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 Instead of bonds being withdrawn from a market that at the same time is being supplied by new Treasury issuance, bonds are being withdrawn from the market by a “virtual buyback” of a counterfactual supply stream.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:

http://monetaryrealism.com/treasury-and-the-central-bank-a-contingent-institutional-approach/

 

 

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3 years 4 months ago

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.

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