The Best Time to have a Debate about the Coin

The current debate about the coin is really a debate about the power of government to create money out of thin air at any time it wishes. Out government has outsourced the creation of money to the private banking system, through the specific  laws we’ve put in place over the last 100 years or so.

The coin is a loophole which allows the government to directly create money. This was not an intentional loophole. It was not a designed part of the larger monetary system of the United States. But this loophole exists – the government can create money directly by miniting large denomination Platinum Coins.

As John Carney pointed out in a twitter comment, there should be something like a “coin ceiling” which gives some structure to this power for the government to directly create money. Prior to the discovery of the coin, it was thought we had entirely stripped the power away from the U.S. government. There was no need to constrain or structure this power. We thought we had taken away the power entirely and given it to the private banking system, so why was there a need to elaborate?

I don’t think a hard-number ceiling on the amount of money the U.S. government can directly create is a good idea. But leaving the power completely without structure isn’t a good idea either. It’s time for a democratic debate on this power.

Additionally, as JKH points out in several posts, using the coin is almost exactly the same as Quantitative easing. Directly creating money acts almost exactly like a real-world tested policy. We know the impact of quantitative easing. We can estimate using the coin will be nearly exactly the same as Quantitative easing. We can even call it Platinum Coin easing, it’s that close in impact.

It turns out today is probably the best time to have a debate over the power of the government to directly create money without incurring debt. Why? Because the U.S. government can borrow all the money it wants in 2013. We don’t need to print money – the U.S. government could easily borrow it instead. In fact, it would be cheaper for the U.S. government to borrow money created by private banks than it would be to mint a coin.

Creating money without incurring debt is likely to have a positive impact on the economy – because the economy is begging for more money and more low risk assets to be created.

So, we can mint the coin and pay for goods and services with little fear creating money will harm the economy. In fact, we can expect it to help the economy. We can debate the power of direct money creation, we can hash out the new structure of our monetary system under ideal conditions.

We can imagine other conditions to have this debate. We could be having this debate when the credit markets are shutting off lending to the United States, and the U.S. would be forced to print money just to continue paying the bills it has incurred. This is unlikely to ever happen, but not completely impossible.

But we are nowhere near that negative scenario right now. The U.S. government does not have a problem borrowing money.

Many people point out that directly creating money by the government overturns long standing norms about out monetary system. Yes, it does. This is a huge change. The coin gives the government the power to spend money without borrowing, and provides an entirely new channel for money creation. That’s a massive change.

But we’re lucky enough to be debating this power today, right now, during a manufactured debt ceiling crisis. It’s essentially the ideal conditions for this debate to happen. We can mint a coin right now with little fear the economy will spin out of control.

We can then have a debate about this power for the government to create money under nearly ideal conditions. What should those constraints be? How much is too much – and how much is too little?

 

 

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wh10
3 years 3 months ago

Wow guys: http://economistsview.typepad.com/economistsview/2013/01/fed-watch-on-the-disruptiveness-of-the-platinum-coin.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+EconomistsView+%28Economist%27s+View%29

“Bottom Line: The platinum coin idea was ultimately doomed to failure because neither the Federal Reserve nor the Treasury could allow for even the remote possibility it might be successful. Its success would not just alter the political dynamic by removing the the debt ceiling as a threat. The success of a platinum coin would fundamentally alter the conventional wisdom about the proper separation of fiscal and monetary policy and the need to control the debt immediately.”

Admin
3 years 3 months ago

It’s sad. You would have hoped that something so public like this would have made a lot more people go – “wait, maybe our govt balance sheet is different than mine is?” Instead, it looks like we’re back to business as usual. The coin scared some people. Scared them stupid.

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wh10
3 years 3 months ago

“Ip argues that interest on reserves gives the Fed the power to control interest rates, and consequently the power to control inflation, regardless of the size of the balance sheet. If you follow Ip’s analysis through to its logical conclusion, then why should the Treasury issue debt at all? Why not just issue platinum coins? Could cash and government debt combine to serve the same functions together that they serve separately? Consider the disruptiveness of that outcome to the status quo.”

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JKH
3 years 3 months ago

Mike,

I think the debate needs to be compartmentalized formally into two different components in space and time:

a) The use of the coin in the case of the debt ceiling impasse – in this case, my view is that the prospective use of this instrument of financing should be fully integrated with the Fed’s quantitative easing policy – with a prescribed exit plan for both components of QE jointly viewed. This is short term. The exit plan is an acknowledgement that it is not feasible to conduct the second debate and resolve it successfully as part of the first. It is an expression of discipline in this regard.

b) The more general debate as you’ve indicated. This is long term. The first debate and its resolution should feed into the second.

The problem I see is that in blending these two approaches together as if they were one, the first is more likely to fail due to the commotion of attempting to conduct the second as part of the same discussion. It is a diffusion risk that will probably end up bolstering the opposition and derailing the first case use of this idea.

With sufficient focus on the first case use, it can be used as a sort of ‘test run’ for the bigger debate.

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JKH
3 years 3 months ago

Another way of saying … in the real world, in a democracy, you have to work within the existing institutional framework (broadly speaking) in order to change the institutional framework

Cut the other guy’s point of view a bit of slack … none of us fully understands how the financial system works … not in total

That’s why I favor a controlled approach to solving the upfront operational problem with the coin – if necessary

The second bigger debate is strategic – much beyond the current operational problem

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Nigel B
3 years 3 months ago
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JKH
3 years 3 months ago

thx – yes, quite similar

doesn’t need saying, but can be said that MMT favors leveraging one off the other, as indicated by Stephanie K. on Hayes this a.m.; that’s a foot shoot risk …

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JKH
3 years 3 months ago

absolutely

its what the CI approach is all about, IMO – experimenting with different dials on the configuration for the monetary system, and enabling flexibility of approach in the long run

also that’s why I like QE integration in the short run – its a seamless way of introducing this idea at a “measured pace” (remember that one?) while dealing with the real world problem of urgent debt and spending dysfunction

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