December 08, 2012
Trillion dollar platinum coin
Here's one of the wilder suggestions floating around for what the President could do if Congress fails to raise the debt ceiling.
To explain the idea, let me begin with some basics on how the banking system functions. If some day you were to bring that jar of coins sitting on your dresser to deposit them in your bank account, the bank would credit your account with the amount of the deposit, and you could then use those funds to write checks.
Similarly, your bank may have an account with the Federal Reserve. If your bank brought some currency or coins in to deposit them with the Fed, the Fed would credit their account by that amount. These deposits with the Fed are known as reserves. A bank can use its reserves to pay for anything it wanted, for example, by instructing the Fed to transfer those reserves to some other bank in payment for an asset that the bank purchased.
The U.S. Treasury also has an account with the Fed. When you write a check to the IRS, your bank's account with the Fed is debited and the Treasury's account is credited. The Treasury can use those funds to buy anything it wants, by instructing the Fed to transfer those reserves back to some bank to whose customer the Treasury wishes to make a payment.
Although Congress has prescribed limits on the Treasury's ability to print currency or mint coins of copper, nickel, silver, or gold, the law specifically says (hat tip: Brad Plumer) that there are no restrictions on what kind of platinum coins might be issued:
The Secretary [of the Treasury] may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.
This provision was intended to allow the Treasury to create special platinum coins for collectors, and American Platinum Eagle coins have been issued in denominations up to $100. So what if Secretary Geithner's discretion led him to mint a couple of trillion dollar American Platinum Eagles?
What would the Treasury do with a trillion dollar coin, you ask? Why, deposit it in their account with the Fed, of course. The Fed would then credit the Treasury's account with 1 trillion dollars. The Treasury could in turn then order the Fed to transfer those reserves to the accounts of any banks to whom the Treasury owes money. The result is that the Treasury's bills are all paid with money that would be newly created by the Fed.
Brad Plumer asked Joe Gagnon, an economist whom I respect, what he thought of the plan:
"I like it," says Joseph Gagnon of the Peterson Institute for International Economics. "There's nothing that's obviously economically problematic about it."
I think Joe says that in part because he finds (as do I) political posturing over the debt ceiling so ridiculous. Once Congress has specified a level of spending and a level of taxes, the amount the Treasury needs to borrow is completely determined by those two decisions. To pretend that there is some separate, third decision of whether to borrow money is simply political theater aimed at the most gullible of voters. Another reason for Joe's endorsement of the plan may be that he favors substantially more expansionary monetary policy, which direct monetization of a few trillion dollars worth of federal spending unquestionably would be.
But even if you grant those two arguments, there is nonetheless something very troubling from an institutional perspective about the proposal. It basically amounts to the assertion that the Treasury Secretary has the unilateral power at any time to monetize completely the entire U.S. debt. The Treasury could issue a dozen or so of these coins and then pay off the Treasury's debtors at maturity just by writing a check written on its resulting ginormous account with the Fed. The creation of this power is I suspect something that Joe and every other sensible economist would view with abhorrence.
The plan requires the Fed and courts to play along. The Fed would need to agree to credit the Treasury's account for the deposit of the coins. I doubt the Fed would voluntarily hand over complete control of the nation's money supply to the Treasury in this manner. And the courts would be asked to confirm that legislation originally intended to satisfy a small group of numismatists in fact ceded authority to the President to monetize the entire outstanding debt of the U.S. government.
It's a cute idea to address a valid current concern, perhaps. But there has to be a better way to solve this.
Posted by James Hamilton at December 8, 2012 07:19 AMdigg this | reddit
This won't play out well in the markets either, I'd imagine. I think, as you point out, the optics of this plan are just terrible.
The better way to solve this problem, again, as you refer to is to simply eliminate the debt ceiling. Congress decides how much money the govt should borrow when it sets spending and revenue collection numbers, not when it comes time to actually pay the bills.
Additionally, if congress does want to keep a cap, it should be a debt to average GDP over 10 years kind of ratio, as opposed to an arbitrary number.
Posted by: Addicted at December 8, 2012 08:16 AM
JDH But there has to be a better way to solve this.
Welcome to the world of second-best solutions.
could issue a dozen or so of these coins and then pay off the Treasury's debtors at maturity
But it's not just paying off holders of maturing Treasury debt; the coin could also be used to fund day-to-day cash management operations at the Treasury.
I doubt the Fed would voluntarily hand over complete control of the nation's money supply to the Treasury in this manner.
Of course, the Fed could unilaterally impose restrictions on the Treasury's account that would still allow the Fed effective control.
Once Congress has specified a level of spending and a level of taxes, the amount the Treasury needs to borrow is completely determined by those two decisions.
Yep. There's a lot of misunderstanding about the planning, budgeting, execution and disbursement processes in the federal government. Let's take a somewhat extreme example...but not all that extreme. Suppose DoD wants to build a new joint fighter that's going to cost almost $500B to deploy. DoD does the planning and inserts the $500B request into the President's budget submission. The Congress agrees that the new joint fighter is needed to protect freedom, democracy and the American way, so Congress appropriates those dollar in FY2013. The "color" of this particular pot of money would have a 3 year budget execution life, so the contract award to Big Warbucks Enterprises happens in FY2015. Building the new fighter is complicated with a production lead time of 60 months after contract award. That means Big Warbucks Enterprises will present the Treasury with a bill in FY2020. Unfortunately, the economy is in recession in FY2020 so tax receipts are down. It is at this point that Treasury must borrow money. Cutting FY2020's budget (which would be really stupid in a recession) does nothing to address Treasury's immediate need to borrow money in FY2020 to pay for programs that were approved and appropriated in FY2013. And if you want to talk about military construction projects or building new submarines or aircraft carriers, then the time horizon is even longer. The typical voter simply does not understand the difference between Congressional appropriations, budget "execution" and Treasury disbursements and cash management. And this gets back to my comment about using the coin to fund day-to-day cash management. In my humble fighter plane example it's important to understand that the Treasury does not borrow in FY2013 to pay for FY2013 appropriated projects. And the Treasury does not borrow in FY2015 to pay for FY2015 "executed" projects. The Treasury only borrows in FY2020 to pay for shortfalls to cash disbursement requirements in FY2020, and the appropriation that authorized that disbursement may have occurred many years in the past. Put another way, Treasury is borrowing today to pay for budgets that Congress appropriated at the beginning of the Iraq war.
Posted by: 2slugbaits at December 8, 2012 08:29 AM
Would the Fed really have to agree to credit the Treasury's account or can Treasury force them to do it? From the Federal Reserve Act.
"The moneys held in the general fund of the Treasury, except the five per centum fund for the redemption of outstanding national-bank notes may, upon the direction of the Secretary of the Treasury, be deposited in Federal reserve banks, which banks, when required by the Secretary of the Treasury, shall act as fiscal agents of the United States; and the revenues of the Government or any part thereof may be deposited in such banks, and disbursements may be made by checks drawn against such deposits."
"Wherever any power vested by this chapter in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary. " 12 USC 246
At the end of the day, I think the US Government, specifically, the Treasury, is the ultimate authority on what is and isn't money in this country, despite the fact that we no longer use Treasury Notes, but Federal Reserve Notes instead.
Posted by: Nylund at December 8, 2012 08:32 AM
Typifying the economists world,select few variables erase all others and the problems are solved.
The USA are in autarky the USD is not a medium of exchange, foreign holders of US treasury are captive investors. Then,give art a chance purchase few paintings.
Almost true though but for how long?
Posted by: ppcm at December 8, 2012 09:55 AM
What can be more joyful than a newly circulating meme that Obama can issue infinite amount of dollars with no check from congress?
Where will it take us? Their highnesses King and Queen Obamas issuing a few trillion dollars to reward and support their loyal subjects?
It is deeply troubling that so many if not majority of Obama cheerleaders would refuse to oppose or even criticize major executive branch power grab, as long as it benefits their own dear leader.
Can the same people even imagine without excruciating pain: Bush having legal power to issue trillion dollar coins at will to support his aims?
Posted by: B Turnbull at December 8, 2012 10:23 AM
When Secy. Geithner tells his staff to issue some bonds, they credit an account with the label "Debt Held by the Public", I suppose. I imagine that this is the account subject to the debt limit.
When Chairman Bernanke tells his staff to buy some of Uncle Sam's bonds, they credit an account in the assets part of their balance sheet.
If the Treasury has issued, say a trillion dollars in bonds, and the Fed has purchased $750 billion of those bonds, what is the "Debt Held by the Public"? Is it still a trillion dollars or only $250 billion?
I'm an amateur in economics, so I have what seem to me to be related questions. Does the Treasury pay interest to the Fed on the bonds the Fed holds? If a bond held by the Fed matures, does the Treasury Dept. pay off the bond? Would it subtract that amount from "Debt Held by the Public?"
Thinking about these matters in the context of a fiat monetary system leads me to the conclusion that the Treasury and the Fed are the right and left pockets of Uncle Sam's trousers, and that the Fed could pay off the entire Federal debt, if it wanted to. I can't see where there might be a limit. It's not as if the Fed only has some fixed amount of money.
I hope that these questions appear worthy of brief answers.
Posted by: Left Coast Bernard at December 8, 2012 10:34 AM
"Once Congress has specified a level of spending and a level of taxes, the amount the Treasury needs to borrow is completely determined by those two decisions."
Technically, this is not quite true, because you have omitted the fourth term in the equation: seigniorage.
So it would be correct to say that once Congress has specified spending and taxes, the amount of "borrowing plus seigniorage" has been determined. So if the Congress sets a maximum value of borrowing, it implicitly also sets a minimum on seigniorage. So one could argue that the laws passed by congress REQUIRE the treasury to fund the government this way.
Posted by: ed at December 8, 2012 10:53 AM
Do we know that that the legislative intent of that provision was for numismatic purposes? I'm tempted to wonder whether an MMT-sympathizing staffer may have slipped that in to provide future Treasury Secretaries the tools needed to work around Congresses that can't govern.
Posted by: Samuel Conner at December 8, 2012 11:23 AM
The Treasury could issue a dozen or so of these coins and then pay off the Treasury's debtors at maturity just by writing a check written on its resulting ginormous account with the Fed.
What's so troubling about that? Absent a debt ceiling, there's already no limit to the government's spending ability other than Congressional discretion--can we really imagine a scenario (outside of Tea Party fantasies) in which Congress would let itself get unfunded by world financial markets? The economic function of T-bills, in its entirety, is to give more money to rich people and institutions as a reward for having money (in the form of Treasury interest payments) -- the Fed can already control interest rates by paying interest on reserves. Or, you know, there's no law against borrowing money when you don't happen to need it -- we could issue T-Bills as a public service to provide an investment vehicle. Or, hey, the government makes the laws; we could just mandate a minimum interest rate. But it's hardly the end of the world if people have to invest in the real economy to get their returns.
At the end of the day, either you acknowledge that fiat currency is fiat and the government controls the money supply as it chooses, or you don't, and you're embracing some variation of a fixed-money standard. Whether you keep score by recording a government debt and issuing bonds against it is basically an accounting artifact, not a sacred trust.
Posted by: Tiercelet at December 8, 2012 12:19 PM
@2slugsbait, While I'm not arguing against your entire comment, I would argue that it is us, the citizenry that uses US currrency as a primary unit of trade, who decide what is money and what its worth, if we're refering to money strickly as a unit of trade with store value (Yeah i read a textbook). I'm just having touble understand how this would not lead to growth in inflation, which is the FEDS responsibility to prevent. Wouldn't creating a trillion dollar coin and using it to balance our spread sheets be the same as printing a trillion dollar bills, even if it never sees circulation? I'm just confused about how this wont increase the money base so please someone help me out.
Posted by: JamesD380 at December 8, 2012 12:27 PM
The sooner the Fed can return to normal monetary policy, the better, as they know how to do that. The cheer would come from shattering the illusion that debt is and the falseness of the austerity position. Remember, this is only the power to eliminate debt, not the power to change taxes or spending.
Posted by: Lord at December 8, 2012 01:09 PM
Apart from the fallacious debt ceiling imagined by partisans competing for their place at the trough no longer overflowing with slop, the real debt ceiling occurs when net interest reaches 25% of receipts after SS and Medicare.
At the trend rates of gov't spending to private GDP and receipts to spending and private GDP, the D Day for gov't deficit spending and interest/receipts arrives no later than the next term of the CEO of the militarist-imperialist corporate-state. Obummer will be lucky if he leaves office before it occurs. The next corporate-state CEO will be forced to declare war on the elder Boomers' SS and Medicare transfers, the poor and working poor and their food stamps, and our foreign creditors, including China and the oil emirates.
The next CEO will need an excuse to default on the unserviceable imperial debt and declare war on those who will be blamed for the default.
History will record that the rentier-financier, militarist Anglo-American oil empire collapsed in the period '13-'16 to the early '20s.
Posted by: Bruce Carman at December 8, 2012 01:18 PM
Left Coast Bernard: Debt issued by the Treasury and subsequently purchased by the Fed would be subject to the debt ceiling but not counted in "debt held by the public". The Treasury pays interest on these Treasury securities to the Fed, which the Fed then returns back to the Treasury (a sizable sum at the moment). You are entirely correct that a unified government account, in which the Fed and Treasury are combined as if they were a single entity, is often a correct way to think about these numbers. Indeed, that is why we bother to calculate a magnitude like "debt held by the public".
Posted by: JDH at December 8, 2012 01:43 PM
Given my outlook for a continued decline in the volume of globally net exported oil that is available to importers other than China & India, I think that it is inevitable that we will see a continued shift from a "Wants" based economy to a "Needs" based economy.
Most oil importing OECD countries are trying desperately to keep their "Wants" based economies going, in the face of constrained global oil exports and the in face of a doubling in annual global crude oil prices from 2005 to 2011/2012, as they run large deficits, financed by real creditors and by accommodative central bankers.
Unfortunately, among the many casualties are millions of young people who graduate every year, frequently with five and six figure student loan debts, with job skills that were designed for a world which really doesn't exist any more.
For most net oil importing OECD countries, my conclusion for a while has been that the earlier that they default on unsustainable debts, e.g., Iceland, the better off they are.
Posted by: Jeffrey J. Brown at December 8, 2012 02:12 PM
Ratio of Global Net Exports of oil (GNE) to Chindia's Net Imports (CNI) Vs. Global Public Debtm 2002 to 2011:
GNE = Top 33 net exporters in 2005, BP + Minor EIA data, total petroleum liquids
Debt data from Economist Magazine
Posted by: Jeffrey J. Brown at December 8, 2012 02:15 PM
Professional analysis from the lawyer who originally brought the platinum coin to the attention of the blogosphere:
Posted by: JKH at December 8, 2012 02:19 PM
If appropriations exceed revenues, then the government has to cover the difference, either by borrowing the money or by printing it. An administration can't simply refuse to spend appropriations: the Supreme Court told Nixon that forty-odd years ago. Borrowing is preferable, but if borrowing is infeasible then the money must be printed.
It turns out that the legal way for a US administration to print money is to mint high denomination platinum coins, but that's just an implementation detail. People get unnecessarily hung up on that detail. The important issue is borrow vs. print.
Posted by: Jim at December 8, 2012 02:29 PM
But there has to be a better way to solve this.
Ah, but you have forgotten that we are plagued by a Republican party of terrorists who don't hesitate to hold a gun to the head of America. These are not rational people. (Evidence of this is their rejection of an innocuous Disabilities Treaty yesterday because of truly crazy conspiracy theories.)
Why would the platinum coin be considered radical if every sensible person realizes that it is simply the same outcome as if we didn't have crazy terrorist Republicans?
It is certainly less radical than FDR's executive order effectively ending the gold standard to save the economy from the Great Depression. One would expect Obama to do the same in order to protect the country from terrorist attack.
Posted by: Joseph at December 8, 2012 03:20 PM
b turnbull What can be more joyful than a newly circulating meme that Obama can issue infinite amount of dollars with no check from congress?
Where will it take us? Their highnesses King and Queen Obamas issuing a few trillion dollars to reward and support their loyal subjects?
I think you are misunderstanding how the coin would work. The coin would not increase the amount of money that the Executive could spend beyond what Congress appropriates. The coin only allows the government to immediately write checks for daily cash management rather than having to go out on the market for public debt. The inflation risk comes from the Treasury monetizing shortfalls to current operating expenses rather than financing those shortfalls by issuing debt. The coin is nothing like royal spending in days of olde.
JamesD380 I'm just having touble understand how this would not lead to growth in inflation, which is the FEDS responsibility to prevent.
You might have misunderstood my point. There is an inflation risk; however, I don't think that risk is a foregone conclusion. The inflation risk comes from the temptation to monetize shortfalls to operating expenses rather than borrowing from the public. That's clearly a risk. Now in the current economic environment I think a little more inflation would, on balance, be a good thing; but obviously using something like the platinum coin in 1979 would have been godawful policy. But just because there is a risk that does not mean the coin ipso facto
must lead to inflation. Having a central bank also carries with it risks of inflation, but I don't think we should abolish the Fed just because I can imagine some doomsday scenario in which the political process nominated and confirmed voting members on the Fed who were incompetent hacks.
Posted by: 2slugbaits at December 9, 2012 05:30 AM
A convenient loophole, but if it was abused then I have no doubt you would find 80 senators and > 350 congressmen willing to authorize a law to restrict the ability of the treasury to mint such coins (in other words, far more than the 2/3 necessary to override a veto).
Posted by: dwb at December 9, 2012 06:41 AM
Unless you are the parent of a child with a disability then I don't think you should call people who oppose the treaty "terrorists".
From Rick Santorum, you may recall he has a special needs child.
There are two very troubling provisions in this treaty. The first spreads the identical standard for the control of children with disabilities as is contained in the U.N. Convention on the Rights of the Child. This means that the Federal government, acting under U.N. directions, can determine for all children with disabilities what is best for them. The second, the education provision of CRPD does not support the parental rights rules of past U.N. human rights treaties. Omission of these rules would potentially eradicate parental rights for the education of children with disabilities...
What’s so problematic here is that the provisions of this treaty could open the door for a professional or government official to override the decision that we as parents need to make for our special-needs children.
Your diatribe is just another sideshow distraction from the real issue - - printing money vs borrowing money couched in terms of the centralization of power within the executive branch.
Posted by: Anonymous at December 9, 2012 11:12 AM
Anonymous printing money vs borrowing money couched in terms of the centralization of power within the executive branch.
You would be on firmer ground if you complained about Congress' dereliction of duty. Congress already appropriated the monies; now it's just a matter of paying for what they spent. We have a disfunctional GOP that one moment tells us "deficits don't matter" and it's okay to spend without taxing, and then when the bill inevitably comes due and creditors want their money the GOP plays games with the debt limit.
Tell us, do you think we should even have a debt limit?
Posted by: 2slugbaits at December 9, 2012 01:54 PM
Anonymous, thank you for illustrating my point. Absolutely nothing, nada, zilch in your quote from Rick Santorum is true. This is typical of the deranged, paranoid thinking typical of Republicans. This is the crazy, UN black helicopter stuff we've come to expect from Republicans. Yet 38 Republican Senators signed on to it. This is why the word Republican has come to become synonymous with the word crazy. Thanks for pointing this out.
Posted by: Anonymous at December 9, 2012 09:50 PM
But what would the markets revulsion be exactly if this was conducted? Everyone sells their existing US government bond holdings to intead hold a whole lot of, errr, USD cash instead? Or the market would then FX these USDs into another currency, therby handing the the USDs to their FX counterparty who promptly, and quite likely, buys USTs with them..?
Posted by: C Jones at December 10, 2012 04:58 AM
This suggestion just illustrates how ridiculous monetary policy has become. Reality is that Bernanke and the FED don't need any cover to spend. He has proven he has no limit on what he can distribute. He has sent money to Europe without any authorization. He buys MBS without any authorization. He admits he is experimenting with the economic system bu that is okay. It is just money. His books are never audited so what the hey.... I wonder, when was the last time Bernanke ate at McDonalds?
Have you ever dreamed of having a check book where you could just write any check you wanted to and never have to worry about paying for anything?
Posted by: Ricardo at December 10, 2012 05:11 AM
Yes, I surely missed this incredible gem of propaganda: never mind that Obama issues trillion dollar coins to circumvent "terrorist"-filled congress--the money are to be spent only according to the budget of the aforementioned "terrorist"-filled congress.
With new free infinite bank account, it is only a matter of time (probably, sooner rather than later,) before the administration finds another loophole in one of the millions lines of federal legislation, and assumes the right and finds an urgent need to spend new money as per its own discretion.
The proposed assumption of the new power to print infinite amount of dollars to fight congressional "terrorists" is just an opening salvo. It appears very likely Obama's second term is going to be marked by much more aggressive push for the all-powerful executive branch.
Also, if Obama does succeed in assuming the right to issue infinite amount of dollars at will, with no check from congress, it may also signal a major defeat of very powerful banking cartel, which as of now has exclusive right to create new US money.
Posted by: B Turnbull at December 10, 2012 10:21 AM
B Turnbull What are you talking about? You're just rambling and venting. Minting a $1T coin does not...repeat, does NOT give the Executive new powers to spend money. Do you understand the difference between appropriating monies and disbursing funds? The Treasury cannot disburse funds that were not previously appropriated by Congress.
Posted by: 2slugbaits at December 10, 2012 03:20 PM
2slugbaits: What are you talking about? Apart from your usual pretentious histrionics, you just repeat your previous propaganda gem. Hint: re-read previous message, esp., paragraph 2.
Posted by: B Turnbull at December 10, 2012 11:19 PM
Although this scheme would set an undesirable precedent, it need not involve money creation. Assuming that the Fed is participating cooperatively, the Fed should simply issue the same mix of bonds that the US Treasury would have done if the debt ceiling allowed, and the Treasury should draw exactly this amount from its account at the Fed. Both should make clear that this is a one-off measure designed to defeat a threat of disruption. Hopefully, the holdouts in congress would then realise that their game is up, and agree to stop using the debt ceiling as a periodic hostage.
Posted by: RebelEconomist at December 12, 2012 05:46 AM
I am not an advocate of MMT but at least they are honest. The game of issuing Treasury bonds for the FED to buy - or $1trillion coins - is all smoke and mirrors.
As the MMT advocates understand, today the only restraint on the issuance of money is perception. Once the monetary authorities decide to drop the pretense we will not have to talk about Treasury bonds and debt ceilings or $1trillion coins. Of course the MMT advocates do not grasp the disaster that followed John Law or France after the issue of the assignat.
Posted by: Ricardo at December 12, 2012 11:14 AM
Rebel is right that this need not involve any net money creation. The Fed balance sheet currently holds over $2.6T in securities, including $1.6T in US treasuries, and $0.9T in government guaranteed mortgage securities. So any money creation by the Treasury could be easily sterilized.
That is, the first $2.5T that the Treasury actually spends from it's accounts could be easily offset by the Fed selling back into the open market an equivalent amount of Treasury backed debt.
So the Fed cedes no control whatsoever over monetary policy, at least until congress runs up another $2T+ in deficits. And even at that point, as Tiercelet points out, the Fed would still be able to restrain private spending if needed by paying higher interest on reserves (reducing the incentive to lend).
Posted by: acerimusdux at December 14, 2012 08:23 AM
What happens to treasuries and mortgage rates if the FED were to sell 1 Trillion of its assets in the near future?
Posted by: KevinM at December 23, 2012 01:16 PM