Platinum Coin Easing

Here we go again.  It looks like the debt ceiling is going to become a problem in the coming months.  It’s ridiculous and I’ll tell you why.  The only reason this debate even occurs is because the Congress has ALREADY decided on a certain allotment of spending.  So, Congress votes to pass XYZ spending for the future and then later on we hit this fictitious constraint where Congress then turns around and says “wait a minute, that’s too much spending!”  I’ve compared this to eating a bunch of cheese pizzas, tying your intestine in a knot and then threatening your stomach not to digest the food because it might kill you.  It goes without saying that that would be incredibly stupid.

Anyhow, silly debates deserve silly solutions.  And the trillion dollar platinum coin proves just how silly this whole debate is.  But this is a very serious matter and if push comes to shove this is a loophole that should be implemented.  In short, the US Treasury could order the US Mint to create a platinum coin of any denomination, deposit it in the Fed’s account and the Fed could then retire some portion of the national debt in what is essentially an exchange of the bonds they hold for the coin.   Then the government spends the money they were already told (by themselves) to spend and we don’t get held hostage by the very same government.

Banking guru and MR co-founder JKH has a superb post up at the MR site regarding the mechanics behind the platinum coin.  It’s a short and simple piece, but it highlights the simple reality here.  He calls it “platinum coin easing”.  In essence, the monetary dynamics are simple.  The coin would replace some of the bonds that the Fed currently holds solving three issues:

1)  A non-inflationary way for the US Government to spend.

2)  It circumvents the debt ceiling by effectively reducing the debt balance by $1T.

3)  It’s a completely legal workaround.

I know, I know.  The whole thing sounds like a bad theory from the Zimbabwean central bank.  But the simple reality is that this isn’t inflationary and is a rather simple way around a very silly constraint.  But as silly as this solution might sound, this is serious stuff because the US Congress shouldn’t be allowed to play Russian Roulette with the US monetary system just because they don’t like the bills they already passed.  I’m totally in favor of a debate about government spending and efficiency, but holding the US economy hostage in this manner once every 6 months is totally unacceptable.  And if it happens again the President and Treasury Secretary should very seriously consider this solution.

NB – Just in case anyone was curious, this policy loophole was discovered by fellow MR co-founder & attorney Carlos Mucha.

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. Totally agree that the debt limit is ridiculous, but I really don’t think we want to go down this route and the reason is that perception matters. The overwhelming majority of the population don’t understand this stuff and would see the debt limit as reasonable while creating a trillion-dollar coin would be seen as fraudulent. Faith in the U.S. currency would be damaged at home and abroad. God help us if the true fraud (the Republican party) forces this to happen.

    • The population also doesn’t understand QE. Hell, 90% of the professionals I talk to don’t understand QE. Most people think QE is “money printing”. Then the policy got implemented and perceptions didn’t matter once the balance sheet effects didn’t follow thru. Same thing here.

      There is no magical moment where no one wants to hold USD’s if the actual fundamentals don’t change at all. And if markets were to react negatively then it would be a huge buying opportunity for those in the know who understand that this doesn’t actually change anything. So, I say, bring on the fear. I’d like to take some more money from the people who plan on responding to this sort of stuff with their persistently (wrong) negativity to policies they don’t understand. :-)

      • You want the Treasury prices to collapse so you can make money?!
        Look, if Treasury prices fall, meaning widows and pension funds see their government bond funds lose value it will be a much bigger crisis than the mortgage debacle. Invidual investors will panic and institutions will get a major margin call.
        So be careful what you root for, please.

        • The prices would snap right back. Not that they’d collapse anyhow. We heard all the same fear mongering when QE2 ended and when S&P downgraded the USA, etc. All this mythical collapse of the bond market is coming from people who don’t understand market dynamics and don’t understand the monetary system. They’re just wasting their time and money.

  2. No, in the current environment it’s not inflationary. But if this had happened before 2009, yes, then it would have been very inflationary.

  3. I am sympathetic to Matt’s point and hear what he’s saying. But I really disagree. Like Cullen, I would see that the long term benefits of this approach would be the educational opportunity that it entails. People would be forced to learn how the system works and be disabused of these myths.

    • I think it’s a fantasy to believe that this would lead most people to learn about the monetary system. Few people are going to make that effort and many of them still won’t understand it. Not to mention that most people willfully avoid learning the truth if it appears to conflict with their current worldview. While the trillion dollar coin appears to be a logical response to a purely technical constraint, it is not going to be seen as logical to the mostly illogical populace.

      My preference, by far, would be for President Obama to instruct the Treasury to ignore the debt limit if it comes to that.

      • Rather, ignore the repeated interest payments on the debt. The Fed only should be paid its transaction fee of 6% of the interest on the security it has just bought. But that is a one-time only fee. You can’t bill the Treasury for it a second time, since the debt obligation has been erased. The Fed automatically and implicitly redeems the debt to the banks for the government when it buys the securities with fiat money it makes on the spot out of thin air (by making a digital keystroke entry in a spreadsheet at the Fed). Fiat money is only legitimate money because Congress authorizes it with power it got from the Constitution.

  4. The other big advantage of the coin would be to watch Peter Schiff’s reaction. Once and for all, he might be forced to close his trap.

  5. Why use platinum? Why not deposit a piece of toilet paper with “1 trillion” written on it?

      • This was more to make the point that if the Fed can say “toilet paper = $1 trillion” then the public might, in a rare flash of revelation, deduct “paper money in my wallet = toilet paper”. Which would be only rational. It does not matter if it is platinum or not.

    • The US Code allows free reign to the Secretary of the Treasury to create these huge denominational buillion coins only if they are made of platinum. It won’t take much
      platinum to make a $10 Trillion coin. The monetary value is what is stamped onto the
      face of the coin, not the value of its platinum.

  6. The US electorate would not accept this. It’s true that 90% of the population has no idea what the Fed does or how the US funds deficit spending, and that’s how the powers that be would like to keep it.

    But 100% of the population WILL understand minting trillion dollar coins to cover our lack of financial prudence. The MSM would be forced to cover the story. Fox News and Drudge would go nuts. A popular backlash would occur.

    The hypocrisy is glaring. If John Q Taxpayer can’t balance his budget he goes bankrupt and is labeled a deadbeat. If the US government can’t balance its budget it mints trillion dollar coins and everybody in the west wing high-fives each other.

    • @ Toby –

      Your ‘hypocrisy’ trope is part of the problem.

      You need to brush up a bit on the reality of the mechanics of the monetary system, and why a household is not comparable to a sovereign currency issuer.

      • I think you missed my point. The public doesn’t give a rip about “the reality of the mechanics of the monetary system, and why a household is not comparable to a sovereign currency issuer.” They are too busy playing with their kids or walking their dog.

        I was just speaking to the public perception of all of this, and the public would call BS.

        • No, I would say the general public has not freaked out yet because QE is way too abstract. The only ones that have been really freaking out have been ZeroHedge, Schiff, HFT Algos etc. Still fairly fringe.

          But, like I said, I think the general public WILL understand a trillion dollar coin. They will picture this gigantic shiny coin with a bunch of 0s on it, and wonder the the hell is going on.

          • not if you do it during American Idol or the super bowl. in one ear, out the other. you’re giving way too much credit to the general public’s attention span or interest

    • The media is already covering the story. It’s like QE all over again and I have to go in the shadows of my blog explaining to everyone why they shouldn’t panic while the rest of the USA screams about this being “money printing”. Sometimes I feel like I am screaming into a black hole….

      • If the President says his Treasury Secretary will pay no further interest on securities already paid once before, and will not roll over another security, or the Banking Committees call in Bernanke and the Secretary of the Treasury to determine why we are spending all this taxpayer money to pay off the continuing interest on an accumulating debt, which doesn’t exist, maybe there will be news coverage.

    • But isn’t that the whole point? Or at least the wonderful side effect of the whole point? The whole country is forced to come to a correct understanding of the monetary system. I’m imagining “the coin” in the Thanksgiving Day parade etc. As someone else said elsewhere, it’s like the final scene in a Gilbert and Sullivan operetta! What’s the alternative? Should we allow John Q, Peter Schiff, and Fox news to continue to live their life lie or should we get on with updating our understanding of the monetary system? I love the alacrity of such a move.

    • Will the people accept the news that there was really no debt at the Fed after all? The Fed routinely clears a governmental debt obligation to the banks or whatever other private or foreign institution holds them, just by the very act of creating fiat money out of thin air to buy them. There is no debt! Get that? No debt. The Fed is the government, just as much as the Treasury is. Will we have problems convincing the Supreme Court? I doubt if it will get that far.

      Nothing has to be done further about this. We can get back to deficit spending, because it does not ultimatey incur a debt at the Fed. And the Fed clears the debt when it buys the securities from the banks.

    • All it would take would be for President Obama to tell the Fed, “I’m not paying anything for this so-called debt. If you don’t like it, sue. You have already redeemed the debt automatically and implicitly as a government agency by buying those securities.”

      I have to believe that the folks at the Fed actually know this and when called on it, will go along. It’s just that no one challenged them on it so they went on doing what they were doing all along.

      So, would someone else send a message to the President telling him there is no debt, so act accordingly. I must be seen as a lone nut harassing them with these messages.

      Now, how did this all come to pass? Any thoughts?

  7. Would you guys go for a debt ceiling of $50 trillion?
    What about a sliding scale — let the debt ceiling rise by $5 trillion a year.
    Would love to see some serious debate in here about how much government debt the system can tolerate, instead of the constant refrain, ‘You don’t understand the system.’
    Let’s say the Congress passed a $10 trillion stimulus package? Would that alarm you?

  8. What intrigued me about this was how close it was to quantitative easing.

    The Fed buys a coin instead of a bond.

    An “exit strategy”, which is an issue for QE, is important in both cases – i.e. important in that it needs to be thought through.

    The Fed can eventually sell the coin back to Treasury, instead of selling the bond (back to the market) or maturing it. The exit strategy involves that latter sort of transaction in the case of bonds. And the Fed has worked out contingency plans for bond QE exist in considerable detail.

    Acknowledging that its a very low probability, it doesn’t seem quite so absurd when considering platinum easing as a QE option – which happens to avoid the legislative complications with bonds right now.

    In fact, the full cash flow pattern – implementation plus prospective exit – is the same for both bond and platinum versions. That’s really the point.

    Viewed in that light, the coin could be viewed as a real platinum bond, or a real term platinum repo (with a contingent maturity date).

    (Not entirely related, but Canada has a rock band called “Platinum Blonde”)

    • The Fed can just keep the debt on the books until it matures and then pay the proceeds to the treasury as it does now with the interest income…

  9. Cullen, I hope you don’t quit screaming into that black hole…. because I am sure you have allowed some people (me, anyway) to escape that hole.

    It reminds me of the story about all the starfish washed up on the beach after a storm, thousands of them. A lady starts picking them up, one by one, and throwing them back into the sea. Some guy walks up and says; “Why are you doing that? There are thousands of them. It won’t make any difference.” The lady picks up one, throws it back into the water, and says… “It matters to that one!”

    • great comment CuriousLurker! I was/am like you in that Cullen has helped me understand the system. Btw, love your name, I was that way for a long time here, years, but only recently have I started to comment more frequently (2nd post today!)

  10. Why not a $50 trillion coin?

    Reminds me of the story of the man offering a $50 million to a woman to perform a sex act. When she said ‘yes’, he responded by offering her 50 bucks. She said, ‘What kind of a woman do you think I am!? So he said, ‘We’ve already established what kind of a woman you are. Now we’re negotiating your price.’
    This post proposes we manufacture $1 trillion. So why not $50 trillion? Let’s negotiate. What is the limit?

    • The limit would be the amount in Treasuries the Fed has outstanding. Anything over this amount would be pointless as the Fed has no need for excess dollars.

      So, yes, you could, in theory, retire all outstanding debt with this legal loophole.

      • So the idea is to pay back $1 trillion to bondholders; of course they would want to take that $1 trillion and give it right back to you in exchange for more bonds. The Treasury would then spend the $1 trillion.
        This could be repeated infinitely.
        Basically, we are saying that too much money is tied up in savings and needs to be spent? And when the U.S. borrows more, it gets some short-term spending but then finds itself with even more deadweight saving?
        Savings are bad, whether it’s deadweight T-bonds or stuffed into mattresses?
        Why not just print money to be spent directly into the economy or handed out on street corners?
        I know — the inflation constraint. Are there models that show what would happen if you gave $1 trillion to low-income Americans?

          • When you turn on the printing press, what happens next?
            As Cullen says, MR is descriptive. We can raise money from the dealers. And, we can print money. We get that.
            Take it one step further. What are the consequences of that?

            • You’re using the term printing money incorrectly. When the govt taxes they take from Peter to pay Paul. Deficit spending results in the creation of a net financial asset in the form of the bond. But it is not money printing. Unless you categorize bonds as money, which they are not. Most govt spending is just a redistribution. The balance of net financial assets increase through deficit spending when bonds are issued, but I wouldn’t call that money printing. It’s securities issuance. It’s money-like, but not money. Ie, a bond “moneyness” is lower than a bank deposit.

              • I was speaking about issueing a $1 trillion platinum coin to pay down debt.
                That’s printing.
                Or, ‘coining.’
                That’s what you are suggesting here, isn’t it?
                Plus the whole idea that the U.S. is sovereign in its currency means that we can print if we’re not able to pay the bondholders (as in Europe.)

                • This isn’t really printing. It’s just an accounting gimmick. We retire the debt which frees up spending under this mythical debt ceiling.

                  • It is printing. It is exactly the same as the schemes being discussed now in the UK and Japan where the Central Bank would buy government bonds and then tear them up so the Government would not have to pay interest or ever pay the money back. So they have their central banks cancel bonds and we mint nice shiny platinum coins with Obama’s face on them (I’ll bet he does this. He is too arrogant not to). It has exactly the same effect – deficit spending through seigniorage.

    • Err Umm, hello fellow Descriptive Monetary Brethren, can anyone at least give me a yea or nay on this Ladies work?

      I mean after all she seems to be the source of the TRILLION Dollar Platinum Coin Concept:
      ” Our Congress could pass a “Trillion Dollar Coin Act of 2011″ whereby, as specifically authorized in the US Constitution, Congress could authorize the US Treasury Department to mint “trillion dollar coins” (it doesn’t matter what they are made of) without incurring any debt. Those “trillion dollar coins” could then be deposited in the Social Security Trust Fund account and other “Government securities” accounts to be used to pay off our Federal-Reserve-created “national debt” without incurring any further debt in the process. This would not contribute to inflation, because most of those “securities” are already being traded in various markets as if they were “cash.” If anything, paying off those securities would contract the US dollar money supply, but further interest-free “trillion dollar coins” could be “minted” (possibly just electronically) to balance that out by using them to finance infrastructure projects throughout the US. In the meantime, our budget deficit would be reduced by no longer having to pay interest on those “national debt” securities once they have been paid off.”

      Has anyone Read or Seen This???
      Am I off my Rocker?
      Sorry, I have been busy working OT lately and have not had much time to research all you folks stuff. but I think this lady has some validity.

      I will be back on fire in a few weeks… So BE READY!! :)

      Thanks

      • Bill Still also talks about coining and spending quarters. The bottom line is coining money in this way is seigniorage, and if spent, it is money (not credit) that goes on to cancel out credit debts. The debt free money movement is predicated on this concept, where credit debts are canceled with money. Seigniorage money enters the supply when spent, leaving wealth in its wake especially if it is spent on infrastructure. It then goes into the money supply for use as M1/M2. Seigniorage money could also be spent directly into households, in alignment with Douglas social credit theory.

        In the case of the platinum coin debate, it could be considered a seigniorage coin that is constrained in its path to swap with a bond held at the Federal reserve, hence canceling out said bond. This presumes that Treasury rips up bonds after taking possession. The platinum coin never enters money supply as M1 or M2. Since platinum coins path really doesn’t disturb the money supply, one could argue it is not really seigniorage, but only an accounting gimmick.

        You may want to read up on Ellen Brown’s discussion of Japan and their 200 percent deficit. http://www.webofdebt.com That is more relevant to us, as they cycle debts from one pocket (Japan Postal Bank, and BOJ), which are public entities, to the other pocket – their treasury. Well, BOJ is partly private, but controlled by as a gov entity. My view is MR’s take on FED’s dual mandate, is that FED can be made to dance like a public entity, similar to what Japan does with their public banks.

        Japan’s debts are their people’s savings, and since they own the banks and roll over their debts to themselves, effectively they spend debt free. Their debt creation is really money, since there is no pressure for the currency “unit” to return to the ledger, and it then becomes domestic savings or spending. This method also comports with Basel II rules, confusing our Western Bankers.

  11. British question.
    “Carlos Mucha.”s
    Is he any realtion to that chap ,Mucha Gracias ?

  12. Over at Reason magazine this fellow writes:

    However, if government decides it magically has $2 trillion worth of coins (that just happen to be made ofplatinum) this would immediately create $2 trillion worth of inflation. The coins would be deposited at the Fed, into the Treasury Department’s account to spend. Money has been created out of thin air here, backed by nothing but arbitrarily denominated coins.

    Boy, good thing those libertarians have reason at their disposal.

  13. how much debt could be retire in a non-inflationary way? or how much debt does the Fed hold?

  14. In the current environment, covering Federal deficits with seigniorage is not likely to be any more inflationary than QEn has been. The worry is about the future. With no need to (formally) borrow the money at interest, the Congress will be tempted to dramatically increase social spending, especially if Pelosi gets back in the saddle after the midterm election. Eventually, this will become highly inflationary, and that inflation will be very hard to stop once it starts.

  15. Challenge the existence of the national debt. I’ve not seen this alternative way of eliminating the national debt in MMT literature. But I haven’t read everything either. Just recognize that there is no national debt at the Fed.
    Ask yourself, how did the Fed get those securities that are supposed to constitute the national debt? They bought them from the banks that had bought them from the Treasury at public auction. O.K. What did it the use to pay the banks? The Fed created fiat money out of thin air and bought them with that. (Digital money). O.K. Now, what is the Fed? Is it a private or a governmental agency? Check the Fed’s FAQ’s. Did the creation of fiat money utilize a power only granted to the government via Congress? Did the Fed have that power delegated to it? O.K. If the government has bought the securities back from the banks, what does that do to the debt obligations of the securities? It redeems them. There is no national debt.
    How can we get this message out and into the minds of the Tea Partyers? How about into the brain of President Obama? Or Tim Geithner? This solution isn’t inflationary either as long as the deficit spending isn’t inflationary. So, the coin solution is moot. I’ve sent messages to Chairmen of Banking Committees, my senators, my congressman, to other congressmen, Alan Simpson (Senator WY, retired), the President. But I think it’s going to take a whole lot of challenges of the existence of the debt to get some action on this. But the fiscal cliff turns on this issue. If there is no debt, all the blockage collapses. And there is lots of things MMTers can elaborate on here. E.g, deficit spending is debt free.
    Fiat money created at the Fed is debt free (contrary to Ellen Brown). We can get out of recession without creating debt. So, what is stopping us?

    • Well done.
      As you say, the Trillion Dollar coin would make a mockery of the current financial and legislative system.
      Currently we pay for our deficit spending by borrowing money.
      MR purports to describe a system in which this money does not have to be paid back (but can be rolled over infinitely, or printed away some day), but that is not how the system was set up. Debt is borrowing.
      It would be far more upfront to campaign to change the system so that we can print money, and not pretend that we are already able to do this.

      • Johnny,

        I’ve commented on the fine article James wrote. And I agree that the coin idea would make a mockery of the system. I’ve only used it to describe the silliness of the entire debate to begin with. I 100% don’t think it will get implemented. Nor do I think any rational president would implement it except in a very serious emergency situation.

        Cullen