Huh? I’m far from a conservative and I still do not see how creating the money by fiat is the same as borrowing it and paying interest on the money borrowed.
Reagan. Then the Republicans will have to accept it.
I read one report claiming that Congress has to choose the image on the face; if true that would scuttle the whole idea.
I started a thread about this very thing a while back.
Anyway, I suggested Dr. Evil with pinky to mouth on one side and “One TRILLION Dollars” in big letters on the other.
Your skepticism is valid generally, but the analogy becomes valid in the present situation where much of the new Federal debt ends up in the hands of the Federal Reserve Bank itself (effectively an agency of the Federal government) through “Quantitative Easing.” In one case, the Fed credits Treasury’s checking account with Treasury bonds as collateral; in the other case the platinum coin is collateral. The only real difference is that the platinum coin is not subject to Congressional debt limit authority.
The pros and cons of the Fed’s “Quantitative Easing” program, which has caused M1 money stock to almost double in just a few years, would be the subject of a different, more interesting, thread.
That’s exactly what I said, though I may not have been clear. It’s the spending that causes inflation. If both the government and the private sector spend there will be more inflation than if just one party did, but the fact that a trillion or 100 trillion dollar coin exists has no effect. They could issue a quadrillion dollar coin, but it would only be the amount spent that matters. But recall the spending has already been authorized, Congress is just threatening to default on its promise to pay, either the debt, contractors, the federal employees, etc.
Okay, I’m still not that clear on the whole concept even after reading those last couple posts; but I do want to say that I’m not just interested in whether or not this tactic would cause inflation. I’m trying to determine if it really would be the *same *as getting the authority to raise the debt ceiling, but just doing it through an end-around technicality. That is, specifically, I want to know if the following is untrue:
–If Congress raises the debt ceiling, the debt in question (two trillion bucks, I guess we’re talking about) will need to be serviced for many years, with interest payments on said debt being a pretty much automatic part of each year’s total government spending, until (if this ever even happens) there is a government surplus long enough to retire the debt.
–If the platinum coins are used instead, that two trillion dollars will not accrue interest, making future deficits at least somewhat smaller, with the compounding effect of taking out less future debt to service the old, and so on and so forth.
Not true? Because if it is true, whether or not it causes inflation, it’s still a pretty big difference IMO.
As I said two posts above, the Federal Reserve system is effectively an agency of the Federal government. (Almost all of) the profit it makes from bond interest is paid back into the U.S. Treasury.
A discussion of the merits of the Quantitative Easing program might be useful. BUT the “platinum coin” device is proposed strictly to bypass a Congress which is controlled by imbeciles and lunatics. Heed the Pavlovian reflex response (fiat money == hyperinflation) only for what it tells you about the ignorance of the Pavlov’s dog.
septimus speaks truth. There’s not really much advantage to financing with a coin instead of debt. At least, not if the Fed continues to act generally as expected.
The issue isn’t interest payments. Interest payments made to the Fed mostly just boomerang right back to Treasury.
The government could profit from a permanent expansion of the Fed’s balance sheet – this would be a form of seignorage – but issuing a coin has nothing to do with the ideal size of the Fed’s asset holdings. Supposing that the Fed were content with the current size of monetary base outstanding in the economy when Treasury came knocking with its shiny platinum coin. They could credit the Treasury’s account by one trillion, and then immediately sell one trillion of the other (genuine) assets on their books to keep the total (nominal) value of everything nice and steady and stable.
One trillion worth of bonds could get released into proper circulation, but from the Fed’s own stockpile, instead of being newly printed from Treasury. No big difference there, just the legal technicality of dodging the debt ceiling by using already existing debt in Fed holding. It’s only if the Fed is content with a permanent increase in their balance sheet that the government gets a free ride, and this would essentially be “printing money” in the classical wheelbarrow sense. It would mean monetizing government expenditures. Nobody fears that, at least not yet. It’s why the Fed has already managed to triple the size of its balance sheet since the financial crisis with extremely tame inflation at present. The government can still borrow at negative real interest rates, which wouldn’t be true if markets actually feared a debt meltdown. There is no market fear yet that this huge expansion monetary base is permanent.
That’s it. The really big advantage to Treasury revenue only comes from the permanence of the newly created money, but the permanence of the money is what leads to the inflation. No real advantage to a coin.
On a related topic: there is, of course, the benefit right now in avoiding interest payments with the bloated Fed balance sheet for a temporary amount of time, but they’ve been doing that anyway. To say it again, the balance sheet has already tripled in size, and the Fed didn’t need a fancy commemorative coin loophole to manage that. If they want to increase the monetary base even further, they can just do it, platinum not required.
No, the coin thing is just a legal technicality, and it’s a political non-starter anyway.
Not a lawyer, but I think we might be able to avoid this whole messy situation with a Congressional law that put the debt ceiling at 300% of GDP, recalculated annually. The issuance of debt to finance government purchases is a Congressional power, apparently not to be delegated, but 300% of GDP is a reasonable sort of number that settles the issue without being ridiculously out of proportion to the economy.
It’s possible things are still unclear – this is a somewhat complicated topic – but this is the only major unanswered question I saw in my quick scanning of the thread:
Treasury would want to play it safe. The Fed as well.
When the Fed wants to cool down the economy, they suck all that monetary base out of the system.
In order to take the money out of the system, they need to have assets to sell. So they go to the markets with their assets, and they say, “Hey! Anybody wanna buy this stuff?” And people look at that stuff and say, “Yes, we will totally buy it!” And they give the Fed cash to buy it. The Fed then destroys the cash and the money goes POOF, back into the void whence it came. This is all done with computers.
If the Fed has a platinum coin on its books… it can’t actually sell that coin on the market. At least, not for the proper price. The Fed paid 1,000,000,000,000 dollars when it “purchased” the coin from the government. But when it sells the coin, it will get maybe 4,000. Which is, ahem, many orders of magnitude short of what is necessary to pull all that cash back out of the system.
Obviously, the economy needs a certain amount of monetary base to keep functioning. They don’t want to suck literally all of the monetary base out. There needs to be some stuff left to circulate. Because of that, it’s likely that there would never be a need to sell the coin. Ever. But it’s one of those what-if sort of situations. What if they really really needed to suck a whole lotta money out of the system, and they don’t have enough proper assets? This could happen. If the market for US bonds weakens considerably, as has happened to some other countries, then the value of the Fed’s balance sheet would take a huge hit. If their assets are worth less in the markets, then they have much less power to suck money out of the system. They might just need a whole lot of genuine assets to sell, not the fake coin.
So yeah. I, for one, would rather see real assets on the Fed’s balance sheet. Probably would never matter, but I’m not one for relying on a happy “probably”. Treasury would think the same thing. Best for everyone if Treasury goes ahead and buys the platinum coin back as soon as possible.
Actually, best for everyone if there’s no platinum coin in the first place.
Bad idea. Suppose it gets lost in the White House couch cushions and the maid pockets it?
I’ll be honest, this is one of the worst answered GQ threads I’ve seen. It’s literally filled with almost nothing aside from jokes, explanations that totally miss the point, or critiques of the current Congress.
I’ll answer you question with neutrality, and completely all in one place, without segues into things unrelated.
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Yes, any debt Congress raises will be in the form of instruments that pay out a coupon payment or interest, and will have to be serviced.
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Correct, a platinum coin would not have a coupon payment.
But let’s reinforce a point right away, if used the trillion dollar coin is only being speculated as a means of satisfying spending requirements in the current budget without issuing new debt, since Congress is threatening to disallow issuance of new debt. This is not a measure to pay off the Federal debt, is not intended to get deficits under control or etc.
The Federal Government’s “bank account” is with the Federal Reserver. The scenario is the SecTreasury deposits the $1 trillion coin and voila, the Federal checking account now has $1 trillion on its balance sheet it did not the day before. All the mandated spending in the Federal budget will be covered by checks issued on this bank account.
Now what inflationary effects would this have? Imagine a scenario where instead of ever issuing debt again, the U.S. government just minted $1 trillion a few times a year and spent as much as they wanted on whatever they wanted, ending for all time government debts and etc. Creating the coin is not inherently inflationary since it isn’t circulating in the economy. But when you spend based off the money in the Federal Reserve account that came from the coin, that money goes to private contractors, employees, large corporations etc and flows through the rest of the economy. This would eventually cause inflation.
When you do it one time only, with a $1 trillion, it is not expected to cause much noticeable inflation because it would only be used to pay for spending the government was going to engage in in any case. So it isn’t really increasing the money supply in the country to a huge degree.
But this isn’t some anti-deficit solution or anti-debt solution. If we paid off all our debts with trillion dollar coins, then all our bondholders would immediately have $16 trillion in cash that they didn’t have before. This money would get spent somewhere, and thus the money created in those coins would start flowing through the economy and causing inflation just like if we had printed $16 trillion in paper money to pay off the debt.
If we just did this trillion dollar coin thing to avoid the debt ceiling monster in perpetuity, it’d eventually have similar effects, because more and more government spending would be technically getting paid for by “created” money in the reserve account, funded by trillion dollar coin deposits.
One trillion dollar coin is not likely to actually cause many problems. But no one is suggesting it as a solution to longstanding issues like deficits and debts. Krugman is probably right also, if we ever got to the point of minting one of these, I do suspect eventually the Treasury would issue a bunch of debt, and use the money from that issued debt to “buy back” the coin and then destroy it. This would have a very similar effect to if the coin had never been minted, but instead a trillion dollars of new debt had been issued instead.
Why would treasury do this? Mostly I think because (and this isn’t a terrible thing) the powers that be in the government are far more paranoid about inflation than all the real life gold hoarders who think we’re just a few weeks away from hyperinflation claim they are.
Of course the biggest problem with this whole plan is apparently no one in the Obama administration has ever taken it seriously. I do not believe Obama has ever directly addressed it, Geithner has never addressed it, but I think a few congressmen have been openly advocating it in recent days.
If you’re really interested in that sort of thing, there is a petition that needs about 20,000 more signatures and it’ll get flagged for a response from the White House.
I thought of an example that might clarify things even more. I break these things into steps, but in reality, some of these steps would move together, and the process could be much more gradual than it might appear. But this gets the general idea across.
STEP ONE, OPENING SITUATION
Fed assets: 3 trillion in bonds
Monetary base: 3 trillion
Let’s state that the Fed goal is to keep a stable monetary base. This is a constant goal, completely separate from whatever problems Treasury is having raising funds for its mandated expenses.
The bonds currently owned by the Fed are not a burden for Treasury. Boomerang effect, interest paid comes right back. The Fed works with the government, after all.
But the government runs a deficit of one trillion dollars. They would like to issue a trillion of debt at auction to pay for this, but golly gee, Congress won’t raise the debt ceiling. So for some incomprehensible reason, they break out the platinum instead of just letting the government shut down. They “sell” this coin to the Fed, and the Fed buys it.
STEP TWO
Fed Assets: 1 trillion coin, 3 trillion in bonds
Monetary base: 4 trillion
But that is too much cash. Too much money for the system. The Fed acts to remove one trillion. They act by selling their bonds.
STEP THREE
Fed assets: 1 trillion coin, 2 trillion in bonds
Monetary base: 3 trillion
New bonds in general circulation: 1 trillion
Look at that. There is now 1 trillion of bonds in circulation that were not in circulation before. These are bonds from the Fed, rather than newly printed bonds. The interest payments on those bonds will no longer boomerang back to the government. It’s essentially the same as if the Treasury had issued brand new debt, and legally, this dodges the debt ceiling. Nifty, I guess.
Treasury isn’t paying any interest on that coin, but they weren’t really paying interest on the Fed debt, either. No real change in that respect.
Eventually, Congress gets tired of its debt shenanigans, and the debt ceiling is raised. Treasury wants to buy back the coin. What do they do? Well, they borrow one trillion dollars in cash. Finally. That seems bad, but it’s what they should have done from the beginning. They get one trillion from bond investors, and they give that one trillion cash to the Fed in exchange for the coin. Giving it the Fed is equivalent to destroying one trillion of monetary base.
STEP FOUR
Fed assets: 2 trillion in bonds
Monetary base: 2 trillion
New bonds in general circulation: 2 trillion
But wait a sec. There’s not enough monetary base in circulation now. The Fed’s goal is a stable money, and we’re one trillion short. And so Fed does its computer thing, and POOF, one million more is created. They buy one trillion of bonds.
STEP FIVE, THE END
Fed assets: 3 trillion in bonds
Monetary base: 3 trillion
New bonds in general circulation: 1 trillion
And look at that. It’s as if none of the platinum nonsense ever happened. Treasury needed to borrow one trillion more dollars, so there’s one trillion more debt in circulation, and the Fed balance sheet is exactly where it started, because the ideal size of the central bank’s assets is not remotely related to how much Treasury needs to borrow. (That’s a key reason why their powers are separate in the first place.)
No one in the entirety of the news industry, with the exception of Paul Krugman, and maybe Ezra Klein after a week or two of homework, would have any idea of how this would work. There would be major hyperventilation. People would go nuts. But really, this does not have to be a big deal. There’s nothing special going on. It’s just accounting tricks, pushing numbers around. Nothing special is happening.
The prime factor driving this process is the deficit, and nothing here makes the deficit go away. These are just legal loopholes to maybe, possibly prevent a government shutdown.
Now, the situation is obviously different if the Fed allows a permanent increase in its balance sheet. But that is already true now. The coin is not necessary for the Fed to increase its balance sheet. The Fed can do that at any time, if it wishes to do so. The coin changes nothing. The platinum thing is a gimmick, nothing more. It’s an idea to dodge a government shutdown, but given the size of the deficit, it’s not a serious way of doing so. The budget is not balanced, and that means there will be another such showdown in the future, and it’s obviously is a big mistake to have the whole Fed balance sheet stocked with unsellable assets.
This is just playing around.
It’s not a serious proposal, it doesn’t solve any fundamental problems, and it’s not worth doing. The only way to genuinely fix this legal problem permanently is to change the way the debt ceiling increases, like my previous suggestion of tying the debt ceiling to a percentage of GDP. That right there is a genuinely good idea, which is probably why I’ve never heard about it in the news. And naturally, we will eventually need to make sure that the deficit is small enough that it’s growing less quickly than nominal GDP, so that we can decrease the debt as a percentage of GDP.
Sorry, can’t agree with you on that. My answer was the bomb-ass shiznitt.
These last two posts were very helpful, thanks!
Now, a side question: it was said they would not be able to sell these coins for more than $40k each, presumably to a rich person looking to own a kind of novelty item. But what happened to “all debts, public and private” and all that jazz?
By the same token, though, if Congress just decided “this whole debt ceiling concept is silly; let’s just repeal the ceiling entirely”, and the US proceeded on its accustomed course of selling treasury bonds and racking up more and more debt, that would also eventually have the same effects, too, right? In the long run, the platinum coin loophole would have the same effect as just continually raising (or eliminating) the ceiling, and it would still leave long-term problems unresolved, but it’s not intended to solve those long-term problems. The long-term problems are far more complicated than anything that can be solved with a simple bit of loophole legerdemain.
Congress actually did get rid of the “debt ceiling”, back in 1979. The Gephardt Rule provides that the debt limit is automatically set at the level projected by the most recent budget resolution–in other words, Congress says “Let’s spend umpteen and leventy jillion dollars on stuff” and Congress says “Let’s tax the American people for umpteen jillion dollars” and the Gephardt Rule says “Looks like we’re borrowing leventy jillion dollars”. If Congress doesn’t want to borrow leventy jillion dollars, Congress can a.) cut spending by leventy jillion dollars or b.) increase taxes by leventy jillion dollars or c.) some combination of both.
However, in 1995 the House waived the rule making debt ceiling increases automatic. The Gephardt Rule was technically never repealed, just “temporarily” waived. (The article I linked to discusses proposals to permanently get rid of the Gephardt Rule, but AFAIK that has never been done.) So, we’ve got this thing, the debt ceiling, that Congress has voted to increase automatically, but then Congress went back and decided to suspend the rule making the level of the debt ceiling automatic. Perfectly clear, right?