The Coin is Dead! Long Live the Coin!

Noah Smith asks a funny question on Twitter:

 “Hey, anyone remember the trillion dollar coin? ^_^  “

I’d say Paul Krugman and Steve Waldman remember the trillion dollar coin quite well. So do all of the people listed by Steve Waldman in the beginning (and the end, Frances and Ashwin!) of his post.

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!)

 

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Jack Foster
3 years 6 months ago

great headline! great post!

Guest
3 years 6 months ago

I’d say the “dork debate” will run for a good while yet. Are we going to have that convention you suggested?

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wh10
3 years 6 months ago
Admin
3 years 6 months ago

Great post Mike. I’m looking forward to reading the comments on this one, so I’ll reserve my time. :O)

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MMTdebtkiller
3 years 6 months ago
The following is from a letter I sent today to a Democratic member of Congress: I am a retired Professor Emeritus of Quantitative Psychology at the Georgia Institute of Technology. That has given me time to pursue new interests. For the past year I have become interested in Modern Monetary Theory, MMT, which is the theory of fiat money systems and their management. Much of my motivation has been to acquire a framework of thought that would allow progressive goals to be achieved. MMT provides that. In 2011 when the debt ceiling first became an issue I was attracted to the trillion dollar platinum coin idea as a way to buy back the securities at the Fed and eliminate the national debt without using taxpayer money. But this past summer I began to have my doubts about this. Could the Secy of Treasury use the $1 trillion coins to buy back the securities if the securities were already redeemed for the United States? No, there would be no authorization for such a purchase because it would amount to buying the securities for the government a second time, and while the first was authorized, Congress would not have authorized a second purchase. So, I looked more closely at why the securities at the Fed might be redeemed already for the United States. Most economists are familiar with how the Treasury issues securities to borrow money from banks for deficit spending via a public auction. Banks buy the securities and Treasury gets the money. The securities are a debt of the United States to the banks at this point. But later the banks put the securities back up for sale at the auction because their reserves were diminished by lending to the Treasury. The Fed comes and buys them with money it… Read more »
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beowulf
3 years 6 months ago

Professor, I went to Emory so naturally I know all the GA Tech jokes (“Before I got to Tech, I didn’t know how to spell engineer. Now I are one!”). But, in truth, the students you taught were much smarter than the average bear (or congressional staffer). My point is I’m glad you are making the effort to spread the word, but this letter is going is so far over their heads its leaving contrails. You need it to keep things simple… like Food Good, Fire Bad simple.

Also, the Federal Reserve Act is pretty explicit that debt bought by the Fed is segregated from the Treasury . If Congress was going to start taking debt out of the public debt limit, they’d start with the Social Security Act trust funds. Tsy owes them trillions of dollars and their managing trustee is… the Secretary of the Treasury. However, the law is clear that they too are segregated from the Treasury.

But again, I appreciate you writing the letter because you’ll likely send whoever reads it to Google to look up stuff they didn’t understand.

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MMTdebtkiller
3 years 6 months ago
Emory is a good school. My wife was on the faculty there until she retired. We at Tech don’t have so many jokes about Emory as we do about U of Georgia. And you are right. Students at Tech are very bright. When I first came to Tech I had to get over thinking that someone who spoke like a redneck , or Gomer Pyle, was an idiot. I learned to judge a book not by its cover but what is in it. It is not clear what you mean by “… the Federal Reserve Act is pretty explicit that debt bought by the Fed is segregated from the Treasury .” Could you give me quotes or where to look? I was just going on my layman’s understanding of securities. The Treasury is not in debt, it is the United States, no? Are the securities not between the United States and the banks? What does it say on the face of the security? And if you have issued a security and someone has bought it, and someone else comes along and buys it from them, doesn’t that eliminate the debt between you and the first person, because they no longer possess the security and got paid for it? That’s what I meant about redeeming the debt between the United States and the banks. Is that the wrong legal term? (I’m no lawyer, obviously). The next issue was whether the debt now shifted to the Fed, i.e. does the United States now owe the Fed the debt obligation on the security? That depends on what/who the Fed is. Ordinarily if the Fed were totally independent of the United States, not a creation of it, not an agent of it, then the debt obligation on the security passes to the Fed. But… Read more »
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beowulf
3 years 6 months ago

Well, the Social Security Act Trust Fund own T-bonds and those are against the public debt limit and the best way to think of the Federal Reserve is as a trust fund. The US Govt is the originator, has a present interest (in income) and a vested remainder future interest (Congress can abolish the Fed anytime in the future and take over its assets).

And while clearly Uncle Sam has equitable title to Fed assets (just as it does, really, to Social Security trust fund assets), Congress has written the debt ceiling law in such a way that equitable title isn’t good enough, because legal title the trust fund and Fed assets are held in legally separate accounts, the T-bonds they hold must be counted against the debt ceiling. Is it a stupid rule, sure. But then the debt ceiling itself is a really stupid rule. Unless Congress changes the law (ideally by abolishing the debt ceiling), we’re stuck with it. But there are other angles of attack available. :o)

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MMTdebtkiller
3 years 6 months ago
So, you are saying that despite my claim that there is no debt at the Fed, the way the debt-ceiling law is written, it counts the number or value of securities held at the Fed as a way of limiting deficit spending. It seems to me that if my argument is valid, that there is no debt at the Fed, then we would need to argue in the court of public opinion that the debt-ceiling is a meaningless and artificial obstruction to Congress’s exercise of its powers to spend. Why limit deficit spending if it does not truly produce debt? Getting an admission from the Fed that there is no debt would greatly help the case. We probably could afford the current levels of defense spending and entitlements without inflation. No need to cut any of it,. BTW, why hasn’t the Social Security Administrator, or the President, had the securities at the Trust Fund put up for sale at public auction? They are several trillions of dollars in value. Is the interest to be earned on them worth the price of governmental paralysis? It would not immediately be potentially inflationary because most of the dollars would just sit untouched in the Fund for several years and would be dribbled out to supplement benefits paid from FICA taxes.. Anyway, I think it is essential for us to establish once and for all that there is no enduring debt in all the securities at the Fed. I think the Administration needs to be encouraged to stop rolling over the securities to provoke the issue with the Fed. How soon and how often does roll-over occur? Unless a crisis leads the GOP to eliminate the debt-ceiling, this is going to take a bit longer to resolve this issue of the national debt. But… Read more »
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beowulf
3 years 6 months ago

Could the Fed simply return most of the securities to the Treasury, if it acknowledges that there is no debt (just to reduce the pile considerably below the debt-limit?”

Yes, but they will never “acknowledges that there is no debt” because without Congress changing the law it is debt. In theory the Fed governors could go into the philanthropy business (but it completely fouls up their books so its less likely than just accepting a TDC).
http://monetaryrealism.com/ben-bernanke-and-the-trillion-dollar-gift/

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