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What Does The Trillion Dollar Coin Do?

8:34 am in Uncategorized by letsgetitdone

The Trillion Dollar Coin proposal for solving the debt ceiling problem is again experiencing a blogosphere explosion this past week. The precipitating factor may be that people are starting to believe that the Republicans will come to a “fiscal cliff” settlement with the Democrats including very little in entitlement spending; but will then come back, in 2013 with a very tough position on the price they want to agree to raise the debt ceiling to give the Executive operating room for any length of time. Bruce Bartlett had this to say on the issue:

In my opinion, the fiscal cliff is akin to the so-called Y2K problem in late 1999, when many people worried that computers would freeze, elevators would stop running and planes would fall from the sky. Of course, nothing of the kind happened.

So if the fiscal cliff is a faux problem, why do we hear that industry and financial markets are deeply fearful of it? The answer is that there is a very real fiscal problem that will occur almost simultaneously – expiration of the debt limit. Much of what passes for fiscal-cliff concern is actually anxiety about whether Republicans in Congress will force a default on the nation’s debt in pursuit of their radical agenda.

I think Bartlett is right about attention shifting to the debt ceiling now, and that’s why we have a sudden explosion interest in high value platinum coin seigniorage having face values mostly in the low trillions, once again. Since the Trillion Dollar Coin (#TDC) is being vetted again, I wanted to make a brief point about it that is not well understood by the mainstream bloggers who have been stampeding to blog about the PPCS solution this week. Let’s lay out the context.

Most people who’ve thought about how the Government creates money know that Congress delegated the primary power to create currency to The Federal Reserve Banks, the system of which combined with the Board of Governors and the Federal Open Market Committee, form the central bank of the United States. In modern times, currency means not only printed money, but also electronically created credits, reserves held in Federal Reserve accounts.

The reserves that have been created by the Fed at any point, are many multiples of the amount of paper currency in existence produced by the Mint on orders from the Fed. So, most of the currency created by the Fed is in the form of reserves rather than paper currency. Also it’s well-known that when the Fed creates reserves, it does so “out of thin air.”

In our fiat currency system there is no “backing” for either the reserves or the paper currency. In exactly that sense, all of our currency is now “printed,” and has been since we went off the gold standard in 1971. There is no distinction between existing currency, whether paper, or reserves, and newly created currency in that respect.

The Fed however, doesn’t make all our money. The Treasury too, has its role. Congress delegated the US Mint the authority to coin fiat money, the value of whose metal content, with respect to certain types of coins, need have no relation to its face value, which can be as high or low as the Mint wants to make it. However, this has created a problem.

If the Mint coins money in denominations appropriate for commonplace retail transactions than the coins involved can be exchanged among parties as needed. But what happens if the Mint coins platinum money with face values in the trillions of dollars? Then that money can’t be used for exchange as a practical matter, because there are no buyers who will accept the trillion dollar coins in exchange. So, if the Treasury wants to use such coins to fill the public purse with money it can later spend on debt repayment or Congressional deficit appropriations, it must transform high face value coins into divisible money; i.e. reserves in its Fed spending account.

Fortunately, since high value coins are legal tender, the Mint, and the Treasury, can force the Federal Reserve to transform high value coins into reserves, by just depositing them into the US Mint’s Public Enterprise Fund (PEF) account, which the Fed must credit with reserves in return for the high value coins.

For example, if the Mint deposits a $One Trillion coin in the PEF, then the Fed must accept the coin and credit the PEF with an equivalent value of electronic credits in reserves. Then, the Treasury has the authority to “sweep” the PEF of all seigniorage, i.e. profits resulting from the Mint/Fed transaction.

In the case of $One Trillion proof platinum coin, the profits are its face value minus a few thousand dollars. So that amount would be “swept” into the Treasury General Account (TGA), which is the account used by Treasury to perform Government spending.

A very good way to look at high value platinum coins is that they are legal instruments for the Treasury to use the unlimited “out of thin air” reserve creation authority of the Fed to fill the public spending purse, the TGA, for public purposes. In effect, platinum coin seigniorage involves the Treasury commandeering the power of the Fed to create reserves and place them in the TGA, perhaps, depending on what the Treasury chooses to do, in the many Trillions of dollars. Functionally, it produces the same result as if the Fed were subordinate to the Treasury within the Executive Branch, and the Treasury had unlimited authority to create both currency and coins by fiat. Is this good?

I think it is. The vaunted independence of the Fed has not served us well over the years. What it has amounted to is that the Fed has not been accountable to the public. Its independence has meant independence from the Treasury and, largely, from Congress. But it has not meant independence from the big banks and Wall Street, which the Fed fails to regulate to any visible extent to protect the economy and the public, and whose interests the Fed has served ahead of the interests of the public at large.

In short, I am all for the President ordering high value platinum coin seigniorage, because I think the constraints imposed by that upon the Fed, and also the filling of the public purse to such an extent that it will be clear to people that the US can never run out of the currency it alone can issue, will make the Congress, the Fed, and the Executive Branch all much more accountable to the wishes of the American people.

The Congress and the Executive won’t be able to hide behind “we’re running out of money” anymore, when they refuse to enact that majority support among the people. And the Fed won’t be able to hide behind its “independence” to justify its doing the bidding the big private banks. Using proof platinum coin seigniorage, will be better for supporting a progressive democracy; and ultimately, that is why I favor it! Read the rest of this entry →

Origin and Early History of Platinum Coin Seigniorage In the Blogosphere

12:15 pm in Uncategorized by letsgetitdone

This post records the history of platinum coin seigniorage in the blogosphere through the debt ceiling agreement on August 2, 2011. Its purpose is to correct errors in the record about the history of this idea appearing on mainstream blog posts by Joe Wiesenthal, John Carney, and Brad Plumer, during the past week. The idea of using coin seigniorage, the profits made from minting proof platinum coins, depositing them at the Fed, and receiving electronic credits in return, to remove the need for issuing debt, and so to always stay under the debt ceiling is due to a commenter (and occasional blogger) on economics and politics blogs whose screen name is beowulf (Carlos Mucha). Beowulf”s first comment on Platinum Coin Seigniorage (PCS) was on Brad Delong’s site on July 6, 2010 (h/t Cullen Roche, 01/05/13). But, the first comment of his I noticed on PCS was at New Deal 2.0. Unfortunately, when The Roosevelt Institute redid its New Deal 2.0 site, it wiped out the record of beo’s comment. However, I quoted his ND 2.0 proposal in a post on November 12, 2010 discussing a possible Government shutdown due to the debt ceiling. I cross-posted this at Correntewire too where beowulf commented further on the platinum coin option.

Beowulf continued his work on the coin seigniorage proposal as the weeks went by in various comments made at blog posts such as this one at FDL, and this one, also at FDL. Then on 12/15/2010 there was an exchange between beo and I about platinum coin seigniorage.

Following that beo wrote me, and we corresponded by e-mail from 12/15/10, roughly until the Christmas break, exchanging views about PPCS, with me urging beo to blog it, and telling him that I would blog in support of him soon after he did. On January 3, 2011, he posted the seminal blog on coin seigniorage. I followed two days later, raising the question of whether President Obama would use it to forestall an attempt to use the debt ceiling to extract cuts in the social safety net or not.

These posts were noticed by Warren Mosler, one of the originators of the Modern Monetary Theory (MMT) approach to economics, who sponsored what turned out to be a wide-ranging and very high quality discussion of the coin seigniorage option at his site. Beowulf contributed extensively and very creatively to this discussion, which remains one of the most important resources on the coin seigniorage option.

Throughout the next six months, I pushed platinum coin seigniorage in blog posts at Correntewire, FDL, and DailyKos from time-to-time and in comments at various sites. Then, in late June and July a spate of posts on platinum coin seigniorage appeared, beginning, I think, with wigwam’s at FDL and DailyKos.

He’s followed up since with a number of other posts including this one with a variation on how coin seigniorage might be applied by buying $2 Trillion in debt from the Fed to create “head room” relative to the debt limit.

Other important posts appeared in the first two weeks of July 2011 by Mahilena, DC Blogger, ubetchaiam, Cullen Roche, and Scott Fullwiler.

Accompanying the last two are extensive discussions of coin seigniorage and constitutionality of the debt ceiling with contributions from beowulf. Scott’s post also received extensive discussion with beowulf contributing at Cullen’s site. Trader’s Crucible, presented a post on the unconstitutionality of the debt ceiling. Its comment thread however, focused very much on platinum coin seigniorage with beowulf and myself making contributions.

In addition, I added a couple of my own posts, one on constitutionality of the debt ceiling and coin seigniorage (06/29/2011), and another on the President’s obligation, if no agreement on the debt ceiling is forthcoming (07/11/11).

At this point, the platinum coin seigniorage debate began to hit the mainstream blogosphere. Felix Salmon at Reuters provided the opening blog post (07/14/11) and he was followed a day later by Matty Yglesias at Think Progress. I replied to Salmon and Yglesias in this post, presenting a fairly comprehensive view of platinum coin seigniorage up to that time, with critiques of their posts (07/17/11).

My post appeared in an abbreviated form at Naked Capitalism, and was also cross-posted at MyFDL, New Economic Perspectives and Global Economic Intersection. It appeared amidst an explosion of blogosphere posts on the subject, including posts on the subject by many mainstream bloggers and others including: Tom Hickey: “Coin Seignorage Breaks into Mainstream,” (07/18/11) Scott Sumner: “Is coin seignorage Obama’s magic bullet?” (07/19/11) Joshua Holland: “There’s a Solution to the Debt Fight That Could Avert Catastrophe — Why Is Everyone Ignoring It?” (07/20/11) Darrell Delamaide: ”Smoke and mirrors with the federal deficit,” (07/20/11) Mark Kleiman: “Phony problem, phony solution,” (07/20/11) wigwam: “Mark Kleiman calls Coin Seigniorage a phony solution; to a phony problem,” (07/23/11) upyernoz: “Platinum Pieces Were Always My Favorite,” and Yves Smith: “We Discuss the manufactured UD Debt Crisis at the Real News Network.” (07/25/11)

These posts were an immediate wave, so to speak, of responses to the Salmon and Yglesias posts. But there was more to come in July. I posted again, presenting a variety of platinum coin seigniorage face value options, along with differing political and inflation implications of the options (07/20/11).

Then I followed with an open letter to Congress and the President on getting around the debt ceiling (07/25/11), and a post on the President’s apparent views on the debt ceiling. (07/26/11)

Meanwhile, Jack Balkin, a Constitutional Law Professor at Yale, had blogged about coin seigniorage telling a good story in an important post (07/18/11).

And Balkin next did a post at CNN, where he reviewed a number of options for getting around the debt ceiling (07/28/11). And, in doing so, brought the platinum coin seigniorage idea into the mainstream discussion.

Balkin’s efforts seemed to fuel another wave of the July 2011 platinum coin seigniorage explosion. These include:

”Capt. Fogg: Billion Dollar Coins and Exploding Options — oh my!” (07/28/11)

Logan Penza: “(Platinum) Pennies From Heaven (UPDATED);” (07/28/11)

Jonathan Chait: “The Coin That Will Save The World;” (07/28/11)

Matthew Yglesias: “The Platinum Coin Option;” (07/28/11)

Brad DeLong: ”The President’s Obligation to Take Care That the Laws Be Faithfully Executed Requires Him to Start Minting Large Denomination Platinum Coins” (07/28/11)

upyernoz: “platinum, baby, platinum” (07/28/11)

Master of Interesting Links: “The meme that will not die!”; (07/28/11)

Tyler Cowen: “Crank up the mint for the platinum coin!” (07/28/11)

Edward Harrison: “The #trilliondollarcoin meme”; (07/28/11)

Matthew Yglesia: Neutralizing Platinum Coin Finance; (07/29/11)

The Economist: “The trillion dollar coin solution;” (07/29/11)

Eric Hayden: “A $1 Trillion Coin Seems Like a Nice Idea” (07/29/11)

Paul Krugman: “Lawyers, Coins, and Money” (07/29/11)

Annie Lowery: “The $5 Trillion Coin” (07/29/11)

Johnsonville: “Debt Watch/Coin Trick: the Trillion Dollar Coin” (07/29/11)

Seneca Doane: “Cut the Gordian Knot with the Platinum Sword;” (07/30/11) This Post was a particularly important because it recognized the key political implications of PCS, and also was enormously popular at DailyKos and elicited 569 comments there.

Laurence Lewis: “The Debt Ceiling Dance and the Trillion Dollar Coin.” (07/31/11)

David Weigel: “The Platinum Coin Hysteria of 2011;” (07/31/11)

So, that was the second wave of responses by mainstream bloggers, and others, to the Platinum Coin Seigniorage idea. In addition, I added two posts on 07/31/11:

What If a Debt Limit Extension Is Voted Down?” (07/31/11) and

Progessives In Congress: Vote for The President To Do It!” (07/31/11)

Also, the last notable post on Platinum Coin Seigniorage (08/01/11) before the debt ceiling settlement of 08/02/11 was Scott Fullwiler’s Coin Seigniorage and Inflation. It’s still the most comprehensive and rigorous discussion available of the relationship between the two.

But then, and lastly, there was Beowulf responds to Dave Weigel of Slate.” (07/31/11) I think this reply is worth quoting, because, in a way, Weigel’s reaction is pretty typical of most mainstream posts, reacting to the idea in what only can be described as a superficial way, part brush-off; part poking fun, almost as if mainstream bloggers were afraid of discussing the idea without an obligatory heaping slice of skepticism accompanying their mention of it. Obviously beo’s reply doesn’t apply to everyone, so I don’t want to over-generalize it. But if you read all the posts, I think you’ll see that Weigel’s reaction is pretty common, so beo’s reply is pretty broadly applicable.

There’s nothing fanciful about it. The strange thing is that the USG is constrained by debt ceiling but a part of the USG (The Fed describes itself as “an independent government agency”) is unconstrained by a debt ceiling. Even more anomalously, Fed-held Treasuries are counted against the USG debt ceiling.

This isn’t about selling drilling rights on the moon but a practice almost as old as the Republic. The US Mint has used coin seigniorage continuously since the Coinage Act of 1792 (in a legal sense, a single $1 trillion platinum coin is the same as trillion $1 coins but with far less expense and effort). It violates no laws nor federal regulations nor prior obligations for the USG to transfer debts from the constrained whole to an unconstrained part (that is violates all logic is the fault of Congress).

The idea actually originated in a note I sent the Department of the Treasury on a collateral issue (as it happened, I had “buried the lede”). I posted about this on Firedoglake (and Correntewire) only after discussing the issue at Warren Mosler’s blog (Incidentally, I’m hardly a lefty. I voted for Romney in the 2008 GOP primaries, will probably do so again next year).

Writer Joe Firestone suggested to me that the platinum coin seigniorage issue was something worth posting a blog about and bugged me until I did (after which, Joe took the leading oar on developing the idea). I’d point out that Warren Mosler also picked up on the economic ramifications very early. But I trust that every reader here with an interest in economics has already read his book The Seven Deadly Innocent Frauds (you can download for free from his site if you haven’t), so that should come as no surprise.

http://moslereconomics.com/2011/01/20/joe-firestone-post-on-sidestepping-the-debt-ceiling-issue-with-coin-seigniorage/

Of course, there is historical precedence for using coinage to pay the national debt, the Legal Tender Act of 1862 authorized the issuance of fiat currency, US Notes or “Greenbacks” (the predecessor of today’s Federal Reserve Notes) required that Tsy pay debt service only with US Mint-issued coins. Of course Nixon freeing us from the gold standard changed everything, but if our politicians understood that, we wouldn’t have a debt ceiling now would we?

And finally, I should note, that once the debt ceiling compromise was agreed to on 08/02/11, the sudden explosion of posts on platinum coin seigniorage quickly faded away, as I predicted it would then. I’ve blogged a lot about it, since, trying to develop the political context further and to make people aware of the policy variations available in the platinum coin seigniorage toolbox. But bloggers doing posts on it were few until just this past week.

Now people are starting to see that there may be a fiscal cliff settlement and immediately afterward a new debt ceiling crisis for us to cope with. So, suddenly the mainstream has taken up where it left off with platinum coin seigniorage in early August 2011. It’s again in a frenzy about it, and it’s again making errors in its analysis of it and in the information it’s spreading about the history of the platinum coin seigniorage idea.

In future posts of mine, I’ll look at the new wave of blog posts and discuss the issues they raise. But for now I want to correct one immediate thing. Joe Wiesenthal, Brad Plumer, and John Carney have been saying that the platinum coin seigniorage idea originates with Cullen Roche’s blog post of 07/07/11 cited earlier with a commenter on that post. Plumer even says:

*Update: Cullen Roche appears to have been one of the first people to discuss the platinum coin idea in 2011 ― it came from one of his readers. See also here.

If Plumer had read the first of his references with the accompanying comment thread, he would have found a host of links to earlier work on PCS. And if he had read the 07/17/11 post of mine he references (also linked to in the review above), he would have found that the first statement of the PCS idea by beowulf, Cullen Roche’s commenter, was on November 4, 2010, more than 8 months before Cullen’s own post. As it turns out even this date is too late, since Cullen, himself, (h/t to Cullen Roche, 01/05/13) discovered an even earlier occurrence at Brad Delong’s blog in another comment of beowulf’s, a full 12 months earlier than Cullen’s first post on PCS.

Also the first full blog post on PCS, as you can see from both Plumer’s reference and the account above is on January 3, 2011. And after that, there are numerous blog posts on the subject before Cullen’s post on 07/07/11. So, I think that Wiesenthal, Plumer, and Carney, all got it wrong. Probably because they relied on each other, rather than on reading their own links, or on using “the google.”

(Cross-posted from New Economic Perspectives.)

Photo in the public domain.