Oh, good, we’re hitting the debt ceiling earlier than expected. Fire up the platinum mint!!
I see that a former director of the U.S. Mint has come out in favor of the platinum coin gambit. He certainly has credibility on the issue, yet I remain unpersuaded.
His argument is too cute by half. Characterizing the scheme as routine, insisting (without supporting evidence) that it would have no macroeconomic effects, and claiming that it would preserve Congress’s authority over the debt ceiling are respectively, dishonest, begging the question, and sophistry.
But, you know what? Go ahead and threaten the Republicans with this. I suggest that we keep churning the coins out until we have a giant surplus since it couldn’t possibly ever have any negative macroeconomic effects.
In truth, I have no idea what kind of collateral effects it would have. I’m pretty sure Congress will fix the loophole on a bipartisan basis before long. And the president will sign it.
In the meantime, maybe the Democrats can trade it for the elimination of the debt ceiling.
You missed Tim Geithner’s 12/21 memo to Congress?
what about it? That he warned of uncertainty?
He announced we had reached the debt ceiling and that he was going to start borrowing from certain government retirement funds to cover it until Congress acted.
love it
In the meantime, maybe the Democrats can trade it for the elimination of the debt ceiling.
Er, yes, that’s the whole point.
It only has macroeconomic effects when money is out of sync with the production of goods and services, when demand causes factor prices to inflate, or when it causes the relative value of the currency to change with respect to international currencies.
The act of minting a coin, depositing in the Fed, and using that to adjust the US debt downward from the Feds own holdings of the debt has no effect. Zero effect. It’s just accounting. An asset swap.
What the President and the Congress do as a result of that move has effects. If you removed the debt ceiling entirely (as one should) you would be in the same situation. And what the Fed does as a result of the changed situation.
Diehl’s assertion of its routine nature is based on his assumption that a prudent Treasury Secretary would transfer the coin back to the Treasury once a new debt ceiling had been approved by Congress. And that the Mint would melt down the coin.
If Congress fixes the loophole, they are empowering the financial industry even more, not just establishing a prudent Treasury policy. And the bankers are the very ones who are driving this deficit brinksmanship.
Of course, the Congress will close the loophole in a bipartisan manner and the President will sign it. They’ve should that they are incapable of doing anything that will ease the suffering of ordinary people in this economy. Why not give the Republicans additional tools for holding the country hostage? Why bother to vote anymore with this sort of economic stupidity going on because it is politically expedient.
Yes, to expand on that point the Fed (if it wishes) could take $1T of the ~$1.6T of U.S. government bonds it currently holds and sell those bonds, vacuuming up cash. (Those bonds are fully backed by the full faith and credit of the U.S. government, with absolute 14th Amendment protection. They are existing bonds previously issued within Congress’s debt limit.) Just as with a $1T increase in the debt limit there would be a $1T increase in non-federal holdings of U.S. bonds. The total amount of U.S. government debt outstanding would remain unchanged (that’s the debt limit), but a bit more of it would be circulating in the financial markets.
However, the U.S. could urgently use some unconventionally generated expectations of future higher inflation to pop out of the zero lower bound right now. Although the Fed could fully neutralize a $1T platinum coin (if “neutralize” is even the right way to think of it), it’s probably not good monetary policy to do so. Economies in the Great Depression that generated some inflation expectations did rather well.
It used to be conventional wisdom during the 1950s and 1960s that inflation of 3% per year was necessary to promote full employment. The structure of employment has so changed since then that broadscale macroeconomic policy like that likely is not as useful as it was with a more uniform workforce.
I was just pointing out that the inflation bogeyman was a false argument against the trillion-dollar platinum coin.
What a trillion-dollar increase in the debt limit would do is permit up to a trillion dollars of stimulus instead of austerity. Which could produce more than a trillion of offset to the deficits in tax revenue even at today’s stingy rates.
I don’t think it would be inflationary in the classic sense of printing money reduces the value of already existing money. That’s different from arguing that doing something so radical would have no macroeconomic effect. I can’t predict what kind of fallout it would have in DC or in the markets. If you do it as some kind of one-off thing never to be repeated, it might cause no more than a small ripple. But it would be a very big deal if it was left to stand as an option in the future.
Inflation means general increase in prices resulting from the supply of money exceeding the stable monetary value of the goods and services produced in the economy. Period.
You are arguing expectations. Of course, unique events have expectations that cannot be predicted in advance. And the effects on Wall Street and in DC would not necessarily be aligned in the short term.
Letting it become a normal means of operation is only a risk if the folks making decisions about it are not prudent about what their decisions mean.
Using currency issuance to fund government risks driving the economy so hard through government spending that individual factor prices drive inflation sectorally based on shortages. It weakens the political power of the financial sector in some of the same ways that paying down the national debt would; hence the panic when Gore suggested eventually paying down the national debt.
Given the current situation, the prudence argument for not doing on a normal basis because “it doesn’t enforce discipline” is a false argument. Governments cannot enforce discipline on themselves except as outside forces–hopefully and informed electorate–pressure them to do so.
It would be a big deal if normalized, yes. It would be a fundamental change in the way that the US government was financed. But that doesn’t make it necessarily more risky in fact for either the political process or the economy over the long term.
IMO it is very unclear that the Congress authorized (or intended to authorize) a new method of funding gub’mint via mass currency issue by passing a commemorative coin law in 1996. And that issuance being unilaterally by the executive, no less!
But I agree that you are right that this is what the debate is all about—funding the operation of gub’mint solely via currency issuance. I think an argument can be made that the constitution does not contemplate any methods other that Congress’ power to lay taxes and issue debt as the sole means of funding national operations.
Diehl’s comments show the law was intended to make money. The point was to sell collectibles to a growing platinum collectables market, especially in Japan, and make money by that route. The lack of constraints was to maximize the Mint’s ability to compete, and thereby earn more money. So you can’t even say that coinage for profit is against the motives for the bill, just that they didn’t realize how much could be made from the fact that everybody wants to “collect” money.
A lot of good points, and yet the discussion seems as if it’s going on in a vacuum. The highly unusual idea of platinum coin financing makes sense ONLY in the highly unusual circumstance where an insane lower house refuses to raise the debt limit to pay debts ALREADY INCURRED. Absent that, all the criticisms apply; but granted that, it is justified to the extent that it allows payment on debt that congress has already incurred.
For the same reason, it is not in and of itself inflationary. It would be inflationary if the fiat creation of that wealth equalled the authorization to spend it. But that is not the case. It’s more like an insurance fund out of which the treasury can make up the difference in debt owed if the house refuses to raise the debt ceiling.
In other words, it is, as I think Booman already pointed out, a way of neutralizing the equally bizarre attempt of the House to turn the debt ceiling into an instrument of extortion. However, it should not be seen as some kind of flashy gimmick to show the Republicans we can be just as crazy as they are. Rather, it is a pragmatic means of neutralizing that threat. If it was not originally so contemplated, and if this has never been done before, you have to consider that no one has ever used the debt ceiling as a partisan cudgel before either.
The whole point of this extortion is to force the president to make a deal to solve a problem the House has created arbitrarily and by itself. The whole point of the platinum coin is to say, no, I’m not going to negotiate something that isn’t even in my constitutional jurisdiction; I have my own solution, and if you don’t like it, you have one too: raise the debt ceiling.
Once the GOP sees the futility of the debt ceiling gambit, there will be no need to go through any of this again — and that can be guaranteed through legislation.
In the ordinary course of things, the Fed sells bonds in order to slow down the economy by sucking up cash. Since it maintains its own account, the money it vacuums up doesn’t have any direct impact on the debt, just as there is no cost to the taxpayers when they buy bonds. I don’t see where what you said is factually wrong, but I don’t think it would have the impact you are implying.
The Fed can buy or sell bonds without it changing our overall debt level. They bought how many billions worth of subprime mortgage bonds without it increasing our debt?
So, what is the mechanism that you are suggesting here?
When the Fed receives the trillion-dollar coin, the only thing it is obligated to do is mark $1 trillion of government loans that it owns as paid and change its asset composition to reflect the exchange of currency for the loan payable.
It is not obligated to do anything external to the Fed’s own account.
That is the monetary circuit-breaker here. And why it has zero effect on the economy.
Aren’t you missing a step here?
You better be sure that the last part works under the letter of the law. Because the ultimate aim is to get cash to pay bills. Unless you are going to get commemorative coins in lieu of a SS check, the third step is unavoidable.
Now, even if it works, there a trillion in new cash circulating, so I don’t see how you can say it is nothing but accounting.
That’s one reason I prefer minting in a denomination suitable for bank transfers. The trillion dollar coin mechanism involves using the Fed in a way that hasn’t been done before. I doubt there’s an actual legal constraint, since the Fed has a lot of latitude, but there might be, and the optics aren’t good anyway. If the denomination is small enough to be used in government transactions, then it’s just paying with cash and relatively unremarkable.
No I’m not. The debt is owed to the Fed, which created the money out of nothing, just like it does bank debt. Payment to the Fed’s own account ends the debt that the Treasury owes. The Fed is not obligated to finance it by reducing the money supply by calling in T-bills.
The federal debt is indeed less. The Treasury doesn’t sell it to the Fed; the Fed is an instrument of the federal government in this case, one that handles the financing of the government debt. It essentially destroys the T-bills in its own account.
Yes, you are definitely missing something.
The problem is that the Treasury doesn’t have any money, not that they owe too much.
Imagine that you owe Tom $10 dollars and you owe Bob $10. If Bob forgives your debt, it does nothing to help you pay Tom. You still need a $10 bill to give to Tom.
The treasury ultimately needs cash, not loan forgiveness.
If the Treasury had money lying around to pay their bills, then we wouldn’t be increasing our debt to the point that we hit the ceiling.
What’s going on is that the Treasury is out of cash and has maxed out its credit card. We can get the credit company (the Fed) to forgive a trillion in debt and or we can get the credit company (Congress) to extend us another trillion in credit. Only in the latter case can we get the cash we need to pay bills.
What you are suggesting is the first case, where we get the Fed to forgive our debt to them so that we can borrow the same amount from them. This satisfies Congress because our debt remains unchanged.
But we have to borrow the money one way or the other.
Governments don’t operate like Bob and Tom. They are the ones the create the money. Under the Constitution, Congress has the authority to do that through coinage. It also has the authority to issue debt, which succeeding Congresses have turned into a means of issuing money so as to avoid inflation (and also to make bankers happy–Alexander Hamilton and all that).
Yes, the government can create money, but it still works the same way.
In this case, a coin is created that, depending on how you look at it, either creates a trillion dollars or destroys a trillion dollars.
Say that Tom is the Treasury, Dick is Congress, and Harry is The Fed.
Dick says that Tom can borrow a $1000.
Tom borrows $1000 from Harry.
Tom is out of money.
Dick says, too bad.
Tom creates a coin and gives it to Harry in exchange for a $1000 loan.
Now Tom owes Harry $2000.
Dick is angry.
Dick wants to impeach Barack.
Now, you could have Harry just give Tom $1000 with no expectation of repayment, but then you’d have an extra $1000 floating in the economy.
Whether it is bonds or it is a coin, there is still a debt.
Unlike the Fed, the Treasury can’t issue fiat currency in the trillions.
Unless we say they can because of some oversight in a commemorative coin bill.
Okay, I see what you are saying. Because mint coins are exchanged for credits rather than bonds, you can do this without issuing bonds. but you have to promise to buy back the coin. Still, it gives you cash in the meantime.
The platinum coin is an asset that the Fed holds. Under the law, it has its face value just as much as if the Fed held gold coins or silver coins.
Because it is a one-of-a-kind minting for a very high denomination, the Fed can hold it as check against inflation in platinum. If platinum ever reaches or exceeds the denomination of the coin, the Fed can sell it for its metallic value.
The purpose of transferring it back to Treasury would be for the sole purpose of destroying the coin. The debt has been fulfilled with the transfer of the coin to the Fed and the elimination of the debt.
It’s just a matter of accounting rules for exchanging assets. It is cash. And the Fed holds the cash. Coinage creates cash.
That’s not what this says:
Read more:
In other words, you sell the coin to the Fed for a trillion.
You get a trillion dollars credited to the general fund.
You buy yourself a trillion dollars of headroom under the debt ceiling.
You issue a trillion dollars in bonds.
You buy the coin back.
You melt it.
In this scenario, you have merely borrowed a trillion dollars that you were not authorized to borrow, but you haven’t actually created any new money. Rather, you have destroyed a trillion in debt.
I think what you are mixing up is that the coin would create a trillion dollars if it were not ultimately bought back and destroyed. But destroying it is like burning a trillion dollars. If the coin isn’t destroyed, then it’s the functional equivalent of printing a trillion dollars and having the government use it all to pay debt.
That doesn’t seem to be what is being contemplated here.
What they doing is basically fooling around with account sheets to raise the debt ceiling by a trillion.
The only way this works is if Treasury is able to issue more bonds and the Fed “destroys” the ones it holds in exchange for the coin. Then, it’s reversed when the debt ceiling is raised.
This is pointless anyway the President has already said he will not do this. I know it’s getting more mainstream press but that’s just because it’s entertaining not because of the merits of the idea, which I really don’t care about one way or the other.
We need to get back to solving problems and the sooner we can get past this charade the better.
Obama will mint the coin in a minute if the alternative is default. If the alternative is just severe austerity, I’m not certain. In any case, unlike during the last debt ceiling fight, the administration has not been saying much this time about taking options off the table. I’m pretty certain the administration plans to clear the table at some point, though it might want the GOP to face some blowback from their stupid before the option is exercised.
Incidentally, Lawrence Tribe seems to think it is legal, and contra Booman is pretty convinced no one has standing to challenge in any case.
I don’t care one way or the other. Although I do believe the President has taken this particular approach off the table.
He took the 14th amendment option off in 2011. I haven’t seen that the administration has taken anything off the table this time. The only thing I’m really certain of is that Obama won’t oversee a default.
I combined a story that Boo posted about what he thought and one where he said he was briefed from the WH that were posted in December. You’re right, I don’t see anywhere that he’s taken it off the table.
If you promise to buy back the coin, that’s a debt.
Why do you keep throwing up strawman?
Obama can only spend money as directed by Congress. That’s true whether he mints money, prints money or borrows money.
That’s incredibly clear. You confused it in a previous post. Why?
The proposal by the Mint the Coin folks is to mint a single coin that would be bought back and destroyed by the mint once the debt ceiling was raised. That’s been stated repeatedly. Krugman’s article which you refer to states that there would be macro-economic effects if that was not made clear.
And you throw out the idea of minting loads of them. Why?
Your issues have been addressed rather clearly. Repeatedly. I find your reaction odd.
Although Booman couches his objections in legal terms, he is (like me) a layman when it comes to both the Law and Economics. But his real concern is valid, and it is a political one. At the moment Obama more or less has the political establishment on his side – and the republican fundi right where he wants them – somewhat marginalised in terms of the realities of DC Power.
The problem with the Trillion $ coin, from a political point of view, is that, for the first time, Obama will be perceived as really having pushed the boat out to quite an extreme degree. He will be seen by the DC establishment as having behaved in a disconcertingly radical way.
From the establishment point of view it doesn’t matter so much if the GOP crazies say and do all manner of crazy things, but if Obama is perceived to have gone crazy/radical, then the establishment and the markets will be seriously spooked. The stability of the whole systems depends on Obama being the adult in the room, to a degree that almost no one is prepared to acknowledge or articulate on either side of the aisle.
So if Obama does go the Trillion $ coin route the establishment (both GOP and Dem) will be spooked because it would undermine the whole bookkeeping scam that is the national debt whereby the Fed normally creates money ex nihilo and lends it to the Government.
I could envisage Obama being impeached if he went down that route, even though using impeachment as a tool in a policy dispute is even more ridiculous than minting Trillion $ coins in the first place.
I would see any impeachment process failing lamentably in the Senate and the GOP House being futher discredited and Obama’s hand being strengthened immeasurably through that process, so I would generally welcome the Trillion $ coin option on both economic and political grounds, but I do have to concede it is a high risk strategy only to be pursued if the GOP really doesn’t back down on the debt ceiling.
I see Booman as a member of the Dem establishment now – he will laugh at this – and can well see why the Dem establishment holds its hands in horror at the prospect of another impeachment process. However if you really want to destroy the GOP rather than rehabilitate it (as Booman wants), I can see no other option.
President Obama will no sooner issue a $1 trillion coin than he’ll denounce clean coal or reverse his decision to nominate John Brennan, for exactly the reason that you say. He’s the opposite of a transformational president. Had he chosen a different life, he might have become a transformational activist.
Wow,
I go out for a morning ride on my unicorn pony, and all sorts of posts are up.
Now I think I will go troll the Notre Dame sites, and laugh my a$$ off at them.
.
I attended a top tier law school, and I can say that the legal analysis offered by you and Kevin Drum is pretty weak. You say that no judge would uphold the law based on what it literally says, but instead would turn to legislative history and intent to determine what it means. There is a reason that actual legal scholars disagree with you guys.
Federal courts have moved hard in the direction of textualism over the past few decades. The main proponent of this type of analysis is Justice Scalia. If the words are clear then they won’t look to legislative history or intent. The words in this case are pretty clear. I think courts would uphold a plain reading of the statute and allow Congress (not the courts) to change the language if it is a problem.
Sorry, but I really have to laugh at this;
“Federal courts have moved hard in the direction of textualism over the past few decades. The main proponent of this type of analysis is Justice Scalia.”
MAHAHAHA!!!!!
Yes, Conservative Justices have ‘moved toward textualism’ and yes, ‘Scalia is the main proponent”.
But only when it suits their policy goals. When it does NOT suit their policy goals, they ignore ‘textualism’. And Scalia is certainly the main proponent of THAT. Just watch what they do to the Voting Rights Act.
Maybe you should have gone to a lower tier law school for lessons in seeing what is in plain sight.
I have to ask, would this really be your advice to the WH if you were in the Office of Legal Counsel writing the memo on this? That Scalia would be the first one up defending a (Dem) admin from evading the Repubs and their debt ceiling statute because the Congress passed a commemorative coin act in 1996? Because of the “clear meaning” rule?
As you know, there are numerous ways around the “clear meaning” rule of statutory interpretation that permit a court to look at Congressional intent behind a statute—such as the clear language not leading to an absurd result. I don’t think Scalia and his boyz would have too much trouble concluding that allowing a 1996 commemorative coin law to evade the Congressional debt ceiling to the tune of trillions would be an “absurd result”.
Scalia and his Boyz are rather partisan, and they don’t seem to find too many self imposed judicial “rules” limiting them from doin’ exactly what they want to do. And letting Obama defeat the Repub House isn’t something they want to see happen.
I agree with other commenters. Scalia’s textualism is a relevant as his judicial philosophy was in Bush v. Gore.
This isn’t some small loophole. This is a total end run around our system of governance.
Perhaps this will make more sense.
http://www.businessinsider.com/why-the-mint-the-coin-debate-could-be-the-most-important-fiscal-polic
y-debate-youll-ever-see-in-your-life-2013-1
John Maynard Kenyes: “Money is a creation of the state.”
Yes, this.
Money is a symbol. Most people think of it as something real, but it isn’t. It does not have an inherent worth, it has a derived worth. And that derived worth is manipulated all the damn time.
The distinction here is the extremely public nature of it, which means it would happen in the view of many people who don’t really understand what money is, instead of just in the view of people who mostly do … and who generally aren’t bothered by that manipulation, especially if they can position themselves to take advantage of it.
Dang, that’s a good article. I have to admit this discussion has been helpful to my own thinking about money. For example, I had already gotten the concept that the creator of money can never truly be bankrupt, but I hadn’t quite gotten how ridiculous the idea was.
I’m coming around on the coin thing. I’m not completely convinced, but I’m evolving.
You bring up statutory construction and legislative intent, but those are only used when there is some ambiguity in the meaning of the text to clear up.
This whole discussion (everywhere, not just in this blog) reminds me of the Monty Python sketch where the Amazing Mystico (and Janet) put up a block of flats using hypnosis. A government official assures us that the building is perfectly safe — as long as its residents believe in it. If that’s not a perfect metaphor for the economy, I don’t know what is.
I notice that the Republicans are taking this possibility seriously enough that they are now ridiculing it. But, their image is of a coin with Obama’s likeness on it. Don’t they know that the appropriate image is either of Ronald Reagan, Alan Greenspan, or Milton Friedman (oh, why not all three plus Paul Ryan).
I’m partial to Reagan on one side, Ayn Rand on the other.
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But We May Sue You
I’m posting this here for a reason that will become apparent in a moment. I have a user who cannot see anything but a ‘1’ in the top left corner of the article on people hating Congress once he clicks to read the comments. He sees it in Chrome, Firefox, and Explorer. I use Safari, and it renders perfectly. Is anyone else unable to see comments in the article about people hating Congress?
If I’m logged in, everything looks fine and I see the comments in that Congress thread.
If I log out, then check the Congress thread again, I only see the “1” in the top left of the page when I click on the comments.
I’m using Firefox on Win7 if it matters.
HTH. Good luck.
Cheers,
Scott.
Yes, it happens to me as well in both Firefox and Chrome on a Mac. It only happens if I am not logged in and only for this post.
Firefox, not logged in, I saw the 1 instead of comments. Safari, logged in, I see the comments
I am perplexed.
Firefox, logged in, I saw the comments
I get the feeling that no matter what evidence/logic/facts is presented, no matter who or how many lawyers/treasury officials/experts come out and declare it plausible, BooMan will always be unpersuaded and oppose this. I certainly haven’t seen him suggest anything that would sway him.
And a person who has made up his mind no matter what but still pretends to be openminded, is a person that is a little lost in his own emotional stubbornness. Not in general, just on the issue of minting the coin.
BooMan and others are getting a bit carried away by this debate. He’s horrified by the optics (of minting the coin), and thus he can never support it no matter what happens.
No matter what. Let that sink in.