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Update on Trillion Dollar Coin: Not Inflationary–it is a Duration Trade

The Platinum coin has been all over the blogosphere as well as the media. Some have been arguing it will cause hyperinflation. How can issuing a coin to be held at the Fed to allow the Treasury to spend up to budgeted amount lead to hyperinflation? It has no first round effect that is different from selling a bond into private banks and then having the Fed buy the bond to replenish bank reserves (the current operating procedure); the second round effect–if there is any–is deflationary because it can remove interest income. Some “challenged” politicians are advocating that we remove the Treasury’s ability to coin platinum.

Here’s an interesting email from someone who works in, and understands, financial markets; note it is consistent with what MMT has to say about the trillion dollar coin:

JJ LANDO   Subject: The Trillion Dollar Coin
1. It’s technically a viable solution to the debt ceiling. Proof that when you look at the mechanics of our Monetary System you discover that the Fed ALWAYS ‘monetizes’ the deficit. QE is just a duration trade. It shortens net issuance and thereby suppresses yields. If you think there is some inflationary impact via higher asset prices – maybe. It would have to overcome the lost coupon interest the rest of the world receives. Regardless, the hyperinflation nonsense being blogged and spewed about QE being a monetization trade is false. It might be good marketing for TIPS and Gold funds, and ppl using these arguments might have attracted insane amounts of investment, but that doesn’t make it right. High Inflation would arrive when there’s too much spending – including GOVERNMENT SPENDING BY CONGRESS NOT THE FED – chasing too little stuff. Not bec of QE. QE IS JUST A DURATION TRADE NOT A MONETIZATION TRADE. When the Fed stops QE, even if deficit spikes, notice the USt still funds. How? It’s called a Repo. Fed does that too. It’s QE but with less duration and no one talks about it.

2. I happen to think this thing will go to the wire, be messy, and there is legitimate chance it gets settled by the Supreme Court. And all due to an odd timing issue where the DEbt Ceiling requires being addressed before the Sequester or the budget. Some speculating it could be even sooner, which would be insane if we don’t even have a Treasury Secretary at the time.

11 Responses to “Update on Trillion Dollar Coin: Not Inflationary–it is a Duration Trade”

olly100January 8th, 2013 at 10:50 pm

Randall

officially the US inflation rate is currently 1.8%, which is very low . Nonetheless, there is currently some inflation. So what's causing it? Clearly the US is nowhere near full capacity or full employment, so what is causing prices to rise?

LRWrayJanuary 9th, 2013 at 1:57 am

Speculation in commodities is my guess. Look what many do not understand is that the CPI (and PPI) is a constructed index; much of it includes prices that are not market based; much is imputed prices. When you get below 3 or 4 percent CPI measured inflation rate you cannot be sure whether that is inflation, constant prices or even deflation. And then there is the whole issue of policy; let us say there really is price inflation; what can and should policy do? If inflation is above 10 or 20% the answer is pretty clear: policy should do something. What? That is less certain. If rates are below 5% or 10% I think the answer to either question is "well, not sure".

olly100January 10th, 2013 at 4:24 pm

you say:

"Hyperinflation happens when government debt is over 80% of GNP and the deficit is over 40% of government spending"

The US budget deficit is currently around 8.7% of GDP.

Vincent CateJanuary 12th, 2013 at 12:08 pm

The National Debt is over 80% of GNP. The deficit number is not a fraction of GNP but of spending. The last 2 months they have spent twice what they got in taxes. So they are over that 40% of spending. On a yearly basis it is about 40% of spending. There is a real danger.

OldNerdGuyJanuary 15th, 2013 at 3:11 pm

This debate is like watching a child trying to argue his way out of eating his vegetables.

When society's leaders (like elected officials and Nobel laureates) resort to proposing clever gimmicks to get out of paying the debt, it illustrates the corruption of not just individuals but the society at large. "How beautiful are the Emperor's clothes!" And sooner or later, supposedly-educated minds will suggest delegating the debt problem to Parker Brothers (i.e., using Monopoly money).

My suggestion is to handle the debt the old-fashioned way: just pay it.

L. Randall WrayJanuary 16th, 2013 at 2:21 pm

oldnerd: Looks like you don’t understand sovereign finances. Sovereign govt does not, cannot “pay” its debt. It can run budget surpluses that gradually retire the debt. So you want govt to suck trillions of dollars out of the economy by taxing much more than it spends? Good luck with that–it would make the Great Depression look like a vacation.

Mark PerrysJanuary 17th, 2013 at 11:07 am

At the end of the day, the coin's value and the assigned value are majorly out of proportion. Holding that coin in your hand will not make anyone feel wealthy; in fact, more likely uncomfortable

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