Tyler Cowen on the trillion dollar coin.

Tyler Cowen has the best analysis of the coin option:

And let’s say that — somehow — the whole thing miraculously worked out well from start to finish.  The testier Republicans would in fact get exactly what they want.  They would receive isolation from any negative consequences from brinksmanship, and a new narrative about how President Obama is a fascist incarnate.

If not taken off the table, the trillion dollar coin option makes it much more likely that the US will go over the “debt cliff.”  That is, more likely that Congress will not vote to raise the debt ceiling by the deadline.  This is because the GOP doesn’t want to be blamed for forcing the US government to default, and hence is reluctant to do so.  Nor do they want to force the administration to suddenly cut off spending for the military, Medicare, Social Security, etc.  So their threats are empty.

On the other hand the GOP would be happy if the Obama administration adopted the coin option, as it looks like a crazy idea to the average American.  It would be a wonderful political issue for the GOP in the 2014 elections.  So they’d be far more likely to push the US over the debt ceiling if they thought that it would lead to a trillion dollar coin that would be acutely embarrassing for Obama, rather than a debt default that would be acutely embarrassing for the GOP.

And that is why the Obama administration will not use the coin option.  On its economic merits I think it’s a good idea.  However, if I was Obama’s political advisor I’d urge him to loudly reject the idea for political reasons.  If he ignores my advice and mints the coin anyway, I’ll strongly support the move since I’m a hugely influential blogger who can single-handeledly turn around public opinion on the issue it will be a sunk cost and I’ll try to minimize the damage by convincing the public that it’s better than default.

PS.  Off topic, but wouldn’t you know that when Obama finally does something I support (picking Hagel) the GOP is opposed.  Apparently the GOP is upset that Hagel is not a warmonger who favors ever-increasing military spending.

Update:  Nick Rowe sent me a very good article on NGDP targeting by his co-blogger Stephen Gordon.


Tags:

 
 
 

74 Responses to “Tyler Cowen on the trillion dollar coin.”

  1. Gravatar of acarraro acarraro
    8. January 2013 at 07:14

    Personally I think it’s really absurd that the republicansare refusing to raise the debt ceiling and still agreeing to pass continuing resolutions like that was different from passing a budget.

    If they were serious, they would raise the ceiling and shut down the government by refusing to pass the CR. At least it would be a reasonable position. And it would be a lot better that refusing to pay for things they purchased already…

  2. Gravatar of foosion foosion
    8. January 2013 at 07:24

    Obama should ignore the question of the trillion dollar coin. If pressed, he should say he fully expects the House to be responsible and increase the debt limit.

    Using the coin would be better than default, but it would still be very bad. Politically it’s easy to mock and substantively it would raise risks by making the market even more aware how dysfunctional our politics has become.

    I agree with acarraro

  3. Gravatar of Saturos Saturos
    8. January 2013 at 07:36

    Felix Salmon also links to this rebuttal (http://www.unfogged.com/archives/week_2012_12_30.html#012671) of Vivian Darkbloom’s position on legality, so Scott can feel vindicated.

  4. Gravatar of Saturos Saturos
    8. January 2013 at 07:50

    Shouldn’t you call out Stephen Gordon’s comments on dynamic inconsistency? (one more time.) I’m convinced it’s not a problem, but then I’m also convinced that sticky nominal wages are the key rigidity.

  5. Gravatar of RebelEconomist RebelEconomist
    8. January 2013 at 08:19

    Since I was only able to comment late on your previous thread on the platinum coin trick, I will make a similar comment here.

    There is a good argument to respond to the Republicans’ use of the letter of the law to make trouble by using the letter of the law to thwart them.

    My suggestion, however, would be that, to avoid any money creation, the Fed issues exactly the same bonds that the Treasury would have issued, and the Treasury uses a platinum coin to purchase the proceeds. This would allow government business to proceed exactly as it would have done without the debt ceiling. Perhaps the Fed could give bond holders an option to convert to an identical treasury bond when a resolution of the debt ceiling allows, and it would probably help to give investors some notice of the change as some may need to establish a formal credit line for the Fed before buying the bonds. I was involved a similar takeover of UK treasury debt issuance by the Bank of England, and as far as I can recall, it went smoothly.

  6. Gravatar of TallDave TallDave
    8. January 2013 at 08:48

    Scott, this is a common fallacy you should avoid — there’s absolutely no reason for the U.S. to default irrespective of the debt ceiling, revenues are many times interest payments (in fact we can easily cover SS and Medi as well). Not only has the GOP passed legislation mandating uninterrupted debt service, CRS has ruled Treasury can prioritize.

    Not extending the debt ceiling essentially just means the government must operate with a balanced budget. That may have consequences, but default is not one of them.

    This whole debate has been consistently misframed — the danger is not that the debt ceiling won’t be raised, that has very little impact on our ability to repay debt (it’s not like the gov’t is incapable of operating under a balanced budget). The danger is that spending won’t be cut, and that eventually our debt will be unsustainable, which can lead to default.

  7. Gravatar of dwb dwb
    8. January 2013 at 09:07

    i cant resist commenting on the trillion dollar coin, its so much fun.

    1. i doubt the Treasury could mint a trillion dollar coin. Likely they can only mint money to conver expenses a week or a month out, not a years worth of future deficits.

    2. I think many macro bloggers are missing the bigger picture of minting a trillion $ platinum coin. Suppose instead the Treasury decides to mint a trillion dollar gold coin (essentially the same except for statutory authority), and that coin contains (say) 1 oz of gold. Now we have a defacto gold standard and a massive devaluation of the dollar (the previous value was about ~1660$/oz). A platinum coin works no differently. The market value of platinum is roughly the same (1572/oz). Minting a 1 oz trillion dollar coin essentially says the dollar is worth 1 trillionth of an oz of gold.

    If the US mints any coins, they are probably going to have to do it in a way that the 8332 tons of gold covers the publicly held debt, plus a considerable margin of error because there is no going back once you do that.

    I dont think spending a trillion dolars is inflationary, but I do think that minting a trillion dollar coin devalues the dollar far more than Nobel prize winning economists imagine.

  8. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    8. January 2013 at 09:09

    Have any of the advocates of the platinum option bothered to read the relevant law;

    http://www.gpo.gov/fdsys/pkg/USCODE-2011-title31/html/USCODE-2011-title31-subtitleIV-chap51-subchapII-sec5112.htm

    Say, this part;

    ———-quote——–
    (2)(A) The Secretary shall sell the coins minted under this subsection to the public at a price equal to the market value of the bullion at the time of sale, plus the cost of minting, marketing, and distributing such coins (including labor, materials, dies, use of machinery, and promotional and overhead expenses).
    (B) The Secretary shall make bulk sales of the coins minted under this subsection at a reasonable discount.
    (3) For purposes of section 5132(a)(1) of this title, all coins minted under this subsection shall be considered to be numismatic items.
    ———endquote———-

    The Canadians colloquially refer to their dollar coin as ‘the looney’. Appropriate here too.

  9. Gravatar of acarraro acarraro
    8. January 2013 at 09:11

    TallDave, I don’t think that you are correct.

    The government has entered into contracts with various providers to buy certain services. That money has already been spent. You cannot simply decide to cancel the contract and not get the service. If it does, it will be declared in default. If the government doesn’t pay on a signed contract, you can certainly get a court order stopping the government from paying some people before others.

    Expenses that have not been approved already are a different matter and the republicans could stop those by refusing to pass a CR. The debt ceiling is not about that. It’s about things the government has already purchased but not paid.

  10. Gravatar of acarraro acarraro
    8. January 2013 at 09:14

    dwb, I don’t think you thought your comment through.
    Are you saying that $100 bill is worth $100 in paper and ink?
    The denomination of a coin is not related to the value of the metal. A quarter is not worth 25c in metal.

  11. Gravatar of Randomize Randomize
    8. January 2013 at 09:33

    dwb,

    The treasury already mints gold American Eagles that contain 1 ounce of gold, sell for considerably more than their raw materials cost, and have a face value of only $50 dollars.

  12. Gravatar of TallDave TallDave
    8. January 2013 at 09:38

    acarraro,

    Contractors aren’t bondholders. I’m guessing you don’t live in IL, we have invoices two years old that the state hasn’t paid yet. It’s not the same as default.

    In any event, they are a relatively small portion of the budget, which is mostly transfer payments.

  13. Gravatar of acarraro acarraro
    8. January 2013 at 09:40

    Patrick, I think you are mistaken. The bit you quoted applies to that section only, which is related to the issuance of gold coins only. That’s why it has to be platinum…

  14. Gravatar of TallDave TallDave
    8. January 2013 at 09:43

    Also, in relation to the coin, dwb is correct — you’re confusing circulating currency with collector’s coins such as the Silver Dollar Eagle. The law in question relates to the latter, not the former.

  15. Gravatar of Geoff Geoff
    8. January 2013 at 10:05

    Dr. Sumner, you wrote:

    “On its economic merits I think it’s a good idea. However, if I was Obama’s political advisor I’d urge him to loudly reject the idea for political reasons. If he ignores my advice and mints the coin anyway, I’ll strongly support the move since {…} it will be a sunk cost and I’ll try to minimize the damage by convincing the public that it’s better than default.”

    Why is minting a $1 trillion coin better than default? Default would raise interest rates on government debt, and that will decrease its ability to borrow and spend out of borrowing. That means there will be a greater relative supply of savings that go to private investment as opposed to financing government spending.

    Is that not a good thing? Yes, it will probably mean higher interest rates on private debt as well, but as long as the Fed maintains NGDP, then there shouldn’t be any demand side recession from the higher interest rates.

    I am small government, but I am no fool. I know that if the government can keep borrowing more, and the Fed keeps printing more, there is ZERO incentive for the government to shrink itself. Government can only be shrunk from without.

    Bankruptcy is the small government proponents’ only feasible option. Relying on the goodwill of politicians is rather naive.

  16. Gravatar of Jim Ancona Jim Ancona
    8. January 2013 at 10:10

    I posted this as a comment on Tyler’s post, but it seems relevant here and I’m interested in the answer:

    I see a number of people on the “pro-coin” side here arguing that, in the absence of a debt limit increase, the only alternative would be default. To me, it seems much more likely that the administration would simply stop paying some bills in order to temporarily balance income and expenditures and thus avoid exceeding the debt limit. Since they would have great discretion as to which bills not to pay, I imagine they would tailor the cuts to maximize the political pain to opponents of the debt limit increase. Imagine the possibilities: Stop paying businesses in Republican house districts and red states. Or close the national parks and DC attractions. Even delay SS checks. I expect such a strategy would rapidly lead to a settlement more-or-less on the administration’s terms.

    Would someone who believes that a debt limit crisis will inevitably lead to default be so kind as to explain what’s wrong with my reasoning?

  17. Gravatar of Jim Ancona Jim Ancona
    8. January 2013 at 10:20

    Keith Hennessey proposes a strategy that might work for the GOP.

    http://keithhennessey.com/2013/01/07/a-modest-debt-limit-strategy/

    Of course, because it might work, I doubt they’ll do it.

  18. Gravatar of Doug M Doug M
    8. January 2013 at 10:21

    What leverage do the Republicans have right now?

    As far as I can tell, very little. The best as I can see that they do is to say, we will relent on the sequester for the spending cuts we want and give a moderate rise to the debt ceiling, or you get only a small rise and you will eat the full sequester.

  19. Gravatar of acarraro acarraro
    8. January 2013 at 10:22

    I am not arguing it’s not a gimmick, but if you read the law Patrick linked, it states in multiple place at what price the government can sell gold and silver coins (the bullion value). There is no such section for platinum. Given that it’s stated in multiple places, one could argue that it’s not a general implied requirement. Given that there is no such requirement for base coins, there is a “precedent” for it. It’s just a badly drafted law…

    I think there is a difference between a long delay in payment to a statement of non-payment. Given the size of the deficit, there would be a lot of people not getting what they expect. Many orders of magnitudes.

    I also doubt that a benefit recipient wouldn’t have standing to sue the government if he doesn’t receive the benefits required by law. Do you really think there is no class action lawyer who will not sue the government for the money? The law is in the books. You might not like the law, but it’s there.

  20. Gravatar of The trillion dollar coin is an utterly idiotic idea « The Market Monetarist The trillion dollar coin is an utterly idiotic idea « The Market Monetarist
    8. January 2013 at 11:19

    [...] Scott Sumner and Tyler Cowen also comment on the trillion dollar coin – for some reason the two gentlemen [...]

  21. Gravatar of Don Geddis Don Geddis
    8. January 2013 at 11:30

    @TallDave: “The danger is that spending won’t be cut, and that eventually our debt will be unsustainable, which can lead to default.”

    US debt is denominated in US dollars, and the government has the ability to print as many dollars as they want. You may get hyperinflation, but you never “need” to default. For a nation with fiat currency, default is always a simple choice, not something forced upon you by creditors.

  22. Gravatar of ssumner ssumner
    8. January 2013 at 12:00

    Geoff, People often argue with me based on particular political outcomes, such as smaller government. But on questions of PROCESS those arguments don’t sway me. I’m trying to make the US less like a banana republic. I favor governance structures that seem effective, not those that always happen to produce whatever I favor. Otherwise I would favor abolishing democracy and instituting myself as dictator. That would provide me with the sort of libertarian policies that I favor, right?

    I believe that countries with effective governance are not places where one side steamrollers over the other, but rather where there is a fair degree of consensus and people work together.

    It seems to me that your argument would push Obama toward supporting the coin, since he favors big government.

    BTW, This is one reason I support the parliamentary form of government.

  23. Gravatar of ssumner ssumner
    8. January 2013 at 12:05

    Jim, That seems like a reasonable idea.

  24. Gravatar of Geoff Geoff
    8. January 2013 at 12:52

    Mr. Don Geddis:

    “You may get hyperinflation, but you never “need” to default.”

    What about for a nation where its debt vastly exceeds its tax revenue base, such that hyperinflation will make its expenses rise exponentially while its revenues rise only linearly?

    Hyperinflation cannot avoid default in those circumstances. Japan satisfies this criteria.

    Too often I see people treating hyperinflation and default as if they are mutually exclusive alternatives, when in reality they can become intertwined such that one causes or is associated with the other. In other words, not even a state with fiat money creation ability can stave off “hyperdefault” if it has a high enough debt load.

  25. Gravatar of TallDave TallDave
    8. January 2013 at 12:54

    Don — yes, I’m assuming we won’t send trillion-dollars coins to our creditors :)

  26. Gravatar of Geoff Geoff
    8. January 2013 at 13:17

    Dr. Sumner:

    “Geoff, People often argue with me based on particular political outcomes, such as smaller government. But on questions of PROCESS those arguments don’t sway me. I’m trying to make the US less like a banana republic. I favor governance structures that seem effective, not those that always happen to produce whatever I favor. Otherwise I would favor abolishing democracy and instituting myself as dictator. That would provide me with the sort of libertarian policies that I favor, right?”

    Hmmm, aren’t we always in the context of “process”? Seems like there is no room for libertarianism if you take non-libertarian processes for granted and treat them as laws of nature.

    I am having trouble understanding your dictatorship comment. In my view, one can’t impose libertarianism by dictatorship, because libertarianism is simply the removal of all forms of dictatorship, from the individual to the society level. If you were to become official dictator, and you tried to “impose” libertarianism on others, then because you could not initiate violence against anyone, lest you violate libertarianism, you would not in fact be a dictator at all. You would be in pretty much the same position you’re in now. Nothing you say would be backed by the threat of initiating violence, so you can’t be a dictator in the strict sense of the term. Heck, you and I can call yourself a “dictator” now, and you would have the exact same power as you would if you were “official” dictator of the country.

    Libertarianism can only be practised through individuals choosing to adopt it as both end and process. You can’t be forced to be a libertarian, and you can’t force others to be libertarian. Forcing others to be libertarian is just another way of saying protecting yourself and those who want your help, from non-libertarians who want to use violence to get their way.

    “I believe that countries with effective governance are not places where one side steamrollers over the other, but rather where there is a fair degree of consensus and people work together.”

    We cannot negotiate with those who say, “What’s mine is mine and what’s yours is negotiable.” – John F. Kennedy.

    “It seems to me that your argument would push Obama toward supporting the coin, since he favors big government.”

    That’s doubtful. I think saying “On its economic merits I think it’s a good idea” is going to push him to supporting the coin option a lot more than saying “The state ought to default.”

    “BTW, This is one reason I support the parliamentary form of government.”

    The fact that this $1 trillion coin idea is even being considered is one reason why I support bankruptcy of such a parliament.

    Or, I could ask “What parliamentary form of government?” Most Congressmen have essentially abdicated their power to the executive, because of how much power it already has, which would be drastically reduced if they could no longer borrow at such low costs.

  27. Gravatar of MikeDC MikeDC
    8. January 2013 at 13:17

    “But on questions of PROCESS those arguments don’t sway me. I’m trying to make the US less like a banana republic.”

    By advocating the minting of $1T coins. OK…

    Anyway, can you explain the mechanics how this would work on the Fed side?

    I haven’t heard anyone explain why the Fed would be amenable to buying a $1T coin from the Treasury. The Fed has been adding to its balance sheet by buying what, $40-$60B a month securities? So this would constitute a massive increase (over a year’s worth in a month) in the amount of debt it issues.

    Yes, it gets that $1T coin as an asset on the other side of its ledger, but that’s a very different sort of “asset” than the bonds it’s normally buying when it generates more Federal Reserve Notes. The bonds remain fungible, sellable assets. The $1T coin is basically a fiction though, and they can’t do anything with it.

    That is, at least notionally, the Dollar is not quite a fiat currency, because it’s exchangeable at its source for another asset (the assets the Fed is holding). All dollars generated by the Fed are offset by fungible assets purchased by the Fed with those dollars. But since the $1T coin is not really a fungible asset, it just constitutes a massive devaluation of the dollar as Federal Reserve Note.

    Which, of course, also means a massive devaluation of the assets held by the Fed to offset that debt. Which, of course, leads to people around the globe running scared from the US dollar and US debt.

    So how would the economic effect of this be much different from default?

    In reality, I don’t see much difference between paying back $0.90 of every dollar owed on a bond or paying back $1.00 by Banana Republicing the dollar supply without an offsetting purchase of assets, thereby leading to an exogenous devaluation of the currency.

  28. Gravatar of Geoff Geoff
    8. January 2013 at 13:35

    MikeDC:

    “By advocating the minting of $1T coins. OK…”

    Mike, he economically advocated it. Politically, he is against it.

    For me? Nutritionally, I’m against it. But artistically? For it. Philosophically, I am against it. But mathematically, I’m for it. Chemically, not for it. Amusement-wise, definitely for it.

  29. Gravatar of bmcburney bmcburney
    8. January 2013 at 14:04

    “I believe that countries with effective governance are not places where one side steamrollers over the other, but rather where there is a fair degree of consensus and people work together.

    . . .

    BTW, This is one reason I support the parliamentary form of government.”

    Did you mean this as a joke? In the parliamentary form of government, the various sides rarely work together. The side with control of the government steamrolls the minority and there are few or no other institutions which can act as a check on the government’s power.

  30. Gravatar of Doug M Doug M
    8. January 2013 at 15:16

    MikeDC,

    The mechanics as I understand it…

    The treasury strikes the trillion dollar coin. Really it would make a lot more sense for the Treasury to mint 1000 billion dollar coins, but that is a little bit beside the point.

    It sells it to the Fed in exchange for a trillion dollars in T-bonds. The Fed is giving up interest bearing T-Bonds for a non-interest bearing coin. The Fed therefore should be looking to sell its T-bonds to the Treasury at an inflated price.

    The Treasury retires the T-bonds that it purchased from the Fed, bringing the Treasury below the debt limit. The Treasury issues new T-bonds on its regular schedule to fund its needs.

    At some future date one would expect the Treasury would offer to buy back its coin from the Fed in exchange for new bonds.

  31. Gravatar of Doug M Doug M
    8. January 2013 at 15:17

    MikeDC,

    The mechanics as I understand it…

    The treasury strikes the trillion dollar coin. Really it would make a lot more sense for the Treasury to mint 1000 billion dollar coins, but that is a little bit beside the point.

    It sells it to the Fed in exchange for a trillion dollars in T-bonds. The Fed is giving up interest bearing T-Bonds for a non-interest bearing coin. The Fed therefore should be looking to sell its T-bonds to the Treasury at an inflated price.

    The Treasury retires the T-bonds that it purchased from the Fed, bringing the Treasury below the debt limit. The Treasury issues new T-bonds on its regular schedule to fund its needs.

    At some future date one would expect the Treasury would offer to buy back its coin from the Fed in exchange for new bonds.

  32. Gravatar of johnleemk johnleemk
    8. January 2013 at 18:40

    bmcburney,

    I think any political process involving human beings will ultimately involve someone steamrolling over someone else — if by steamrolling you mean passing a measure 51% to 49%. I would venture that Parliamentary systems, adversarial as they are, promote constructive steamrolling — a Parliamentary government (at least in the Westminster form) would never become as gridlocked as the US government has. If it did, the issue would be resolved by a dissolution of the current occupants of the executive and/or legislative branches until the government has been reconstituted in a form that can actually function.

    I think another thing Scott is alluding to is that Parliamentary democracies, especially those which don’t take after Westminster as much, foment much more coalition-building than one typically sees in the US. Even if the coalition steamrolls its opposition, the point is that you have to (and can be reasonably expected to) build a coalition to begin with — unlike the US where if the 2 major parties can’t agree at all, everything is stuck until a crisis forces one of them to cave.

    In case it wasn’t clear, I agree with you that Scott is probably erring when he suggests that there’s a functioning form of government where one group of people don’t steamroll another. But despite the fragmentation of political factions in Parliamentary democracies, it seems to me that at least they are able to eventually arrive at a result that is broadly acceptable, without the need for shenanigans like floating the trial balloon of minting a $1 trillion platinum coin.

  33. Gravatar of Saturos Saturos
    8. January 2013 at 20:28

    Sorry, had to post this one – Rachael Meager has a suggestion for Scott: https://twitter.com/economeager/status/288382720931930112

  34. Gravatar of ssumner ssumner
    9. January 2013 at 06:37

    Geoff, I think you missed my point, In all of human history has a parliamentary government ever proposed somethign analogous to a trillion dollar coin? It’s one part of the government using a zany tactic to stop the zany tactic of another part of the government

    MikeDC, You said;

    “By advocating the minting of $1T coins. OK…”

    I’m trying to move toward a form of government where we don’t need to do silly coin tricks to avoid default. I am not advocating trillion dollar coins.

    bmcburney, The term “steamroller” was inappropriate, but I think you are confusing two issues. It’s true that parliamentary governments are often elected dictatorships, but they rely on coalition politics–parties in the coalition must work together. That’s why those governments tend to have basic agreement on issues like the health care system. They must govern responsibly because they can’t blame the other side for obstructionism. In the US the GOP pretends to be radical flamethrowers, obstructing everything Obama wants to do, but when they are elected they basically do the same stuff. They simply don’t want Obama to get credit.

    BTW, I meant proportional representation, not the first past the post of Britain and Canada.

  35. Gravatar of Geoff Geoff
    9. January 2013 at 09:02

    Dr. Sumner:

    “In all of human history has a parliamentary government ever proposed somethign analogous to a trillion dollar coin?”

    Since parliamentary government, in a historical context, is relatively young, and fleeting throughout the past, the lack of empirical examples doesn’t say much. After all, the day after democracy began in ancient Athens, there were few examples of democracy leading to welfare/warfare tendencies, but that doesn’t prove democracies don’t tend to lead to welfare/warfare societies.

    To answer your question, the answer is trivially yes: The current parliamentary government. That is sufficient evidence that parliamentary government can lead to proposals for $1 trillion coins, since $1 trillion coins are being proposed by the existing parliamentary government.

    “It’s one part of the government using a zany tactic to stop the zany tactic of another part of the government.”

    Yes, I agree. To be more accurate however, I would say:

    “It’s one part of the parliamentary government using a zany tactic to stop the zany tactic of another part of the parliamentary government.”

  36. Gravatar of Saturos Saturos
    9. January 2013 at 09:15

    Krugman has an innovative way around the debt-ceiling: http://krugman.blogs.nytimes.com/2013/01/07/moral-obligation-coupons/

  37. Gravatar of Mike Sax Mike Sax
    9. January 2013 at 09:35

    Wow. I would say ‘great minds think a like.’ In any case I was thinking exactly the same thing.

    http://diaryofarepublicanhater.blogspot.com/2013/01/platinum-coin-mania-and-why-im-not-fan.html

    http://diaryofarepublicanhater.blogspot.com/2013/01/forget-mint-coin-as-debt-ceiling-is.html

    I agree entirely. Obama doesn’t need the platinum coin or the constitutional option as the GOP threat is empty. He’s ruled out the constitutional option and I’d be very suprised if he doesn’t feel the same about the platinum coin.

    Regarding Hagel

    http://diaryofarepublicanhater.blogspot.com/2013/01/why-chuck-hagel-is-smart-pick.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+DiaryOfARepublicanHater+%28Diary+of+a+Republican+Hater%29

  38. Gravatar of Mike Sax Mike Sax
    9. January 2013 at 09:37

    why is my comment “awaiting moderation?”

  39. Gravatar of bmcburney bmcburney
    9. January 2013 at 10:33

    Johnleemk and ssumer,

    Either you have a system in which all of the functions of government are divided into separate institutions or you have a system of government in which all power is under the control of a single institution, group or individual. One system tends to promote “gridlock” the other “steamrolling.” The question of which system is prefered is really a question of which system is least worst.

    Of course, “gridlock” is not inevitable in the case of government founded on “separation of powers” principles and “steamrolling” is not inevitable in the case of unicameral parlimentary government. It may be, for example, that in a few years Nancy Peliosi will be returned to the speakership, conservative members of the Supreme Court are replaced and this terrible scourge of “gridlock” will pass away from the land. At that point, everyone will “work together” because any dissenting opinion will be “steamrolled.”

    And, with all due respect, in a democratic system all politics is based on coalition-building regardless of whether a two party system or a multiple party system is in place. The two US parties are themselves coalitions and might be divided into two or three parties in Europe. It is hard for me to see how that would make the situation dramatically better or worse.

  40. Gravatar of 篮球高手 篮球高手
    9. January 2013 at 10:45

    这个,我看可以! This is good!

  41. Gravatar of MikeDC MikeDC
    9. January 2013 at 10:51

    ssumner:
    1. Saying “the form of government” is a major factor in this debacle is like saying emphasizing that calling the type of car a major factor in a wreck and ignoring the fact it was driven by a 14 year old on crack.

    Take any form of government you want, and a chronically misinformed body politic will screw it up. History is filled with Parliamentary governments engaging in trickery, fraud and shenanigans.

    —————————
    By the way, I don’t understand the general dislike of the debt ceiling. When I’m programming a change to a piece of software, I find most users like to be notified of important pieces of information like this. IE, “Hey, if you go ahead with this operation, you might run out of memory. It might deplete more resources than you expect it to. Etc., etc.

    The debt ceiling is a perfectly logical confirmation request to force the user to prioritize and resolve contradictory goals when resources are starting to run scarce.

    Without a debt ceiling, we continue spending unchecked and unquestioned until the problem is bigger and even harder to deal with.

    In short, the debt ceiling is one of the BEST pieces of legislation around, because it requires recognition of an issue. Now, you might be disappointed that politicians aren’t solving it the way you’d like, and that the general citizenry is terribly misinformed about public finance. But that’s the message, not the messenger.

    Eliminating the messenger won’t eliminate the problem. On the other hand, since the problem is misinformation, confronting the problem is a good place to start.

  42. Gravatar of MikeDC MikeDC
    9. January 2013 at 11:06

    Doug,
    Thanks… OK, suppose instead of issuing new debt, the Fed, as you say, swaps the fungible, interest bearing asset of $1T in outstanding T-Bills for the non-fungible, non-interest bearing asset of a $1T coin. I still don’t understand why the Fed would do this.

    The practical effect is simply the Fed forgiving $1T in debt it’s owed, taking it off the balance sheet, and replacing it with an asset that’s not really an asset? That’s something like a third of the Fed’s total booked assets, by the way, and a vast majority of of its T-assets.

    Call me a skeptic, but this to me suggests that there would be significant economic impact stemming from the change in relative price between federal reserve debt notes and assets purchased by the Fed. There’s suddenly a lot less of one and no more of the other.

  43. Gravatar of Jeff Jeff
    9. January 2013 at 11:47

    There are a couple of problems with the platinum coin trick that should be considered.

    First is the issue of collateral. Section 16 of the Federal Reserve Act requires that Federal Reserve Notes not held in the vaults of Federal Reserve Banks have to be collateralized by securities. Acceptable securities include U.S. Treasury and agency debt, gold certificates, Special Drawing Rights and mortgage-backed securities. Notably absent from this list are Treasury-issued coins, platinum or not.

    Table 10 on the Fed’s H.4.1 statistical release shows that the Fed currently has about $2.6 trillion of assets that can be pledged, of which about $1.1 trillion already has been. So if the Treasury were to coin, say, $2 trillion in platinum coins and deposited them at the Fed, only $1.5 trillion of those deposits could be sterilized by selling off other Fed assets. Reserves would have to increase by at least $0.5 trillion to make up the rest.

    One might also ponder how the platinum coin trick affects the Fed’s “exit strategy”, i.e., the expected effort by the Fed to reduce the size of it’s balance sheet as the economy recovers. If the Fed has been forced to hold one or more trillion-dollar platinum coins as assets, it is not going to be able to shrink them off it’s balance sheet, as there is no one out there to sell them to. The only possible buyer is the Treasury.

    Then there is the credibility problem. How sure are you that the Treasury is really going to buy the coins back if and when the debt ceiling is raised? For that matter, with platinum coins removing the urgency from the matter, why would Congress raise the debt ceiling at all?

    Finally, there is also the potential here to create budget problems for the Fed that could interfere with the conduct of monetary policy. Currently, the Fed gets a lot of money from the interest on its bond holdings. Whatever is left after paying for Fed operations and interest payments on deposits at the Fed gets turned over to the Treasury. Among other things, this means that the Fed funds itself and is not subject to the congressional appropriations process.

    But if the Fed holds coins instead of bonds, it has to start worrying about budgetary constraints. For example, suppose inflation picks up and the Fed wants to tighten. If the Treasury won’t buy back the platinum coins, the Fed has to raise interest rates because it can’t shrink the balance sheet. But to do that, it has to raise the rate it pays on excess reserves. If there’s no income coming in from its assets, it doesn’t have the money to pay the higher interest on excess reserves. It would require a Congressional appropriation, which effectively means the Congress, not the Fed, makes monetary policy. Just the prospect of that has to hurt Fed credibility and make it harder to conduct policy.

  44. Gravatar of Philippe Bélanger Philippe Bélanger
    9. January 2013 at 12:18

    Dr. Sumner, I left a comment on Robert Murphy’s blog concerning this issue and he suggested that I ask your thoughts about it:

    Since taxes produce distortions, is not the optimal policy to have the government print all of its expenditures? The central bank can always offset unexpected shocks to the ngdp level, so this would be a way to have none of the negative supply-side effects of taxes, plus a stable ngdp level path. In the event that the Fed has no assets to sell as a way to reduce ngdp growth, it could always do so by raising interest rates on reserves.

  45. Gravatar of johnleemk johnleemk
    9. January 2013 at 13:39

    bmcburney,

    The Dems and GOP comprise different coalitions in of themselves, but paradoxically, they don’t need to unify in order to hold on to power. Members of Congress don’t need to vote in lockstep, even on fiscal life-or-death issues, to keep or gain control of the presidency, or a chamber of Congress. There’s not much of an incentive for a recalcitrant member or faction of the legislature to fall into line, other than things like plum committee assignments or special funds for their constituency.

    In the Westminster system, on an issue as crucial as the debt ceiling (the equivalent would be a “supply bill”, which is treated as a motion of confidence/no confidence), if the party or coalition in power can’t get the votes it needs to pass, the executive branch automatically dissolves and has to be replaced. The outgoing chief executive has the option to request the dissolution of the legislature as well, so the defeated government can seek a new mandate from the people. The debt ceiling crisis is much much less likely to occur under a Westminster government because either the government has a coalition that will hold, or it doesn’t, and the nation will immediately be able to elect a government that can hold.

    (This isn’t to say this successful new government is the guaranteed outcome, but it’s by far the likeliest one. The only modern case on record I know of where a political crisis saw new parliamentary coalition governments unable to form up is that of Belgium.)

    The other thing to note is that although parties in a 2-party system comprise various internal factions, these factions almost always remain nominally loyal to the party, whatever their issues. The Tea Party in Congress won’t desert the GOP; neither will the Log Cabin Republicans. In a Parliamentary democracy, part of the point of coalition-building is that no matter who wins, if your faction doesn’t have a majority, you have a choice as to who to to join with to build a government. You aren’t wedded to the Tea Party if you’re the moderate wing of the GOP who’s just won 40% of the seats in the lower house; you have the option of forming a coalition with the Greens, or a separatist party, or what-have-you. Boehner would probably have a better time of it if the Blue Dog Democrats were a party of their own that could enter his coalition if they wanted to. But the Blue Dogs are wedded to the Dems, and short of something cataclysmic, they won’t move over to the GOP whip. And I bet Obama would like it if there actually were a party of moderate Republicans he could negotiate with to join his coalition — but there isn’t such a party.

  46. Gravatar of bmcburney bmcburney
    9. January 2013 at 15:15

    Johnleemk,

    I don’t really understand the overall point you are attempting to make but I am prepared to disagree anyway.

    Although the belgian case is unusual in that no government whatsoever has been able to form for several years, governments of very brief tenure are common during periods of political “crisis” in the parlimentary system. In the belgian case and in many, many others such a crisis can persist for years in the parlimentary system without resolution despite the number of governments formed. This occurs in parlimentary systems because the formation of a government implies the ability to “steamroll” opposition and rival factions refuse to surrender that power to their opponents. This is rare in the US system as the existance of distinct institutional power centers which cannot be easily “steamrolled” by others promotes a process of negotiation. Despite the enormous fanfare, in the US we actually “went over” the fiscal cliff for less than 24 hours. Compare to Greece, Italy, Belgium, etc.

    In the US, it is utterly commonplace for factions within a party to desert the national party leadership on particular votes. This is particularly true in the House of Representative where actual “party line” votes are rare. It is also quite common for presidents to negotiate with faction leaders or individual members to obtain the votes necessary to move legislation. In fact, there is a faction of moderate Republicans Obama could have negotiated with to achieve his stated goals. Obama did not do that in the recent case because his actual goals are different than his stated goals. He wanted to humiliate all the Republicans, not negotiate with some of them.

  47. Gravatar of Benny Lava Benny Lava
    9. January 2013 at 15:53

    Jim Ancona,

    The problem with your solution is that it is unconstitutional. The congress has appropriated money to be spent. For the president to not spend money congress has directed would be either impoundment or a line item veto, both found to be unconstitutional.

    I think it interesting that so many “small government” advocates endorse a policy that unconstitutionally increases the power of the president. Is that what small government means? You should be careful what you wish for.

    If balancing the budget is truly the goal then maybe you should advocate for congress to refuse to pass a spending bill that is not equal to revenue. And if the government shuts down, like it did in the 90s, then so be it.

  48. Gravatar of Doug M Doug M
    9. January 2013 at 16:44

    I have started to have some bizarre fantasies about the trillion dollar coin.

    6 billion dollars in cash just went missing in the Iraq invasion. Literally, truckloads of cash, and, it just went missing. You want to keep track of a single coin… sounds like trouble.

    Monty Burns stole the Harry Truman Trillion dollar bill, and Fidel Castro stole it from Burns.

    I see the Joker (the Cesar Romero Joker, not the Heath Ledger Joker, or even Jack Nicholson Joker) stealing the coin, and Batman (Adam West, of course) tracking him down to recover it, but only after he escapes the Joker’s nefarious ‘Liquidity Trap.’

    Or the North Koreans attempting to counterfeit the thing. If they are successfully counterfeiting our $100 bills, then $1 Trillion coin would be fair game.

  49. Gravatar of MikeDC MikeDC
    9. January 2013 at 17:34

    The whole affair, and especially economists reactions makes me think of Dr. Strangelove. Krugman is definitely Buck Turgison and Sumner is getting dangerously close to sounding like Strangelove about the whole thing.

  50. Gravatar of johnleemk johnleemk
    9. January 2013 at 18:32

    bmcburney,

    It seems to me that you are at least partially countering your own suggestion that Parliamentary democracies are prone to steamrolling by noting that if there is no consensus, there is no consensus. The point is that hardly ever do you see a crisis balloon in a Parliamentary democracy with all parties in government more or less dawdling until the final hour. Italy appointed an economist who appointed an unelected cabinet of technocrats to lead a unity government in order to implement reforms. Greek society may be paralysed by internal unrest and uncertainty, but against the odds (and terrible monetary policy), government reforms have hardly stalled. Ireland and Iceland both acted decisively in their own ways to deal with the crisis. Parliamentary governments prevent the need for steamrolling because they systemically encourage more negotiation, and the possibility of coalition governance means virtually every faction can plausibly see itself as part of a government-in-waiting.

    No such possibility exists in the US. The Tea Party has hardly any chance of accomplishing its agenda if the Democrats control Congress. Perhaps the best they can do is extract some concessions by threatening to filibuster in the Senate. Certainly they have no shot at joining the government and influencing its agenda from within until the next election. If the Tea Party existed in, say, Germany, and was about as powerful as the Free Democrats actually are, it would have a plausible role to play in a coalition government, and if it were to join such a government, it could extract more concessions (Cabinet posts, parts of the legislative agenda, etc.)

    100% party-line votes don’t exist in most liberal democracies, even in Parliamentary governments, and log-rolling and horsetrading exist in every kind of legislature. But it’s impossible for the sort of gridlock and uncertainty you see around fiscal issues in the US persist for very long in Parliamentary systems (even if you don’t have a functioning government like Belgium, it doesn’t literally shut down the way the US government actually did under Clinton/the GOP House). A government that cannot whip enough votes to fund itself will automatically dissolve. The fact that the US government, when divided between multiple parties, routinely cannot log-roll or horsetrade enough votes to fund itself points to a problem with the system.

    I don’t know whether Obama’s negotiating failures stem from contempt/hatred of Republicans (likely) or just incompetence/inexperience (also likely). But that hardly absolves the system from blame because a system of government shouldn’t have to rely on always electing good negotiators (or alternately, a set of leaders entirely from one party) to get things done. The Parliamentary system means that if Obama couldn’t negotiate with various factions to form a functioning government, he’d likely have never been in power in the first place.

  51. Gravatar of MikeDC MikeDC
    10. January 2013 at 06:32

    johnleemk,
    I think your analysis is overlooking the fact that all of those parliamentary governments got themselves into a considerably worse position than the current US situation before they started acting decisively.

    The decisive Greek and Italian governments of today were replacements for dawdling, incompetent, or downright fraudulent systems that failed to deal with the problems well past the point at which the US system is at, and is at least provoking attempts to address the problem.

  52. Gravatar of Morgan Warstler Morgan Warstler
    10. January 2013 at 07:56

    Scott,

    wouldn’t $1T coin be essentially the end of QE? And cause stock market to get crushed?

    The Fed would be sterilizing the coin, and be selling T-Bills hand over fist.

    Effectively, the fed would no longer be “moving last” – Fiscal would be the only real QE, the only transmission mechanism, right?

    Others, what am I missing?

  53. Gravatar of Jim Glass Jim Glass
    10. January 2013 at 08:44

    A top (if not the top) legal blog weighs in on the platinum coin:

    http://www.volokh.com/2013/01/10/is-the-platinum-coin-ploy-legal/

    “I am quite skeptical that the platinum coin ploy would be legal.”

    Just like the two lawyers who commented on it here said. Geesh. Go figure.

    And since, also contra naive claims here, during any period of litigation the ploy would *not* be in effect — so it be useless for trying to beat the debt limit.

    Finis. End. The whole thing is a ludicrously bad idea that fortunately is as impossible in practice as it is awful in principle. (How did issuing trillion-dollar bills to get around his debt limit help Mugabe’s credit rating?)

    However, it is a wonderful exercise is psychology watching people embrace it. Clearly, the process that creates all the material at Snopes.com isn’t limited to people with two-digit IQs.

  54. Gravatar of bmcburney bmcburney
    10. January 2013 at 10:41

    Johnleemk,

    I think you ought to look more closely at the examples of “success” you offer for the parlimentary system and the examples of failure you offer for a separation of powers system. In Belgium and Italy the parlimentary system “dealt” with a political crisis by essentially abandoning democracy. In Italy we have a government nobody elected and in Belgium we have no government at all. Hooray!! Greece is headed that way as well. And, please also note, very little actual reform in any of them.

    At the present time, all three are essentially run by unelected civil servants and the only effective limitation on their power is a different group of unelected international civil servants. We are well on the road to re-establishing the feudal system in Europe with civil servants in the role of the aristocracy. I believe this occurred because repeated “steamrolling” encouraged by the parlimentary system drained the political system of the trust-among-rivals necessary for democracy to function.

    Compare that to the US. Did the government really “shut down” during the Clinton Administration? Really? Clinton declared that it would and did temporarily close some National Parks. Except for some vacation plans which were disrupted, nothing actually happened. In fact, the previous “debt limit crisis” and the “fiscal cliff crisis” and Clinton’s “government shut-down crisis” are all examples of political theatre. Each one was manufactured crisis for the purpose of gaining political advantage. All three were resolved when the Democrats accepted Republican surrenders. The next “crisis” of this nature will be resolved the same way, and the next, and the one after that. At some point, I suppose people may catch on or just grow tired of the show.

    The point is that the Republicans negotiated their surrenders and their position in the political landscape will remain secure until the next election. They cannot really be “steamrolled” they can only lose elections. This does cause “gridlock” from time to time. “Gridlock and uncertainty” are features, not bugs.

  55. Gravatar of Jim Glass Jim Glass
    10. January 2013 at 17:33

    One last look at how a “trillion dollar coin” would work legally, in reality:

    ~~~~

    [the U.S. Mint would produce a platinum coin in a denomination of one trillion dollars...]

    The Federal Reserve would receive a coin which would yield a profit of $1 trillion dollars based on the concept of seigniorage, which is the difference between the cost to produce the coin and the “face value” of the money stamped on it by the U.S. Mint.

    However, under the rules of both the American Eagle program and other commemorative programs, the coin does not become “legal tender” until the U.S. Mint is paid for the coin with other legal tender or an appropriately valued amount of bullion. Until the U.S. Mint was paid, the Federal Reserve would possess a rather beautiful coin worth only about $1,700, representing the intrinsic value of the platinum contained therein.

    In the recent case of the government confiscation of 1933 Saint-Gauden Double Eagle gold coins from the heirs of Israel Swift, the court ruling confirmed the validity of the legal tender concept. In the court ruling, Judge Davis cites precedents, including the government’s original case against Israel Swift in 1934, and confirmed that until a U.S. Mint coin is bought and paid for, the coin is not considered to be legal tender.

    The concept of a coin not becoming legal tender until it was paid for was further confirmed in the sale of the Fenton-Farouk 1933 Double Eagle gold coin. When the Double Eagle was sold on July 30, 2002, for $7.6 million, an additional $20 was required to be paid to “monetize” the face value of the coin in order for it to become legal currency.

    Exactly how would the U.S. Mint be paid in order for the $1 trillion coin to become official legal tender?

    If the Federal Reserve accepts the trillion dollar coin from the U.S. Mint, they would incur a $1 trillion liability to the U.S. Mint. To offset the liability to the U.S. Mint, the U.S. Treasury would have sell $1 trillion in bonds which can’t legally be done due to the limits placed on its borrowing capacity by the debt ceiling limit. The idea of a $1 trillion platinum coin becomes a fatally flawed solution that solves nothing.

    ~~~~

    Finis.

  56. Gravatar of Geoff Geoff
    10. January 2013 at 17:39

    Jim Glass:

    I am all in favor of introducing a $1 trillion legal tender coin…as long as I am the one to receive it.

  57. Gravatar of MikeDC MikeDC
    10. January 2013 at 17:46

    You guys must be wrong. I’m assured by reputable sources the economics of this idea are perfectly sound.

  58. Gravatar of ssumner ssumner
    10. January 2013 at 17:49

    Philippe, Printing money is an “inflation tax,” which also causes distortions.

    MikeDC, The real “doomsday machine” is the euro.

    Morgan, No, the Fed still moves last.

    Jim Glass. The great legal mind known as Larry Tribe says it’s 100% legal. I can’t imagine a court telling the government it must default on debt while the case winds its way through the courts. In any case, as I said Obama is better off not using it, as it will be easier to call the GOP bluff.

  59. Gravatar of Philippe Belanger Philippe Belanger
    10. January 2013 at 18:44

    Is is not possible for the Fed to make sure that there is no inflation by offseting the increase in government spending with a reduction in the money supply? My suggestion was that the government should print the money it needs to fund its expenditures, and then have the Fed apply its monetary policy, which could be a price level target (in which case would be no inflation tax, I think) or (even better) an ngdp target.

  60. Gravatar of Geoff Geoff
    10. January 2013 at 18:46

    “My suggestion was that the government should print the money it needs to fund its expenditures, and then have the Fed apply its monetary policy, which could be a price level target (in which case would be no inflation tax, I think) or (even better) an ngdp target.”

    Why would anyone accept dollars as payment if they never have to pay taxes in dollars?

    Taxes are necessary for the dollar to be maintained as the currency, are they not?

  61. Gravatar of Philippe Belanger Philippe Belanger
    10. January 2013 at 19:14

    @ Geoff I hadn’t thought of that. I guess the government can still require that fines be paid in dollars. Plus if the government provides a currency with a stable expected purchasing power, I don’t see why people wouldn’t accept it as a medium of exchange and for debt denomination. From what I know, historically people have stopped using a currency when it’s purchasing power became to costly to predict, even though the government still accepted it as payment for taxes.

  62. Gravatar of Morgan Warstler Morgan Warstler
    10. January 2013 at 19:38

    Scott, how does the fed move last, if it is SELLING $1T?

    Are you saying the fed would have discretion on whether it sterilized?

    If so, if the fed might not sterilize, then we are saying outright that the coin DOES cause inflation, right?

    It is important because politically, the GOP wants to say “this coin causes inflation”

    And the other side wants to say, NO FED WILL STERILIZE. No worries!

    And you are saying, this might be EVEN MORE UNANNOUNCED QE.

    And that’s a new thing.

  63. Gravatar of Michael Sankowski Michael Sankowski
    10. January 2013 at 22:05

    Wow – everyone in this comments section really needs to go over to Monetaryrealism.com and read up on how the coin works.

    JKH has written about the similarities between using the coin and quantitative easing pretty extensively as posts and across the comments section of various posts. The coin hits the accounts of the fed in exactly the same way as QE. The coin is close enough to QE that we’re calling it “Platinum Coin easing”

    JKH and the former head of the U.S. mint are going through the exact details on how the coin would hit the accounts at the fed. This details determine if the coin can be used to extinguish existing debt or must be used to finance “new” spending.

    beowulf (the originator of the coin idea) has explained the legal path of the coin very well, how and why the treasury secretary will be almost forced to use the coin in order to comply with the his legal and constitutional mandates.

    I’ve covered what the potential impact of hitting the debt ceiling in terms of likely unemployment.

    Really, spending a few minutes or even hours over there would make this discussion much more productive and informative.

    Morgan, thats a good point about the fed moving last. Creating a discussion around that idea is part of the point of the coin from the very beginning of the idea.

    Jeff, the fed would have to accept the coin at face value. beowulf addresses this somewhere at MR.

    Jim Glass, beowulf destroys this argument by quoting Justice Roberts. If a statute can be interpreted two (or many ways), the court must choose a path which upholds the constitution. The only way to avoid questioning the validity of U.S. debt – which even payments to contractors is considered to be a form of debt for the U.S. – is to pay the bills incurred. Congress has made a law prohibiting more debt issuance, but allows for Platinum coins to be issued. The path open for the Treasury is to mint a platinum coin, which is not counted at the debt ceiling, and allows the bills to be paid.

    Really, go spend the time over there and make this discussion more productive. I don’t agree with Scott about NGDP futures, but that doesn’t mean everything here is worthless. NGDP targeting is a good idea. The coin could help hit the NGDP level target if used wisely. This is a smart comments section, and it’s a tragedy ya’all aren’t able to meaningfully contribute because you just don’t know enough.

  64. Gravatar of Michael Sankowski Michael Sankowski
    10. January 2013 at 22:13

    For example, here is JKH on how the Platinum coin interacts with the Fed and Treasury:

    http://monetaryrealism.com/treasury-and-the-federal-reserve-platinumqe-integration/

  65. Gravatar of ssumner ssumner
    11. January 2013 at 06:41

    Philippe, If the Fed offsets the inflationary effect, it must sell bonds to the public. In that case why not just have the Treasury sell bonds to the public? I don’t follow your logic.

    Morgan, Yes, I presume the Fed would sterilize, at least in the long run.

  66. Gravatar of Jeff Jeff
    11. January 2013 at 07:11

    @Scott,

    Their is no chance the Treasury will default on debt payments, coin or no coin. Interest payments on the debt are less than a tenth of incoming tax revenue, and by the 14′th Amendment, those payments are made first. Michael Sankowski above says payments to contractors are covered by this as well. But the vast majority of government expenditures (Social Security, Medicare, Medicaid and the Department of Defense) cannot be made until after required debt payments are met.

    @Michael Sankowski:

    If a statute can be interpreted two (or many ways), the court must choose a path which upholds the constitution. The only way to avoid questioning the validity of U.S. debt – which even payments to contractors is considered to be a form of debt for the U.S. – is to pay the bills incurred.

    I agree with both parts of this, but I don’t think you have fully considered the implications of the first part.

    The Constitution gives Congress alone the power to coin money and regulate the value thereof. Constitutional powers of one branch cannot be delegated to or usurped by another branch. The Congress has delegated its constitutional power to create and regulate money to the Fed, which is a creature of the Congress. The Treasury is part of the Executive Branch, the Fed is not. There is no constitutional way to give the Treasury control of how much money is created and circulated. That power belongs to the Congress.

    The Treasury can create commemorative coins, but it cannot force the Fed to accept them as deposits at whatever face value the Treasury decides to put on them. If it could, it would have control over money creation, because accepting the coin at the Fed would immediately create reserves in the Treasury’s account at the Fed, and reserves are money. (Almost all payments to and from the government are made by transferring reserves at a Federal Reserve Bank from one entity’s account to another’s.) I don’t really care what Laurence Tribe says about it, as I doubt he has the slightest inkling of how money comes into existence.

  67. Gravatar of Michael Sankowski Michael Sankowski
    11. January 2013 at 07:21

    @Jeff

    Go over to Monetary Realism. JKH and the head of the mint have discussed this issue in detail. beowulf has addressed this issue in detail.

  68. Gravatar of Morgan warstler Morgan warstler
    11. January 2013 at 07:45

    Ok so the fed announce in long run it will sterilize BUT it will use discretion in how fast it sells treasuries…

    So the coin means overnight instead of buying t bills and mbs the fed is now selling a ton of tbills and buying mbs while trying to increase inflation.

    Do I have this right?

  69. Gravatar of While I Was Bogged Down With Keynesians, Sumner Solidifies His Power Grab – Unofficial Network While I Was Bogged Down With Keynesians, Sumner Solidifies His Power Grab - Unofficial Network
    11. January 2013 at 07:53

    [...] Sumner thinks the trillion dollar coin is bad for the Democrats politically, but if Obama “ignores my advice and mints the coin [...]

  70. Gravatar of Larry Larry
    11. January 2013 at 10:49

    The Fed doesn’t have to sell anything. It can take the coin, further increasing its balance sheet. It’s like adding one more year to its QE program and nothing more. If that’s too sudden for its liking, it can sell some of its QE-accumulated assets.

    Governments have practiced seignorage in the past. It doesn’t always turn out well…

    I like Parliaments because they are accountable and with a simple no-confidence vote can trigger elections. I like filibusters when my side is in the minority and can slow the madness.

    Wikipedia states that the US government as of 2000, was already getting some $25B in seignorage each year.

    If we are in a liquidity trap, this would end it, right, NKers?

    The coin would likely increase inflation, but the Fed is OK with that at the moment, right?

  71. Gravatar of Philippe Bélanger Philippe Bélanger
    11. January 2013 at 12:24

    The social gain would be a lower public debt. I think the trillion-dollar coin illustrates well this point. If the treasury mints the coin and the Fed offsets any (unexpected) inflationary effect, society is better off than if the Treasury issues a trillion dollars in bonds, because in the latter case it has increased the public debt. That new public debt will have to be paid by increasing taxes, which will have negative supply-side effects.

  72. Gravatar of The trillion dollar coin is an utterly idiotic idea « "La Vitre Cassée" The trillion dollar coin is an utterly idiotic idea « "La Vitre Cassée"
    11. January 2013 at 16:34

    [...] Scott Sumner and Tyler Cowen also comment on the trillion dollar coin – for some reason the two gentlemen are [...]

  73. Gravatar of ssumner ssumner
    12. January 2013 at 10:03

    Jeff, I understand that the Treasury won’t actually default. But the alternative to default is making Obama dictator of the US. That was my point. Obama then determines where our tax dollars are spent, not Congress. I want Congress to make that determination.

    In practice, of course, neither will happen. The GOP will blink.

    Philippe, You are wrong–there are no free lunches in economics.

  74. Gravatar of Vivian Darkbloom Vivian Darkbloom
    13. January 2013 at 09:44

    From the Wonkblog:

    “The Treasury Department will not mint a trillion-dollar platinum coin to get around the debt ceiling. If they did, the Federal Reserve would not accept it.

    That’s the bottom line of the statement that Anthony Coley, a spokesman for the Treasury Department, gave me today. “Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit,” he said.

    The inclusion of the Federal Reserve is significant. For the platinum coin idea to work, the Federal Reserve would have to treat it as a legal way for the Treasury Department to create currency. If they don’t believe it’s legal and would not credit the Treasury Department’s deposit, the platinum coin would be worthless.”

    http://www.washingtonpost.com/blogs/wonkblog/wp/2013/01/12/treasury-we-wont-mint-a-platinum-coin-to-sidestep-the-debt-ceiling/

    So much for “100 percent legal”.

    By the way, Constitutional scholar Laurence Tribe did not say the “trillion dollar coin trick” was “100 percent legal”. He said, in answer to leading questions, that a literal interpretation of the statute would justify minting the coin. But, nobody disputes that. The statute clearly authorizes minting a commemorative platinum coin. If the US Mint wants to put Alfred E. Neuman’s face on it and the notation $1 trillion, the statute literally allows it. But, Tribe did not opine on anything else, most importantly, whether the law authorizes a circulating coin and whether one can take a $1 trillion credit for something wildly in excess of market value. In evaluating the legality of a transaction and its consequences, one needs to look at the transaction as a whole, and not just a discrete part of it in isolation.

Leave a Reply