Coins Against Crazies: Krugman on the trillion dollar coin

[eridani]

http://www.nytimes.com/2013/01/11/opinion/krugman-coins-against-crazies.html?hp&_r=0.

As it happens, an obscure legal clause grants the secretary of the Treasury the right to mint and issue platinum coins in any quantity or denomination he chooses. Such coins were, of course, intended to be collectors’ items, struck to commemorate special occasions. But the law is the law — and it offers a simple if strange way out of the crisis.

Here’s how it would work: The Treasury would mint a platinum coin with a face value of $1 trillion (or many coins with smaller values; it doesn’t really matter). This coin would immediately be deposited at the Federal Reserve, which would credit the sum to the government’s account. And the government could then write checks against that account, continuing normal operations without issuing new debt.

In case you’re wondering, no, this wouldn’t be an inflationary exercise in printing money. Aside from the fact that printing money isn’t inflationary under current conditions, the Fed could and would offset the Treasury’s cash withdrawals by selling other assets or borrowing more from banks, so that in reality the U.S. government as a whole (which includes the Fed) would continue to engage in normal borrowing. Basically, this would just be an accounting trick, but that’s a good thing. The debt ceiling is a case of accounting nonsense gone malignant; using an accounting trick to negate it is entirely appropriate.

But wouldn’t the coin trick be undignified? Yes, it would — but better to look slightly silly than to let a financial and Constitutional crisis explode.

Now, the platinum coin may not be the only option. Maybe the president can simply declare that as he understands the Constitution, his duty to carry out Congressional mandates on taxes and spending takes priority over the debt ceiling. Or he might be able to finance government operations by issuing coupons that look like debt and act like debt but that, he insists, aren’t debt and, therefore, don’t count against the ceiling.

[discntnt_irny_srcsm]

1. regarding...

...inflation. Depositing the coins with the Fed wouldn’t be inflationary. Spending any of that money would be inflationary.

[DanTex]

3. Actually, no.

Spending the money wouldn't be inflationary either, assuming that the Fed sold some bonds in order to compensate and keep the money supply unchanged.

And really, as Krugman pointed on his blog, even expanding the money supply under current conditions (zero interest rates) would not be inflationary anyway.

[discntnt_irny_srcsm]

4. My comment...

...was not assuming that the Fed sold bonds.

[DanTex]

5. Here's Krugman's explanation of why it wouldn't be inflationary.

In the current zero-interest-rate environment, expanding the money supply would actually not be inflationary.

The first level is that in practice minting the coin would be nothing but an accounting fiction, enabling the government to continue doing exactly what it would have done if the debt limit were raised.

Remember that the coin is supposed to be deposited at the Fed, which is effectively just a semi-autonomous government agency. As the federal government proper drew on its new Fed account, the Fed would probably respond by selling off some of its $3 trillion balance sheet. In effect, the consolidated federal government, including the Fed, would be financing its operations by selling debt instruments, just as always.

But what if the Fed decided not to shrink its outside balance sheet? Even so, under current conditions it would make no difference — because we’re in a liquidity trap, with market interest rates on short-term federal debt near zero. Under these conditions, issuing short-term debt and just “printing money” (actually, crediting banks with additional reserves that they can convert into paper cash if they choose) are completely equivalent in their effect, so even huge increases in the monetary base (reserves plus cash) aren’t inflationary at all.

http://krugman.blogs.nytimes.com/2013/01/08/rage-against-the-coin/

[discntnt_irny_srcsm]

6. That's thoughtful of you

Thanks

[Publiuus]

2. The fed isn't part of the government

It's a private bank that makes trillions off the backs of the working poor.

[mostlyconfused]

7. Funny though how the whole conversation is about creative ways to get around the problem

not of ways to try to fix the problem. The government overspends to the tune of $1.1 trillion each year right now and taxes cannot be raised high enough to address the gap. Instead of a conversation about spending and how to cut it, we're debating the merits of this goofy coin idea. If a $1 trillion coin is a good idea, why not mint about 50 of them, pay off the debt, and be done with this conversation for a couple of decades....keep running trillion dollar deficits, and just print more coins when they are needed again.