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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!

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Comment Preferences

  •  Now it's a proof coin? (1+ / 0-)
    Recommended by:
    furi kuri

    It isn't enough to be merely a circulation strike trillion dollar coin? What's next, DCAM (deep cameo) proof?

    •  Proof Platinum Coins (0+ / 0-)

      Treasury already produces these in low denominations, and has the templates and means to quickly produce such coins. To produce a $60 T coin, all that has to be done is to change the face value of the coin, engrave it with the appropriate image, and it's good to go to the NY Fed for deposit in the Mint's account!

  •  Question; why platinum? (2+ / 0-)
    Recommended by:
    clonal antibody, psyched

    As you've mentioned, I see tons of blog comments about the TDC, and they all mention it as a 'platinum' coin, but without digging through endless reams of comments I'd like to find out, why platinum? Is platinum the ONLY metal allowed for this, and why? Why not any other precious or non-precious metal, especially if the coin's face value is not based on its metal worth?

    "Marco Rubio es un pañuelo Rosa!" - Montgomery Burns

    by Fordmandalay on Sun Dec 09, 2012 at 10:19:46 AM PST

  •  Thanks for putting this all together! (1+ / 0-)
    Recommended by:
    psyched
  •  Mint a couple of $20 trillion coins. (4+ / 0-)
    Recommended by:
    furi kuri, katiec, jellyyork, psyched

    Screw the debt ceiling.

  •  I think the platinum coin idea is quite (0+ / 0-)

    interesting, with a few caveats:
       There are bound to be unintended consequences.  Either high inflation from bypassing the House and the Fed, or swift action by the SCOTUS that will undo the action, leaving a hole in the nation's spreadsheet equal to the value of the coin, or volatility in currency markets that cannot figure out what the dollar is worth...
       An interesting twist would be to issue a series of very high denomination platinum coins with intent to circulate them.
       For instance: Nobody's going to ever accept a trillion dollar coin as payment.  It's just too much risk, with absolutely no way to mitigate it.  So it would be an un-spendable albatross, prone to legal attacks that regular currency is not.  But there are bound to be many interested in a one-million, ten million, or even a hundred-million dollar coin.  I'm sure there are plenty of rich folks who would invest in them just to say they have them.  So make them to spend them.  Use them to provide foreign aid.  Once our defense contractors get them in payment, they'll be golden.  Put them in the mix: some for servicing debt, some to pay domestic contractors from the private sector.
       Make them valuable enough to have their own presence, but small enough to "recall," or pay back with our traditionally-issued currencies.
       It will be really hard for anyone, even the SCOTUS, to question their validity if they have been accepted by a wide range of creditors and are already in wide circulation, it will be much cheaper to buy them back individually, if we have to, and even if they are declared not legal tender at some point, they will create their own speculative numismatic market that, at some "balance" face value, speculators will risk keeping five or ten million invested in hopes that coin will be worth far more as a physical specimen of a failed coinage experiment.  Anything we don't have to buy back would be gravy.
       Once the platinum coins are specifically, themselves accepted by currency markets, their validity is as assured as a pallet of 20's, and the success of the strategy is at least partially secured.
       Of course, there is the enormous down side that high-value currencies are incredibly transportable, and thus very prone to use by very evil people.  I don't know if there is a way around this.  Maybe, through serial numbers, or possibly chain-of-custody agreements, or maybe utilizing special exchanges to buy and sell them with restricted licensing... or caveats that reduce them to metal valuation if they are removed from special, trackable packaging, or who knows, that down side could be avoided.

    •  Make them highly radioactive (0+ / 0-)

      Money that literally burns a hole in your pocket! That way the coins HAVE to be quickly spent and in continuous circulation, and can't be hoarded.

      "Marco Rubio es un pañuelo Rosa!" - Montgomery Burns

      by Fordmandalay on Sun Dec 09, 2012 at 12:58:10 PM PST

      [ Parent ]

    •  I think the problem with that idea is that (0+ / 0-)

      they can't be worth more than the platinum in them--rich people aren't going to blow ten million on a coin that's worth maybe a thousand, rarity value only adds so much--people that already have ten million to invest would rather put it in something that pays some sort of dividend, or has a value that may increase in time (art, real estate, etc.). It's hard enough to get people to use dollar coins...million dollar coins are not going anywhere.

      "All governments lie, but disaster lies in wait for countries whose officials smoke the same hashish they give out." --I.F. Stone

      by Alice in Florida on Sun Dec 09, 2012 at 01:34:56 PM PST

      [ Parent ]

      •  Alice (4+ / 0-)
        Recommended by:
        katiec, jellyyork, Swoof, psyched

        Am I therefore to presume that you do not use any pennies, nickels, dimes, quarters, half dollars, dollar coins, dollar bills, two dollar bills (there are those you know!) Five dollar bills, ten dollar bills, twenty dollar bills, fifty dollar bills, one hundred dollar bills? All of those have no inherent value, other than the fact that they are issued by an arm of the US Government, and are denominated at those values. So a million dollar coin would be worth a million dollars, because the US Government says so, and for no other reason.

        However, as for the Trillion dollar coin, it would never be circulated. At least not in my lifetime. All that will happen is that the Fed accepts it as vault cash, and credits the US Treasury account with an electronic computer entry. And now the government has cash to spend. What the government spends it on will be decided by your elected representatives, and the lobbyists that they listen to!

        •  Very clearly put. Thanks. This is a keeper. (1+ / 0-)
          Recommended by:
          psyched
        •  I was responding to a different comment, (1+ / 0-)
          Recommended by:
          clonal antibody

          one that posited the notion of instead issuing a ten-million dollar coin for circulation, with the notion that wealthy people would want it as a collectible. As as for coins and dollar bills, I rarely use them because for the most part I use a credit or debit card. Rich people have accounts full of millions of dollars that have no physical existence--they invest in stocks that do not issue certificates, they have accounts in various currencies around the world that exist in electronic ledgers rather than stacks of bills or coins. Also, it's one thing to use one-dollar bills that are "worthless" except as exchange--it's quite another matter to use a million-dollar-bill. There's no good reason (at least, no legitimate reason) to use cash for a million-dollar transaction.

          I understand the notion of the trillion dollar coin as a workaround the deal with the problem of the House of Representatives being controlled by Republicans seemingly hell-bent on bankrupting the country (as well as the problem of the Fed being more concerned with propping up the banks than the country); what I don't see in that regard, however, is the Secretary of the Treasury going for such a radical idea, however reasonable it may be in the circumstances.

          "All governments lie, but disaster lies in wait for countries whose officials smoke the same hashish they give out." --I.F. Stone

          by Alice in Florida on Sun Dec 09, 2012 at 08:17:35 PM PST

          [ Parent ]

    •  The coin (0+ / 0-)

      will just sit at the Fed, in its vault forever. It can't be stolen because what would the thief do with it. Everyone would know the Fed was the owner.

      Once the Fed gets it, the Treasury gets Fed reserves in its account. For a $60 T coin, $60 T in reserves created by the Fed out of thin air using its currency power. The Treasury can then keystroke debt repayments and deficit spending out of the $60 T. Payoff of debt on schedule would not be inflationary; but deflationary. The reason is that Treasury debt instruments are more inflationary than reserves.

      Deficit spending paid from seigniorage profits may or may not be inflationary; but it has nothing to do with the seigniorage aspect; only if Congress spends past the point it needs to  in order to enable full employment. Otherwise the seigniorage spending won't cause inflation. 'll be doing a post on inflation and PCS soon.

  •  imagine if someone stole that coin! (0+ / 0-)

    and where would you use it?

    Obama 2012...going to win it with our support!!!

    by mattinjersey on Sun Dec 09, 2012 at 04:54:44 PM PST

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