Can someone explain the trillion dollar coin to me?

Factual Questions
1

I’ve read a number of articles dealing with it (this one is as good as any), and most say it is more or less a sleight of hand that allows the government to go on doing the same as it would anyway if the debt ceiling were raised. A few commenters insist it is like a “helicopter drop” that could cause hyperinflation, but they are roundly jeered as not understanding why it is so different.

I am not a conservative, not even close; but I confess to a similar lack of understanding. I understand the money is already appropriated, but how does it make no difference whether there are a trillion (or two trillion) worth of U.S. bonds out there accumulating interest, or there are just not because the tab is paid up through seignorage? Some bloggers are even saying it is a reasonable option to pay off the entire national debt this way, and then to just take on no new debt but rather to continually finance the deficit through these coins. Wha???

2

I think the notion is that we mint a few trillion dollar coins (not involving trillions of dollars of platinum, mind you, but with a fiat value of one trillion each), and put them in a safe at Ft. Knox or whatever so we can say the debt is reduced by that much. That allows us to continue to sell bonds to finance the debt.

It is just an end-run around the debt ceiling statute, nothing more and nothing less. In practice, it is no different from raising the debt limit by the amount of the coins. Unlike a helicopter drop, the currency never enters circulation.

The bonds still get issued, but that would be true under the platinum coin approach or the raise-the-ceiling approach. Whatever macroeconomic consequences it has would be identical.

3

I understand that the coins do not use a large amount of platinum.

But okay, we can “say” the debt is reduced by this much and issue the bonds we would anyway. But then what if somewhere down the line the budget is actually balanced again as it was in the '90s? And we actually start paying the debt off as Andrew Jackson did (let’s leave aside the debate of whether this is a bad idea). At some point, bondholders will have been paid less interest than they would have if we just did it the way of raising the debt ceiling. Right?

ETA: Krugman says “In reality, to pursue the thought further, the coin really would be as much a Federal debt as the T-bills the Fed owns, since eventually Treasury would want to buy it back. So this is all a gimmick…”. But he doesn’t explain why Treasury would want to buy the coin back. Nor does this mention any idea of Treasury owing any interest.

4

My first post has it wrong.

The proposal is that we deposit the platinum coins at the Federal Reserve and write our checks based on that balance. This is the equivalent of just putting more money out into the economy.

The notion is that the short-term inflationary consequences are likely to be small (just like quantitative easing), and that in the long-term we can buy back the coins by replacing them with bonds once the ceiling fiasco is solved.

At least I think that’s the plan, but I’m obviously less clear on it than I thought I was.

ETA: I think the notion is that the Fed will exchange the coins for T-bills at some point in the future to avoid the long-term inflationary consequences, in answer to your last edit.

5

No, you’re pretty clear on the plan. The people who came up with it don’t understand how money works, so there’s not much point debating the details. It makes no difference whether the government makes a trillion dollar coin or simply declares that Obama’s underpants are worth infinity kajillion dollars. TNSTAAFL: There’s No Such Thing As A Free Lunch.

In short, this proposal think they can somehow get around inflation by a complex scheme of lying, except they just advertised they’re planning to lie, and it would blatantly obvious anyway. If you’re writing checks based off the fiat value, then you’ve automatically going to create inflation by the same amount you would have done anyway. You can’t get real value out of it without causing inflation, just as the various IOU’s in the Social Security trust Fund don’t make it more or less likely to be solvent later on.

6

I think it’s more along the lines of :
“You’re maxxed out - you can only borrow up to the value of your house, $250,000…”
“OK, here’s a new house valuation that puts it at $350,000; please up my credit limit.”
How could that possibly cause a problem? :slight_smile:

IANAeconomist but - I think it’s just a trick to get around the limit that congress has imposed. Dollar bills are just “promises to pay”. Coins are considered actual money. If the government creates a trillion-dollar coin it has a trillion dollars more. Put it in a vault and now borrow against it, and technically you are not exceeding your debt limit because your trillion of extra borrowing is balanced by a trillion of cash deposit.

Whether congress should play these games with the debt limit, and whether the Treasury should play these games to get around it - separate debate for GD.

What effect it would have?
Economically, virtually none. All spending still has to be approved by Congress (and the president). So it’s not like suddenly the land will be flooded with milk and honey and money, causing massive inflation and financial armageddon. The economy would go on as normal. One less contentious annual debate would disappear off Congresses obstructionist plate.

Up until Obama became president, raising the debt ceiling was a normal, regular occurrence, a symptom of the fact that Washington collectively could not control the urge to inject its pork-infested veins with a few hundred billion more each year. Somewhere in the paroxysm of shock that the Republicans (a) lost (b) to a black man (c) who did no,t like Clinton, keep mumbling the mantra “restrain spending” until blue in the face (since blue was not an option)… Congress (R) began to obstruct the raising of the debt ceiling to make its point.

Again, the productiveness of the process is GD territory. The fact is, Washington has for decades spent more than it takes in, except for a brief respite under Clinton. It spends about 30% more than it takes in, typically. Getting this in order means either severe unpalatable (to both sides) cuts, or higher taxes, or more likely, both. As the merde approaches the fan these last years, the volume of debate has increased.

So every time there is another impass - a cliff, a ceiling, whatever - people float ideas of various legality and reasonableness that would detour the roadblock.

What would really happen if they did this? Nothing, other than the righteous screaming from congress and the level of vitreol over the administration would hit a new high.

7

Yes, it is in effect an end-run around Congress’s own debt ceiling where they refuse to borrow the money for the items they already budgeted/spent. If they don’t borrow, the US can’t pay its lenders and/or its usually outlays (e.g., soldier pay; contractors repairing a bridge; FBI salary; etc…). And if the US defaults on payments, its credit rating goes down and future borrowing becomes much more expensive, if it can even borrow any more. This would not be a back-door austerity move that some naive right-winger believe; but it would make this past fiscal cliff look like fiscal Armageddon.

So, rather than simply break the law and ignore Congress’s inability to raise the debt ceiling, the Executive Branch can use the Constitutional mandate of the Treasury to mint coin. Minting of extra coinage is usually done on an as-need basis keeping up with expansion of GDP. But, there is no limit given on that power. The Treasury could cause runaway inflation on a regular basis by minting too much coinage. Or, they could mint a one-time-only trillion dollar coin (what metal it’s made of is irrelevant) so as to pay what it owes and run as usual without borrowing.

Yes, this would be inflationary, but, inflation right now is nearly non-existent thanks to the Fed’s policies to prod the economy. And, done as a one-time trick to stop from defaulting on payments, it would avert something worse from happening. And bypass the idiots in Congress playing fiscal brinkmanship.

8

The relevance of platinum is that, unlike gold and other precious metals, there are no laws restricting the Treasury’s creation of platinum currency.

9

The basic point is the following. The debt ceiling is a rather dumb restriction. Once Congress passes a budget, the government knows how much it is to spend. Of course it needs money. It gets money from revenue (taxes) and borrowing and creating it. It’s the government it’s allowed to do the latter. To put a separate restriction on borrowing means you have to constantly increase the allowed amount of borrowing for spending you’ve already authorized. In years past, this was pro forma by Congress.

Banks can effectively create money as well through lending due to only being required to keep a fraction of deposits on hand. The Federal Reserve, which is not the government, tries to control the money supply through interest rates to keep the economy growing and prevent too much inflation. But it really isn’t the money supply per se that causes inflation. It’s spending that does – too much demand for too few goods.

Some time ago Congress authorized the production of platinum coins on the sole authority of Treasury. I assume the idea was to let them produce either commemorative coins or bullion coins (coins that would be worth essentially the value of the platinum they contained much like the gold coins people hold for investment). But there was no restriction so the Treasury could simply produce a platinum coin with $1 of platinum in it and label it $1 trillion or $100 trillion or whatever and deposit in the Fed increasing the government’s bank balance.

Wouldn’t this create massive inflation? No. It is government (and everyone else’s) spending that does that not the mere existence of money. And the spending still is or has to be authorized in the budget (or off-budget like the Afghan war was under Bush but still authorized in any case). This is simply a way to avoid another meaningless fight in Congress over the debt ceiling like we had last summer.

10

But doesn’t financing the spending by depositing a coin have a different effect than financing it by selling debt instruments? One sucks in money from the private economy before spitting it back out, not increasing the overall supply. The other just adds.

To put it another way, if I borrow a dollar from you and give it to Bob, there is no inflation. If I print a dollar and give it to Bob, there is.

What am I missing?

11

Ah.

They should just come up with some alloy and call it Unobtainium.

12

It needs to be legal tender, and the only legal tender the Treasury is allowed to create with no express cap is platinum coins.

The real question is: whose face will be on the coin? I propose John Boehner. But the IKEAmonkey is also a good suggestion.

13

When the government spends by borrowing, they take money out of the (world) economy at one point by selling abond, and inject in another point later by issuing government cheques.

If they simply issue government cheques, they increase the world/national money supply, and thus run the risk of inflation.

Simplest process would be to deposit the coin; then borrow against it. “We have an extra billion in the Fed. Please buy our bonds like you would normally. All that happens is that our net debt, after adding assets to liabilities, is now $1T less, so we can keep selling bonds without violating congress’s upper limit on debt.”

14

That’s not how the debt ceiling works, it turns out. It prescribes an absolute limit on the face amount of debt secured by the United States government. It does not account for assets.

15

Not to dispute the other posters on the board but about a year ago I heard the whole idea behind the trillion dollar coin was to create enough money to pay off the national debt. Left unspoken was that we would hav to make 16 of these coins to do so and all of the other things being discussed in the thread on that very issue. As anyone else heard that use of the $1,000,000,000,000 coin?

16

No, but I wonder if it will work in an arcade machine.

17

can you imagine if it slipped out and was auctioned off by a coin dealer? Obviously it wouldn’t sell for face amount-not by a long shot-and the discount would be considered how much the ‘value’ of the dollar fallen. Say it sold for 1 million, so the dollar in now worth 1/1000000th of the ‘old’ value. :slight_smile:
think of the headlines! the congressional speeches!
oh well. it won’t happen. Fiat money depends on trust. Making a 1 trillion $ coin damages the illusion. That wouldn’t benefit anyone.

18

My first thought was that the coin should be massive and opulent, bigger than the the million-dollar gold coins put out by the Canadian and Australian mints, but then maybe subtlety might work well. Make the coin smaller than a dime and store it in a beautifully-padded little wooden box. :slight_smile:

19

This is my question. I posted it here and not GD because I have no problem understanding the “con” (no free lunch) POV; what I don’t understand is the MMT side that says this is just another way of extending the debt limit through a technicality.

20

Exactly correct. The Mods may as well close the thread.

The SDMB is far more intelligent than the average comment blog, but a few recent threads have shown that “conservative” ignorance is surprisingly high, even here.