The Trillion Dollar Coin

[AUChizad]

Three sources for objectivity.

http://www.theatlantic.com/business/archive/2013/01/everything-you-need-to-know-about-the-crazy-plan-to-save-the-economy-with-a-trillion-dollar-coin/266839/

Everything You Need to Know About the Crazy Plan to Save the Economy With a Trillion Dollar Coin
By Matthew O'Brien

It is the single most important comment in the history of Internet comments. Probably.

Back in the summer of 2011, as House Republicans threatened to force us to default on our obligations, a commenter on Cullen Roche's blog, Pragmatic Capitalism, suggested an inventive way around the debt ceiling: a trillion-dollar coin.

Ah, the debt ceiling. It's the ludicrous credit limit Congress has given itself, which could force us into default. Here's why it makes no sense. Imagine you were a high-earner living beyond your means, and your credit card company came to you offering to pay you to expand your line of credit -- but you said no! You've made a resolution not to increase your total debt anymore, no matter how attractive the offer. That's a fine resolution, but, remember, you're still living beyond your means. Uh-oh. You still have all your old bills to pay, but now you don't have the money to pay them all. Pretty soon, your credit card notices you're not paying all your bills, and jack up your interest rate. This is the worst personal-finance plan ever, and it's what House Republicans are saying they'll do to the economy by holding the debt limit hostage to their demand for deep spending cuts.

Enter the trillion-dollar coin. It sounds nuts. But there's a loophole that actually lets the Treasury create coins in whatever value it wants, even $1 trillion. It's all straightforward enough. The Treasury would create one of these coins, deposit it at the Federal Reserve, and use the new money in its account to pay our bills if the debt ceiling isn't increased. This has gone from being just another wacky idea in the world of internet comments to something that's getting taken seriously due, in large part, to the efforts of Joe Weisenthal of Business Insider and Josh Barro of Bloomberg View to promote it. (Which you can follow on Twitter at #MintTheCoin). Their logic is that as silly as the trillion-dollar coin sounds, the debt ceiling is far sillier -- and much more destructive.

As this terrifying report from the Bipartisan Policy Center shows, the consequences of going over the debt ceiling are unthinkable and unpredictable. At best, it will mean immediate 40 percent austerity; at worst, it mean an outright default on our debt. Both are bad enough that a legal gimmick like the trillion dollar coin sounds sane in comparison, if it comes to that. At least that's what Representative Jerry Nadler, Paul Krugman, and, as of pixel time, over 6,000 other patriotic Americans think.

But maybe you're not convinced yet. Alright, here is EVERYTHING you need to know about the trillion-dollar coin, and why it might just be the crazy solution Washington deserves and needs.

What's this nonsense I've been hearing about a trillion-dollar coin? It's got to be some kind of elaborate --

Stop. It's no joke. At least no more than voluntarily defaulting on our obligations by refusing to lift the debt ceiling would be. It sounds like something out of the Simpsons, but thanks to a crazy technicality the Treasury really can create a trillion-dollar coin, which would let us keep paying our bills if the debt ceiling isn't raised. It's an absurd solution to an absurd problem, but a solution nonetheless. As they say, when in Washington....

No, I'm pretty sure this is from the Simpsons.

Almost. That was a $1 trillion bill, which Fidel Castro tricked out of Monty Burns, but this is real life, so it has to be a $1 trillion coin. A platinum coin, to be exact.

[b\]I'm almost afraid to ask, but why does it need to be a coin? And why platinum?[/b]

We don't make the loopholes. We just find them. The Treasury can't print money on its own, because the money supply is supposed to be the strict purview of the Federal Reserve ... but that might not be quite so strict after all, thanks to a coin-sized exception. Congress passed a law in 1997, later amended in 2000, that gives the Secretary of the Treasury the authority to mint platinum coins, and only platinum coins, in whatever denomination and quantity he or she wants. That could be $100, or $1,000, or ... $1 trillion.

Did Congress decide life wasn't imitating Bond films enough? What were they possibly thinking?

The idea was Treasury would only use this authority for collectible coins, while making a little money for the government in the process. But the law is vague. It only says the Treasury can mint platinum coins in any denomination it wants. So, to infinity and beyond!

Okay. So the Treasury can mint a trillion-dollar coin because of a law that lets it mint commemorative coins in whatever denomination it chooses, right? Doesn't this violate the spirit of the law?

Maybe. But remember, part of the point of creating these commemorative coins was to increase government revenue. As former Congressman and author of the original bill Mike Castle told Dylan Matthews of the Washington Post, the intent was to use the government's seigniorage power to very modestly reduce the deficit. Seigniorage is the delightfully literal concept of making money by making money. It's the difference between the cost of creating currency, and the value you assign to that currency -- in other words, the "profit" governments get from minting money. The trillion-dollar coin is seigniorage just like commemorative coins are seigniorage -- well, except that the trillion-dollar coin is a whole, whole lot more of it. Even if you don't find this terribly convincing, it doesn't really matter. The plain text of the law, not its intent, is what matters. And that means the trillion-dollar coin is almost certainly legal.

"Almost certainly legal" is good enough for me, but what if it isn't for everybody else? Would it survive a court challenge?

I just want to say one word to you. Just one word. Standing. It's far from clear anybody would have the legal standing to challenge the trillion-dollar coin in court. That would at least require a joint resolution of Congress, which isn't happening, or an in investor who can show that not defaulting on our obligations caused them injury. Even if such an investor exists, say somebody who took credit default swaps (CDS) out on Treasury bonds, they'd be going up against a good bit of precedent. Call it FDR's revenge. When he took office in 1933, FDR faced the singular economic challenge of reversing the massive deflation of the previous four years. Falling wages and prices had increased real debt burdens, and set off a wave of mass bankruptcy. FDR turned this around when he devalued the dollar by taking us off the gold standard, but one problem remained: the gold clauses. These clauses gave creditors the option of getting back in either dollars or gold, with the latter being particularly appealing after its price soared almost 60 percent. But increasing inflation doesn't help debtors if their debts increase in equal measure, so Congress passed a joint resolution that voided all gold clauses in all contracts.

Bondholders were understandably upset about having to get paid back in cheaper dollars, sued, and lost. In a series of cases, the Supreme Court ruled that Congress could indeed nullify the gold clauses in private contracts under its power to regulate money, and that Treasury bondholders could not seek redress. As far as precedents go, this suggests the trillion dollar coin should be legal even if it changes the value of private contracts, like CDS, under the power to regulate money. And that's assuming CDS holders even have standing. They might not. As UCLA law professor Jonathan Zasloff explained to me, investors betting on a U.S. default are betting on something that's unconstitutional under the 14th amendment, and you probably can't base a contract off something that's illegal.

Okay, so this might be legal, but --

If you're still not convinced, just ask Representative Greg Walden, a Republican from Oregon, who's so convinced it's legal that he introduced a bill to close the platinum coin loophole.

FINE. It's legal. But there's still one thing I don't understand. Would we need to come up with $1 trillion worth of platinum to mint our $1 trillion platinum coin?

Repeat after me: seigniorage, seigniorage, seigniorage. Oh, and seigniorage. The entire point of the trillion-dollar coin is it gives us money to pay our bills if the debt ceiling isn't raised. But it won't give us any money if we spend an equal amount creating it. We want to take the smallest amount of platinum we can find and scribble "$1 trillion" on it. If you think this sounds nutty, ask yourself whether your $100 bill is made from $100 worth of cotton.

So why not just mint 16 of these $1 trillion coins and retire the entire national debt, smart guy? Or, even better, create a single $16 trillion coin -- scratch that, make it $100 trillion!

Now that's just crazy talk. Let me be clear: Nobody wants to use platinum coins to eliminate the debt. As Paul Krugman points out, there's a limit to how much seigniorage a government can extract before hyperinflation sets in, and that's certainly far less than $1 trillion, let alone $16 trillion. The trillion-dollar coin is just a technical fix to the technical problem of the debt ceiling. Remember, not lifting the debt ceiling doesn't prevent borrowing for new spending. It prevents borrowing for spending Congress has already appropriated. The Treasury can get around this by minting the trillion dollar coin, depositing it at the Fed, and paying the bills we've previously promised to pay -- and nothing more. It's about not defaulting on our debts, rather than paying them down.

Can we cut this short? I need to run out and buy some canned food and gold bars to prep for the coming hyperinflation. A trillion dollar coin is only two orders of magnitude away from us matching Zimbabwe for monetary ignominy.

Take a deep breath before you do something rash, like buying overpriced gold coins from Glenn Beck's buddies. As Joe Weisenthal of Business Insider points out, the biggest fallacy about the trillion-dollar coin is that it will be massively inflationary. It won't be. If the government quickly spent $1 trillion, that might be inflationary. But the coin wouldn't pay for new spending. It would pay for old spending -- spending already authorized by Congress that we can't pay for because of a ridiculous self-imposed limit on government borrowing,  the debt ceiling. The total amount of spending in the economy would stay the same.

Now, inflation might go up in the long-term if the Fed doesn't intervene. That's because the composition of spending will have changed -- more currency, less borrowing -- even though the amount has not. If the monetary base stays permanently larger, inflation should eventually increase -- which is why the Fed will intervene. It has its inflation target, and it cares very much about hitting it. The Fed can do this if it "sterilizes" the trillion-dollar coin by selling bond in an equal amount, vacuuming up just as much money as the trillion dollar coin injects. Inflation, whipped.

Let me see if I've got this right. The Treasury mints money and pays for stuff with it, and the Fed sells bonds to offset this new money? This sounds kind of like ...

Monetary policy! It's just a particularly convoluted way of doing sterilized quantitative easing (QE). Okay, let's translate this into English. QE is plenty misunderstood, but it's actually simple enough. It's about printing money and buying stuff. More specifically, the Fed prints money and uses it to buy bonds from banks, which increases the reserves banks hold. In sterilized QE, the Fed uses operations like reverse repos -- don't worry, it's not important -- to prevent these new bank reserves from getting lent out. Putting it all together, the Fed 1) prints money, 2) buys stuff, and 3) sucks out as much money as it prints. This should sound familiar. It's exactly how the trillion-dollar coin would work, with the Treasury just replacing the Fed in the first two steps. To simplify a bit, the Treasury would 1) mint the trillion dollar coin, 2) use it to pay for already approved obligations, and 3) have the Fed would suck out as much money as the Treasury mints. It's sterilized QE through the platinum looking-glass.

It seems like a really bad idea to let the executive usurp control of monetary policy from the Fed. Isn't this a frightful precedent?

Yes and no. The consequences could be terrible if trillion-dollar coins become a regular part of policymaking, but monetary-policy-by-executive isn't exactly unprecedented. As former Treasury official and Western Kentucky professor David Beckworth points out, FDR grabbed the reins of monetary policy when he took the U.S. off the gold standard in 1933 and announced he wanted prices to return to their pre-Depression level. Obama could theoretically use platinum coins to do the same, perhaps targeting nominal GDP instead. But the danger, as Ryan Avent of The Economist points out, is if this extraordinary measure became ordinary, or if markets merely feared it might. Treasury bonds might lose some of their safe haven luster and send interest rates up if investors began to anticipate a new normal of higher inflation due to period coin seigniorage.

Hmmm. I'm feeling generous, so I'll concede two points. First, the trillion dollar coin is legal, and second, the economics of it make sense. But that doesn't mean it wouldn't be a political trainwreck.

Indeed. Cardiff Garcia of FT Alphaville makes the rather persuasive case that Democrats shouldn't use the trillion dollar coin as a negotiating tactic to increase their leverage in the debt ceiling talks, since House Republicans would welcome Obama embracing such a ludicrous-sounding ploy -- making a debt ceiling breach more likely. But it does make sense as a form of insurance against the economic carnage a protracted debt ceiling breach would entail.

Okay, serious question time. What if somebody stole the trillion dollar coin?

Good luck getting change for it. Or finding a bank that will accept it as a deposit. It would only turn out to be worth the platinum it was minted on -- which, hopefully, should not be very much.

Even more serious question time. Who should we put on the trillion dollar coin?

There are lots of good options here. Paul Krugman has suggested John Boehner, which has a certain poetic justice to it, but Ron Paul or a banana are good options too.

Last question. You don't seriously think this is a good idea, do you? If ever there was something that tells the world we're a banana republic, it's --

Choosing to default on our obligations. There is nothing crazier than that. If it it's a choice between defaulting on our obligations, and minting a trillion-dollar coin, I say mint the coin. In an ideal world, Obama would end the platinum coin loophole in return for the House GOP forever ending the debt ceiling, as Josh Barro proposed, but I'll settle for anything that involves us paying our bills as we promised.

The only thing we have to fear is fear of the trillion-dollar coin itself.

http://www.outsidethebeltway.com/just-say-no-to-the-platinum-coin/

Just Say No To The Platinum Coin
Doug Mataconis

While the White House remains mum about it, the rather bizarre idea of solving the debt ceiling crisis, even just temporarily, by minting a trillion dollar platinum coin continues to get much attention out in the media. With the exception of Kevin Drum, pretty much every major pundit and economics writer on the left seems to be in favor of the idea, while the right largely rejects the idea as a gimmick. In all honesty, I don’t think anyone expects President Obama to go down this road, but many people seem to be suggesting that the threat of doing so would potentially be something that would force the House GOP to act on the debt ceiling rather than taking the hard line of demanding commensurate spending cuts for every increase in the debt ceiling. Given the utter absurdity of the idea, though, I can’t see how that would actually work. Just as President Obama thinks that he can call the GOP’s bluff because, in the end, they’ll be afraid to actually let the economy hit the debt ceiling limit, it seems rather clear that the GOP would think that they can call Obama’s bluff by daring him to take a step that, in all likelihood he will not take.

Felix Salmon points out why the threat of the platinum coin is unlikely to have the impact its proponents believe:

    [T]here are two problems with this approach. The first is that it’s a version of Hank Paulson’s famous dictum that “if you have a bazooka in your pocket and people know it, you probably won’t have to use it”. That wasn’t true for Paulson, and in general it’s not true of bazookas. In politics as in the markets, if you have a bazooka in your pocket, you’re likely to be backed into a position where you’re forced to use it, sooner rather than later.

    The second problem is that what we’re talking about here has a kind of Cold War mutually-assured-destruction mentality: “don’t you dare try to force a debt default, because if you do, I’ll come out and render you entirely irrelevant with my platinum coin”. The nihilistic logic of the Cold War was brutal and scary at the time; but at least it was played by people who respected each others’ intellectual prowess. In this case, we’re basically talking about Barack Obama trying to bluff the House Republicans. And as any poker player knows, when you’re up against a very stupid opponent, you should never try to bluff.

    The solution to the fiscal cliff crisis was to let the House Republicans overstretch, self-destruct, and render themselves powerless: that’s how to best deal with such people. There’s exactly zero chance that the House Republicans, faced with the Coin Threat, will suddenly turn logical and decide that they’re not going to play political games around the debt ceiling after all. Rather, the Coin Threat is a political game, played by the other side: it’s the executive branch bringing itself down to the House Republicans’ level.

    If you believe that the country is best run by grown-ups, you can’t believe in #mintthecoin, because it simply isn’t a grown-up strategy. If you believe that the House Republicans behave in crazy and illogical ways, then you can’t believe in #mintthecoin, because the threat of minting the coin doesn’t work against someone who’s crazy and illogical. And if you believe that the best way to approach the debt ceiling is to try and abolish it altogether, then you can’t believe in #mintthecoin, because the entire strategy is based on the idea of keeping the ceiling where it is, and then trying to circumvent it.

Salmon is largely correct. Rather than suddenly making the House GOP more reasonable, the Platinum Coin Threat is only likely to cause them to dig in their heels even further while at the same time reinforcing, for them and their supporters, the idea that Obama is a President willing to operate outside the law and without the consent of Congress regardless of the costs. If the President actually did go through with the Platinum Coin, the response wouldn’t be capitulation. Instead, as Tyler Cowen notes, it’s likely that what we’ll see in response is a renewed round of partisan warfare, including a plethora of lawsuits challenging the President’s authority. Regardless of what a Court ultimately decides, and I think there are numerous reasons that the Courts would act to strike down what would appear for all the world to be a clear act of Presidential overreach, it would take time for any legal challenge to have an air of finality and, during that time, the resulting uncertainty would be bad for the American economy and our position as the world’s financial capital. We would be the laughingstock of the world. Granted, this would likely happen if we didn’t raise the debt ceiling, but you don’t respond to one really bad idea by proposing another, equally bad, idea in response.

As we learn more about this idea, it’s becoming exceedingly clear that the legal argument in its favor is far less clear than proponents would like us to believe. Edward Moy, a former director of the United States Mint points out several practical and legal flaws with the idea that the President could solve the debt ceiling crisis by minting a platinum coin worth $1 Trillion:

    First, it may be legal to mint a platinum bullion coin with a $1 trillion face value, but it’s not legal to pass it off as actually worth $1 trillion if there isn’t $1 trillion of platinum in it. That’s because it’s a bullion coin and not a legal circulating coin. The face value of a bullion coin has no relationship with the metal content because the value is in the metal, whose price fluctuates daily.

    Second, for a coin to be worth its face value, it has to be made as a circulating coin.

    Here’s how a circulating coin is made. Congress needs agree on the metal content, dimensions, the designs on the heads and tails sides, weight, and other details. Then they have to pass legislation to create a $1 trillion circulating coin. The President needs to sign it. Then the Mint would have to design it get the design approved, procure whatever new materials they need, make the dies, test production, and then make one. Then a bank would have to order one because a business customer needed it to make change. The Fed would pay the Mint face value for the coin. After deducting the cost of the coin, the Mint would return the balance to the Treasury. All this needs to be done before we run out of money. Good luck with that.

    Third, the current law does allow the Mint to make a platinum proof coin and does not specify whether this applies to a bullion coin or a circulating coin. A proof coin refers to a mirror-like finish and is made for coin collectors. However, a proof coin must be accepted at face value. Some have argued that the law can be stretched to allow for a platinum circulating coin, but this would not be consistent with the intent of the original legislation.

In other words, if the President went ahead and did this, all we’d really end up with is a really nice Commemorative Coin that says “One Trillion Dollars” on it. That’s not a solution to our fiscal problems in either the short or long term, and it’s no way to run a country.

http://gawker.com/5974218?utm_campaign=socialflow_gawker_twitter&utm_source=gawker_twitter&utm_medium=socialflow

Former Mint Director Who Wrote ‘Trillion-Dollar Coin’ Law Explains Why the Coin Isn’t a Bad Idea
Max Read

It's not every day you get an email from a former director of the U.S. Mint (unless you're married to one, probably) — but it's also not every day that you write about the very real possibility that the U.S. Treasury might mint a platinum coin worth one trillion dollars. Either way, it was an excellent surprise to hear from Philip Diehl, the former Mint director and Treasury chief of staff who drafted Sec. 5112 of title 31, United States Code with Rep. Mike Castle — in other words, the guy who wrote the "trillion-dollar coin" law. His take? Not only does the law clearly allow for the coin to be minted, it also would have "no negative macroeconomic effects."

While we at Gawker support the trillion-dollar coin as much for the possibility of making it 16 feet tall and engraved with the runes from Zep IV as for its policy merits, it's good to hear that the co-drafter of the law itself is essentially on board. Here's his full email:

    I'm the former Mint director and Treasury chief of staff who, with Rep. Mike Castle, wrote the platinum coin law (Sec. 5112 of title 31, United States Code) and oversaw minting of the original coin authorized by the law, so I'm in a unique position to address some confusion I've seen in the media about the $1 trillion platinum coin proposal.

        In minting the $1 trillion platinum coin, the Treasury Secretary would be exercising authority which Congress has granted routinely for more than 220 years. The Secretary's authority is derived from an Act of Congress (in fact, a GOP Congress) under power expressly granted to Congress in the Constitution (Article 1, Section 8). What is unusual about the law is that it gives the Secretary discretion regarding all specifications of the coin, including denominations.
        The accounting treatment of the coin is identical to the treatment of all other coins. The Mint strikes the coin, ships it to the Fed, books $1 trillion, and transfers $1 trillion to the treasury's general fund where it is available to finance government operations just like with proceeds of bond sales or additional tax revenues. The same applies for a quarter dollar.
        Once the debt limit is raised, the Fed could ship the coin back to the Mint where the accounting treatment would be reversed and the coin melted. The coin would never be "issued" or circulated and bonds would not be needed to back the coin.
        There are no negative macroeconomic effects. This works just like additional tax revenue or borrowing under a higher debt limit. In fact, when the debt limit is raised, Treasury would sell more bonds, the $1 trillion dollars would be taken off the books, and the coin would be melted.
        This does not raise the debt limit so it can't be characterized as circumventing congressional authority over the debt limit. Rather, it delays when the debt limit is reached. Those who claim otherwise are misinformed or pursuing an agenda.
        This preserves congressional authority over the debt limit in a way that reliance on the 14th Amendment would not. It also avoids the protracted court battles the 14th Amendment option would entail and avoids another confrontation with the Roberts Court.
        Any court challenge is likely to be quickly dismissed since (1) authority to mint the coin is firmly rooted in law that itself is grounded in the expressed constitutional powers of Congress, (2) Treasury has routinely exercised this authority since the birth of the republic, and (3) the accounting treatment of the coin is entirely routine.
        Yes, this is an unintended consequence of the platinum coin bill, but how many other laws have had unintended consequences? Most, I'd guess. The fact that this use of the authority granted by Congress is unintended has no bearing on its legality or constitutionality.

    Philip N. Diehl
    United States Mint


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I don't like the idea at all.

[Saniflush]

Once again. 
Making money with nothing to back it.
Bad.

[Townhallsavoy]

Once again. 
Making money with nothing to back it.
Bad.

Yeah but it gives you more time to work and pay taxes so that the government can print more of it. 

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Yeah but it gives you more time to work and pay taxes so that the government can print more of it.

The Federal Reserve is a private bank.

[GH2001]

The Federal Reserve is a private bank.

That's just the deposit bank for transactions.  Or supposed to be! We're talking about minting here. Which is another issue. Only the congress and the us mint have authority over the currency/printing but yet the fed authorizes the printing and names the currency after themselves. Look on a dollar at the top for proof. They overstepped their bounds long ago. Really when they were created but even moreso now with the fiat monetary system they run. Freedom to facsism is a good movie that explains it well.

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That's just the deposit bank for transactions.  Or supposed to be! We're talking about minting here. Which is another issue. Only the congress and the us mint have authority over the currency/printing but yet the fed authorizes the printing and names the currency after themselves. Look on a dollar at the top for proof. They overstepped their bounds long ago. Really when they were created but even moreso now with the fiat monetary system they run. Freedom to fascism is a good movie that explains it well.

I own Freedom to Fascism. I bought it when it came out. Aaron Russo, RIP, got to the bottom of things. "Why We Fight" was the next movie I bought. They both go hand-in-hand and their (TPTB) agenda is quite effective. On the order of putting countries in debt through war, they fund both sides, thus creating wealth through inflation (Prescott Bush and Union bank WWII, ). History has proven that a gullible nation of sheeple is easy to manipulate. The public education system makes for easy control of sheeple from cradle to grave.


The brown-shirts have to revise the 2012 IRS code for what? They say the fiscal cliff vote, but I think they are actually retroactively raising taxes for the fiscal year 2012. In other words, they gon' steal our refunds. Any IRS brown-shirts here?

I follow John Loftus. 

[AWK]

Bad...Idea...

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