Monetary Realism

Understanding The Modern Monetary System…

Trillion Dollar Coin and the Bataan Death March

I wanted to come out of retirement (started studying military history and may blog on it some day) long enough to make a point about today’s Tsy announcement that neither Tsy nor the Fed was interested in the trillion dollar coin.

Treasury: We won’t mint a platinum coin to sidestep the debt ceiling

To throw away the high ground in a fight; to climb in the water to fight the shark is just irrational when you can stay in a boat and throw sticks of dynamite. It reminded me of General MacArthur dooming American troops to being starved out of Bataan by the Japanese Army by him neglecting to secure his food depots.

“One depot alone, at Cabanatuan on the central Luzon plain, held fifty million bushels of rice—enough to feed U.S. and Filipino troops for over four years.”

American Caesar: Douglas MacArthur 1880 – 1964

However, its also possible that the New York Fed has a Manhattan Project or two up its sleeve. Time will tell.
Ben Bernanke and the Trillion Dollar Gift

Don’t take consol in your fears

UPDATE: Tsy blaming the Fed for not issuing the TDC is weak, like blaming your dog for you not going out for a walk this evening. The Federal Reserve Act’s dispute resolution procedure could have been designed by a Saudi marriage counselor.
“Wherever any power vested by this chapter in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.”


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47 Responses

  1. Zero Bound says

    No way the Banksters want Obama issuing Platinum Coins when they’re enjoying a nice little T-bond scam. Cheap money from the Fed and make a return by buying the T-bonds.

  2. Philip Diehl says

    Regarding the Update: there’s no doubt that nixing the TDC was a joint decision reached among the WH, the Treasury, and the Fed, and my guess is that it was a short conversation. Who would take responsibility for the decision was decided based on their calculations re the politics and the optics.

    • lambert strether says

      Like Murder on the Orient Express: They were all in on it.

    • Clonal Antibody says

      Paul Krugman says

      Meanwhile, I get calls. The White House insists that it is absolutely, positively not going to cave or indeed even negotiate over the debt ceiling — that it rejected the coin option as a gesture of strength, as a way to put the onus for avoiding default entirely on the GOP.

      Truth or famous last words? I guess we’ll find out.

      • beowulf says

        See Cullen’s dad quoted above. If things go south, White House will own every last piece of the trainwreck.

        You know for a team that is so good at politics (winning the Presidency twice is not nothing), to seemingly go to pieces between elections does sort of lend credence to the Lambert Strether theory that they’re just pretending to suck, that they really are getting their desired outcome; in this case, the inevitable cave to, errr– I mean “grand bargain” with House Republicans.

        • Nathanael says

          I would say “Stupidest President Ever”, but then we did have GW Bush, and there was Buchanan and Pierce, and Harding, and Hoover, and….

          …well, anyway, the problem is that we needed a President who was in touch with reality, but we didn’t get one. I’m not expecting better in 2016.

      • Clonal Antibody says

        Sorry wrong link Paul Krugman

        Sometimes copy and paste just does not work

    • JKH says

      Pretty tough situation for Bernanke to be in when you think about it. He had to deal with the contingency of the platinum option being triggered – in terms of net QE policy effect, etc. – as an uncertain but potential outcome. Tough to be there when the overall strategy includes such a big component of political brinkmanship. Maybe he just resisted – implicitly holding the pin on the grenade of threatening to walk a year early, which would have roiled markets – on the basis of the unusual position that put the Fed in, not because of legality or operational capability, but because it would have been unfair morally to the Fed as an institution and its staff to be put in that position.

    • beowulf says

      If things go south, its the President that’ll be blamed for the consequences of an (avoidable) financial catastrophe. It did him no favors for Treasury to publicly announce they wouldn’t use the TDC.
      Even if they never intended to use it, the other side didn’t know that. They just destroyed its value as a bargaining chip.

      • wh10 says


  3. Philip Diehl says

    The lion tamer quote is clever, but I don’t think the word “distraction” really captures what’s going on.

    I’ve spent time in the South African bush among wild lions. My guides explained that lions perceive the world through gestalts , very different from how we perceive the world. A group of people in an open Range Rover can enter into a hunting party of lions, including mothers with their cubs, with impunity because the lions perceive them in terms of the familiar sound, smell, and sight of you-in-Range Rover, neither a threat nor an opportunity for an easy meal.

    I’ve been surrounded by a pride of 20+ lions, all within 10 to 30 ft., lounging about, taking a siesta during a hunt. Even as they looked directly into our eyes they remained indifferent. But if I were to stand up, I would become a human, as though teleported, standing on top of the Range Rover gestalt and instantaneously in danger.

    I suspect this is what happens when a lion “tamer” raises a chair. The chair creates a different gestalt that disrupts, erases or intervenes in the gestalt of the human and interrupts the feast, flight or fight instinct it triggers.

    Obviously, a chair is a poor defense against a lion, so something deeper than mere distraction is going on here. I’m told 90% (or so) of all charges are false charges designed to intimidate. If you can manage to hold your ground, despite immediately vacating all liquid in your body, the lion stops her charge.

    Sort of like the House GOP.

    But then there’s that other 10% of the time. That’s why Obama should have kept the TDC in his back pocket.

  4. PeterP says

    Yet another interpretation, by Tim Duy: TPTB did’t want to make clear that there is no revenue constraint, since they do want that Austerity.

    Great job Beowulf either way! This was big.

    • Michael Sankowski says

      I think the Tim Duy article is going to be very influential. Brad Delong already linked to him about another article this morning.

      • JKH says

        BTW, Mike, if you haven’t listened to the Moyers/Krugman interview, you must

        incredible transformation of Krugman wrt the detail that he now gets into regarding monetary operations – its a big part of the 1 hour interview – he’s studied up for sure over the past year or so

        • wh10 says

          Yes, his thinking has most certainly evolved over the past several years, coming in much closer alignment with the various post-Keynesian strands of thought. Essentially, he’s explicitly recognized the implications of a) floating fx rates and b) a Fed that sets rates on c) domestic debt. I also like his added point that even if investors moved out of USD, that would be beneficial.

          But there are still some pretty big debates that haven’t been resolved yet. First, did you catch how he mentioned in normal times, monetary policy works in part by increasing reserves, which banks then lend out? Ugh. And he’s still very wedded to the concept of the liquidity trap, as is Tim Duy, which I pointed out in the other thread. So the debate with regards to whether or not issuing bonds in concurrence with deficit spending matters for inflation is still very much alive (as is the degree to which monetary policy works in normal times).

        • Ramanan says

          Also forgets that the recession in early 2000s was prevented from imploding not just by low interest rates but by a huge fiscal expansion by the Bush government.

        • Cullen Roche says

          He’s still fully in the liquidity trap view of the world which means his understanding of banking is still wrong. That’s a huge problem. I think it’s the key differentiating factors between us and “them”. Banking is the centerpiece of the monetary system. You can’t begin to understand how the system works if you fail to understand how this key component works. I compare it to being a doctor who doesn’t understand the circulatory system. You can’t begin to understand how the major organs work if you don’t understand how they get nutrients, oxygen, etc. You know, that whole Da Vinci thing I preach about. :-)

        • wh10 says

          Right. And I recall during that debate between him and Fullwiler, he pretty much literally said “I talked to a colleague about this, there’s nothing there in his critique, I’m moving on.” What’s up with that?

        • beowulf says

          I liked how Krugman (on his blog) characterized the other-than-wisdom of throwing away TDC card and how even temporary default risks the worldwide reputation of Treasury bills as the ultimate safe asset, “It would certainly be an interesting experiment, but one best carried out if you have plenty of bottled water and spare ammunition in your basement.”

        • Ramanan says

          This one I guess. (looks like – hopefully the full interview)

        • Ramanan says

          Platinum coin at around 39:00!

        • Clonal Antibody says
      • JKH says

        I thought it was another example of an economist discovering accounting.

        But the more the merrier I suppose.


    • beowulf says

      Thanks Peter, I guess this one of those things that are politically unthinkable… unless a Republican president does it; like using a budget reconciliation bill to increase the deficit or expanding an entitlement (e.g. Medicare) without paying for it.

  5. Clonal Antibody says

    Nice roundup at Johnsville News – Champagne Wishes and Platinum Dreams: RIP

    Includes a link to this discussion

  6. Kris Smith says

    It’s precisely the right strategy in my view. Obama needs to lead the Republican leadership in the House and Senate to believe that no one is going to pull their chestnuts out of the fire if they fail to increase the debt ceiling. Otherwise they have every incentive to cling to a hard right position and try to force his hand.

    • beowulf says

      Right, Talking Points Memo quotes WH Press Secretary Jay Carney making this argument…
      “There are only two options to deal with the debt limit: Congress can pay its bills or it can fail to act and put the nation into default“… blah blah blah … “Congress needs to do its job.”

      The trouble here is the White House clearly appreciates the risk, understands it can take action to avoids the risk and yet is failing to act. Its not going to get very far blaming anyone else who has also failed to act. Fairly or unfairly, most people assume the President of the United States is in charge of the government.

      If the goal here is to drive the government into default but in such a way that the Obama White House gets 100% of the blame, then they have a very solid plan. This is a perfect example of what courts call the the last clear chance doctrine.

      Worlds Collide Alert! After a quick Google search, the simplest explanation I found of “last clear chance” was offered by a Virginia lawyer, one Brien Roche, whose son Cullen dabbles in high stakes poker, jai-alai and economics.
      “When negligence of plaintiff continues as proximate cause, then this is fatal to plaintiff’s case under last clear chance. If plaintiff had last clear chance to avoid accident and failed to do so, then plaintiff may not recover.”

      • beowulf says

        “No one doubts Congress’s power to create a vast and varied federal bureaucracy. But where, in all this, is the role for oversight by an elected President? The Constitution requires that a President chosen by the entire Nation oversee the execution of the laws.” Free Enterprise Fund v. Public Co. Accounting Oversight Bd (2010)

        The White House has lost its collective mind if they think the American people will blame anyone other than the President for the failure of the US government to prevent an economic catastrophe that (as the Republicans will surely remind the press) the President could have easily avoided by using powers Congress already gave him. Congress did its job, its the President’s fault he didn’t do his.

        If you don’t think the Republicans would dare pivot to Obama’s blind side like this, remember the decisive issue for the 2010 Republican takeover of the House was their stance as defenders of Medicare (this pitch gained them a huge cohort of senior voters). At this point, the smart play for the GOP is to not do anything and let Obama either cave or suffer the blame for a default.

        • Kris Smith says

          You may be right, Beowulf. That’s not the way it turned out in ’95-96, but its also true that the economy is more dependent on government spending at the moment. And there is always the charisma of McConnell and Boehner to consider.

      • Kris Smith says

        I’m going to get myself in trouble in a hurry here since I’m not an attorney… Last chance to avoid is a dealbreaker in states with contributory negligence laws, of which Virginia must be one – but in most states by the time you’re arguing last chance the defendant has acknowledged they’re on the hook and is just trying to reduce the damages due to the plaintiff’s comparative fault. Usually by something well south of 50%.

        The Republicans are a long way from putting Obama in a position where he has the last chance to avoid anyway. To do this, the House would need to pass a bill (without Democratic help) that will also get through the Senate AND that Obama won’t sign. That’s a long shot in my view since they can’t seem to pass anything other than the Ryan budget. The way the debt ceiling gets raised is just like the fiscal cliff. Through the Senate; forcing Boehner’s hand in the house where it passes with Democratic support. Until that route fails the administration won’t offer anything that takes the pressure off Republicans to act, and they shouldn’t.

        As to the assumption of risks argument there’s more than one set of risks to consider here. What about the risk that we’re going to repeat this or some other manufactured crisis every 3 to 6 months? Until the Cantor wing of the house learns that it needs to negotiate or Boehner learns that he needs to work toward the center instead of this majority of the majority stuff, this is going to keep happening, coin or no coin. That is the game Obama is playing here and he’s finally playing it well.

        It’s not about who is going to take the blame anyway. If the House fails to act their approval rating will drop (if that’s still possible). If they continue to fail to raise the debt ceiling Obama will mint the coin or go the 14th amendment route (we can expect at least two more denials first) at which point his approval ratings will drop. Then the House will probably vote to impeach him and his approval ratings will jump 30 points overnight. What the hell do I know about it? Right now the public believes the Republicans are the problem and Obama is using that to his advantage and will continue to.

        P.S. I totally expect to get schooled on the legal stuff, and if you bring in a jai-alai analogy I’m done for.

        • Nathanael says

          The trouble is precisely that the platinum coin offers Obama a legal option to avoid the problem. If it didn’t exist, Obama could use the 14th amendment and declare that one of the inconsistent pieces of legislation was unconstitutional and had been implicitly repealed (traditionally it’s the oldest one, so it would be the debt ceiling).

          If Obama actually allows the default, he’s in violation of the 14th amendment and the Impoundment Control Act of ’74 and nothing is going to allow him to escape blame for it.

        • Kris Smith says

          Using the coin might be legal, but its not been shown to be legal. Lawrence Tribe says it is, the Fed and Treasury say they don’t think so. I don’t think anyone disputes that the law was not intended to fund expenditures in any meaningful way. Whether Obama takes more blame for failing to save the Republican’s ass(es) from their inaction is an open question, but we’re not even close to that yet. Right now he’s still trying to get Congress to act.

          I have concerns about actually using the coin which I wrote about in the comments on the Negotiating With Morons post, but Exra Klein and Felix Salmon have both written about it better than I am able to.

        • Nathanael says

          If you’re right and Obama goes ahead and mints the coin, and the House impeaches him for *that*, you’re right, he’ll win, 30 point approval boost overnight.

        • Kris Smith says

          I won’t be right because I just said I didn’t know. I was just pointing out an absurd situation from 15 years ago to show how hard it is to predict how these things will work out. The main point is that right now opinion is against the Republicans and the White House will milk that for what its worth.

  7. Matt says

    If you read the Administration’s statement at face value, it makes perfect sense in terms of President Obama’s political incentives (given that they do not understand how money works).

    By ruling out the trillion dollar coin, the 14th amendment, and any other work-arounds that might come up, the Obama administration is pursuing a deliberate strategy – the strategy known popularly as burning one’s bridges” (or boats).

    Obama is following in the well-worn footsteps of Cortés, who sank his ships upon arrival in Mexico, the ancient Chinese general Xiang Yu, who ordered his troops to destroy their boats and supplies before the battle of Julu (“break the kettles and sink the boats”!), and the ancient Romans, who routinely burned their boats or bridges as a deliberate tactic.

    By burning ones bridges, ones own “troops” become committed to victory – because they know that with no way out, the only options are victory or death. Just as importantly, the enemy “troops” get the same message – with the effect of making them more likely to flee, since they know they face a determined opponent.

    So platinum coin seignorage is an ingenious idea that would have solved the technical problem of the debt ceiling, but the Obama administration is not interested in solving technical problems. Thus, if momentum should build up behind another way around the debt ceiling that the administration has not yet explicitly ruled out, such as issuing scrip, the Obama administration will rule that out as well.

    The administration realizes at this point that these self-induced crises are going to keep recurring unless something is done to cause them to stop re-occuring.

    From the administration’s perspective, even if the debt ceiling were to be outright abolished, and thus seemingly solved forever, that would not change this calculation. Until the House Republicans are broken and brought to heel, these crises will keep occurring in one form or another.

    It is immaterial whether the crises are realized through the specific institutional forms of the debt ceiling, the annual budget process, or custom-made rube-goldberg traps like sequestration.

    The Obama administration also realizes that, as long as these crises continue to occur, Obama will have no opportunity to accomplish anything at all in his second term other than ward off repeated crises.

    Therefore, Obama has a political imperative that demands a final confrontation.

    So, what should we expect from such a confrontation?

    For the next month and a half, we can expect that Obama will repeatedly say that he will not negotiate, and Boehner will repeatedly demand spending cuts.

    Boehner and the House Republicans will refuse, up until the last minute, to simply raise the debt ceiling with no concessions.

    But Obama calculates that the Republicans will take the blame for any default or government shutdown.

    This will of course lead to a government shutdown and/or quasi-default (in which Treasury will do everything in its power to avoid a technical default).

    Unless Obama misplays his hand to the point where he rather than the Republicans begin to be blamed, this will stretch on until either Boehner and the House GOP pass a clean debt-ceiling increase, or offer up something that Obama can consider a “balanced” austerity package (including some sort of tax increases on the wealthy).

    All the while, the stock market will go steadily down and the economy will suffer increasingly more and more, which will cause political pressure for a deal to mount.

    And then, unless somehow the result is a clean debt-ceiling increase with sequestration either further delayed or simply ignored, the economy will take its trip down the austerity drain.

    • lambert strether says

      On the Romans burning their boats: The game theorist’s way of expressing that idea is (I think) to say that the way to win a game of chicken is to throw your steering wheel out the window. First.

      • Nathanael says

        Of course the actual way to win a game of chicken is to get out of the car and leave it on autopilot, but not tell the other side. I know that’s cheating, but it sure does win.

        What’s the analogy? The analogy would be to mint the coins without bothering to mention it to the Republicans in advance.

      • Cesar says

        LOL, funny post; and a worryingly accurate analogy of some of the government nonsense that has gone on.

    • beowulf says

      Its more like the strategy of the villains in James Bond movies who want to talk things out a while, maybe explaining their motives, what they think of James, what they might have done if they had only met in other circumstances, etc., instead of just smoking the guy.

      The slower they act, the more time they give the other side to react and get inside their OODA loop.

      • Michael Sankowski says

        OO-DA! OO-DA! I need more wine.

    • beowulf says

      “Unless Obama misplays his hand to the point where he rather than the Republicans begin to be blamed…”

      Of course he’ll be blamed, if the economy goes to hell Fox News and the Republicans will pivot to the argument that he had a chance to use the trillion dollar coin but he chose the path of unilateral surrender, and they’ll be right!

  8. Joe Firestone (LetsGetitDone) says

    Well, that was quick! But good! Btw, isn’t the Chair of the Fed mandated by law to accept the interpretation of the Treasury Secretary on legal matters like the validity of a deposit of a Platinum Coin? If not I want the Treasury to shift its account to Bank Of north Dakota. -:)

  9. Clonal Antibody says

    However, my fear is that it will become the Bataan Death March for a substantial number of Americans. Very likely, the O administration and the “Crazy Majority” of the GOP will come to a mutually agreeable path to Austerity – and Austerity is going to doom a substantial portion of the US population to enter long term poverty.

    • Michael Sankowski says

      Check out that post about the impact of the debt ceiling. This might be the next thing out of MR to make a splash. Nobody has quantified just how bad this would be, except me and comstock partners.

      • Clonal Antibody says

        Did you update your post with the impact of the declining Tax revenues?

        • Michael Sankowski says

          I have not had time to figure out the math, and frankly, I don’t think I will be able to do it anytime soon.

          can you do it? I can send you the exact math from Kash Mansori.

        • Clonal Antibody says

          Sure send it over I will look at it.