then a manager of computing at Stanford University, he sued the Pentagon, challenging the constitutionality of its nuclear hair-trigger "launch on warning" posture, for riskily and unconstitutionally delegating the decision to initiate nuclear Armageddon to a 3-minute computer-governed military drill.

Johnson is currently challenging the Treasury and GAO in federal court, for misrepresentations as to Federal Reserve versus United States currency. The case raises novel issues of law re the government's right to lie.

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