Philip Diehl, Former Head of the US Mint Addresses Confusion Over the Platinum Coin Idea

Philip Diehl, former head of the US Mint and co-author of the platinum coin law comments on the recent confusion and discussions over the use of the platinum coin.  This is a must read:

I’m the former Mint director and Treasury chief of staff who, with Rep. Mike Castle, wrote the platinum coin law and produced the original coin authorized by the law. Therefore, I’m in a unique position to address some confusion I’ve seen in the media about the $1 trillion platinum coin proposal.

* In minting the $1 trillion platinum coin, the Treasury Secretary would be exercising authority which Congress has granted routinely for more than 220 years. The Secretary’s authority is derived from an Act of Congress (in fact, a GOP Congress) under power expressly granted to Congress in the Constitution (Article 1, Section 8).

* What is unusual about the law (Sec. 5112 of title 31, United States Code) is that it gives the Secretary complete discretion regarding all specifications of the coin, including denominations.

* Moreover, the accounting treatment of the coin is identical to the treatment of all other coins. The Mint strikes the coin, ships it to the Fed, books $1 trillion, and transfers $1 trillion to the treasury’s general fund where it is available to finance government operations just like with proceeds of bond sales or additional tax revenues. The same applies for a quarter dollar.

* Once the debt limit is raised, the Fed ships the coin back to the Mint, the accounting treatment is reversed, and the coin is melted. The coin would never be “issued” or circulated and bonds would not be needed to back the coin.

* There are no negative macroeconomic effects. This works just like additional tax revenue or borrowing under a higher debt limit. In fact, when the debt limit is raised, Treasury would sell more bonds, the $1 trillion dollars would be taken off the books, and the coin would be melted.

* This does not raise the debt limit so it can’t be characterized as circumventing congressional authority over the debt limit. Rather, it delays when the debt limit is reached.

* This preserves congressional authority over the debt limit in a way that reliance on the 14th Amendment would not. It also avoids the protracted court battles the 14th Amendment option would entail and avoids another confrontation with the Roberts Court.

* Any court challenge is likely to be quickly dismissed since (1) authority to mint the coin is firmly rooted in law that itself is grounded in the expressed constitutional powers of Congress, (2) Treasury has routinely exercised this authority since the birth of the republic, and (3) the accounting treatment of the coin is entirely routine.

* Yes, this is an unintended consequence of the platinum coin bill, but how many other pieces of legislation have had unintended consequences? Most, I’d guess.

Philip N. Diehl
35th Director
United States Mint


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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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  1. Amazing. I think your description as “fighting stupid with stupider” is appropriate. If it came down to default or using the coin Congress would be irresponsible not to mint the coin. I am glad this idea is gaining credibility.

  2. “* Once the debt limit is raised, the Fed ships the coin back to the Mint, the accounting treatment is reversed, and the coin is melted. The coin would never be “issued” or circulated and bonds would not be needed to back the coin.”

    That’s the similarity to regular QE – it’s intended to be temporary, and there’s an exit strategy – and the Fed can co-ordinate this with regular QE.

  3. The people who have lost credibility are the ones using the threat of default as a ploy to cause spending cuts. The rational people are just figuring out ways to release the hostage from a bunch of crazed Republicans.

  4. Nothing quite says, “Banana Republic,” than paying your debts with Monopoly money.

  5. So, the “original intent” of the US Constitution allows this, as specifically outlined in later laws. We are obviously inline with the Founding Fathers

  6. By my reading of the law, I appears as if they can do the same thing with bronze “medals”.

  7. JKH, How is this similar to QE?

    “The Mint strikes the coin, ships it to the Fed, books $1 trillion, and transfers $1 trillion to the treasury’s general fund where it is available to finance government operations just like with proceeds of bond sales or additional tax revenues”

    Isn’t QE an asset swap for reserve, where this is an actual printing or “Booking” inside money to the federal govt’s account so it can readily spend into the economy.

    I am not saying it’s printing new money, just that the mechanism seems differnt as far as how these two opperate.

    QE is an asset swap that does’t add to the Federal Govt’s account for procuring and spending outside money, where the Trillion dollar coins seems to.
    What am I missing?

  8. And Lead.

    Which would be far more efficient. A few thousand lead coins would cast far less, melting temperature is lower and would save energy too.

  9. A little mystified by why nobody thought of this 18 months ago? I think there are larger constitutional questions, too – but this is terribly farcical and we are wasting public space debating this nonsense when we should be having that very real, legitimate, quite interesting debate on spending and the role of government.

  10. Amazing what a voice with authority can accomplish that Krugman and others who ought to be listened to cannot accomplish. This puts the whole issue to rest once and for all. It would seem to me to be a done deal now. I see it as an opportunity to teach the economically naive something about how a modern monetary system works.

  11. I agree that it makes sense 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, but this is, contrary to Cullen’s previous post, potentially inflationary. An off-market exchange between the government and the central bank is classic “printing money”. Base money is created as and when the Fed draws on its Fed account to spend.

    The key step I see missing is that the Fed should issue exactly the same bonds that the Treasury would have issued, perhaps with an option for the holder to convert to an identical treasury when a resolution of the debt ceiling allowed. This would sterlise the money creation that would otherwise occur. Provided that the authorities give sufficient notice of the change to allow normal holders of treasuries to establish a formal credit line for the Fed, government business can proceed as normal.

  12. OK, I got it, Thanks. Is the Coin version considered FED monitization of debt because it directly get’s coin from treasury vs Secondary mkt like it procures treasuries?

  13. yeah, pretty much

    two things I’d emphasize

    – in both cases, the cumulative budget deficit is being partially funded with reserves instead of bonds (in the case of regular QE, its the cumulative deficit; in the case of platinum, its happens to be the current deficit as part of the cumulative – i.e. its the spending of platinum sourced Treasury balances at the Fed that creates new excess bank reserves as the money is being spent – i.e. as the deficit is being created in the process of spending from those balances

    – the key to the comparison also IMO is that both regular QE and platinum QE are intended to be temporary, and there is an exit plan in both cases, and the exit plan is contingent on circumstances that allow for that exit in each case. In the case of regular QE, its simply Fed deliberations on when enough is enough; in the case of platinum QE, its when Congress gets around to coming to grips with its responsibilities to allow the normal funding of spending that has already been approved – at that point, Treasury can recommence normal borrowing and the platinum transaction can be reversed – i.e. exit can commence. I was very pleased to see Diehl note this reversibility/exit aspect in his description.

  14. I’d like to see this explained using T accounts. This explanation is far too vague.

  15. Good reading.

    So the coin does not cancel debt.

    However it is not clear why the government can not simply use the trick for more spending. Despite the fact that spending must be authorized by Congress, if funds are available, the administration can simply issue executive orders for special program. This way, it creates a second source of funding, bypassing Congress.

    This looks like a Trojan house Congress planted for itself. Smart kids.

  16. not much time now

    I’ll try and do something (compact debit and credit version) a little later today

  17. I think that it is important to avoid any platinum QE, since that would involve money creation by government, which would compromise Fed monetary policy independence. See my suggestion to get round this below.

  18. We see the strategy now for dealing with federal debt and the coming spending demands.
    Print more money (Monopoly money, as stated above.)
    This circumvents the political process and ultimately debases the currency, but the fact that it’s being discussed shows that panic is setting in.

  19. I have a minority view here. So won’t waste my or anyone else’ time.

    But I take the accepted view of this blog, the coin is “fighting stupid with stupider” to stress that it won’t solve any problem politically. It will actually make matters worse. On a pragmatic ground, the U. S. will appear to make itself laughter of the world for a few months.

    More seriously, the nation will appear completely divided and it will have a much worse economic impact.

  20. The T-bonds that are held by the Fed are already effectively “cancelled” in the sense that they have already been taken out of circulation. The US govt should really just be allowed to net out those bonds, which would provide room under the debt ceiling. However, the US govt is not technically allowed to net out those bonds held by the Fed. Enter the TDC, which would effectively accomplish the same thing.

  21. How about this instead? The US Treasury deposits a $1 quadrillion dollar coin in every homeowners bank account for 1 day. The interest is used to pay off all existing mortgage debt, and after the 1 day each gold coin is sent back to the mint to be melted down. In the meantime, the average American’s balance sheet is significantly improved and the economy is ready to rocket skyward. Problem solved. You’re welcome America.


  22. Yes, the U.S. government is ‘technically’ not allowed to print money. We’re supposed to borrow it, then pay it back.
    But this part of the movement to recharacterize debt so that it can be laundered into disappearing.
    It’s a neat trick, but if we’re going to do it, let’s address the potential pitfalls, both economic and political.

  23. Hey guys, did I miss anything this morning? :o)

    If I remember correctly, bronze is for medals and not for coins (and only the latter is legal tender).

  24. Johnny, let’s say you owned $1,000 worth of T-bonds. Now let’s say the Fed so-called “prints” dollars and gives them to you and takes your T-bonds. Are you any richer? Has your spending power increased? No and no.

  25. You’re right.
    However, you have changed the rules. We’re not borrowing money anymore; we’re printing money. In your example, we created a Net Financial Asset that can be converted to dollars when you return them to the Fed. In other words, a Treasury Bond is redeemable currency. It’s money.
    You’re creating money to finance spending.

  26. Let’s not get into a debate about the definition of money again because we always end up going in circles. But I think we can all agree that both dollars and t-bonds are NFA. You are swapping one NFA for another type of NFA. What’s the big deal?

  27. You’re printing money.
    The way Cullen describes it, we’re adding a net financial asset, which I contend is money.
    In your example, you’ve pretty much conceded that you’re creating a new dollar. You took a dollar of savings and turned it into a dollar of federal spending and another dollar still in savings.
    Yeah, that’s a big deal.

  28. This might be inflationary, but I doubt it would be much more inflationary than issuing bonds. Both bonds and the coin issue NFA of different types. Bonds defer spending for a certain period (for the holder) while this cash form of coin spending is zero duration money. I don’t know if that would be a lot more inflationary, but it could be.

    The bigger point is that the coin idea, if used permanently, would completely change the way our government works. The government would no longer be outsourcing money creation to banks, but would be financing spending internally.

  29. Right. A permanent coin implementation would COMPLETELY change the way our monetary system is designed. It would entirely self financing then.

  30. Right. Permanently is the operative word. But as far as I understand, the TDC proposal is temporary. It would replace t-bonds that have already been issued, and are held by the Fed. It seems to be very similar to QE, which does not create any new NFA, Johnny.

  31. O.o

    I really can’t tell who or what you’re arguing against here. And you managed to sound snarky while doing it! Congratulations!

    Point is, issuing a $1 trillion coin to get around raising the debt ceiling doesn’t cause any more inflation than just raising the debt ceiling.

  32. Some one at the treasury did mention this prior to 2008 according to Ellen Brown, she thinks it was someone working there. I just found the transcript and they up it by 10 coins:

    “[Brown]: In fact I read somebody’s opinion, I think it was somebody from the Mint said that you could solve the whole problem by printing, or stamping, ten one-trillion-dollar coins, I mean today, that’s what it would be, and then just pay off the debt with these ten trillion dollars worth of coins. Because there’s no, it doesn’t say in the Constitution what the face value of these coins would be.”

    So the Idea has been out there, now who at the treasury said it if in fact they did…

  33. In simpler terms, the $1 trillion dollar coin is an absurdly bad idea. Forget about inflation, what happens when the rest of the world sees the issuer of the global reserve currency sidestep any and all fiscal responsibility by misusing a law that was clearly not meant to be used in this manner. Supporters of this idea seem to have no fear of (and clearly no belief in) unintended consequences.

  34. What is also farcical is playing chicken with the ability of the US government to pay its debts. The appropriations were already authorized, discuss the role of government spending AFTER the checks our government agreed to write have been written.

    You’ve made your point as to how silly the platinum coin is, none of us disagree, but so is an artificial debt limit that only one other democracy of the world has in place.

  35. Simple
    We have a face value of us$50 gold coins made out of $1,600 worth of gold.

    Now we are talking of $1600 worth of platinum having a face value of US$ trillion

    Simple comparison

  36. The only reason we’d do it is because of the arguably more absurd idea of a debt limit…

  37. Do you have an unlimited amount of credit with American Express? You don’t? How absurd!

    Maybe if Congress kept the debt limit in mind before approving spending bills and didn’t assume that a debt ceiling raise was a given we wouldn’t be in this position.

    So no, a debt limit is not absurd – abusing it and then trying to cheat your way around it is.

  38. Pierce, I am having second thoughts on the whole “The appropriations were already authorized”
    point, because today is 1350 days since congress has actually passed a budget and the whole process has become politicized. Hary Ried has not allowed a buget to the senate floor for a vote, thus still working under the previos democrat sponserd budget from cira 2009 I believe.

    So it’s all politics.

  39. COngress approves taxes and spending. The Treasury then goes and enforces those taxes and spends those appropriations as directed. If there is a deficit, they sell bonds to fund the differene. So, tell us, why do you think Congress needs to impose an arbitrary number on the Treasury in order to limit its ability to act on what Congress has authorized them to do? Do you think we would run out of money? Do you think a treasury bond auction would fail? We know that the Federal government has no solvency constraint, so why have a debt limit? Stupid.

    Now some members of Congress are willing to use that limit to force the other party to cave in to their demands or the economy gets it. Well we’re not going to negotiate with terrorists, and we have a legal means that allows the Treasury to use seignorage to carry out the spending wishes of Congress, without having to issue new debt. Gimmicky, but stupid times call for stupid measures.

  40. We need smarter measures than an arbitrary limit. MR has a number of equations that help figure out the optimal level of spending based upon sectoral balances. Beowulf, JKH, Mike, etc. have put a lot of thought into this. It’s a better system to have dynamic measures based upon imports, exports, tax revenues, etc., rather than a hard silly “credit limit” imposed on a government that can always, operationally, pay its bills.

  41. If one person spends too much money and can’t pay it back, they suffer the consequences. If congress spends too much money and can’t pay it back, then we inflate it away and the entire country suffers. You talk as though actions have no consequences and that we should be able to spend an unlimited amount of money because…..why?

  42. No one said that. And you have a mistaken understanding of the government’s finances and their role in furthering the public welfare. You should read Cullen’s primer on MR.

  43. Both of you said that. If there is no limit to the debt, what is to protect the taxpayers from unlimited Congressional spending?

  44. Voting? Isn’t that the point. Only one other democracy in the world has a debt ceiling…so you think we need it to function properly? To keep our congresspeople in check? Also, you didn’t apparently read my comment about smarter measures. We should have intelligent mathematical measures that help us determine spending, not an ARBITRARY limit. Inflation is the bugaboo of a fiat currency, not solvency.

  45. You are confusing a solvency constraint with an inflation constraint. Congress can always pay its bills, but they shouldn’t just spend any amount of money because that would be inflationary. Therefore the debt ceiling serves no purpose because it is designed to limit the government from a solvency crisis, of which there is no risk.

    And this is a debt limit, not a spending limit, which means the debt was issued due to a deficit between taxes and spending. Tax rates and spending are political questions and should be resolved through political means. Don’t sabotage the operations of a system which could have negative effects on the economy to achieve political means. That is the definition of terrorism. I don’t think this is intentional, but many politicians are misinformed about the situation and the consequences could be disastrous.

  46. Yes, I think we absolutely need a limit in place to keep our congresspeople in check. Do you honestly believe they’re responsible enough to do the right thing on their own? Isn’t that what checks and balances is for?

    And please forgive my lack of faith in some magic mathematical model that easily solves this whole thing.

  47. It obviously does NOT keep them in check, because they pass budgets that they should know are going to have us hit the limit. It’s not achieving what you think it does/should. See Joe’s comment. He’s got it right.

  48. Not once have I have voiced any concerns over solvency, but you are correct, inflation will be the problem. And last I checked we’re not running a surplus in this country so yes in large part our spending problem is in fact a debt problem.

  49. Can you tell us when inflation will be a problem? If you can’t tell us with certainty when this problem will arise, you can’t say with certainty that we have a debt problem today. Right now inflation is pretty low and unemployment is still pretty high, so the economy seems to be operating undercapacity. Not to mention the debt we issue to finance the deficit is a savings vehicle for the private sector, so the interest paid on the debt isn’t getting in to the economy.

  50. Budget resolutions are policy plans. They are not appropriations bills, or spending bills, which actually allocate money for specific purposes.

    If a budget resolution doesn’t pass, the federal government doesn’t go dark. In the absence of a budget resolution, appropriations bills have continued to allocate money.

  51. Hey beowolf, I remember discussing this stuff with you 2 years ago or so. It sure did catch on (finally)!
    I went back to the link you provided back then. The law was provisional then, and I don’t know if it might have changed since then. Legal research is not my thing….

    31 USC § 5112 – Denominations, specifications, and design of coins

    Under section “O”, First Spouse Coin Program

    (8) Bronze medals.— The Secretary may strike and sell bronze medals that bear the likeness of the bullion coins authorized under this subsection, at a price, size, and weight, and with such inscriptions, as the Secretary determines to be appropriate.
    (9) Legal tender.— The coins minted under this title shall be legal tender, as provided in section 5103.

  52. Inflation is a function of the rate of change of government spending, which is clearly on the rise. While I’d love to be able to point to some magic formula that tells us the exact minute of its arrival, I can’t. No on can. Back half of this decade? Later? Not sure. Not a question of if though.

  53. oops, I forgot to add that I don’t know if that verbiage means only the coins are considered legal tender, or if the medals are as well.

  54. You’re not arguing here in good faith. Joe, I’m not sure it’s worth the bandwidth engaging someone who doesn’t feel like reading the literature.

    And yes, inflation can, barring fuel shocks, be fairly accurately predicted based upon sector balance equations.

  55. ““The appropriations were already authorized”
    point, because today is 1350 days since congress has actually passed a budget”

    The spending has been authorized via several appropriation bills. All these appropriation bills have been voted upon and authorized by Congress.

  56. “Inflation is a function of the rate of change of government spending”

    Ever hear of demand-pull or cost-push inflation?

  57. “Do you have an unlimited amount of credit with American Express?”

    The government is not a person.

  58. “No on can. Back half of this decade? Later? Not sure. Not a question of if though.”

    Interesting because austrian economists and pundits have been predicting it ever year since 2008 or earlier.

    And would this inflation also come with job growth and wage inflation? Because that would be good for the private sector and the deficit would shrink as tax receipts rise and automatic spending on unemployment, welfare drops.

  59. I consider inflation warnings to be the same as global warming warnings.
    In each case, conditions exist which will cause a problem later.
    In each case, these conditions appear to be irreversible.
    As for inflation, the rate of debt is growing faster than the economy and right now it’s structural growth beyond the control of policy makers.
    We are creating more and more ‘net financial assets’ which the Fed must purchase.
    None of us really know the form this will take, and saying that inflation can’t happen later because we don’t see it now, is no different than debunking global warming because it just snowed.

  60. without regurgitating points from the other thread – I will say two things. One this reference to other democracies as if they’re some sort of model baffles me. Just about every other democracy has pressed the economic self destruct button a few times over! There really is no better economic story ever written than the United States – so I don’t see what that argument is intended to establish. There are a lot of bad currency systems out there – do you want a bad currency as some sort of national objective?!
    Two – I see some sense to the debt ceiling on logical grounds. At the time it allocates spending congress has imperfect information. A future congress may disagree with prior congresses decisions based on better information than congress had when it made its decisions. Since congress is meant to allocate resources, it seems to me that the debt ceiling serves the function of allowing congress to periodically review the big picture. Since the president enjoys a veto they can’t simply rollback spending decisions made by previous members of congress. That actually sounds to me like a sensible decision.

    Needless to say, politics is far more idiotic than any considered decision making or rational approach – but I don’t see why the debt ceiling isn’t a theoretically valid temporal check on decisions made in previous years.

  61. Also, just to clarify where my constitutional objection comes from – Article I, Section 9, Clause 7:
    “No money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time”

  62. Krugman picked up on this too. He likened minting the coin to forcing the Treasury Secretary to wear a clown suit to avert a terrorist attack. His assessment: if this really comes down to it… just mint the darn coin already (wear the clown suit) already!!

  63. ‘Why does the Fed have to purchase those assets.’
    Because debt levels are rising at such a rate and so much new debt must be issued that we’re going to run out of savers (buyers), unless the Fed steps in, or unless the primary dealers just carry the bonds.
    And because people don’t buy bonds in other to store them — they buy them to finance future spending.
    And because anything that *can* happen, usually does.
    And because MR doesn’t explain the consequences of $30, $40, $50 trillion debt just sitting there, ticking.

  64. Johnny,

    Your argument is so tired. Every fear mongering nitwit said the same thing when QE2 was about to end. And then you turned out to be dead wrong. But you still scream this argument all over the place even though it was proven totally wrong.

    I don’t know how Cullen hasn’t banned you yet. He’s explained this to you a million times and you just refuse to accept the facts.

  65. Inflation is a function of far more than government spending. Where do you people come up with these brain dead anti government arguments? You obviously don’t even understand basic econ.

  66. Another former mint director disagrees per cnbc’s netnet

    Says basically since this coin is not in circulation it does not have the benefits of say a penny which can be made of just about anything (for any cost) and given a value by the govt.

    Instead it is bullion and thus $1T of platinum must be bought and used in the creation of the coin. Which defeats the whole purpose of this exercise.

  67. Why would you ban somebody over a difference of agreement?
    I think the onus is on you to address these questions.
    Federal debt at 300 pct of GDP?
    Half the budget paid for by debt issuance?
    Don’t those create problems?
    Why don’t you address the specific problems raised by posters?

    Cullen is on record as saying uncontrolled deficit spending will lead to inflation. Don’t you think current deficit spending is on that path?

  68. That doesn’t seem right according to the law. For precedent, just look at the converse that happens with nickel.

  69. Was this $1 trillion coin idea first published on If this idea is really used and results in hyperinflation then this site would get the credit for destroying the world financial system! The power of ideas is amazing. In other hyperinflation cases the public wanted more money created too. People get tired of paying taxes and most can’t really understand the problem with just making more new money.

  70. Don’t worry Vince (or, worry I guess), it doesn’t actually produce any new money. 1) the threat alone should prompt action and 2) if it doesn’t, it’ll simply prove the idiocy of a ‘debt limit’ that’s never adhered to (for good reason). Ultimarely a fiat currency is backed by a populace’s productivity. That’s it.

  71. A new $1 trillion coin is not new money?
    After depositing at the Fed you could withdraw $1 trillion in $100 bills. The Fed would have to get these printed as it would not have had them laying around. You don’t think there is new money?

  72. Vincent, The concept has been floated as early as 2008/09 as far as I can find any how:

    Ellen Hodgson Brown alluded to this Idea that she says she heard or read from someone who work for the US Mint. Could have be conceived even earlier. at least after 2000 when this law was re-wrote.

    That’s all I can find on the net any hoooo

  73. Pierce,

    Can you tease out the logic of why a fiat currency is backed by a populace’s productivity generally? Seems like a simple enough statement, but I think it’d be interesting to articulate the exact link.

    Specifically, in an MR framework, if the banking system controls the money supply then how does the general output back the banking system’s liabilities. The assets offsetting a bank’s deposits are well defined as balance sheet items, but by extending the value of currency to the productivity of the whole populace, it seems like there is a broader consideration than just the banking system’s balance sheet.


  74. Scott, If I may speak only my opinion and not on behalf of Pierce or others. I would say that what you are asking is WHY there is faith in a US Dollar, am I correct? If so, The FAITH is well… basically because of TRUST.
    On a Macro level, the whole planet, almost every living human knows these United States as a TRUST factor with regards to LIFE and LIBERTY and MONEY (or wealth).

    Just look at the bond rates and how low they have become , not because of MIS-trust, but because of massive Trust that peoples, Nations, Business flood the market in search of a safe harbor such as the US Treasury.
    Why? Because of Trust. We trust in God and E Pluribus Unum and in MOST peoples core soul, they feel along the same principles.

    Think about it. If an Asteroid was about to hit the planet earth and everyone had to cash in their wealth to preserve it. I would venture to say that all things being equal, folks would use the USD because it most aligns itself with the free spurt of humanity that is created within mankind’s DNA.
    But That’s JMO..

  75. I hear you–there is some logical sense to what you are saying but it also conflicts with some of the basic principals of MR I think, specifically because in MR USD=bank deposits.

    Individual banks hold a specific quantity of assets which balance out their deposit and other liabilities (with excess value being equity capital). The aggregate banking system likewise holds a specific quantity of assets which is a quantity much less than the “capitalized” value of the entire potential output of the US economy. I guess my question is: if these assets explicitly back the money supply, then what’s the step that takes us beyond that accounting treatment and into the realm of “faith” in the broader economy as the backing for US deposits. Seems like the value of the deposits should start and stop with the value of the assets on the balance sheet, right?

    The only entity that one might argue has an ability to command control of the US economy to make good on its liabilities is the US government with its power to tax (I would actually argue that it doesn’t command complete control but that’s another issue). So, is the claim that USD is backed by the general US economy an implicit acknowledgement that USD is a liability of the government alone?

    Once again, just want to point out that I do not consider myself an MMTer so no need to throw bricks at and/or block me.

  76. I’d argue that it’s the assets of the issuing institution.

    As a type of security, money is a liability of an issuing entity. The value of any liability is by definition based on the entity’s ability to repay the liability. A bank’s ability to repay its liabilities is almost wholly based on the assets it carries on its balance sheet (I say almost because most banks are given very little credit for intangible assets).

  77. Yes, but in the end it’s all about TRUST.. Why do we Americans put IN GOD WE TRUST om oou Money, and then the rest of the world buys our treasury’s as a safe have to TRUST IN US which WE TRUST IN GOD.. Crazy Aint IT?LOL

  78. The best way to value a corporation is to discount its cash flows. Assets are valuable to the extent that they increase future value. Otherwise, they’re losing value in real terms. What is the national equivalent of cash flows? National income!

  79. Obviously there’s a faith based component to the market value of currency, that’s like any other security. However there is also an intrinsic value component which the market value can diverge from.

    Think of a corporate bond. The variance in rates paid by different issuers is wholly dependent on the market’s trust in the company’s ability to repay. The reason that market values fluctuate so significantly is that over the course of time confidence is highly variable. However, at the end of the day the company is either going to pay you back or not. That’s the intrinsic value and I’d argue the true value of any security. Good investors look for opportunities where market value has diverged from intrinsic.

    My point is that there is a clear accounting relationship defining the intrinsic value of a deposit. How can the intrinsic value then extend beyond that accounting relationship to include the output of the whole economy?

  80. I don’t think that addresses my point. For a couple of reasons.

    1) It doesn’t solve the problem that a bank issues deposits, not the nation as a whole. A discounted PV of national income would describe the “enterprise value” of the USA, but no bank holds an asset on its balance sheet that represents this tbeoretical value. At best the government has the ability to tax this theoretical asset and so its liabilities are “backed” by national income. A bank’s liabilities are only backed by the assets on its balance sheet.

    2) It doesn’t actually seem to talk about deposits at all…

  81. Okay, you’re not being inquisitive. You’re just being difficult. If you can’t connect the dots between output and the medium of exchange then I don’t know what to tell you.

  82. Agreed, not arguing that point. So you could say liabilities of the Federal government are in some way backed by national income. (There is obviously a limit to this though, the government can’t enslave its people and hold output constant).

    The point is that if USD is not a liability of the Federal government, but instead an outsourced oligopoly of private institutions, I’m not sure you can make the claim that USD is backed by national income. Instead it is backed by JPM, BAC, WFC or C’s income (derived from their assets).

  83. Clearly I can’t connect the dots but I am trying to be inquisitive and add to the discussion/understand your point of the view.

    I genuinely believe that this is a paradox for the MR framework. No reason we can’t work through this together.

  84. I really don’t see how Exxon’s oil is connected to a liability at Citigroup other than its direct relation to any business that it does directly with Citigroup. Any loan from C obviously would be a claim on only a fraction of XOM’s assets though. I don’t think you can reasonably claim that C or the banking industry collectively has a lien on all of XOM’s oil. There are other creditors/pension obligations that preclude commercial banks from seizing all of XOM’s assets in a default scenario. Also, that wouldn’t explain how a company with no bank debt, whose income is counted in national income, could have a lien against it by a bank and thus back deposits.

    I’m really not sure what I’m doing differently than 90% of the other commentators on this site, but I’m sorry if I’m offending you. Your site happens to have a large concentration of people who are educated, interested and like to think about monetary theory. I enjoy being part of that group and adding to the discussion. I see lots of people disagree with you and challenge your thoughts. I’m not sure why I’m constantly getting blocked for it.

  85. When I wrote that response I’m pretty sure you used XOM instead of TOL, but no worries. Just wanted to point that out so I don’t look strange for throwing XOM into the mix.

  86. Yes, I changed it to a house since most loans are attached to houses, which I thought might be an easier way to understand this all. Look, I am not trying to be a jerk, but you’ve dragged this same point out for 2 months. I am a super patient guy, but I am gonna have to call this one quits with you. Sorry.

  87. Thanks for this Cullen.

    Does someone mind explaining the transaction and the subsequent reversal in accounting terminology – i.e. Dr and Cr?

    thanks in advance.

  88. Probably I just missed it, but what would be the impact of this trick on the debt burden level? I mean, someone has to pay, somewhen, no?

  89. This is at least for the first part a legal issue. And Mr Diehl simply doesnot look very good at that.

    Just using his way of reasoning. A law states: It is not allowed to take dogs into the restaurant. Does this mean you can take your grizly or tiger or elephant or all 3 of them into the restaurant? According to Mr Diehl (at least according to his reasoning here) it is allowed. If he was the restaurant owner he probably would take another view is my guess.

    Basically we simply donot know. One way of looking at it say: they are no dogs so it should be allowed (Mr Diehl’s pov likely). But there are other ways dogs include other larger animals. Tigers in a restaurant is so completely unusual that you will not have in advance a law about it, but that doesnot mean it is allowed.

    With the coin from a pure legal aspect (there are also other things to consider that are possibly/likely even more important) it is about the way you interpred the law. As well about things like abuse or misuse of law. Which are at the end of the day to be decided by a judge from a legal pov. Let us say that at least an interpretation that 1Tn dollar pieces are not to be considered a coin is also a possible interpretation. As is using this to circumvent the debtceiling is not the reason this power was granted to the Treasury.

    In the process of doing the thing there might be other problems. As you need cooperation of the FED mainly. Which legal view will the FED take? And will that legal view be purely legal or also influenced by other aspects. It would bring fiat money to a whole new dimension, one can imagine the FED not being to keen on that, as it basically dumps a political problem (not raising the ceiling and/or get the fiscal deficit under control) at least temporary on its (the FEDs) desk. Which could be a good reason to take the view from a legal pov that a 1 Tn coin is not allowed and from a more practical pov saying at the same time: ‘it is a mess you created, so you clean it up’.

  90. National taxes support demand for the currency, not national income. But when the government is spending twice what they get in taxes there may come a point when there is not sufficient demand. If people start to bail on the government bonds and the government has to print more money you get into a bad feedback loop where the velocity of money is going up and the quantity of base money is going up while less and less people want to hold bonds. This is really what hyperinflation is.

  91. they can make the coin as large as a nickel and claim it has any value they want. they do not need a trillion dollars worth of platinum. they have to use platinum because gold copper and silver etc… have their value ranges specified by the law. you cannot mint a gold coin and simply say its worth a trillion. but platinum was not specified, which means they can do exactly that.

  92. It doesn’t come down to default – that’s the lie that Dem’s have pushed and their media cohorts have sung to. There’s more than enough tax receipts to service the interest on or even pay down the debt.

    The issue was and continues to be the continued deficit spending for handouts & defense.

    Why are there so many people who continue to believe that default is the destination beyond the debt limit fork in the road?

    This level of misinformation didn’t exist when W. Bush was up against the debt limit.

  93. >This level of misinformation didn’t exist when W. Bush was up against the debt limit.

    Misinformation, disinformation, lies and outright propaganda are the Team’s methods.

  94. Do you think a $100 bill is actually printed on $100 worth of paper? Of course not. It’s only worth $100 because the govt says it is and because there’s a certain level of output that it can purchase. Same idea here. The funny thing is, most people are fine with saying a piece of paper is worth $100, but now they’re outraged that a metal coin could be worth a trillion. This whole debate, from start to finish, is getting silly. There are so many misconceptions and falsehoods surrounding the debt ceiling and ways to circumvent it.

    What I find most amazing is that so many seemingly smart people think it’s okay to threaten default using a self imposed constraint yet they also find the coin idea ridiculous.

  95. Let’s see…we want to create out of thin air $1 Tn (vs. US and foreign currency purchasing debt instruments such as bonds & T-bills)…pay it to ourselves, then allow ourselves to print dollars to fund deficit spending. Am I the only one that thinks this is a bad idea?

  96. Oh boy, here we go. This topic was inevitably going to descend into partisan politics. Why can’t anyone have a reasonable discussion about the direction of our country without comments like these creeping in?

  97. Johnny, the reason we get so irritated with you is because you keep bringing up tired lines like this “I think the onus is on you to address these questions”, because 1) they HAVE been addressed and 2) to be blunt about it, it’s intellectually lazy to put all the burden on Cullen and commenters to break down every last fine point about these matters for you. You seem smart enough not to have to have these things spoon fed to you.

  98. And those assets are backed by the productive capacity of the populace the loans were given out too. Why else would they make the loans? Not sure why that last step isn’t patently obvious.

  99. I have two questions that have not been addressed.
    1. What does the Fed do if we have a spike in inflation? Inflation comes in cycles which are dimly understood by economists, but it will come again. The usual policy of raising interest rates to combat inflation would be difficult if we are borrowing $1 trillion per year (and growing.) … PS: No fair saying inflation is a good thing that comes with growth (it’s not) or that you don’t see it happening (after all, you can dismiss any risk by claiming that it can’t happen.)
    2. The U.S. is a huge economy that no doubt can carry $15 trillion in debt. Could we carry $30 trillion in debt? Can we finance 50 percent of government spending?

    I agree with most of what Cullen has propounded. MR does seem to describe the operational realities. It’s just that those realities, taken to their logical course, lead us to higher and higher debt loads, private and public.

  100. Johnny, when govt debt to GDP gets high enough, the big inflation risk comes from higher interest rates. I know it is counter-intuitive but higher rates will likely lead to higher inflation! This is because higher rates equals higher debt service costs, thus higher govt deficits. See Scott Fulwiler’s recent piece on the sustainability of govt debt at NEP.

  101. It depends on the kind of inflation. And how much. You want blanket answers to questions that are more nuanced than you seem to find acceptable. And, I’m pretty sure Cullen and others have addressed these issues.

    If it’s inflation due to improved economic conditions, the Fed can increase rates and/or sell securities held on its balance sheet to reinforce its rate setting action. Improved economic conditions necessarily mean an increase in tax receipts, so the government may not have to deficit spend at all, therefore not have to issue any new Treasuries at the higher rates.

    If it’s cost-push inflation due to something like oil shocks or the like, the Fed is more limited in its ability to combat it. This kind of inflation doesn’t mean increased servicing costs though, as the Fed does set the rates and only allows Treasuries to sell for what it wants to. Cost-push inflation due to input costs increasing is something that would require governmental and private sector efforts to fix, but it doesn’t change the nature of the Fed as the rate setter.

    Not sure what your concerns are about the ratio of the debt to the economy. The debt is a private sector savings instrument. I don’t think there’s a magical number or ratio where it starts to get scary. I’ll leave the number crunching to the experts, but the government can always service its debts. You know this.

  102. Geoff: Partly because of what you said, and partly because the costs of debt service if rates rise, don’t you think that rates have to stay low. So what are the ramifacations of permanant zero based rates?

    Pierce, when you say the government can always service its debts, you’re taking this thing way further than Cullen states. Yes, we all know the government can make good on its debts. So 20 years from now, when we’re paying paid in useless script, you’re going to tell us, ‘See, I told you the government doesn’t have a solvency concern.’
    You’re calling the debt a private sector savings instrument, but once the Fed starts buying bonds itself, then debt morphs into something else.
    Curious if you think we needed to borrow — let’s say, $5 trillion? Do you think there are $5 trillion savings out there that can be mopped up into Treasuries? And would that be the most productive use of savings?

  103. We are on an MMT bboard where they can only see the good effects of making new money. So you and I might be the only ones who think this is going to be a problem.

  104. 1. This isn’t an MMT website. IT’s MR. Huge difference. MMTers are the ones who want the govt to self finance. I just describe how the system works via MR.

    2. The coin doesn’t create new money. It would continue spending as usual in a temporary fix around the debt ceiling. In fact, NOT spending would be hugely deflationary since it would be $100B per month in lost spending in the economy.

  105. There should never be a threat not to pay our bills. If Congress wants to cut spending, then they shouldn’t pass appropriations bills or load other bills with “pork”. TThey passed the bills. They MUST cut the check. We don’t need a debt ceiling to know the level of deficit soending. It’s ridiculous.

  106. Right. They implicitly sell the debt when they pass the legislation. It’s absurd to use a fake constraint after the fact. I say close the coin loophole, end the debt ceiling.

  107. But wouldnt this coin idea cause the inflationistas to become emotionally unstable and make poor investment decisions which the rest of us could take advantage of? This has potential!

  108. The loans are a claim to some of the production, but not all of it. It’s taken for granted that USD is backed by a 16T dollar economy and I’m just challenging the assumption made here. How do banks have a lien on companies with no debt which contribute to that output?

    This is an important point because if you believe that USD is backed by $16T in output then I think you have to acknowledge that that backing comes from the government’s taxing authority. If that’s the case, then you’re acknowledging that USD is a liability of the Federal Government. On the other hand, if you want to argue that deposits are USD, then it’s quite clear that deposits are not backed by the economy as a whole, but instead by the income and liquidity of the issuing institution alone. I don’t see how this isn’t empirically obvious. Loans go bad and banks fail all the time. Uninsured depositors lose money and the bank has no lien on GDP to make the depositors whole.

  109. Who ever said USD couldn’t be destroyed? Do you think USD can’t be destroyed just because the govt can tax it? That’s preposterous. One could easily argue that inflation destroys USD a little bit at a time and that in a hyperinflation the USD would be completely destroyed. It doesn’t matter how much taxing authority the govt has or how many guns the govt uses. The only reason the US govt doesn’t fail in the same way that a bank does is because it taxes the enormous output of its private sector. The US govt does not give a currency value. Resources naturally precede taxation. Govt is a user of pvt resources!

  110. Ok, MR site.

    How is a new $1 trillion coin that the Fed accept as a deposit and issue new paper money for not new money? How is it temporary? The odds are they will make more and more coins if the first one works. They said QE1 was temporary and would be unwound with an exit strategy. But instead we had QE2 and QE3 and QE-infinity.

  111. Did you read the comment by Diehl? He explained it. It’s a temporary resolution. The coin would get melted once we went back to business as usual.

  112. Cullen, you might want to touch on this further in its own post. The idea that governments are users of resources is important. Banks only become solvent because they run out of resources. Government’s cause hyperinflation when they can’t tax resources. I find this topic so important. Yes, the US government doesn’t “run out of money” as you often say. But that’s mainly because it doesn’t run out of resources.

  113. Cullen, this doesn’t really sound right. Could you mean that Govt Bond Value is #1 based on the productive capacity of the nation, and 2) The Govt authority to Tax that production?

  114. Well, the income is generated from the productive capacity of the nation. The value of govt bonds is largely derived from the ability of the govt to tax this output and pay owners of bonds out of this revenue source. If there is no output to tax there is no revenue to be had and there is no need for anyone to want to own the bonds that govt sells. You wouldn’t buy the bonds from an entity that couldn’t generate the revenue to pay you, would you? You certainly wouldn’t buy those bonds if that govt was just printing money to cover a total lack of revenue….I like the way LVG phrased this below. Govt is a user of private resources. It only has authority so long as it can use these resources….

  115. Until it is melted it is money and paper money will be issued if it is deposited at the Fed. But he is wrong, it won’t be melted. Why would they sell bonds and pay interest when they had an interest free coin? If they make one, they will make more and more coins till they get hyperinflation.

  116. To not mint the coin would be deflationary to the tune of $100B less in spending per month. So, it’s only inflationary to the extent that it avoids deflation….

  117. I think Cullen is right. They’ll want to melt the coin to re-assure the market. I think there are people in the administration with real influence who understand very well the dangers of hyperinflation. However, minting this coin once will provide PLENTY of leverage to do exactly what Cullen says would be best: Pass a bill that both closes this coin loophole AND removes this silly debt ceiling vote/fight once and for all!! That would really be the optimal outcome.

  118. Nice! … kind of like the people advertising that they definitely would NOT be raptured to heaven, but they’d be happy to sell you an insurance policy to guarantee that your pets would be well taken care of if you were pretty sure that you WOULD be raptured. Remember that?

  119. In fact, I wonder if that wouldn’t be the best thing for the admin to do if it really comes to that: order that the coin be minted and introduce the legislation in one fell swoop… and perhaps have Geithner dress in a clown suite during the press conference to emphasize the point.

  120. Geithner could just stand there silently in the clown suite, and Obama could say “I’ve instructed Secretary Geithner here to remain in this clown suit until this legislation is passed! … and I won’t be compromising on that! PASS THIS BILL!! .. and let Tim regain his dignity again!”

  121. Cullen, how about a friendly no money bet. I bet that if they issue a first one trillion dollar coin that they issue a second one before they melt the first.

  122. Probably they won’t issue a coin. But that was not my point. My point is that if they issue one they will not be recalling it and melting it, but instead they will follow with a second and a third coin, etc.

  123. Cullen,

    This is a very interesting article/response from Mr. Diehl.

    However, when it comes to the internet, I am an extreme cynic.

    Have you confirmed that this was actually Mr. Diehl who posted this?

  124. Please go to any bullion seller’s website and look at the US silver, gold or platinum eagle bullion coins. or go to Ebay for that matter.

    The 1oz Silver Eagle has a $1 demonination…sells for around $35

    The 1oz Gold Eagle has a $50 denomination sells for around $1750

    The 1oz platinum coin has a $100 demonimation and sells for around $1800

    The value of the coin IS determined by the metal content…the denomination IS arbitrary.

  125. In spring of 2000 (March I think), Philip Diehl stepped down as the 35th Director of the U.S. Mint. At a ceremony marking that occasion, Treasury Secretary Larry Summers presented Diehl with the Treasury Medal for outstanding public service. In the joking around after that ceremony, someone suggested Treasury should mint a trillion dollar Platinum coin and put it in a bright red fire alarm box with the instructions “Break glass only in case of emergency.” And that was that. Serious suggestion? I doubt it. But it certainly applies to the debt ceiling impasse.

  126. Fortunately, Treasury and Fed have killed this idea. Now let’s get back to serious proposals instead of fantasizing about legalistic trickeries.