The platinum coin idea is on a roll—I’ve heard it has climbed into the top five of Twitter Trending (whatever that is). It was the frontpage of HuffPost: http://www.huffingtonpost.com/2013/01/03/debt-ceiling-coin_n_2404653.html; Paul Krugman wrote about it http://krugman.blogs.nytimes.com/2013/01/02/debt-in-a-time-of-zero/?smid=tw-NytimesKrugman&seid=auto ; Josh Barro picked it up http://www.bloomberg.com/news/2013-01-03/why-we-must-go-off-the-platinum-coin-cliff.html; and Joe Weisenthal featured it: http://www.businessinsider.com/3-huge-myths-about-the-plan-to-save-the-economy-with-a-trillion-dollar-platinum-coin-2013-1. But the best piece is Joe Firestone’s: http://neweconomicperspectives.org/2013/01/paul-goes-platinum.html.
Joe was the first to introduce me to the idea, and I included a section on the Platinum Coin in my new book. My exposition is pasted below.
**Reminder: tomorrow my book will be featured on an FDL book salon: http://fdlbooksalon.com, 5:00pm ET/ 2:00pm PT Saturday, January 5, 2013, Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems. OK, enuf with the advert.**
President Obama might just be playing with us, but he’s been rather firm in his insistence that he is not going to negotiate over the debt limit this time around. Does he have an ace-in-the-hole? Many people are starting to wonder if he’s heard all this talk about the platinum coin. Could this be the way to break the Republican deadlock? If they refuse to raise the debt limit, the President orders the mint to stamp out a couple of nice new shiny platinum coins—in denominations of $1,000,000,000,000.
That’s an attention-grabber.
A friend of mine who does not normally go all Ga-ga for Obama thinks the President has decided to exterminate the Republican party—and he’s going to use the debt limit debate to do it. Here’s my friend’s argument:
“I think he is luring the republican right into a trap. Please proceed, representatives, he is saying. Show us how you want to gut entitlements. Open your big mouths and show that you are willing to also close down the government and default on the debt. Then after they self assasinate he will move to the fourteenth amendment and the platinum coin. From the day he was elected in 2007 he began the ground game to win the next election. They were setting up the offices in the key districts in the swing states. I think he is engaged in a similar long range plan now. It is to character assassinate the republican right with their own words and by their own hand. The average life expectancy is 80. That means that every year 1.25% of the population exits through death and 1.25% comprised of the young enter. Over four years that is a shift equal to five percent of the electorate. He figures that shift adds maybe two percent to the democratic edge in an election. So he figures that with enough character assassination of the republican right and this demographic shift the republican right will be defeated by the end of his term and enough will have been done to prevent the GOP from picking up seats in the midterms.”
Wishful thinking? I don’t know. But that sure would be fun!
{Update: Turns out President Obama also has the option of minting $25 Palladium coins–80 billion of those would be worth $2 Trillion. Better diversify into palladium! http://www.washingtonpost.com/blogs/wonkblog/wp/2013/01/04/michael-castle-unsuspecting-godfather-of-the-1-trillion-coin-solution/. And it is ironic that these laws were passed to allow Uncle Sam to reap seigniorage–but little did the writer of the platinum coin act–Republican Representative Castle–realize you could get Two Trillions Worth!}
From my book, Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems:
There are two ways to obviate the need to raise the debt limit: Treasury warrants and large denomination platinum coins. Let’s examine each.
When Uncle Sam needs to spend and finds his deposit account at the Fed short, he can replenish it by issuing a nonmarketable “warrant” to be held by the Fed as an asset. With the full faith and credit of Uncle Sam standing behind it, the warrant is a risk-free asset to balance the Fed’s accounts. The warrant is just an internal IOU—from one branch of government to another—really not anything more than internal record keeping. If desired, Congress can mandate a low, fixed interest rate to be earned by the Fed on its holdings of these warrants (to be deducted against the excess profits it normally turns over to the Treasury at the end of each year). In return, the Fed would credit the Treasury’s deposit account to enable government to spend. When the Treasury spends, its account is debited, and the private bank that receives a deposit would have its reserves at the Fed credited.
From the Fed’s perspective it ends up with the Treasury’s warrant as an asset and bank reserves as its liability. The Treasury is able to spend as authorized by Congress, and its deficit is matched by warrants issued to the Fed. Congress would mandate that these warrants would be excluded from debt limits since they are nothing but a record of one branch of government (the Fed) owning claims on another branch (the Treasury). The Fed’s asset is matched by the Treasury’s warrant—so they net out.
And Congress would not need to increase the debt limit when a crisis hits that results in growing budget deficits.
The second method is to return to Treasury creation of currency—on a massive scale, pun intended. Currently the US Treasury has the authority to issue platinum coins in any denomination, so it could for example make large payments for military weapons by stamping large denomination platinum coins. It would thereby skip the Fed and private banks. And since coins (and reserves and Federal Reserve notes) don’t count as government debt for purposes of the debt limit this also allows the Treasury to avoid increasing debt as it spends platinum coins. The coins would be Treasury IOUs but would not be counted among the bills and bonds that total to the government debt. Like currency the coins would be “redeemed” in tax payment, hence demanded by those with taxes due. So that is another finesse to get around arbitrary limits or procedures put on Treasury spending
These proposals just show how silly it is to tie the Treasury’s hands behind its back through imposing debt limits. We already require that a budget is approved before Treasury can spend. That constraint is necessary to impose accountability over the Treasury. But once a budget is approved, why on earth would we want to prevent the Treasury from keystroking the necessary balance sheet entries in accordance with Congress’s approved spending?
The budgeting procedure should take into account projections of the evolution of macroeconomic variables like GDP, unemployment, and inflation. It should try to ensure that government keystroking will not be excessive, stoking inflation. It is certainly possible that Congress might guess wrong—and might want to revise its spending plan in light of developments. Or, it can build in automatic stabilizers to lower spending or raise taxes if inflation is fuelled. But it makes no sense to approve a spending path and then to arbitrarily refuse to keystroke spending simply because an arbitrary debt limit is reached.
Before concluding, let us deal with common objections to such procedural changes.
- Objection: We need to tie ourselves to budget limits to keep politicians from spending too much.
Response: For better or worse we have a budgeting process through which Congress decides how much to allocate to programs, then submits the plan to the President. Once approved, this authorizes spending. That is the “democratic” process through which our elected representatives decide which programs are worthy of funding—and at what levels. Much of the spending is “open-ended” in the sense that it is contingent (unemployment benefits paid will depend on economic performance, for example). I do not see how adding a constraint beyond this is either necessary or consistent with democratic control and accountability. By its very nature a debt limit is arbitrary and inconsistent with the budgeting process. In the past, it never mattered—the budget trumped the limit and Congress routinely raised the limit. Now politics are subverting the budgeting process in an undemocratic manner.
- Objection: We need the independent authority, the central bank, to constrain “money creation” to finance spending.
Response: As discussed above, Congress and the President first work out a budget. That authorizes Treasury spending. We can come up with alternative procedures to allow Treasury to accomplish that task. A relatively primitive but effective one would be for it to simply print up Treasury notes and spend. Or it can directly keystroke entries into the deposit accounts of recipients—but that requires that Treasury can also keystroke reserves onto bank balance sheets. Since we divide the tasks between Treasury and Fed, having banks “bank at the Fed”, it must be the Fed that keystrokes the reserves. There is no fundamental reason for this—banks could have accounts at the Treasury used for clearing and then the Treasury would keystroke the reserves. But we don’t do it that way.
So we could have the Fed act as the Treasury’s bank, accepting a Treasury IOU and keystroking bank reserves. But we don’t do that either—we say that although the Fed is the Treasury’s bank, it is prohibited from directly accepting a Treasury IOU. And hence we created complex procedures that involve private banks, the Fed and the Treasury to accomplish the same thing.
3. Zimbabwe! Weimar!
Too much government spending can be inflationary. We need to constrain government, and we do so through the budgeting process. The debt limit normally does not constrain government—either it is not binding or once reached it is normally raised. Our inflation fighting should be done during the budgeting process, not through arbitrary debt limits. In current circumstances there are no inflation pressures (indeed, to the contrary there are global deflationary pressures except here and there in commodities that are subject to speculation). In any case, these two proposals only change procedures but have no significant impact otherwise on the economy in comparison to raising the debt limit. Bank accounts get credited as the government spends, and debited as the government taxes. If the spending exceeds the taxing, there are net credits. Banks end up with reserve credits and if desired the Fed can sell them some of its huge stock of Treasuries to provide a slightly higher earning asset in place of reserves. (Households get platinum coins and can deposit them for credits to their checking accounts. Banks then send them on the to Fed to get reserve credits.) All of these actions would take place under either of these two scenarios, as well as under current operating procedures (if the debt limit is raised).
In other words, the warrant and trillion dollar coin have the same first-round inflationary consequences as current procedures. However, bond sales potentially have larger second-round inflationary consequences because they commit the Treasury to interest payments that add to nongovernment sector income—thus can increase aggregate demand. Our Zimbabwe warriors have it exactly wrong. If they fear inflation they ought to push for platinum coins.