The Trillion Dollar Coin

Joe Weisenthal has written a column about the proposed trillion dollar coin as a means to resolve the debt ceiling issue:

This is really thrilling.

An arcane idea that started on finance blogs in the summer of 2011-- that Tim Geithner should mint a trillion dollar platinum coin to avert the debt ceiling -- is now seriously taking off.

The premise of the idea is this: Although the Treasury can't just create money out of thin air to pay its bills, there is a technicality in the law that says the Treasury has special discretion to create platinum coins of any denomination, and the thinking is that Tim Geithner could make the coin and walk it over to the Federal Reserve and deposit it in the Treasury's bank account.

“Thrilling” isn’t the word that comes to mind….

Weisenthal points to a blog post by Cullen Roche as the first blog to really promote the idea:

The simple threat of doing this would end this debate right here and right now.   It’s time for Congress to stop playing Russian roulette with the US economy.  If you want to take a stand on spending then do so before you pass legislation that causes us to run up into the debt ceiling.  Don’t use some phony law to try to scare people into thinking that we are Greece (something that’s entirely impossible anyhow).

Now it is quite true that the debt ceiling game is Kabuki Theater, a charade allowing some congressman to pretend they are fiscally conservative, while all the while supporting bills that increase the debt.  But this isn’t the solution.

Weisenthal even evokes Paul Krugman, but fails to mention that Krugman, if anything, comes out against the idea (well, tepid at best):

The peculiar exception is that clause allowing the Treasury to mint platinum coins in any denomination it chooses. Of course this was intended as a way to issue commemorative coins and stuff, not as a fiscal measure; but at least as I understand it, the letter of the law would allow Treasury to stamp out a platinum coin, say it’s worth a trillion dollars, and deposit it at the Fed — thereby avoiding the need to issue debt.

In reality, to pursue the thought further, the coin really would be as much a Federal debt as the T-bills the Fed owns, since eventually Treasury would want to buy it back.

I don’t know why the Treasury would eventually want to buy it back.  Why?  There is no plan to buy back the debt issued by the Treasury, why would this be any different? 

Krugman is now apparently at least beginning to show some concern about (price) inflation…

It’s true that printing money isn’t at all inflationary under current conditions — that is, with the economy depressed and interest rates up against the zero lower bound. But eventually these conditions will end. At that point, to prevent a sharp rise in inflation the Fed will want to pull back much of the monetary base it created in response to the crisis, which means selling off the Federal debt it bought.

…so he throws a few drops of cold water on the idea:

We are living in weird economic times, where many of the usual rules don’t apply and there are big free lunches to be had. But not everything is a free lunch, even now. Sorry.

So, Krugman seems to come out against the idea of the trillion dollar coin, but he remains wrong on there being free lunches.  There are none, at any time.

The Weisenthal points to Josh Barro at Bloomberg:

If Republicans start issuing a list of demands that must be met before they will raise the debt ceiling, Obama should simply say that he will issue platinum coins as necessary to pay government bills if he cannot borrow. But, to avoid causing long-term inflation expectations to skyrocket, he should pledge that he will have the Treasury issue enough bonds to buy back all the newly issued currency as soon as it is allowed to do so.

Does Barro actually believe that the President will give up this power once he uses it?

Back to Weisenthal : what about inflation?

This would not result in massive inflation, because we wouldn't have a gigantic injection of new money into "the system." That is only achievable through massive spending beyond which the economy can handle. But this loophole would in no way let the government spend beyond which Congress has allocated through the budget.

He (nor Krugman) understands anything of inflation.  It seems he is thinking only in terms of prices.  However, unless the coins have $1 trillion worth of platinum in them, this is inflationary to the money supply.  Once that happens, the misallocations begin; resources are diverted from the productive to those with first access to the coin; and new bubbles form…somewhere.

This entire idea is a green-backers dream.  The Treasury should issue currency (and coin) directly, and not borrow.  No effort needed to back the currency.  Just print (or coin) away.

If this power ever transfers from the Fed to Treasury (or Congress), the odds of hyper-inflation go from miniscule to probable.