Friday, July 29, 2011

Debt Watch / Coin Trick: the Trillion Dollar Coin

One creative solution to the U.S. Government's debt-ceiling, which has bubbled up from the progressive MMT (Modern Monetary Theory) economic community, has been called the #trilliondollarcoin meme.

The looming August 2nd deadline for raising the debt-ceiling, and the stalemate in Congress make this plan a possible option for the Obama administration. It is a maneuver where the President can bypass the will of Congress and skip over the debt limit by having the Treasury mint a trillion dollar platinum coin. The idea, in one sense, is reminiscent of other Presidential end-runs like a recess appointment or a pocket veto. In this case you could call it finding monumental pocket change in the seat cushions at the Treasury.

At first, it might look like a magic trick because the Obama administration will be pulling a trillion dollar or even larger platinum coin out of thin air. However, if you study the details of the plan, you will find it does offer a quick and legal way to get around the debt limit by using what is called coin seigniorage.  Seigniorage (pronunciation guide) is a word derived from the old Anglo-French word seignurage, meaning the "right of the lord to coin money."  In this case, the legal right of the Treasury Department and the U.S. Mint to make high denomination platinum coins is the loophole that is being exploited.

Ed Harrison at the Credit Writedowns blog succinctly summarizes the plan:
The #trilliondollarcoin meme --
Just so you know what I am talking about, the idea is an end-run around the debt ceiling and it works like this:
  1. The Treasury mints a $1 trillion coin, or whatever amount is desired.
  2. The Treasury deposits the coin into the Treasury’s account at the Fed.
  3. The Treasury buys back bonds
  4. The retirement of bonds is an asset swap, no different from QE2
  5. The increase in reserve balances is not inflationary, as Credit Easing 1.0, QE 1.0, and QE 2.0 already have shown.
  6. These operations by the Treasury create no new net financial assets for the non-government sector
  7. The debt ceiling crisis is averted
Dave Winer at Scripting News called it "currency hacking" and added "I like it." That seems to be the consensus of most progressives who have studied the plan, they like it. Most Republicans and Tea Party people, you can be sure, will not be so keen on this trillion dollar coin if it does get minted.

The idea originated** from a writer named "Beowulf," who is a frequent commenter on lefty blogs like FireDogLake, New Deal 2.0, and also Warren Mosler's MMT blog. Beowulf posted an article fully explaining the idea on the Fire Dog Lake blog back in January. Since then that the idea has been kicked around on liberal and MMT blogs. Proponents of Modern Monetary Theory (MMTers), previously critiqued here, like the coin seigniorage idea because it dovetails nicely with their economic and monetary worldview.

In a January 20th blog post, MMT creator, Warren Mosler reviewed the idea and said:
As far as I’ve been able to determine, it does work operationally. It seems the US Treasury is already legally empowered to simply mint it’s own platinum coin in any denomination it wants and effectively deposit it in its Fed account, rather than sell bonds to the public to fund its Fed account.

This process doesn’t change actual govt spending, so doing it this way doesn’t add to inflation, nor does it change the fact that govt deficit spending adds income and net financial assets to the other, non govt sectors. It’s just that the new financial assets will simply be new reserve balances at the Fed, rather than new Treasury securities (which are also simply accounts at the Fed).

What issuing these coins does do is remove the legal need for the debt ceiling to be raised, and also reduce the amount of outstanding Treasury securities, which is what is called govt debt. So while both reserves and Treasury securities are, functionally, govt liabilities and differ in name (and sometimes duration) only, the headline rhetoric does make that distinction. So technically, this process eliminates the ‘national debt’ and removes any (misguided) notion of solvency risk.
The idea just started to get serious traction the last few days as the debt stalemate has grown more intense and partisan. Yale constitutional law professor Jack Balkin floated it as an option in a CNN op-ed yesterday (July 28th).

Today the idea has gone mainstream. It is covered by NY Magazine, CNBC, and The Economist. Even Nobel economist Paul Krugman of the NY Times has weighed in. Annie Lowrey of Slate discusses it as one of several gimmicks the government could use to resolve the debt-ceiling debacle.

Who knows if the Obama administration uses this idea or any of the others being floated. Lowery dismissed the idea by saying:
Coin seigniorage feels like a late-night TV scam, and could raise some sticky questions about who controls the money supply and whether the country is simply monetizing its debt.
Krugman added:
These things [like coin seigniorage] sound ridiculous — but so is the behavior of Congressional Republicans. So why not fight back using legal tricks?
However, coin seigniorage is not a scam. It is legal and so what if some people call it a legal trick. As for sticky questions about who controls the money supply, simple, the same people who control it now: the Treasury and the Fed. As for monetizing the debt, that might be next week's hotly debated topic.

This plan looks like it might be Obama's ace in the hole, whether you like it or not. If it is minted, perhaps the new trillion dollar coin will be called the Obama Buck or the Barack Buck.

This scheme might put some jingle in the jeans of every President, who needs some extra scratch.
via The Atlantic Wire
Here is a timeline of the platinum coin seigniorage idea progressing through the blogosphere:

Beowulf / Fire Dog Lake [Jan. 3, 2011]
Coin Seigniorage and the Irrelevance of the Debt Limit --
If you think about it, it does seem odd that the US Government is the monopoly supplier of US dollars and yet our politicians go through life thinking the government will run out of money unless it can borrow more. Of course that’s not true, the coins in your pocket are legal tender and yet were not issued against debt. They’re minted by the US Government, backed only by the gilt-edged credit of the American people, no one is paid interest on it and they don’t add a penny to the statutory debt. What’s more, the use of coins as legal tender is scalable, they could replace the use of Tsy debt sales...
Joe Firestone / Corrente [Jan. 5, 2011]:
Will He Say He Has No Choice or Will He Use Seigniorage?

Joe Firestone / Corrente [Jan. 19, 2011]:
President Obama Should Use Coin Seigniorage Now!

Warren Mosler / Mosler Economics [Jan. 20, 2011]:
Joe Firestone post on sidestepping the debt ceiling issue with Coin Seigniorage

Christopher C. Currie / [Mar. 21, 2011]
A Trillion Dollar Coin Act of 2011

Joe Firestone / Corrente [April 5, 2011]:
Use Coin Seigniorage Now!

Joe Firestone / Corrente [May 18, 2011]
President Obama: Stop Breaking the Law; Use Coin Seigniorage

wigwam / Daily Kos [Jun 27, 2011]:
How to Knock Two-Trillion Dollars Off the National Debt, Ending the Debt-Limit Crisis

wigwam / FireDogLake [July 5, 2011]
The Jumbo-Coin Option

mahilena / Corrente [July 6, 2011]:
HOLDING Debt Ceiling Hostage? No more! - Obama Payoff Debt producing equal value coins!and/or render Ceiling unconstitutional

Cullen Roche / Pragmatic Capitalist [July 7, 2011]:
Let's End this Debt Ceiling Debate with a $1 OZ $1T Coin

Joe Firestone / FireDogLake [July 7, 2011]:
The Debt Ceiling Is Not Unconstitutional, Right Now!

ubetchaiam / FireDogLake [July 7, 2011]:
A response to Wigwam and call to action

Scott Fullwiler / Credit Writedowns [July 13, 2011]:
QE3, Treasury Style

Felix Salmon / Reuters [July 14, 2011]:
The damage already done by the debt ceiling debate

Matthew Yglesias / Think Progress [July 15, 2011]:
Monetizing The Debt

Joe Firestone / Naked Capitalism [July 18, 2011]:
Why Matt Yglesias and Felix Salmon are Wrong About A Legal Way to Circumvent the Debt Ceiling Impasse

Joe Firestone / New Economic Perspectives [July 18, 2011]:
Coin Seigniorage: A Legal Alternative and Maybe the President's Duty

Tom Hickey / Mike Norman Economics [July 18, 2011]
Coin Seignorage Breaks into Mainstream

Jack M. Balkin / Balkinization blog [July 18, 2011]:
Obama's Top Secret Plan to Solve the Debt Crisis

Prof. Scott Sumner / The Money Illusion [July 19, 2011]:
Is coin seignorage Obama’s magic bullet?

Joshua Holland  / Alternet [July 20, 2011]:
There's a Solution to the Debt Fight That Could Avert Catastrophe -- Why Is Everyone Ignoring It?

Darrell Delamaide  / MarketWatch [July 20, 2011]
Smoke and mirrors with the federal deficit

Mark Kleiman / [July 20, 2011]:
Phony problem, phony solution

wigwam / Fire Dog Lake [July 23, 2011]:
Mark Kleiman calls Coin Seigniorage a “phony solution” to a “phony problem”

Inventing The American Left — A 'Dog's Eye View [July 27, 2011]:
Proof Platinum Coin Seigniorage — The Ultimate Left Cure For #Debtpocalypse?

Jack M. Balkin / CNN Opinion [July 28, 2011]:
3 ways Obama could bypass Congress — Editor's note: Jack M. Balkin is Knight Professor of Constitutional Law at Yale Law School.... — 
Very soon, Congress will raise the debt ceiling....

Sovereign governments such as the United States can print new money. However, there's a statutory limit to the amount of paper currency that can be in circulation at any one time.

Ironically, there's no similar limit on the amount of coinage. A little-known statute gives the secretary of the Treasury the authority to issue platinum coins in any denomination. So some commentators have suggested that the Treasury create two $1 trillion coins, deposit them in its account in the Federal Reserve and write checks on the proceeds...
Balkin discussion:
Capt. Fogg / The Reaction:
Billion Dollar Coins and Exploding Options — oh my!

Logan Penza / The Moderate Voice:
(Platinum) Pennies From Heaven (UPDATED) --
Ironically, a quick look at the legislative history indicates that paragraph (k) was modified to specify platinum coins could be so issued in 2000, by a Republican Congress...
Jonathan Chait / The New Republic:
The Coin That Will Save The World --
Somehow, I've missed out on a discussion of the coolest (and apparently legitimate) way to avoid a debt ceiling crisis...
Erik Hayden / Atlantic Wire: A $1 Trillion Coin Seems Like a Nice Idea

Paul Krugman / NY Times: Lawyers, Coins, and Money
Balkin related:
Matthew Yglesias / ThinkProgress:
The Platinum Coin Option --
This would, I assume, lead to a downgrading of American sovereign debt.
J. Bradford DeLong / Grasping Reality with Both Hands:
The President's Obligation to Take Care That the Laws Be Faithfully Executed Requires Him to Start Minting Large Denomination Platinum Coins --
I would furthermore say that by the failure of President Obama to have taken this step last month he has already violated his oath of office. One of the laws he is required to faithfully execute requires that he prevent the debt of the United States from being questioned. Yet by his inaction the debt of the United States is, right now, being questioned--and is being increasingly questioned more and more as time passes.
Upyernoz / rubber hose: platinum, baby, platinum

Mike Norman Economics: The meme that will not die! [yes, indeed]
** Update:

It now looks like the Trillion Dollar Coin Idea was first mentioned by Ellen Hodgson Brown. Here is an interview from December 2008 with Thom Hartmann where she discusses the idea. Also, have seen indications it might be mentioned in her book entitled: Web of Debt (1st edition, published 2007).

Thom Hartmann /
Transcript: Ellen Hodgson Brown, 09 December 2008 --
[Brown]: The solution is that the government itself should be creating our money supply. And that's where most people think money comes from. If you ask anybody on the street, who makes our money, they think it's the government. In fact it all comes from private banks.

[Thom]: Except for coins.

[Brown]: Except for coins, which is just a token. It's just a remnant of what they put in the constitution, which is that Congress shall have the power to coin money.

[Thom]: Right.

[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...

The bankers' Federal Reserve Notes and the government's coins represent two separate money systems that have been competing for dominance throughout recorded history. At one time, the right to issue money was the sovereign right of the king; but that right got usurped by private moneylenders. Today the sovereigns are the people, and the coins that make up less than one one-thousandth of the money supply are all that are left of our sovereign money. Many nations have successfully issued their own money, at least for a time; but the bankers' debt-money has generally infiltrated the system and taken over in the end. These concepts are so foreign to what we have been taught that it can be hard to wrap our minds around them, but the facts have been substantiated by many reliable authorities...
Ellen Hodgson Brown / [Dec. 8, 2008]
Sustainable Government: Banking for a "New" New Deal --
Only about 3% of the U.S. money supply now consists of “hard” currency—coins (issued by the government) and dollar bills (issued by the private Federal Reserve and lent to the government). All of the rest exists merely on computer screens or in paper accounts, and this money is all created by banks when they make loans...

The Constitution says “Congress shall have the power to coin money,” and that is all it says about who has the power to create money. It does not say Congress can delegate to private banks the right to create 97% of the national money supply in the form of loans...
2nd Update:

Ellen Brown joins the current discussion regarding the trillion dollar coin. The Market Has Spoken: Austerity Is Bad for Business [Aug 7, 2011] --
Another alternative was suggested in my book Web of Debt in 2007: the government could simply mint some trillion dollar coins.  Congress has the Constitutional power to “coin money,”  and no limit is put on the value of the coins it creates, as was pointed out by a chairman of the House Coinage Subcommittee in the 1980s..
Associate professor of economics at Wartburg College, Scott Fullwiler provided more detailed analysis at the New Economic Perspectives blog: Coin Seignorage and Inflation [Aug 3, 2011] --
the coin seigniorage option for coping with the debt ceiling—whether now or in the future—is both a legal option, and also one that will not have any inflationary side effects.

The amount of coin seigniorage employed is highly significant for several issues, including the following: whether we will have any federal debt in the future as measured by the debt ceiling or the ratings agencies; whether wealthy individuals or foreign nations will continue to receive risk-free "welfare" payments in the form of interest from the federal government...

one issue that it is not relevant to is whether coin seigniorage itself causes inflation. It just doesn’t. 

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