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Updated 6/28/2011.

Through open-market operations (e.g., QE1 and QE2), the Fed has purchased (monitized)  $2T of Treasury bonds, i.e., the Fed has paid off $2T of the national debt with money from its (virtual) printing press. But, Treasury bonds held by the Fed still count as part of the national debt.  The Secretary of the Treasury can, however, buy them from the Fed with a single freshly minted $2T platinum coin, and then retire (burn) them.  This plan is based on one  proposed at FDL by Beowulf and letsgetitdone.

NOTES:

1) As a one-time transaction, the Treasury would present the Fed a $2T coin, which by law is "legal tender for all debts, public and private," in payment for $2T of Treasury bonds (debt) that the Treasury now owes the Fed.  The Fed cannot refuse.

2) The Fed gets paid in full and winds up with an asset, namely $2T of additional "vault cash."  So the books balance and no debt gets “repudiated.”

3) A $2T coin in impractically large for the Fed to circulate, so it will remain vault cash.  Nor does the Fed have any motivation to circulate it.  They are charged with controlling inflation and have the ability to virtually print money by crediting accounts in exchange for other assets.

4)  Some people insist that the Fed's purchases of Treasury bonds (quantitative easing)  "debase" the dollar by increasing the amount of money in circulation.  This proposal is to purchase bonds that the Fed already owns.  This coin would increase the M0 money supply but not the measures of money in circulation (M1, M2, M3, and M4), which specifically exclude vault cash.   So, this transaction cannot (further) debase the dollar.

5) The relevant section of the U.S. Code is TITLE 31, SUBTITLE IV, CHAPTER 51, SUBCHAPTER II, § 5112:

    (h) The coins issued under this title shall be legal tender as provided in section 5103 of this title.

     [...]

     (k) The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.


So, this plan is both legal and binding.  And, per Beowulf:  “[E]ven if Congress passes a law to strip the Secretary of his coin seigniorage power by veto-proof majorities, the 10 days the President is given to sign or veto a bill is more than enough time to mint away the entire public debt.”  

Originally posted to wigwam on Mon Jun 27, 2011 at 07:39 PM PDT.

Also republished by Money and Public Purpose.

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Comment Preferences

  •  I see at least one flaw: (2+ / 0-)
    Recommended by:
    JeffW, shaggies2009

    This coin MUST be minted.  Therefore it will exist.

    Coins can be stolen.

    "Nothing in all the world is more dangerous than sincere ignorance and conscientious stupidity." --M. L. King "You can't fix stupid" --Ron White

    by zenbassoon on Mon Jun 27, 2011 at 07:42:48 PM PDT

  •  Cute. Post again when you have a real solution. nt (3+ / 0-)
    Recommended by:
    JeffW, LHB, erush1345

    "We are stardust, we are golden, we are caught in the devil's bargain, and we got to get ourselves back to the garden." - Joni Mitchell

    by shaggies2009 on Mon Jun 27, 2011 at 07:49:48 PM PDT

    •  So detail the flaw, if you have one. (0+ / 0-)
      •  Ok (2+ / 0-)
        Recommended by:
        VClib, erush1345

        Fed already monetized this debt when they purchased the treasuries under QE 1 & 2. Under this scheme, they would be monetizing the whole two trillion again. Even if they promised to lock up this coin with their favorite cufflinks, they would still have carry the value of it on their balance sheet.

        It would immediately debase the currency because it would show up as M1, cash. Markets would not hesitate to sell their treasuries sending interest rates skyrocketing. It may not be a "default" in the purest sense but the effect would be the same.

        "We are stardust, we are golden, we are caught in the devil's bargain, and we got to get ourselves back to the garden." - Joni Mitchell

        by shaggies2009 on Mon Jun 27, 2011 at 08:42:30 PM PDT

        [ Parent ]

        •  According to the St. Louis Fed ... (0+ / 0-)
          Ml includes funds that are readily accessible for spending. M1 consists of: (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler's checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts. Seasonally adjusted M1 is calculated by summing currency, traveler's checks, demand deposits, and OCDs, each seasonally adjusted separately.

          This  deposit would immediately be swapped for the Fed's Treasury bonds. at which point it would fall into none of these four categories.

          The value of this coin would wind up on the Fed's books, replacing $2T of the Treasury bonds they are now sitting on.

          •  This must be one magic coin (0+ / 0-)

            because it cannot be both currency issued by the treasury and at the same time not currency. M1 includes M0 which is hard currency.

            Your basic problem is that you assume the Fed can do one sided accounting entries. It does not operate that way. In order for the Fed to create money, there has to be demand for money, and something to offer the Fed in exchange for the money. In most cases this exchange is simply the promise to pay it back with interest.

            The Fed also is mandated to manage inflation. The thing about QE is that even though they are creating more money, they have the treasury bills in exchange for it. This works to assure they can pull money out of circulation by selling these bills to the open market. The risk for the Fed is that interest rates increase and thus the power of their t-bills goes down.

            What you are proposing is that they give up their t-bills in exchange for a magic money coin that is not money. This means they can no longer redeem through exchange the two trillion they issued. If the coin is money, that's even worse -- they only have more money with which to control the money supply!

            Feel free to reply, but I won't be coming back to this thread. I've seen you had a similar exchange with LHB in a similar diary. LHB's points were very similar to mine. You don't seem to get it, and I doubt I will be able to change that.

            "We are stardust, we are golden, we are caught in the devil's bargain, and we got to get ourselves back to the garden." - Joni Mitchell

            by shaggies2009 on Tue Jun 28, 2011 at 01:32:42 AM PDT

            [ Parent ]

            •  Please re-read the definition of M1. (0+ / 0-)

              Note that M1 specifically excludes currency inside "the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions."  Per the St. Louis Fed:

              Ml includes funds that are readily accessible for spending. M1 consists of: (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler's checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts. Seasonally adjusted M1 is calculated by summing currency, traveler's checks, demand deposits, and OCDs, each seasonally adjusted separately.

              With respect to your parting comment:

              Feel free to reply, but I won't be coming back to this thread. I've seen you had a similar exchange with LHB in a similar diary. LHB's points were very similar to mine. You don't seem to get it, and I doubt I will be able to change that.

              LHB insisted that the debt gets repudiated but couldn't identify who fails to get paid.  Similarly, you have claimed that this coin would increase M1 but have not identified which of the four categories of M1 it falls under.
    •  asdf (1+ / 0-)
      Recommended by:
      shaggies2009

      This is at least the second or third time I've read virtually this exact diary on the subject.  What the diarist seems to not comprehend is while it might by legal to do this (and there would most likely be legal objections to it), doing this will do absolutely nothing besides destroy our economy and perhaps our nation as a whole.

      In other words, I'd rather NOT read this again...

      "It has been said that politics is the second oldest profession. I have learned that it bears a striking resemblance to the first." - Ronald Reagan

      by erush1345 on Mon Jun 27, 2011 at 10:05:34 PM PDT

      [ Parent ]

      •  Perhaps you could explain how and why. (0+ / 0-)
        ... doing this will do absolutely nothing besides destroy our economy and perhaps our nation as a whole.

        The Fed has already monetized $2T of the nation's debt, and the consensus of economists is that it has help a bit, and certainly not destroyed the country.  Fixing the books to accurately reflect that fact is unlikely to have any impact other than to end the debt-crisis kabuki in Washington.
        •  asdf (2+ / 0-)
          Recommended by:
          bwintx, shaggies2009

          Shaggies2009 above did a pretty good job of explaining it above.

          Basically the reason is that writing off our debts with accounting tricks will cause investors in the American currency (thus the financers of our debt) to no longer offer to lend to us.  You would wind up in a never ending cycle of 'printing' more money, thus driving up inflation.  Eventually, we're Wymar.

          I can't say that I was completely for QE1/2, but at least both of those created money that was able to be removed from circulation, thus it did not spook the financers of our debt nearly as much as your plan would.

          "It has been said that politics is the second oldest profession. I have learned that it bears a striking resemblance to the first." - Ronald Reagan

          by erush1345 on Tue Jun 28, 2011 at 04:44:00 AM PDT

          [ Parent ]

          •  This is a one-time transaction between agencies .. (0+ / 0-)

            ... a branch of the government, the Treasury, and a quasi-governmental agency, the Fed.  I'm explicitly not proposing "a never ending  cycle."

            Secondly, QE1 and QE2 exchanged credit in accounts at the Fed, the most liquid asset there is, for Treasury bonds.  That credit has not been revoked and cannot be revoked.

            By contrast, this coin would sit in a vault at the Fed or wherever.  It would not get circulated because the Fed has no motive to put it into circulation.  Their mission after all is to keep inflation down.   And, when they want to increase the amount of money in circulation, they have easier ways of doing so, e.g., QE1 and QE2.

          •  What makes you think that (1+ / 0-)
            Recommended by:
            wigwam

            deficit spending without debt issuance is any more inflationary than deficit spending with issuance. In fact, it's less inflationary because bond have more leverage in the market than bank reserves. See here on this point.

            In addition, if the bond market doesn't want any more bonds because they lack confidence, then the Treasury can use more coin seigniorage to back Congressional appropriations. That will be deflationary because less interest income will need to be paid to bond holders. In fact, if we ceased issuing debt altogether the debt would eventually be paid down to zero and all interest costs would be saved. Why would that be inflationary? What is the mechanism of inflation, provided the deficit spending involved doesn't drive the economy beyond full productive utilization?

            It's not enough to say that this or that will cause inflation and then mention Weimar and Zimbabwe. You also have to show why the US's situation is like the situation of those nations. See this one for an analysis of why our situation is not like theirs. See also this one on the "printing money" thing.

  •  And who would buy these platinum slugs? (1+ / 0-)
    Recommended by:
    shaggies2009

    The upper 1%

    Riiiiiiiiiiiight! Suuuuuuure!

    Nice try...

    Float like a manhole cover, sting like a sash weight! Clean Coal Is A Clinker!

    by JeffW on Mon Jun 27, 2011 at 07:50:39 PM PDT

    •  This coin gets deposited with the Fed, whereupon.. (0+ / 0-)

      ... the Mint's account gets credited $2T.

      As I pointed out, the Fed has no use for it, since they have access to infinitely many dollars via their (virtual) printing press.  So, it would probably be a good idea to immediately melt it down.

  •  The die is cast. This phony issue is a pretext to (1+ / 0-)
    Recommended by:
    Wheever

    purposely plunge the U.S. into an economic crisis in order to take advantage of the confusion, destroy the presidency of Obama, and finish the job of installing a permanent neo-fascist plutocracy (which is now in its nascent state).

    I wrote about this on these diaries:

    1. Forget About 2012 - Get Ready For The Next Shock

    2. 2012 Will Mark The Final Collapse of Democracy in The U.S.

    3. Don't Be a Sitting Duck - Unite And Prepare For Upcoming Economic Collapse

  •  This is like "Space Cash" on South Park! (4+ / 0-)
    Recommended by:
    JeffW, VClib, erush1345, LHB

    "Space Cash" arrives from an alien ship that lands here. It's taken from the ship and divvied up among all the countries in the world, which start to "spend" it.

    Then some "Space Cops" show up to tell everyone it's really worthless and the whole thing was just a test to see how honest we were and we failed.

    My synopsis doesn't do it justice though!

    This ain't no party. This ain't no disco. This ain't no foolin' around!

    by Snud on Mon Jun 27, 2011 at 07:54:11 PM PDT

  •  lawl @ firebaggers. (0+ / 0-)


    Kevin dropped his ice cream and blames Obama? He's gone hamsher!

    by punditician on Mon Jun 27, 2011 at 08:13:46 PM PDT

  •  Just Like a Bad Penny... (2+ / 0-)
    Recommended by:
    shaggies2009, erush1345

    This asinine argument is back again.  

    Anybody got change for a $500 billion dollar coin?

    To arrive at what now you do not enjoy, you must go where you do not enjoy. To reach what you do not know, you must go where you do not know. To come into possession of what you do not have, you must go where now you have nothing." SJOtC

    by LHB on Tue Jun 28, 2011 at 12:07:00 AM PDT

    •  And you erroneously claimed that the debt ... (0+ / 0-)

      ... gets "repudiated."  But repudiation is when the debt is not paid.  In this case the Fed gets paid in full.  I.e., there is no repudiation.

    •  Won't have to make change (1+ / 0-)
      Recommended by:
      wigwam

      just have to place the coin in the Mint's account at the new York Fed. The coin is legal tender so the Bank has to credit the Mint's account. The Treasury then sweeps the account for profits from the Fed's acceptance of the coin, and the profits, about $499,999,997,000 on a $500B coin is transferred to the Treasury General Account (TGA). The Fed then spends according to Congressional Appropriations, or in wigwams proposal buys back 42T worth of Tresury bonds and retires them.

      What happens to the coin? It sits at the NY Fed in its vaults for the duration. It is never circulated and never used. So, all this gas being generated about the coins is just that. Sound and fury signifying nothing.

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