Krugman talks long and loud on the Coin:
“First, as a legal matter the Federal government can’t just print money to pay its bills, with one peculiar exception. Instead, money has to be created by the Federal Reserve, which then puts it into circulation by buying Federal debt. You may say that this is an artificial distinction, because the Fed is effectively part of the government; but legally, the distinction matters, and the debt bought by the Fed counts against the debt ceiling.
The peculiar exception is that clause allowing the Treasury to mint platinum coins in any denomination it chooses. Of course this was intended as a way to issue commemorative coins and stuff, not as a fiscal measure; but at least as I understand it, the letter of the law would allow Treasury to stamp out a platinum coin, say it’s worth a trillion dollars, and deposit it at the Fed — thereby avoiding the need to issue debt.
In reality, to pursue the thought further, the coin really would be as much a Federal debt as the T-bills the Fed owns, since eventually Treasury would want to buy it back. So this is all a gimmick — but since the debt ceiling itself is crazy, allowing Congress to tell the president to spend money then tell him that he can’t raise the money he’s supposed to spend, there’s a pretty good case for using whatever gimmicks come to hand.”
Krugman does not know it yet, but he will figure out the coin is Platinum Coin Easing. If we are forced to use the coin, the accounting shows the impact will be similar to quantitative easing.
It’s just a matter of time before Obama brings up the coin. It’s a few months at most. Here is Rep. Jerry Nadler talking about the coin:
“There is specific statutory authority that says that the Federal Reserve can mint any non-gold or -silver coin in any denomination, so all you do is you tell the Federal Reserve to make a platinum coin for one trillion dollars, and then you deposit it in the Treasury account, and you pay your bills,” Nadler said in a telephone interview this afternoon.
I asked whether he was serious.
“I’m being absolutely serious,” he said. “It sounds silly but it’s absolutely legal. And it would normally not be proper to consider such a thing, except when you’re faced with blackmail to destroy the country’s economy, you have to consider things.”
I don’t think the coin will be used, but the idea of the coin has now hit critical mass. He’s a congressperson, so he only knows what his aides are telling him. If his aides are talking about it, you can be sure all of the democratic aides are talking about it over drinks. It’s just part of the everyday conversation in the support staff of congress.
Nadler is right – it’s not normally proper to consider such an extreme tactic. It is terrible it had to come to this, but here we are. It would be good if we just didn’t have a debt ceiling at all. Then, it would be so much nicer if the government had a well established, and commonsensical method to allow for the Treasury to print money directly – along with rules on how much and when this could be done.
But we don’t have those nice things, so we’re forced to watch the spectacle of the greatest country in human history resorting to a legal trick, in order to pay its bills.
If you look back at my writings on the Traders Crucible, I was against the Coin for a long time. I thought it was a farce, and degraded our nation. But I was wrong.
The coin is easy to understand. I can explain how it works to my 65 year old mom, and she totally gets it. The coin makes explicit we are printing money. We’re making money out of nothing, and it can help our society. Those are some of the good part of the coin.
But there are bad parts of the coin too. The dangers of printing too much money exist. These dangers are far from us today, almost comically far away. But this will not always be the case, and now everyone knows we can print money.
Giving the power to politicians to print money is a bit terrifying – this power has caused problems before. Although, looking at the list of hyperinflaitons, you’ll be struck by the lack of long term impact of hyperinflation. Poland isn’t doing all that badly today, and recovered faster from their bout of hyperinflation than we have from our little depression.
Every policy, every choice, every action has a string of consequences – and not all of these consequences are good, even if the overall impact is positive.
(Update 1-4-2013 4:44pm The most interesting man in the world could decide to end the debt ceiling crisis at any time. https://twitter.com/DosEquisSR/status/287323265981112320 )
(Update 5:31pm I finally get my dream of a Zero Hedge Post on the Trillion Dollar coin, with a completely awesome chart on the total value of platinum available. )
(Update 6:36pm We are going international with an article in Spiegel Online)