In this post I said I would blog about the likely expected relationship between the different PCS options and inflation using the framework laid out by Scott Fullwiler! But, after reconsidering, I thought I’d hold off until later, and, instead, first provide a discussion of the “new wave” of MSM-based blog posts on the Trillion Dollar Coin (TDC) “solution” to the upcoming debt ceiling conflict. As it turns out that will take a number of posts in itself
This new wave may have started with a post by Bruce Bartlett (h/t Lambert Strether) in the New York Times saying that the real fiscal cliff behind the anxiety many people are feeling is the debt ceiling crisis. Bartlett didn’t write about the coin. But, I think he got mainstreamers off the fiscal cliff, and focusing on the debt ceiling as “the real crisis,” where a bipartisan compromise could result in serious damage to the social safety net most Americans want to see maintained and even extended.
So, on 12/05 at 10:04 AM, the platinum coin, or at least the TDC became mainstream News again, James Pethokoukis at AEI posted “How could Washington avoid a debt ceiling default? Mint a few trillion dollar platinum coins. Seriously.” His was quickly followed by posts from Joe Wiesenthal at Business Insider (12/05 at 10:24 AM); Chris Hayes at MSNBC substituting as host on the Rachel Maddow show (12/05 at 9:20 PM); John Carney at CNBC (12/06 at 11:54 AM); Kevin Drum at Mother Jones (12/06 at 3:01 PM); Matthew Yglesias at Slate (12/06 at 4:15 PM); Matthew Yglesias at Slate (12/07 at 11:07 AM); Harry Bradford at The Huffington Post (11:15 AM); and Brad Plumer at the Washington Post (12/07 at 12:37 PM) Let’s review Pethokoukis and Wiesenthal in this post, and hold reviews of the others for future ones.
This post raises the issue of the debt ceiling and how to cope with a lack of settlement. Platinum Coin Seigniorage (PCS) as a possible solution to the likely upcoming “crisis” is presented in the form of a long quote from Chris Krueger an analyst at Guggenheim Securities’s Washington Research Group. Krueger postulates that a handful of trillion dollar coins would be minted and would result in augmenting the Treasury’s account at the Fed by the amount of the handful. Krueger then opines that the Treasury would pay its bills removing the threat of default, and he adds:
”. . . The effects on the currency market and inflation are unclear, to say the least. You would also likely trigger a wave of lawsuits similar to the Constitutional Option and create two tranches of treasuries. Both this option and the Constitutional Option are VERY low probability options.”
Actually, if the Treasury uses the handful of trillions to repay its intra-governmental debt, then the effects on inflation are very clear. The money repaid will not be spent; but held in “Trust” accounts at the Fed. Since they will not enter the economy, they can’t possibly increase demand, because there is no plausible mechanism which they could work through to cause inflation. This should be clear with a moment’s thought and it indicates that Krueger’s speculation about inflation and the currency is irresponsible, and the product of lack of thought about how the money is likely to be used.
Next, it’s true law suits might occur, if someone could be found who would plausibly have standing to sue. But, since the money produced by the Fed in return for the coins won’t be used for anything except repayment of intra-governmental debt, who would be damaged by such a course of action?
Not the Government agencies that had the Treasury debt repaid, who operate under the authority of the President in any case. And they’re the only parties involved in this, other than the Fed.
And even if the Fed had doubts about the validity of the law providing for PCS, it can’t sue because the law governing the Federal Reserve states that in cases of disagreement between the Treasury Secretary and the Fed Chairman, the view of the Secretary will prevail. So, it seems that no one would have standing to sue if Treasury used PCS.
Krueger says that both PCS and constitutional options are “low probability options.” Well, it goes without saying that they ARE low probability options, since out of all the times the debt ceiling has been extended there has never been a President who used either option. Even if the President were to use one of them; it would still be a low probability option the next time a ned to raise the debt ceiling arose.
However, low probability options are not necessarily low likelihood options. The question is whether the hypothesis that the President will use PCS to avoid the debt ceiling has a higher or lower likelihood of being true than competing hypotheses about what the President will do about the debt ceiling problem. It is not whether it has a higher or lower probability than they do.
That likelihood will depend on the circumstances of the negotiation with the Republicans and the outcomes of the crisis that the President and members of Congress find acceptable. We don’t know those circumstances right now. But we do know that the Republicans are likely to demand a high price for lifting the ceiling, and that the President has said he won’t play debt ceiling games. So, if the Republicans insist on a very high price how will he avoid doing that?
There are only four options if he can’t deal with them on acceptable terms both to himself and Democrats in Congress: first, he can shut down the Government, prioritize debt repayment, and spending, and bring public pressure to bear on the Republicans to give in. I agree with those who say that this course would be very effective eventually in forcing the Republicans to lift the ceiling; but also less or more damaging to the economy, and to many, many people, depending on how long it takes to force the Republicans to deal on acceptable terms. So, this option is very costly in real terms.
Third, he can use the constitutional option asserting that the debt ceiling legislation is unconstitutional because it conflicts with Section 4 of the 14th Amendment.
And fourth, he can use a little known debt instrument called a consol. Consols pay interest forever, but the Government never has to repay the principal on them. For this reason, they would not count against the debt subject to the limit, which is what counts for violating the debt ceiling law.
Among the above, the most harmful choice for the economy and people is to shut the Government down for more than a few days. Of the three other options, the constitutional option is a worse choice than PCS or consols, because, the President has the choice of using one or the other, or a combination of both, to comply with the law and not breach the debt ceiling, so, he can’t very well say that the debt ceiling prevents him from complying with the dictates of the 14th amendment. He will lose that one in Court, if it gets there. It might not get there, however, because of the standing question. You’d need both Houses of Congress to contest the issue, and the Democratic Senate is very unlikely to go along.
The choices that are least painful to the economy, and also least likely to get challenged in Court with any likelihood of success, because they are consistent with the wording of legislation, are the PCS and consol options. So, even though those options have never been used before, the hypothesis that either one or both may be used is not low likelihood, compared to the other reasonable possibilities. Since these are good options from the viewpoint of legality, if the President is really unwilling to play debt ceiling games, is pushed too far, and doesn’t want to take the substantial risk of damaging the economy at all through a government shutdown, then they are also likely ones.
After quoting Krueger, Pethokoukis ends his post by saying that he agrees with Krueger about the possible effects of using PCS on the currency market and inflation. In other words, he’s afraid of the possible effects, but has no specifiable reasons for his fear. So, this fear is just speculation, irrational and without foundation. It’s not something we ought to take seriously.
Joe Wiesenthal’s main point seems to be that it’s amazing that we’re talking about the constitutional and PCS options. On the PCS option he quotes Krueger approvingly in the same way Pethokoukis did. About PCS specifically he says:
The other possibility that was probably even more mind-bending was the Trillion Dollar Coin Idea, which originated with a reader of Cullen Roche’s blog. The gist is that the Treasury is allowed to unilaterally mint platinum coins. It could create a $1 trillion coin, and deposit it at its account at The Federal Reserve.
It sounds completely crazy, but … it’s even crazier to think that the U.S. would default arbitrarily just because of a dumb law.
So if the choice is between default and a trillion dollar platinum coin, we endorse the coin all the way.
So, Wiesenthal seems to like the coin option; but doesn’t tell us why he likes it better than the constitutional option. Also, he focuses only on the TDC platinum coin option, and mentions no other variations on PCS. He even says that if the choice is between the TDC, and default then he prefers the coin. In addition, he doesn’t point out that the coin option conflicts with the constitutional option, in the sense that as long as it and consols are options, the constitutional option doesn’t work from a legal point of view.
Finally, Wiesenthal says that the Trillion Dollar coin originated with a reader of Cullen Roche’s blog. This is certainly true. But the “reader,” beowulf (Carlos Mucha), 1) was a reader and commmenter on many blogs at the time (July 7, 2011) apart from Cullen Roche’s and 2) originated the platinum coin idea in a comment at New Deal 2.0, 8 months before Cullen Roche’s post on PCS that beowulf commented on, and then blogged about it at FireDogLake and Correntewire on January 3, 2011, more than 6 months before Cullen Roche blogged on the subject. So, though Wiesenthal’s statement on the origin of the PCS idea is strictly true, it is a misleading distortion of the actual provenance and development of the idea, which you’ll find here.
Let’s wind this first Big Story Missing post up! There are two points that stand out for me from the first two blog posts in the new wave on PCS. First, the story they focus on is the debt ceiling and the TDC, or low trillions variations on PCS, And second, they don’t treat interactions among the options the President has for getting past the debt ceiling crisis. In particular, they don’t assess the legal impact of some of the other options on the constitutional option. So, have they focused on something other than the big story here? That’s the question I’d like readers to keep in mind as we review other new wave commentaries in future posts.
(Cross-posted from New Economic Perspectives.)