Monetary Realism

Understanding The Modern Monetary System…

Platinum Arrow in Quiver – Now Take Aim

If Treasury were to mint and then deposit a $ 1 trillion Platinum Coin at the Federal Reserve, its deposit account at the Fed would be credited with $ 1 trillion in new balances.

One option might be for Treasury to buy back Treasury debt now held by the Fed (assuming appropriate available supply from Fed inventory). That would drop utilization under the current debt ceiling by $ 1 trillion, allowing Treasury to “reload” on new Treasury issuance. This would allow Treasury to execute already authorized spending without the overhang of imminent debt ceiling “negotiations”.

One disadvantage of that approach is that it constrains the Fed’s flexibility in using Treasury bond inventories to best advantage in a complex monetary policy environment. Those inventories would suddenly drop.

The other option, preferable in my view, is for Treasury to conduct already authorized spending from a now flush bank account balance at the Fed. Then, that money would gradually find its way into the deposit liability and reserve accounts of the banking system.

Unlike the first option, no Treasury debt need be issued for the next $ 1 trillion in net spending from that account – and this will definitely be spending that has already been approved by Congress.

The resulting gradual increase in bank reserve account balances is a form of quantitative easing.

Instead of buying bonds, the Fed has bought the coin.

In this regard, the parallel suspension in new Treasury bond issuance is similar in economic terms to the more standard QE method whereby the Fed buys Treasury bonds in the market. Instead of bonds being withdrawn from a market that at the same time is being supplied by new Treasury issuance, bonds are being withdrawn from the market by a “virtual buyback” of a counterfactual supply stream. The net result is that no new Treasury bonds are being issued – because they are subject to virtual buyback at the point of virtual issuance.

So the effect on the bond market is similar, in general terms.

So this is all copacetic with standard quantitative easing.

The effect on the Fed balance sheet looks different though.

There is a coin there now – instead of bonds that might have been bought in standard QE.

But the effect on the consolidated balance sheet of the Fed and Treasury is generally similar:

The economic effect of those bonds that the Fed might have purchased in the counterfactual bond QE would have cancelled out – as bonds originally issued by Treasury but then held by the Fed. Similarly, the economics of the coin QE cancel out, because the coin was deposited – i.e. sold – by Treasury, and bought by the Fed. These balance sheet configurations in both cases are internal to the joint fiscal effect of Fed and Treasury operations, because the Fed’s bottom line earnings are mostly remitted to Treasury.

So platinum coin easing is a species of quantitative easing in this general sense, with an economically equivalent result.

So the $ 1 trillion increase in bank reserves can be worked into the overall Fed program of quantitative easing.

There are two issues at this point regarding such a joint Fed/Treasury strategy:

a) Is the Fed comfortable with a $ 1 trillion increase in banks reserves? I’d say it should be, given that the professional staff at the Fed understands that the institution is fully equipped with the requisite monetary policy tools that will enable a methodical and orderly exit from its QE balance sheet profile, when the time comes. Among other things, the opportunity to increase the interest rate on excess reserves is an obvious alternative to and complement for any normal program of Treasury bill issuance under those circumstances.*

b) Is this a rational and reasonable way to deal with short term technical monetary and fiscal policy issues that are associated with the effect of a “fiscal cliff” debate that is now converging with another debt ceiling “negotiation” fiasco?  I’d say that it is. The spending in question will already have been approved. President Obama is right to say “I’m not playing that game” (i.e. that debt ceiling game). Platinum coin easing is a rational and entirely legal facility perfectly designed to respond to an entirely irrational and now irresponsible legislative mechanism.

*A hypothetical institutional framework for full co-ordination of the monetary effects of both monetary and fiscal policy (e.g. platinum strategies) can be found here:




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37 Responses

  1. BrianL says

    I am worried that expanding the Money Supply will cause the private sector to spend and expand when it would otherwise have not. In turn, contracting the MS will cause the private sector to make spending cuts. The winding up and unwinding of Fed assets does not occur in a vacuum. Increased MS will flow disproportionately into economically-incentivized assets that will run out of customers and find themselves over-leveraged once the MS is dialed back. Hitting inflationary and employment benchmarks during this cycle only serves to mask the misallocation of resources that will eventually erupt. Why would we want to fool the private sector into thinking there was a boon? Leave the private sector alone (completely) and let them establish stable exchanges that work without governmental monetary policy. Only then, will resources be allocated as efficiently as possible (though never perfect).

    The Coin gives the Treasury more power to distort the market. Since I don’t view an active monetary strategy as rational, I don’t view the coin as rational.

    • beowulf says

      “The Coin gives the Treasury more power to distort the market. Since I don’t view an active monetary strategy as rational, I don’t view the coin as rational.”

      Think of it as the proportional response to an irrational threat. If there was no debt ceiling crisis, there’d be no reason for the Coin. I hope Congress and the WH can work out a deal to avoid hitting the wall, the trouble is what happens if they don’t. Whether you think Congress or the President is more at at fault, its Tsy that will be forced to deal with a typhoon-size market distortion if and when the govt hits the debt ceiling. Not making contingency plans for that crisis would be irrational.

    • Jose Guilherme says

      You have no reason to worry.

      If the Treasury uses the Platinum Coin to buy back debt already held by the Fed there will be zero net change on both the monetary base (reserves) and the money supply (deposits).

      Neither expansion nor contraction.

      Only at a (putative) later moment, when Treasury deficit spends, will there be an increase in money (deposits at commercial banks).

  2. Clonal Antibody says

    If Bernanke was smart, he would reply “The Federal Reserve is legally obligated to credit the Treasury account with the amount of the coins the US Treasury chooses to send to us.”

    • beowulf says

      Ha, at which point he might as well add, “Its interesting, isn’t it, that the Senate is required to confirm presidential appointments but the House is not.”

  3. Ramanan says


    You could get someone to ask someone from the press to ask Ben Bernanke in the press conference following next week’s FOMC meeting.

    footnote says there is one.

    • beowulf says

      Nahh, never ask a witness a question if you don’t know what he’ll say.
      Bernanke’s already caused enough grief by coining (ha!) the term “fiscal cliff (which most people seem to think increases the deficit). If Geithner has his back to the wall, Bernanke knows accepting a TDC is preferable to the USG going into default. But to ask him now, best case scenario he’ll run for the high grass to avoid getting into the middle of a political issue, worst case, he’ll say something dumb that he’ll have to eat in a couple months when he’s forced to pull the trigger, but will in the meantime encourage the Tea Party congressmen in their efforts to destroy the Govt’s credit.

      I’ll tell you, the parties are so polarized, unless Boethner caves early on the McConnell Protocol (or Mystery Method or whatever Tsy called Mitch’s idea for presidential debt ceiling hikes) we may NEVER get a debt ceiling hike before the 2014 elections. I’m not sure where House votes will come from. In this political climate, a House Republican who votes to raise the debt ceiling will face an automatic, well-funded primary challenge, in the same way if he had voted to raise taxes.
      In which case, I think the the Tsy Building and the New York Fed will be sending telegrams seeking advice to the Great North Woods, to the small fishing village where JKH sits, remembering old battles and planning new ones.

      • Ramanan says

        Should have said, the idea is gaining popularity … don’t be surprised if someone asks Bernanke!

    • Ramanan says

      Sorry bad phrasing.

      get someone from the press to ask Ben Bernanke …

  4. Jose Guilherme says

    The Fed cannot buy bonds directly from the Treasury.

    If it now buys a Platinum Coin a Pandora’s box will be opened. Nothing will prevent the government from deficit spending by depositing more coins at the Fed, bypassing the markets.

    So, it´s a great idea but I don’t think it stands a chance of being implemented.

    • Clonal Antibody says

      The US Treasury could ship $1 Trillion in pennies to the Fed, and that would be perfectly legal. The Treasury could also print US Notes (similar to Federal Reserve Notes) but it is limited by a Civil War era law from printing more than $450 million in such notes. The $1 Trillion platinum coin is no different than $1 Trillion in pennies. The only thing is that the $1 Trillion coin will never get into circulation because nobody can afford to buy it from the Fed. So it just sits on the Federal Reserve books as an “asset”

      • Jose Guilherme says

        The $1 trillion coin’s purpose is definitely not to get into circulation, contrary to the “normal” coins we use for paying small bills. In JKH’s proposal, it would credit the Treasury’s account at the Fed. The government would then spend the $1 trillion by transferring this amount to the deposits that the private sector beneficiaries of said spending keep at the commercial banks.

        In fact, said operation would correspond to the neo-chartalist view of how central governments can finance their expenditures. That’s why I don’t think it can happen – it’s too revolutionary, too dangerous for the powerful guardians of neoclassical orthodoxy.

        But it’s a great idea, all the same. It illustrates the possibilities open to governments, once freed from the veil of self-imposed constraints on their spending.

        • Clonal Antibody says

          You said that exactly right!

    • Clonal Antibody says

      It already buys coins from the Treasury. That is how regular coins get into circulation. See Distribution of Currency and Coins

      Federal Reserve banks receive coins at face value because they are obligations of the United States Government.

      • Jose Guilherme says

        It´s a different case. These coins are not for direct deficit financing by the Fed. They’re issued as a substitute for bank reserves, because there is currency demand by the public.

        Whereas the Platinum Coin would directly credit the Treasury’s account at the Fed, the supreme financial “crime” in the eyes of the high priests of monetary ortodoxy.

        • Matt Franko says


          The Fed would not be “buying the coins”… rather, the Treasury would be depositing the coins into it’s (Treasury) account at the Fed.


        • beowulf says

          The Fed does indeed buy coins from Tsy (or from anyone else who deposits coins) at face value.

        • Jose Guilherme says

          The expression “buying the coins” is Michael Sankowski’s, not mine.

          But he’s right. JKH’s proposal is tantamount to direct deficit financing by the Fed.
          According to JKH “…no Treasury debt need be issued for the next $ 1 trillion in net spending from that account …”. So the Treasury would deficit spend by issuing a Platinum Coin.

          My point is: what would restrain this option to the current case? You’ve broken the taboo against direct finacing by the Fed. The establishment isn’t going to like this. And with TPTB opposition, it simply won’t happen.

        • JKH says

          “My point is: what would restrain this option to the current case? You’ve broken the taboo against direct finacing by the Fed. The establishment isn’t going to like this. And with TPTB opposition, it simply won’t happen.”

          Lots of different but connected points there. I think your quite correct on the last two points.

          But your first question is the most interesting – I think. Again, consider the comparison with bond QE. There is a restraint with bond QE – which is the commitment and plan for “exit” at the other end. Bernanke has been very explicit and forthcoming about the different ways of reversing bond QE when the time comes. That’s the “restraint”. Drop platinum easing into the same type of equation and disclosure, and you have the restraint. I’m certain that the Fed could draw up a paper or draft a speech very easily and map platinum exit to bond exit in a surprisingly pleasing manner. You could put them both side by side on a white board, one against the other, and compare the cash flow pattern – which will be very similar.

          And the taboo is actually bond specific – Beowulf can point to how platinum easing is a slam dunk in terms of legality. There is no taboo.

        • Jose Guilherme says

          Since the prohibition against direct financing of the Treasury by the Fed is bond specific and does not include Platinum Coins it follows that there is no legal obstacle to a consolidation of the Treasury and the Fed into a single entity.

          Of course, at present there is a political obstacle to this. No one has yet seen a Platinum Coin engaging in Platinum Easing. But if it does happen – if only once – then the political obstacle (taboo) will have been overcome. In the following periods the Treasury could just keep on adding Coins to the Fed’s books, increasing its account at the central bank and then happily deficit spend by crediting commercial banks’ client accounts.

          So this debt ceiling crisis opens up some exciting possibilities concerning deficit spending by a truly sovereign government – one that can freely finance itself on “its” central bank via billion or trillion dollar Coins, as opposed to the present factual situation, where the Treasury is forced to sell its bonds to the private dealers and/or banks in order to finance its deficit spending.

          Alas, this is also the reason such a solution is unlikely to pass. The irrational belief that forcing the government to sell bonds to the financial markets is what prevents the Fed from “printing money” and thus cause “inflation” is still strong enough to block any realistic chance for a Platinum Easing outcome.

          Anyway, no reason to despair. Because one day a different, more monetarily enlightened President may decide – perhaps out of necessity, to finance a war or fight global warming, whatever – to simply apply the existing laws and deficit spend by selling coins to the Fed. That will be the day when the U.S. will become fully sovereign, monetarily speaking.

        • JKH says

          “So this debt ceiling crisis opens up some exciting possibilities concerning deficit spending by a truly sovereign government – one that can freely finance itself…”

          It gets better from that particular perspective (although I’m not really promoting the full Monty on this) – see beowulf’s latest post – platinum easing could be interpreted as a marginal surplus, meaning a net balance for that part of budget finance (as opposed to a deficit in the case of bond financing)

        • Jose Guilherme says

          Just read beowulf’s post. Fascinating stuff.

          But it really makes no sense to consider the 2 trillion dollar amount of the coin a “receipt” of the government and then decide the deficit has turned into a surplus.

          Normally, deficits are defined as “spending in excess of taxes”. There is an economic logic to this – taxes suck resources out of the economy, while spending translates to injections into the economic flow of income.

          There is no way a coin placed on the Fed’s books can be compared to taxes. No spending power has been curtailed by the coin. So, I’d say it’s all an unfortunate play with words – that will serve to confuse rather than clarify the debate.

        • beowulf says

          Well, I think its fair to say no one connected the dots on the Hill. Remember this bill is about replacing paper dollars with dollar coins, to sweeten the deal by I dunno a couple billion dollars a year, the bill sponsors propose putting coin seigniorage on-budget.

          The point is, absolutely none of the bill sponsors considered what the effect of its passage would have on a $1 trillion platinum coin deposited at the Fed (Tom Harkin would probably get a kick out of that part, the Republican sponsors, not so much). I’m just describing the effect of the law (if passed), not its intent.

        • beowulf says

          What choice would TPTB have? If the House Republicans refuse to budge on the debt ceiling, our options are a government with no bond funding or a government with no funding at all.

        • Matt Franko says


          it isnt necessarily “breaking a taboo”, there is a law (Federal Reserve Act) that has specific language in it that I’m sure our good counselor Beo has reviewed and made a legal judgement will not be violated by “a deposit”…. rsp,

        • Jose Guilherme says

          There is a law but it hasn’t been used before, at least in recent times.

          The law contradicts a sacred tenet of the orthodoxy: don’t finance deficit spending directly via the central bank. Require instead that bonds be sold to the private markets to keep the pretence that governments are not and cannot ever be monetarily sovereign.

          Of course, now that the self-imposed restraints on government spending are bound to back fire and create a real problem for the elites they may be forced to accept “irregular” solutions such as the Platinum Coin.

          IMO if it does come to that, the Treasury will prefer that the Coin be used to cancel the debt on the Fed’s books. The JKH solution, while perfectly legal and indeed more rational is simply too dangerous – it would lay bare the real situation as far as monetary sovereignty is concerned. Low chance TBTB will allow that.

        • Clonal Antibody says

          The point is that the decision as to how many coins to ship to the Fed is legally a Treasury decision, and not a Fed decision – even though both act in concert. The US Treasury needs to fund spending that has already beenauthorized by the Congress. Legally seigniorage profits count as revenues for the government (no different than tax revenues) as soon as the coins are shipped to the Fed. However, there is not much profit in $1 Trillion of pennies, while there is a lot in the platinum coin.

        • Clonal Antibody says

          In other words, there is no deficit as soon as the Fed accepts the trillion dollar coin! The revenues to the government just increased by $ 1 Trillion.

    • JKH says

      No suggestion here of the Fed buying bonds directly from Treasury.

      Agreed there’s virtually no chance.

      But it’s an interesting proposition – given that its legal (apparently), and has a technical effect similar to QE.

      • Jose Guilherme says

        My point was that buying coins is functionally equivalent to buying Tsys directly from the Treasury.

        In the case of the Platinum Coin it’s a legal possibility, but likely won’t happen for ideological reasons.

        Yet it’s no doubt an interesting proposition: the Fed directly financing the government’s deficit. And if it can be done in Canada, with no visible harm to the system – why not in the U.S., one day?

        • Clonal Antibody says

          But that is exactly how the US Treasury deals with all coins!

        • Michael Sankowski says

          Yes, the Trillion Dollar coin is more of a stunt than it does have real economic impact – at least from the point of view of the U.S. Government.

  5. Matt Franko says

    Great work… keep pounding ‘the coin’ fellas! KEEP … IT …. UP!!!

    “Treasury to buy back Treasury debt now held by the Fed (assuming appropriate available supply from Fed inventory). ”

    Might severely damage the Fed’s flow of operating funds…. rsp,

    • Michael Sankowski says

      We’re starting to call this Platinum Coin Easing. It seems like that’s a good way to describe the effects of the Coin. It’s similar to QE in terms of economic impact. It should theoretically loosen credit.

  6. Michael Sankowski says

    I’d prefer the second option as well.

    Dropping $1T in QE on the market in one day would cause many people to become extremely agitated. One objective of the coin is to calm markets, not upend them.

    This is very clear: “Instead of buying bonds, the Fed has bought the coin.”

    Understand that phrase, and it’s immediately obvious the coin is not a huge departure from QE as we’ve seen it over the last 3 years.

    The coin does take away some of the flexibility from the Fed. It’s probably not as big of a deal today because the Fed has already purchased a decent amount of U.S. debt. In the future, they might want to sell the coin back to the Treasury to unwind this QE, but at that point, they could raise rates instead.