Economic consequences of the $1T coin

In an earlier thread a commenter questioned the statement that issuing a $1 trillion coin would "have no economic consequences." He was right, of course. Everything has consequences. A more precise question compares two scenarios:

Scenario A:
The debt limit is raised (or abolished). The government over X years (where X is between 1 and 2) issues a Trillion dollars in increased debt. The Federal Reserve buys $Y of that on the open market, and collects $P of interest over the time.

Scenario B:
The government issues the coin and deposits it in its account in the Federal Reserve. It gradually spends from that account over X years. The Federal Reserve sells $1 Trillion - $Y treasury bonds on the open market over X years. Consequently, the Federal Reserve collects less interest, $Q over that time.

Now aside from the peripheral costs, the money spent casting and striking the coin, the difference between dealers getting commission on $1 Trillion + $Y bond sales in Scenario A and commission on $1 Trillion - $Y in scenario B, the macro-economic results at the end of the period will be the same.

The Federal Reserve uses the interest it collects to pay its expenses and turns the rest over to the treasury. So, in scenario B, the Federal Reserve would collect less money from the Treasury and pay the Treasury as much less -- a wash.

We can't keep doing that forever. The Federal Reserve only own so many treasury bonds, and they have to own some in order to make the market. Doing it for two years, however, looks quite reasonable.

I don't know whether the treasury's balance in the Federal Reserve is counted in official reckoning of the "money supply," but a trillion extra sitting there won't have the effect that money actually in circulation does. (If you bury money in your back yard, it is counted in reported money in circulation, but the effect of that reported money in circulation on economic activity is only reliable on the -- generally accurate -- assumption that the same fraction of that reported money is buried.)

(It's not actions whose consequences should be considered; it is choices. What is different if you do This as opposed to what happens if you do That? Is a bacon burger healthy? Well, compared to starving to death, it is. )

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