Steve Randy Waldman writes about finance and economics at interfluidity.com

~~~

Rebranding the “trillion-dollar coin”

So, hopefully you know about the whole #MintTheCoin thing. If you need to get up to speed, Ryan Cooper has a roundup of recent commentary, and the indefatigable Joe Wiesenthal has fanned a white-hot social-media flame over the idea. For a longer-term history, see Joe Firestone, and note that all of this began with remarkable blog commenter beowulf. See also Josh Barro, Paul Krugman, Dylan Matthews, Michael Sankowski, Randy Wray among many, many others. Also, there’s a White House petition.

Basically, an obscure bit of law gives the Secretary of the Treasury carte blanche to create US currency of any denomination, as long as the money is made of platinum. So, if Congress won’t raise the debt ceiling, the Treasury could strike a one-trillion-dollar platinum coin, deposit the currency in its account at the Fed, and use the funds to pay the people’s bills for a while.

Kevin Drum and John Carney argue (not persuasively) that courts might find this illegal or even unconstitutional, despite clear textual authorization. For an executive that claims the 2001 “authorization to use military force” permits it to covertly assassinate anyone anywhere and no one has standing to sue, making the case for platinum coins should be easy-peasy. Plus (like assassination, I suppose), money really can’t be undone. What’s the remedy if a court invalidates coinage after the fact? The US government would no doubt be asked to make holders of the invalidated currency whole, creating ipso facto a form of government obligation not constrained by the debt ceiling.

I think Heidi Moore and Adam Ozimek are more honest in their objection. The problem with having the US Mint produce a single, one-trillion-dollar platinum coin so Timothy Geithner can deposit it at the Federal Reserve is that it seems plain ridiculous. Yes, much of the commentariat believes that the debt ceiling itself is ridiculous, but two colliding ridiculousses don’t make a serious. We are all accustomed to sighing in a world-weary way over what a banana republic the US has become. But, individually and in our roles as institutional investors and foreign sovereigns, we don’t actually act as if the United States is a rinky-dink bad joke with nukes. As a polity, we’d probably prefer that the US-as-banana-republic meme remain more a status marker for intellectuals than a driver of financial market behavior. Probably.

The economics of “coin seigniorage” are not, in fact, rinky-dink. Having a trillion dollar coin at the Fed and a trillion dollars in reserves for the government to spend is substantively indistinguishable from having a trillion dollars in US Treasury bills at the Fed and the same level of deposits with the Federal Reserve. The benefit of the plan (depending on your politics) is that it circumvents an institutional quirk, the debt ceiling. The cost of the plan is that it would inflame US politics, and there is a slim chance that it would make Paul Krugman’s “confidence fairies” suddenly become real. But note that both of these costs are matters of perception. Perception depends not only on what you do, but also on how you do it.

The Treasury won’t and shouldn’t mint a single, one-trillion-dollar platinum coin and deposit it with the Federal Reserve. That’s fun to talk about but dumb to do. It just sounds too crazy. But the Treasury might still plan for coin seigniorage. The Treasury Secretary would announce that he is obliged by law to make certain payments, but that the debt ceiling prevents him from borrowing to meet those obligations. Although current institutional practice makes the Federal Reserve the nation’s primary issuer of currency, Congress in its foresight gave this power to the US Treasury as well. Following a review of the matter, the Secretary would tell us, Treasury lawyers have determined that once the capacity to make expenditures by conventional means has been exhausted, issuing currency will be the only way Treasury can reconcile its legal obligation simultaneously to make payments and respect the debt ceiling. Therefore, Treasury will reluctantly issue currency in large denominations (as it has in the past) in order to pay its bills. In practice, that would mean million-, not trillion-, dollar coins, which would be produced on an “as-needed” basis to meet the government’s expenses until borrowing authority has been restored. On the same day, the Federal Reserve would announce that it is aware of the exigencies facing the Treasury, and that, in order to fulfill its legal mandate to promote stable prices, it will “sterilize” any issue of currency by the Treasury, selling assets from its own balance sheet one-for-one. The Chairman of the Federal Reserve would hold a press conference and reassure the public that he foresees no difficulty whatsoever in preventing inflation, that the Federal Reserve has the capacity to “hoover up” nearly three trillion dollars of currency and reserves at will.

That would be it. There would be no farcical march by the Secretary to the central bank. The coins would actually circulate (collectors’ items for billionaires!), but most of them would find their way back to the Fed via the private banking system. The net effect of the operation would be equivalent to borrowing by the Treasury: instead of paying interest directly to creditors, Treasury would forgo revenue that it otherwise would have received from the Fed, revenue the Fed would have earned on the assets it would sell to the public to sterilize the new currency. The whole thing would be a big nothingburger, except to the people who had hoped to use debt-ceiling chicken as leverage to achieve political goals.


Some legal background: here’s the law, the relevant bit of which—subsection (k)—was originally added in 1996 then slightly modified in 2000; here is appropriations committee report from 1996, see p. 35; and legislative discussion of the 2000 modification.

Huge thanks to @d_embee and @akammer for digging up this stuff.

originally published at Intefluidity

Category: Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

25 Responses to “Can Treasury Issue Coinage to Meet Congress’ Spending? (Yes)”

  1. warren.buffett says:

    * Abolishing the Gold Standard looked ridiculous too. But, the fact of the matter is, all Intra-Governmental can be effectively cancelled out by this Trillion Dollar Coins.

    * Also QE without inflation means, there is not enough money supply for the economy to operate at full capacity, So someone has to print.

    I support the Platinum Coin Idea because it actually proves that fears of inflation, dollar crisis are all baseless and exists in the mind of Republicans/Zerohedge/Schiff fans

  2. river says:

    So I wonder if conservatives would get mad if Obama put Ronald Reagan’s portrait on the 1 trillion dollar coin?

  3. Frilton Miedman says:

    Catch phrase of the year – “colliding ridiculousses” – Awesome!

    That describes the oxymoron of Austrian economics perfectly.

    Constructing a fiscal scenario with super-low tax rates for the “investment class” while deregulating banks to the extent they ” Ponzi” the entire real estate market with fraudulently rated MBS derivatives, enabling them to make massive salaries extracted mostly at the expense of middle class home equity while paying tax rates a single mom pays under the guise of “job creation”.

    Waging wars to the benefit of defense contractors whom pay big bucks to campaign coffers,

    Writing a free check to campaign donors in pharma with medicare D – no strings attached on price negotiation,

    All done without a thought about revenues to subsidize it or the debt at the time…”Reagan proved deficits don’t matter” Cheney once said, when the treasury secretary warned him 10 years ago.

    In the end, when the entire scheme backfires – extract payment from those who lost the most at a time when we have the widest gap in wealth disparity of the developed world.

    Meanwhile, billionaire bribers like David Koch et al see no problem there, while they operate our politicians behind the scenes like so many string puppets to maintain the status quo,

    There’s no such thing as bribery, because “money is speech”.

    “Colliding ridiculousness”, maybe fighting fire with fire is the right idea….I could use a little ridiculousness from the left finally, for chuckles.

  4. Moss says:

    Since this whole fiasco is like high stakes poker I would just do it.
    Have your chips ready, play them if necessary.

  5. AHodge says:

    if its otherwise time to default its not crazy
    the solid conservative donald marron, a fiscal guy i respect, says so where i summarize his key points below
    believe he doesnt think they have to circulate

    for other solutions
    some legal experts think there is either a
    dont hurt US borrowing reputation language that is in funding legislation
    or general national security justification
    for ignoring the debt ceiling
    We could just do that, let them sue if they dare. dont know what the markets would do with that
    the court case could take years
    and use the coins as backup?

    marrons summary

    1. A legal loophole gives the Treasury Secretary apparently unlimited authority to mint platinum coins.
    2. Most observers think this is a terrible idea, but the legal arguments against it are weak at best.
    3. The minting the platinum coin needn’t mean monetizing our debt.
    4 economic arguments against the coin are stronger but manageable.
    The Federal Reserve has ample ability to offset any inflationary impact by selling some of the trillions in Treasury securities it already owns. As long as the Fed does its job, inflation would not be a risk.
    5. The best arguments against the platinum coin involve image and politics.
    Minting a trillion-dollar coin sounds like the plot of a Simpson’s episode or an Austin Powers sequel. It lacks dignity. And despite modern cynicism, that means something.
    6. Nonetheless the platinum coin strategy might be better than the alternatives if we reach the brink of default

  6. VennData says:

    Put a panda on it. Maybe the Chinese will buy it at a discount.

  7. you know, if you’d care for some ‘background’ on who /popularized/ this “Coin”-Idea, it started in the 20thC. with..

    http://www.nizkor.org/ftp.cgi/people/g/gritz.bo/ftp.py?people/g/gritz.bo/gritz.dat

    “Bo Gritz”

  8. RW says:

    I support the platinum coin alternative to default. Every summary I have seen makes it clear it is entirely legal and economic impact could be readily controlled.

    Even better it would counter an absurdity — congress forbidding the executive to pay for spending congress had already authorized — with an equal absurdity while preventing congress from forcing the president to break the law in violating the full faith and credit of the United States.

    For those reasons and for the sake of historical justice I would vote to put Ronald Regan’s image on the coin: He started this mess, let his icon help finish it.

  9. Robespierre says:

    Why isn’t anyone asking why wasn’t this used on the first debt-ceiling fight? This solution was known then so why now and not then? My guess is that Obama used the “crisis” to get the democrats to go along with social security and medicare cuts he was selling at the time.

  10. RW says:

    The Bipartisan Policy Center estimates that, if the debt limit is not raised, measures by the Executive to avoid national default will probably be exhausted somewhere between February 15 and March 1, 2013 (slideshow walks thorugh the estimates and some alternatives)

    Since it is unlikely that any truly extraordinary efforts will come from an executive as conventional and MOR as Obama’s — e.g., just ignoring the debt ceiling (illegal) or issuing coinage (legal but ‘inappropriate’) — it may not be long before everyone discovers just how dangerous the game the Republicans are playing really is.

    NB: If anyone were serious about exercising right of seignorage, any bill passed by the House to block minting coins would be DOA at the Senate.

  11. DeDude says:

    I still say that it should have Obama’s smiling face on one side and his bare ass on the other. Then he can hold it up in front of the Teahadist and tell them: “you can kiss and make up or you can kiss my ass; but you will not be able to blackmail “we the people” with our economy as your hostage.

  12. NoKidding says:

    Why is the idea stuck at 1 trillion? Should be higher.

  13. Jon G says:

    I think it should have Lewis Carrol on one side, a looking glass on the other.

  14. znmeb says:

    But … but … but … creating viable sustainable fiscal and monetary policy for a huge diverse economy is *hard*! It requires *dialogue* and *hard work*, *thinking*, *planning*, gathering *data*, making and validating *models* of human behavior. It requires *communication* amongst the voters, the media and the elected and appointed officials. It requires reporters and editors to ask some pointed questions and dig beneath the press releases. And it requires most of all *decisions* – how do we achieve growth *and* equality of opportunity?

    But hey – fuck all that shit! Let’s just invoke the 14th Amendment or mint a $1T platinum coin. Because it’s just a game, right? It’s not like any of this matters to people, is it? Because if it *did* matter, we’d be holding the President, the party leaders in both Houses, the Cabinet and the Federal Reserve Board accountable and not letting them get away with this horseshit!

  15. jbegan says:

    Can the Treasury mint the coin? Sure. Will it? Nope.

    Of more interest is the Civil War added 14th Amendment, which declares that Congress cannot disavow debts that it has voted in:

    “The validity of the public debt of the United States, authorized by law, including debts incurred for payments of pensions and bounties for services in suppressing insurrection or rebellion,” the critical sentence says, “shall not be questioned.”

    Although Obama has said he won’t use this Amendment, in my mind, unless it is revoked by Congress, it stands as an inviolable requirement. I’d like to see the Right Wing, who happily dodge and dismantle responsibilities to their constituents while holding reading of the Constitution explain why this Amendment should be ignored when the 2nd Amendment seems to have been written by the hand of God. I might point out that the mention of ‘pensions’ sounds remarkably like ‘Social Security’, doesn’t it?

  16. BillZ says:

    The trillion dollar coin idea hits a brick wall since the coin would not be “legal tender.”
    http://goldandsilverblog.com/why-the-trillion-dollar-platinum-coin-wont-work-0450/

  17. socaljoe says:

    Why only one coin?

    Let’s mint a couple thousand $trillion coins.

    We can abolish all taxes… handouts and bailouts for everyone… no more wars… we just buy our enemies off with a couple $trillion… a couple $billion for every household… no need for congress… the executive branch has all the money to do whatever it wants… what a wonderful idea!

  18. Does anyone else find it curious that no one seems to mention George Soros relative to the coin seigniorage concept whereas he was the first person we wrote about floating the idea many moons ago. Then there was Pete Peterson’s office who came out with their piece. Joe Weisenthal’s “perfect antidote” has gotten more coverage on this concept than some of the biggest contributors to the presidential re-election campaign.

    http://tradewithdave.com/?p=14624

  19. bubbles says:

    Obama does not give a sh!t whether its legal or not just as much as Dub didn’t think any law or the Constitution mattered!

  20. DeDude says:

    Oh- no they are already chopping the coin down from 1 trillion to 25 billion – is that inflation or deflation?

    http://money.cnn.com/2013/01/09/news/economy/platinum-coin-debt-ceiling/index.html?iid=HP_LN&hpt=hp_t3

  21. pjschgo says:

    I’m still not convinced the debt ceiling is legal under the Constitution. If the 14th Amendment says the validity of the US debt shall not be questioned, how can you pass a law giving Congress the option to not pay for the spending it has already authorized?

  22. Greg0658 says:

    I attended “Lincoln” yesterday as this thread was being telegraphed into here & there .. my hometown still runs 35mm and didn’t make the 1st round plays

    not all but most comments sound like paperpushing whiners “how am I to make a living”
    – if this kind of stuff takes hold

    of course the OpSys needs real rules to divy up real work and the meat & potatoes
    – create the drive in people to build a better mouse trap aka moviehouse

    my 1st printed comment on “Lincoln” (the movie) (& I guess the EdSys) I had no idea how much horsetrade’g went into passage of the 13th