Explaining the Silliness of the Debt Ceiling and Platinum Coin to The Rest of the World….

I did a couple of interviews for the BBC Sunday afternoon and evening explaining the current debate that’s raging over the debt ceiling.  I’ll post the interviews when I have the links for them.  But here’s the basic gist of where I stand on all of this.  I think it’s all rather straight forward:

  • The debt ceiling is a silly rule that only exists in one democratic nation outside of the USA.
  • Why is it silly?  It’s silly because Congress already debated and voted on the spending that results in the debt issuance.
  • If Congress wants to reduce spending they should revisit items through the standard legislative process as opposed to holding the US economy hostage once every few months and causing endless uncertainty for the rest of us.
  • The US government can always harness its banking system to procure funding for future spending (well, 99% of the time and in that 1% of the time when it can’t the Fed will buy the bonds on the primary market, but that’s a different matter and totally different from QE).  The system is designed so the US government can always procure funds.  Auctions, for instance, are literally designed not to fail.  So the USA is not designed like Greece or Spain.  The US government has an inflation constraint, not a solvency constraint.  (See here for more).
  • Willingly defaulting on US debt by using the debt ceiling as a threat is pure madness.  I can’t think of many things that would be more reckless than this.
  • The platinum trillion dollar coin, which was first discussed on the internet by MRist Carlos Mucha and then first disseminated by Ramanan, (later by people like me) is a legal workaround the risk of defaulting in which the Treasurer can mint a trillion dollar coin, deposit it at the Fed and effectively allow the US government to cancel $1 trillion of existing debt.  It’s the same as raising the debt ceiling $1T except it cancels outstanding debt as opposed to raising this silly self imposed constraint.
  • It’s not inflationary since it’s not $1T in new spending, but rather a cancelling of existing debt that the Fed has already taken out of the private sector to begin with.
  • It’s a silly idea.  It’s an accounting gimmick.  And I absolutely don’t think it should be used.
  • It’s sad that this is the current state of affairs in American politics.  The fact that we’re fighting stupid ideas with stupider ideas would be funny if it wasn’t so sad.
  • BUT, if we have to choose between defaulting, which would be catastrophic and implementing a silly accounting trick then the decision is a no-brainer.  It would be unpatriotic to default.  Even more unpatriotic for leaders to allow default when they could mint the coin.
  • Hopefully there’s a rational way around all of this.  The best suggestion I’ve heard is from Josh Barro at Bloomberg who says we should eliminate the debt ceiling in exchange for closing the coin loophole.  Sounds fair enough to me.
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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. What effect, if any, is Congress’ failure to pass a budget in your view? Has Congress in fact/de jure followed its statutory budgeting requirements such that the debt ceiling issue is redundant?

  2. Most of the things you’re writing are true but try to say the same differently, that is:
    inflation constraint = resource constraint
    here the debate have still to begin. The farcical (dramatical) thing is that both sides are in denial and sleeping on ideolgically and demagocical arguments. The fact is we’re no more in the ’60, polulation is aged and aging more, 4 billions of people excluded from energy and agri resources hunting are now competing, fishing resources are over consumed, the quality of agricultural land is depleting. We MUST invest trillions now in research and education in general but it appears we don’t have the funds, while we spent trillions to bail out an incompetent and fraudulent financial sector.
    ALL THESE ARGUMENTS ARE NOT SILLY BUT CRIMINAL (debt ceiling, deficit cuts…) but none is speaking about the real issue: transitioning from an inefficient economy based on bad use of fossil energy, inequality and ignorance to a efficient economy based on renewable energy, much better (and sane) food consumption habits and knowledge. I’m not investing on an economy like our, much wiser spending all what I have to enjoy life until the inevitable day will come when the stupids are punished for their sins.

  3. Cullen:
    I’m still stuck on the coin idea not being inflationary.
    Wouldn’t $1 trillion in deficit not matched with savers buying $1 trillion in bonds lead to inflation and/or a lower dollar?
    If not, then why not cancel a whole bunch of debt (or all of the debt) held by the Fed?
    Wouldnt the Fed need these bonds to sell when the economy picks up and inflation heats up?
    thanks.

  4. http://news.bbc.co.uk/1/hi/help/3681938.stm Segment at about 2:44 for UK residents (or UK VPNs)

    I listened to the interview, it was in the graveyard business section towards the end of the show, unfortunately. However, it does show that here in the UK, we do have news programs willing to explore ideas that aren’t (yet) mainstream.

  5. Consider two situations.

    (a) Debt ceiling increased or abolished altogether.
    (b) Politicians do not increase the debt ceiling and a platinum coin is minted

    In both cases, expenditure of the government and the tax receipts are the same.

    Both as as inflationary or deflationary as the other.

  6. ■If Congress wants to reduce spending they should revisit items through the standard legislative process as opposed to holding the US economy hostage once every few months and causing endless uncertainty for the rest of us.

    Cullen,

    Isnt this the point? Half of Congress (technically less than half) want to keep spending and the othe half dont. So the only way to actually agree on something is to use something that the other side sees as theatening even if tecnically it isnt a threat. Politcians dont understand a shred of what you write above so why would those who want to reduce spending use any other tactic but this one

  7. “■It’s not inflationary since it’s not $1T in new spending, but rather a cancelling of existing debt that the Fed has already taken out of the private sector to begin with.”

    Cullen, this is absolutely beautiful!!!!

    Following this logic, we can do this. First, the Fed “takes out” some debt of the private sector. Next, Treasury issues a platinum coin, deposit it with the Fed, and “cancels” this “existing debt”. It is not inflationary. Then, the fed again “takes out” some portion of “existing debt”, and the Treasury issues another coin to “cancel” it. And again, it is not inflationary. The operation with “existing debt” is repeated until either all “existing” debt is “canceled”, or just some portion of it is left for fun or for China to keep.

    And… Bingo! all stupid issues with politics, respublicans, and debt limits are solved! Consumers, businesses, and the government can happily run a new debt supercycle. And, I forgot to mention, it is not inflationary!!!!!

    Cullen, your money theory is the best!

  8. Conceptually it makes no difference, however, perception matters. If such a gimmick were used, people would question the soundness of our currency and governance. When that happens, you can start inching towards a failed state, which would lead to hyperinflation. Ultimately we still have to uphold the soundness of the system. Perception matters.

  9. Seems to me part of the problem here is accounting. Shouldn’t the net assets of the Fed (including bonds) be applied to the Fed Govt balance shhet? As essentially, these bonds are

  10. Why not go all in and make 18 or 19 of them and wallah no debt and money to spend!! I better not type this a serious suggestion someone in Congress may be reading your site.

  11. Correction-as essentially the interest paid on these bonds is returned to the treasury.

  12. the debts are not cancelled. Debts of the FED replace the debts of the Treasury. As long as there is mo additional spending by the government, this would not be inflationary.

  13. Your 2 cases are clearly the same. But it seems the situation is a it different here.

    Here is what I understand.

    1. Treasury issues 1 trillion dollar debt
    2. The Fed “accepts” the debt, thus “creates” money
    3. Treasury uses the debt for speeding
    4. Treasury hopes to receive the same amount of tax to cancel it out
    5. But instead, Treasury issues “the coin”, the Fed cancels the debt
    6. But the spending has already taken place. Thus there is an extra 1 trillion dollar in circulation

    This is my layman’s understanding. Can you clarify?

    Even if the Fed reduces the money supply, the economy has already had the “money”. In other words, if “I” am the economy, I receive 1 trillion dollars, I am rich no matter what the Fed or the Treasury does.

  14. No, you are wrong. Cullen said “canceled”. And I completely agree. A coin is money, not debt. This is very basic definition in any money theory. The “loophole” is to issue coins, not another type of obligations.

  15. People have been “questioning” the soundness of the currency all through QE and the other fed ops. I’ve been debunking silly hyperinflation and inflation articles for YEARS now. And the USD is strong, inflation is low. Perception HASN’T mattered at all.

  16. Cullen,

    You are wrong. Perception is the only thing that matters in any money system. But who told you perception was and is hyperinfationary??? Do you have any statistics? Besides very few inflation-mongers perception is neutral to deflationary. Actually, a lot of very bright people in the bonds business have been deflationary/neutral for a while, which is reflected in their P&L.

  17. Do we really want to cancel all the outstanding debt? After all, doesn’t grandma want her interest bearing debt? Isn’t that why she bought it in the first place? So her savings could earn interest? Cancelling all the debt would not be wise.

  18. You’re both saying the same thing. Technically, it cancels some of the US Treasury’s outstanding liabilities. Which is what matters here.

  19. Take one of those coins to China and tell them we just paid off $1T of the debt they’re holding.

  20. Ronny,

    I am telling you again, you are wrong. Obviously, i am not authrity for you, but you can ask Cullen.
    If treasury writes IOU on a piece of platinum, insead of piece of paper, it would be US debt obligation, like any other US treasury note/bond. It has no relationship to “platinum coin” idea, and would be regulated by congress.
    The loophole is specifically related to COINS, which are not debt, it is money! If the government gives me such coin as a gift, I can go to a shop and buy myself some stuff. It is a legal tender in the US!!!

  21. I respect your opinion, and maybe I am wrong. If the Treasury mints the coin, is the coin an asset of the Treasury, or is it a liability, which means that the Treasury has to accept the coin for payments ?

  22. Cullen,
    can you elaborate on how this would be ” a cancelling of existing debt that the Fed has already taken out of the private sector to begin with.”

    I’m somewhat confused about the cancelling part.

  23. It sounds like a coin — money — which can only be used for one purpose, to cancel debt.
    But if such a coin can indeed be issued, why then couldn’t it be used to directly fund government spending? Or be used to pay down other debt, like student loan obligations.

  24. What is silly and useless is our form of government/Congress, implemented in days when you would have to saddle a horse and ride from San Frransico to Philidelphia to vote! Want a spending reduction, abolish Congress and kill associated packs and replace with a small committee that would propose legislation voted on via the internet by the PEOPLE! The Technology has now made the inept and corrupt Congress obsolete and their past two years childish actions have sealed the deal in my humble opinion!

  25. The one item that has never been covered in all I’ve read is that the original and main purpose of the debt ceiling legislation in the early 80s was to make it more difficult to do the kind of excess spending by profligate politicians etc. in the 70s that got CPI-U inflation up to ~17% annualized in Jan 1980.

    … and some people wonder why so many are concerned about high inflation ahead.

  26. Sorry KB, you haven’t thought through this. Perception and Reality matters.

    Here’s the Reality. US can produce ~17 Trillion dollars of goods every year. It also has at least $500 Trillion dollars of assets (land, shale oil, coal, gold, institutions, buildings, bridges, machines) through which you can run an economy which produces 17 Trillion dollars of goods.

    Whether to buys those goods or assets, you need the US$. i.e there is a demand for that dollar and US Govt. has barely scratched the surface with the amount of debt it can actually take on.

    So, every morning zerohedge/schiff/clueless-commentators are trying extra hard to perpetuate the hyperinflation / dollar crash ‘perception’, and every day it meets reality and adjusts

  27. They have not passed a “new” budget but they have still passed a budget by continuing resolutions to extend the previous years budget to keep the government running. They could choose to not pass a budget and not continue to fund the government but that was a disaster when they did it in 1994.

  28. George H,

    Several things. “Money” – as in monetary aggregates do not “cause” inflation.

    The government’s expenditure and income are about the same if the coin is issued. The coin is like a bond with maturity 0. The only trick is that it is not included in the definition of public debt.

    Imagine instead there wasn’t a debt ceiling and the government issued $1T bills maturing everyday day – which is almost like the coin. This case is as inflationary or deflationary as issuing the coin. So why do you think the coin is inflationary?

  29. It could, but the executive can’t spend money not appropriated by congress. As long as the FED buys the coin the government is just shifting around money in control of the government. Once you talk about USING the money for something else then you are talking about Fiscal policy and that is enacted by congress.

    Ignore the coin, it is the same thing as if the FED decided to rip up and cancel all the obligations of the treasuries they own. Nothing would change except the national debt would decrease by a few trillion dollars.

  30. warren buffett

    I agree; so long as the US continues to produce the amount of debt is irrelevant but, they do need to make sure the printing presses do not overheat in the process.

  31. lol, to put it in other words: How can the FED legally remove the coin from its balance sheet? (even if this is not important)

  32. Yes, that’s why it’s an Inflation Constraint. In fact Inflation is the best metric to
    i) see whether we are utilizing our assets to the fullest capacity

    ii) where the marginal investment should go.

    Remember, the inflation in energy prices in 2007 has led to a some great innovations and investments in that area.

    The worst thing you can have is a deflationary trap.
    i) You’ll have no clue where the best marginal investment has.

    ii) You destroy the greatest resource of all — Time

    There is no resource constraint — Reference Asteroid, Deep Sea Mining and the coming Robotics Revolution

  33. It is because of 3 I put above (should have been “spending”).

    Did that not happen?

  34. A trillion more…
    http://www.youtube.com/watch?v=g3S_k1dRbXY

    /sarc

    Perspective on total money supply growth (all, annual growth rates): Currency & coin – 8.7%, M1 – 11.5%, M2 – 8.7%, M3b – 6.7%, U.S. total credit (Z1) – 1.4%, U.S. federal debt – 8.0%.

    Total world derivatives – 9.7%.
    Top 5 central banks balance sheet growth – +11%.

  35. Cullen

    Can you please explain the mechanics of how the Fed would sterilize this $1 trillion platinum coin? What would the impact be on bank reserves, etc.? I read the “Platinum Arrow in Quiver” article over at Monetary Realism, but unfortunately it is a bit confusing…

  36. Warren Buffet

    Thanks for your response with which I concur absolutely.

    The next decade or two will be very interesting so I remain optimistic.

  37. Well, how much the US (by the way, who is this US? When I produce something, it is mine, not some US’s…) produces goods&services is quite irrelevant to hyperinflation thesis, becasue, as we all know, it is 100% political-dependent.

    Also, if “the US” has, let’s say 1000 sq feet of RE and produces 100 cars, it absolutely does not mean that it has “$1m” RE and produces “$1m” cars. It may be true today, but tomorrow it can be $100m, or $0.1m

  38. Agree that we are entering iffy territory if we start making calculations based on expected output, or potential output.
    It does seem to me that we are trying to replace supposedly missing output by issueing federal debt.
    Obviously we are probably not working at our full potential, but that’s a good debate. Probably there are better ways to raise that than creating future obligations or risking inflation.

  39. Spending is the cause of the inflation but the spending happens iregardless of the coin issuence. If they raise the debt ceiling there is spending, if they issue the platinum coin, there is spending. There is a equivalence between the to as far as inflation is concerned. “paying off the debt” with coin issuance is equivelent to moving cash from your savings account to your checking account. No new “money” is created. Only Govt spending “creates” money and only when it is done without offseting revenue increases regardless of the meathod of financing it.

  40. @ Ronny,

    Fed can perhaps hold/use it as collateral against other things? Who knows, it would likley do nothing and return the coin to the Treasury at smoe point when the siutation has changed. Then it would be melted down.

    I’m no expert, but I have to assume based purley on the enormous denomination there is no way for it to get ‘outside’ the Fed or Treasury.

  41. KB,
    The same US who has the ‘option. to tax you 100% of what you produce. Before you go off on a “I will stop producing rant”, hear me out

    Currently the US citizens collectively have a net-worth of 70 Trillion in dollar-denominated assets. At least most of the assets are worth that much because we have a functioning government and institutions.

    A dollar-crash will make those assets drop their value by 50% (loss of $35 Trillion) and probably unemployment of 40%+ (including the rich). Now the US citizens have two options

    A) Collectively give $10 Trillion (from your net-worth) and save the dollar and save your annual income of job.

    or

    B) Lose around $35 Trillion + lost your annual income producing job.

    Bottomline, the US govt. adds several trillion dollars of value to the combined net-worth of it’s citizens by its presence and operations; In the worst-case scenario it can extract at least half that value. Most rational citizens would give up 20% to save 50%.

    But, just like you won’t sell your house to pay the $5 you owe your friend, the US won’t have to use that option. $17 Trillion is piddly in the overall scheme of things. (and the $1 Trillion Platinum coin proves that)

  42. Thanks…the “no new money” part is important to note.
    There would still be bonds issued for the new spending. The coin only makes room for it without an obligatory debt ceiling hike. Does that sound right?

    Now the problem I have is when the Fed starts to sell bonds to cool things down. Presumably, the Treasury just buys back the coin? But what about the debt that was “cancelled” by the coin? thanks.

  43. The platinum coin lets the Treasury create an asset ex nihilo to cancel out the Treasuries held on the Fed’s balance sheet. The Fed only got those on its balance sheet because it exchanged reserves, also created ex nihilo, with banks for those Treasuries, thus removing them from the private sector.

  44. Default is the only the way the government will cut spending. It’s sad how it takes that state failure is the only historically proven way to scale back the role of government (example: Fall of USSR in Eastern Europe).

  45. Of course the scheme is (potentially) inflationary. The government selling a non-marketable asset to the Fed for credit in its account is pure money printing, in the old-fashioned use of that phrase. Extra base money is created as and when the Treasury draws on its Fed account to make payments.

    That is not to say that I disagree with the idea though. It seems to me that, if the Republicans would use the letter of the law to cause trouble for the government, it is not unreasonable that the government uses the letter of the law to thwart them.

    An appropriate way to sterlise the money creation would be for the Fed to issue exactly the same bonds that the Treasury would have issued, perhaps with a promise to swap them for treasuries if required, when legally possible. There might be a slight problem that some treasury investors do have a formal credit line for the Fed, but giving a bit of notice would allow such problems to be resolved before the first auction.

  46. I agree cancellation of debt does not NECESSARILY lead to inflation.

    I don’t have a clear picture about moving money from savings to checking. Perhaps it is that simple. But let me post a different situation.

    If we can pay of the debt with the issuance of the coin, there shouldn’t be any deficit at all. We just deficit spend and pay off it with the coin at the end of the year. (To do so, for example, we can pass a law to label “any outstanding deficit amounts to extraordinary condition that requires the Treasury to issue the coin”.) Since there is no inflation, who cares? Economists don’t. The people certainly won’t.

  47. Are you willingly ignorant of U.S. history; or did you just sleep through class your whole life?