Noah Smith asks a funny question on Twitter:
“Hey, anyone remember the trillion dollar coin? ^_^ “
The coin was only an idea, only supposed to spark a debate about the ability of the government to issue money directly. It was a big, shiny lure dangling in front of fish.
Then, the debt ceiling came along and changed the coin from “funny and interesting idea” to “necessary if we want to avoid an economic meltdown“. That debate catapulted the coin to fame, and fortunately kickstarted the debate Paul K, Steve W and others are having now.
The coin is fun, and preposterous, but it should raise questions for the smart set. And it did. There are many parts of this debate, and not all of them are simple to understand. One of the more complex aspects of the coin has to do with what is known as Excess Reserves.
If you remember, the coin acts almost exactly like Quantitative Easing. And QE has to deal with the problem of those reserves.We here at MR don’t think QE has much impact on the real world – anyone who reads Cullen Roche knows our take on it. Scott Fullwiler says:
“So, what do the banks do with all their new vault cash that is well in excess of what they expect their customers to withdraw? They sell it back to the Fed in exchange for reserve balances, and the currency is now out of circulation. But now there is a large excess of reserve balances—what does the Fed do about that? As above in Figures 2 and 3, it either accepts a zero interest rate or pays interest on reserve balances at its target rate if it wants a non-zero rate. And now we’re right back to points 1 and 2 that are the very things neoclassicals agree stop QE in its tracks. Or, the Fed can sterilize by selling securities to drain the reserve balances, which again just reverses the QE.
What does all this mean?
First, the quantity of currency circulating—“dead presidents”—can never be exogenously controlled in a world in which we have banks (!) that costlessly convert currency to deposits, savings, and so forth, effectively taking the currency out of circulation, which banks then convert to reserve balances. There is no hot potato effect for currency in the real world.”
This debate goes to the heart of our economic system. Noah, the coin was a trojan horse to bring this debate into the fortress of people who could understand there even could be a debate.\
For example, Joshua Wojnilower (Woj) gets it right away:
“First, does financing the deficit by making a deposit at the Fed add to the monetary base? Second, what impact on the economy does the coin have that requires ‘sterilizing’? Third, if the monetary base expands, will the expansion mainly end up in currency form?
Answer(s): When the Treasury deposits a $1 trillion platinum coin at the Fed, the Fed credits the Treasury’s account with $1 trillion in reserves. These reserves, however, are not counted in the monetary base since the Treasury’s account does not count as reserve balances in circulation. The simple action of depositing a platinum coin at the Fed therefore has no direct impact on the economy that would require sterilization*. In fact, the primary (sole?) purpose of this exchange is to allow the Treasury (Congress) to spend without requiring debt sales that would exceed the debt limit. This seemingly harmless subversion of federal spending requirements actually holds great significance regarding the roles of private banking and the Fed in our current monetary system.
While the Fed’s role and independence is diminished by these actions, the role of private banks could potentially be reduced by far more. With government spending unconstrained by debt sales (and a compliant Fed), the government could subvert the reign of private banks as primary issuers of money. This would drastically reduce the profitability of banks and their power to influence government actions. Recognition of these potentially dramatic changes to the financial system may have provided the impetus for the Fed’s decision to shoot down the “platinum coin.”” [bold from Mike]
Yes, that’s the heart of this debate. How do we want our monetary system to operate? Do we want a private or public banking system, or something in between? Note the link to Cullen, right smack in the middle of Joshua’s post.
So Noah, yes, the Trillion Dollar Coin is being discussed, and will be discussed.
(Update: fixed the lack of a link to Woj. Sorry about that Joshua!)