[ol]
[li]The Treasury mints a $1 trillion coin, or whatever amount is desired.[/li][li]The Treasury deposits the coin into the Treasury’s account at the Fed.[/li][li]The Treasury buys back bonds[/li][li]The retirement of bonds is an asset swap, no different from QE2[/li][li]The increase in reserve balances is not inflationary, as Credit Easing 1.0, QE 1.0, and QE 2.0 already have shown.[/li][li]These operations by the Treasury create no new net financial assets for the non-government sector[/li][li]The debt ceiling crisis is averted[/ol][/li][/QUOTE]
Nope, won’t work. I’d argue that the law calls for the Treasury to mint and issue the coin. If they just deposit the coin with the Fed, then it doesn’t count as being issued. And if they put it out there, somebody would have to buy it.
OTOH, the law also authorizes striking “A fifty dollar gold coin that is 32.7 millimeters in diameter, weighs 33.931 grams, and contains one troy ounce of fine gold.” A troy ounce of gold traded for $1628.30 today. So all Treasury would have to do is authorize 61,413,744 commemorative $50 gold pieces, sell them for the spot price of gold and they’d have their trillion dollars with change left over.
Lord God, is this what it’s come to? Talk of issuing coins worth $1 trillion in one sector of the government to give to another, as an end run around an intransigent Congress, in order to stave off another worldwide Great Depression?
One problem I see is that if you buy back and retire bonds with a platinum coin that is essentially worthless, our creditors would see that as less than above board.
And yes, I understand that fiat money is not functionally a hell of a lot different than that, but at least fiat money is issued with the consent of Congress and the President as part of a broader economic scheme overseen by the Federal Reserve. To start stamping out trillion dollar coins puts a serious damper on that.
Hell, why not mint a one hundred quadrillion dollar coin, pay off the whole debt, make everyone millionaires and buy every citizen a mansion?
I haven’t heard that anyone in power is actually considering something like this.
As far as I know, it’s just something that’s going around the blogosphere.
I’m sure there are all kinds of problems with it, but it’s interesting to consider. What exactly are the problems? How different is it from quantitative easing which, as I understand it, consists of the Fed creating money in order to buy bonds on the open market?
The difference from QE is that the Fed will eventually sell those bonds, thus removing that created money. But, short term it’s the same thing isn’t it? Create money and buy bonds.
One difference is that it’s the Treasury buying the bonds rather than the Fed. This is necessary because when the Treasury buys the bonds they are retiring the debt, which is the whole point - lower the amount of debt thereby putting us a trillion dollars below the current ceiling so there’s no need to raise it.
Would the Treasury buying bonds with created money have different effects on the private sector than the Fed doing it? You’re still basically turning bonds into cash, the only difference being that the debt is actually being retired when the Treasury does it.
Governments have long been able to print money willy-nilly. The problem with your method to make everyone millionaires this way is it causes massive inflation. Sure you could have $100 trillion. In fact you can get a legal tender $100 trillion bank note from Zimbabwe right now (really). As it turns out the exchange rate on that is about $5 US.
There is nothing illegal about the Fed doing this. The issue is the inflation it would cause. Although this guy at The Economist thinks even that might not be an issue:
Because there are not a quadrillion dollars worth of treasury bonds to purchase.
The whole point is to buy back bonds and retire the debt. What you’re (sarcastically) suggesting is completely different. No one is talking about just throwing money into the economy. They’re basically talking about turning outstanding government bonds into cash and retiring that debt, thus bringing us a trillion dollars below the current debt ceiling. In theory this adds no new financial assets to the economy.
I’m not seeing how this would work. If the debt ceiling is raised, the treasury will sell new bonds on the open market to gain this extra (rounding here) two trillion dollars. There will then be a legitimate debt instrument outstanding which the U.S. Government under it’s full faith and credit agrees to pay back with interest.
If you stamp two 1 Trillion Dollar coins, you have created nothing of wealth or value. You have told our creditors who were expecting 14 plus trillion of value that we will now pay them 12 plus trillion of value + two shiny platinum coins. We would be, in effect, defaulting on that two trillion.
But then again those two platinum coins would be backed by the full faith and credit of the U.S. Government to the tune of two trillion so that might work. I think I talked myself into understanding it.
But, by doing so you would be devaluing the dollar intentionally, so you are sort of screwing your creditors. My head hurts now.
Imagine we have a Doper economy with $1000 in it. We all have some share of that $1000. Some of us are in debt, some of us have a large percentage of it.
As Supreme Leader (I elected myself, you don’t get a vote ;)) I decide to turn on my printer and print up another $1000 so there is now $2000 in the Doper economy.
I have, in effect, taken half of your money and given it to myself. A widget that cost $1 yesterday should now cost $2.
This largely becomes a back-handed tax on the rich. Those who hold a lot of Doper money lose a lot. Those who have a little lose little and those who are in debt benefit (if they owed you $10 their debt is now effectively $5…they still owe $10 of course but that $10 is now worth $5).
This is of course massively oversimplified so if it is wrong I’m sure someone will let me know but looks that way to me.
Frankly, given the state of the economy, this looks like a pretty good solution to me.
It replaces one trillion dollars worth of bonds with one trillion dollars worth of cash. Thus no net increase in financial assets, which is what I said. “Financial assets” includes both cash and bonds.
What would be the effects of this? I don’t know.
The Fed did something similar in recent years when they created cash to purchase treasury bonds in what is called quantitative easing.
This assumes that it would cause inflation. If the recent quantitative easing didn’t cause inflation then why would this?
Is there any reason to believe that swapping cash for bonds would cause inflation? (That’s a serious question, not rhetorical. I don’t know the answer.)
