Scarcity. The value of all the dollars in the economy is theoretically equivalent to everything else in the economy. The amount of goods and services is fixed, so if the amount of money doubles, the goods and services will now cost double.
In other words, people will start spending the extra trillion, and driving up prices of the things they buy.
Look at it this way: during the Age of Exploration, the Spanish monarchy imported tons of gold and silver from the New World. Their currency was in the form of gold and silver, so they used the new metal to mint more coins and pay for wars and more ships and things.
As more and more gold entered the economy, the value of gold dropped relative to the value of ships and muskets and things. That meant private enterprise could no longer afford to buy ships; after all, the supply of lumber, pitch and tar didn’t go up.
Thus, private citizens bought ships and stuff from France and Britain; after all, gold and silver were still worth the same amount in France, which hadn’t imported tons of the stuff (yet). So Spain’s gold and silver trickled out to the other countries of Europe, which created inflationary pressures there, too (especially since their domestic prices for ships and muskets were going up because of all the stuff they were shipping to Spain).
When the extra gold ran out, Spanish industry collapsed.
So how would the ratings agencys react to this solution? Doesn’t seem to me like something they would approve of, so if the US is downgraded the damage is done anyway.
It’s at least a partial default. Inflation is expected through the normal process of government. Deliberately injecting 2 trillion dollars into the economy without an offsetting liability is not a normal process.
Surely you would agree that minting a 2 quintillion dollar coin would be hyperinflationary and would be a default on our obligation.
So 2 trillion is just a partial step in that direction.
Again, bonds are not a financial asset to the U.S. Government. They are a liability. The confusion may come because if you hold a bond in your retirement portfolio, they are an asset to you, but since the government must pay them back, the are liabilities to them.
So what you have is an injection of $2 trillion in assets to retire $2 trillion of liabilities. That keeps the balance sheet intact. But it ignores the fact that those $2 trillion of “assets” are stamped platinum coins created from nothing and do nothing except to add $2 trillion to the money supply.
When the fed injects cash into the economy, we get $X in cash assets, which are offset by $X of a liability: treasury bonds that the Fed purchases.
So take a debt of $10 trillion. If you increase it by $2 trillion the right way, we now have a debt of $12 trillion. If you print a $2 trillion platinum coin, we now have a debt of $8 trillion (which we over the next year and a half increase back to $10 trillion). That difference between $12trillion and $10trillion represents the amount that we have “defaulted” on our obligations by devaluing our currency.
Seriously, think about it. If this was such a magic bullet, then why has nobody, Republicans or Dems mentioned it as a solution? It’s only on the internet that we see this.
The treasury has the legal right to simply create money without incurring any debt. So minting a $1T or $2T coin doesn’t automatically create debt. They don’t (and shouldn’t) do it regularly because under most circumstances it would be inflationary.
Suppose we do this instead. We mint the coin and use it to buy back bonds that are currently held by the Fed (and only bonds held by the Fed). That way we haven’t added any new money into circulation. It would basically be an accounting trick allowing us to legally retire whatever debt is currently held by the Fed, which is at least $900b from QE and QE2 and probably more. This would lower our current debt below the current ceiling, and give use some breathing room without injecting any cash into circulation.
As to why politicians haven’t mentioned it - look at the disagreements and misunderstandings on this board, which consists mostly of people with a greater than average understanding of these things. Do you think any politician would want to suggest something like this? Even if (and I emphasize if) it’s a good idea it would probably be political suicide to even suggest it.
As I explained above, the teradollar coin can be viewed as a legalistic nicety, equivalent to the T-bond–>QE easy money pump.
But the FRB, like any bank, is supposed to have books that balance. At present it has almost $3 trillion of assets and exactly-the-same almost $3 trillion of liabilities and capital. If it arbitrarily “forgave” a trillion dollars of U.S. debt, how do the books balance? I’m not saying your idea is unworkable; I’m just curious what legal nicety is proposed.
Another possibility would be to issue U.S. Notes (ordinary banknotes which were common in my youth but stopped being printed in 1971) instead of the platinum coin; I think this not proposed, because Congressional approval would be required. U.S. Notes are a U.S. obligation (just as F.R. banknotes are F.R. obligations), but are not included as debt. In other words, they have a legal status similar to coins, i.e. as fiat money.
(F.R. Notes appear as a liability on F.R. balance sheet, but these liabilities are not included in U.S. debt, and shouldn’t be since that would double-count the U.S. T-bond debt which backs them.)
Stated differently, the “tricks” are to increase debt without it being counted as debt toward the ceiling. Coins and U.S. Notes have that status, as fiat money. Another alternative is to start paying Federal workers with special scrip, hoping banks accept it. (Was this done in California IIRC for a short time a few decades ago?) To avoid legally being debt (a promise to pay on a certain future date), the “scrip” would speak of “if Congress comes to its senses” rather than “when Congress comes to its senses.”
As i understand it they can’t just issue bank notes because there’s a statutory limit to the amount of banknotes that can be in circulation. The platinum coin thing is just a quirk in the laws.
I don’t get your point about it being a way to increase debt without it counting towards the ceiling. It looks to me to be a way to reduce debt by creating money. I don’t see how anything akin to debt is being created. I don’t think the creation of money somehow incurs debt. It’s certainly not something to be done lightly, but I don’t think it incurs debt.
In one case, the FRB gives U.S. Treasury $1 trillion (whether in banknotes or checking account; it doesn’t matter) in exchange for $1 trillion of T-bonds. The other case is exactly the same except that FRB gets the platinum coin instead of the T-bonds. What’s the difference? The T-bonds are a Treasury obligation, but that obligation will be met by, in effect, replacing those T-bonds with T-bonds of later maturity. How is that different from a teradollar coin which might instead be exchanged for 1000 gigadollar coins?
I’m not interested in pursuing the legal semantics of “debt.” Scrip is legally debt but U.S. Notes are legally fiat money, not counted as debt; it’s just a legalism. Do you see that the $1 trillion of T-bonds on deposit at FRB are little different, in their financial effect, from a platinum coin on deposit?
What $1T of bonds on deposit at the Fed are we talking about?
The plan was for the Treasury to mint the coin, sell it to the Fed, then use the proceeds to purchase $1T worth of outstanding T-Bonds (from the open market or the Fed or whatever). Since the Treasury issued the bonds, buying them is the same as retiring them isn’t it? They’re satisfied and no longer exist and aren’t on deposit anywhere.
You’re making it complicated. Work through the steps treating U.S. Treasury and FRB as two separate entities; knowing that the FRB’s books must balance; and assuming that the Treasury obtains an additional $1 trillion from a non-revenue source (i.e. bonds or coinage). Do not make the mistake of conflating T-bonds Treasury has redeemed with T-bonds FRB holds in its vaults.
After you trace the step you will see that Platinum Coin results in exactly the same thing as Create new T-bonds and let FRB “QE” them except that in the former case FRB gets a teradollar coin for its vaults; in the latter case it gets a trillion T-bonds.
I find the legalistic detail (the T-bonds are “debt” but the coin isn’t) relatively uninteresting but YMMV. But first let’s agree on what the FRB balance sheet ends up as in the two cases.
It is true that the comparison works only if the FRB has a trillion T-bonds to, in effect, exchange for the coin. This is why I stated that the platinum-coin forces FRB to pursue its QE policy (i.e. to keep buying T-bonds, though in the platinum-coin case this is bypassed since the new T-bonds don’t exist).
Perhaps this “balance-sheet” accounting will clarify. Details along the way don’t matter; just look at end-of-day results. For simplicity assume all cash is in Franklin-portrait banknotes; multiply all numbers by Trillion.
(A) Baseline -- Congress forces U.S. to cut $1 trillion of spending
Private hands Assets FRB Liabilities U.S. Treasury
------------- ---------------------------- ---------------
0 0 0 0
(B) Borrow via T-bonds; FRB pursues Q.E. in same amount
Private hands Assets FRB Liabilities U.S. Treasury
------------- ---------------------------- ---------------
$1 $1 T-bonds $1 FR-notes in debt $1
(C) Circumvent debt ceiling by minting platinum coin
Private hands Assets FRB Liabilities U.S. Treasury
------------- ---------------------------- ---------------
$1 $1 coin $1 FR-notes obliged to redeem coin
FR-notes (i.e. portraits of Benj. Franklin) are, of course, IOU’s issued by the FRB so appear as liabilities to the FRB, making its books balance. If you want to quibble that money paid to Federal employees is not “in private hands”, just look a cycle later, after the Fed worker has paid his plumber or whatever.
Whether semantically the coin is a “debt” doesn’t interest me, but it is an obligation since the coin is inscribed Legal tender for all public debts; the Treasury is obliged to accept it if you want to pay your taxes with it.
Fine. But what are they obliged to accept? $2 trillion in payment of a debt? What if a hamburger at McDonalds costs $2 billion because the government hyperinflates the economy?
Did they still honor their obligation?
Note: I’m not saying that 2 trillion will be hyperinflationary, but it will be inflationary to the tune of the difference in money supply, making the dollar whatever fraction of a percentage point weaker. It’s only a smaller version of hyperinflation. It’s a slimy way to get out of paying a debt.
And it has the added value of making your creditors nervous. Are you going to be minting another trillion dollar coin later this year? Next year a ten trillion dollar coin?
What are we debating? All I’m saying is that for the U.S. to trade a “trillion dollar” coin to FRB in return for 10 billion portraits of Benjamin Franklin is equivalent to the U.S. trading a “trillion dollar T-bond” to FRB for the same Franklin portraits. The FRB, itself a government agency, is hardly going to try to sell those bonds if the market doesn’t want them, anymore than it would try to pass the trillion-dollar coin.
If one way is inflationary, so is the other way. If one way is NOT inflationary, then NEITHER is the other way.
Personally I think Obama should have shown some spine and just ignored Congress and its debt ceiling. The platinum coin was a way to do that legally, but there were others.
As for being a “slimy way to get out of paying a debt” ( ), the idea is to avoid incurring additional “debt.” Or, if you agree with me that the teradollar coin isn’t so different from a teradollar bond held by FRB, it’s a minor legal trick to bypass a “slimy” Congress.
), the idea is to avoid incurring additional “debt.” Or, if you agree with me that the teradollar coin isn’t so different from a teradollar bond held by FRB, it’s a minor legal trick to bypass a “slimy” Congress.