Monetary Realism

Understanding The Modern Monetary System…

Using the Coin = “Platinum Coin Easing”

There is a review of the Coin which has the worry the coin would “Destroy the Currency” of the United States. At one point I would have felt this way too about the Coin. The coin seems to be totally different than what the fed has done in the past.

But we found the coin would have much the same impact as traditional quantitative easing. Issuing and using the coin would be just like QE I, QE II, and the ongoing QE III in impact on our system. It could be considered to be Platinum Coin Easing.

Here is how it the accounting works in traditional quantitative easing (with massive help from JKH):

Treasury issues $ 1 trillion in bonds. That puts $ 1 trillion in its account at the Fed. Therefore, reserves are down $ 1 trillion. The Fed immediately buys the bonds in exchange for reserves. End result is that Treasury is up $ 1 trillion in its account; Fed is up $ 1 trillion in bonds. On day 2 (illustration purposes), Treasury spends the $1 trillion. Reserves increase by $ 1 trillion. End result – deficit financing of $ 1 trillion with an all-in cost to Treasury of the interest rate paid on reserves.

Here is what happens when using the Coin:

The Mint/Treasury deposits a $ 1 trillion coin at the Fed. That leaves the Fed with a $1 trillion coin asset, which it has bought by crediting the Treasury balance at the Fed, in effect after the internal bookkeeping. On day 2 (illustration purposes), Treasury spends the $1 trillion. Reserves increase by $ 1 trillion. End result – deficit financing of $ 1 trillion with an all-in cost to Treasury of the interest rate paid on reserves – that cost is now reflected as a negative interest margin (no income on the coin minus interest on reserves) that the Fed passes to Treasury. Same result as in traditional QE.

These are effectively the same. This is why using the coin could be called “Platinum Coin Easing”.

As far as we can tell, QE does not have much impact on inflation. So far, a few trillion of traditional QE has had little or no impact on the value of the U.S. Dollar. Oil is only a bit higher today than it was in 2006, 2007, and lower than it was in 2008. The USD is stronger against some major currencies like the EUR. Inflation in the United States is at or near generational lows.

And this is just in the United States. Japan has done it’s own version of QE for over a decade, and their inflation rates are extremely low.

So it’s likely that any Platinum Coin Easing would not destroy the currency of the United States.

 

 

 

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132 Responses

  1. beowulf says

    Ha, that reminds me of Albert Speer (German industrial genius/ Mike Brady doppelganger*) mentioning in his memoirs that the German Post Office, for God knows what reason, had its own atom bomb project.
    *http://traderscrucible.com/2011/06/21/from-the-comments-the-economy-is-an-engineering-problem/#comment-867

  2. JKH says

    “A related question… ”

    I’m planning a post on this sort of thing at some point – as an extension of the contingent institutional approach.

    Given that starting point, IMO it may not be a slam dunk that your question is best addressed to MMT :)

    Although – a reminder that this series of posts examines the “what if” more than the “should”, at least at this stage.

    I agree the internal accounting becomes ever more interesting as one expands the scope of government banking.

  3. beowulf says

    Widen your gaze Mr. Holmes. Remember, you own a bank.

    “The Fed defines the money stock as MZM, or Money at Zero Maturity. The interest on money is the MZM own rate.
    The first thing to notice is that the quantity of MZM held by the public [as bank deposits and currency] is already roughly equal to the quantity of Federal Debt held by the public, and more often than not, the former exceeds the latter. Therefore the public is already willing to hold the entire U.S. federal debt as zero maturity money, paying an absurdly low interest rate – on average, a negative real rate.”
    http://windyanabasis.wordpress.com/2011/03/28/leaving-modern-money-theory-on-the-table/

    That’s the RSJ article I think is Win (JKH disagrees). RSJ comes up with two different ways to answer his own question: “How would one go about seizing seignorage income from banks?” :o)

  4. Jose Guilherme says

    Blurry line, indeed.

    By owning a commercial bank the government could – if it so wished – bypass the private markets in order to sell its debt securities.

    It would simply instruct its bank to buy the bonds at the coupon and price of the government’s choice.

    It would be a perfectly legal way to overcome the prohibition against the central bank buying government securities in the primary market.

    And then the central would buy the bonds to the government owned commercial bank as a normal part of its operations in support of the policy rate.

    Neat, clean and legal.

  5. Michael Sankowski says

    Great question, btw. Are these private sector institutions or are they public sector institutions?

    They are acting as private sector, but the ownership is (can be) public in these circumstances.

    It’s a very blurry line.

  6. Michael Sankowski says

    FYI- Japan has a postal savings system, and it’s huge.

    http://en.wikipedia.org/wiki/Japan_Post

    Most of Japan’s government debt is held internally and “Japan Post also held about ¥140 trillion (one fifth) of the Japanese national debt in the form of government bonds.”

  7. beowulf says

    Well, there used to be a Postal Savings System (which predated the Federal Reserve by a couple years and eventually shut down in the 1960s).
    http://en.wikipedia.org/wiki/United_States_Postal_Savings_System

    What was interesting about it was prior to creation of the FDIC in the 30s, the Post Office offered the only sort of deposit account backed by Uncle Sam’s Full Faith and Credit. Some of the Postal Bank’s business practices were so odd that they were surely established by Act of Congress– for example, they fingerprinted every depositor and capped each deposit account to a just a couple thousand dollars. And I just learned this from the wiki article… “the locations of the central depositories… were selected by merit rather than geography, based on those [post offices] with the best efficiency record in the state.”
    OK, that’s insane. Here in Georgia, Atlanta, Macon and Savannah were at that time the only cities with US District Courts (the only place the Post Office can sue or be sued), so naturally the Post Office sited its Georgia depositary in … Brunswick! That is to say, a beach town in the middle of nowhere (especially before interstates) between Savannah and Jacksonville FL. That may be the craziest thing I’ve read all month. But I digress. :o)

    Despite its manifest lack of business acumen, I can’t imagine any sort of public bank that wasn’t run by USPS, seeing as they’re overstaffed anyway with a Post Office in every zip code. Where the plan falls apart is that existing banks– especially the community bankers that even Wall Street-hating congressmen listen to– would understandably protest that its unjust for the federal govt to both regulate them and compete against them. So I don’t think Brunswick will become a banking town again anytime soon.

  8. Jose Guilherme says

    A related question, perhaps best addressed to a proponent of MMT:

    Should consolidation of the Treasury and central bank accounts be extended to a government owned commercial bank?

    In many countries of Europe and South America the government is a majority shareholder – in some cases the single shareholder – of commercial banks. In Brazil, for instance, the government owns two of the largest commercial banks in the country.

    Say the government sells T-bills or bonds to said banks. If those securities stay in the banks’ books then it seems we’re watching another instance of “the government owing to itself” – just like it does whenever the Fed buys back T-bonds that were originally held by the private sector.

    I haven’t seen this possibility addressed in the MMT literature. Any ideas on this issue over here at MR?

  9. JKH says

    At one level, the problem is one of information disclosure – the rational interpretation of the existing government balance sheet as a pure accounting consolidation – in the context of its various insitutional components, including intra-institutional holdings of debt by the Fed and the trust funds. This can be done – but it isn’t being done particularly well these days.

    At another level, the problem is one of contingent institutional design at an operational level (beyond mere accounting consolidation) – i.e. the best design for what is currently a set of separate institutions – and there is potential for change, there but there is also lots of room for debate about that.

    Finally, the most fundamental problem is the rational interpretation of why the government issues bonds. And there I think there the general discussion (e.g. MMT inspired) misses the mark. The fact that a monopoly issuer of reserves might never need to have a related institutional entity issue bonds is a necessary condition for the rational elimination of government bond financing altogether – but it is not a sufficient condition, IMO. And because it is not a sufficient condition, there may be good reasons why the debt on the books of the Fed and the Trust Funds should not be eliminated.

    But that’s a much longer story.

  10. Robert Rice says

    ” Only the party that issues debt can redeem it (which means trading reserves for a bond and then canceling it).”

    I don’t think I am making you aware of anything you are not already, but his idea is that the Federal government issued the debt via the Treasury to the primary dealers, and then the Federal government repurchased that debt from the primary dealers via the Fed, which conceptually is a lot like debt redemption, given it is all the same Federal government issuing the debt and then repurchasing, i.e. redeeming it. While his point is well made from a conceptual angle, your point is also well made from the technically correct angle–it’s not the same agency within the Federal government redeeming the debt; the Federal government counts its beans by agency not by viewing them all as a synthesized entity. Both points are good points.

    It is ultimately noteworthy that the Federal government owes itself a fair bit of money. This sounds a lot like phony debt, debt-in-name-only, debt we record on paper as a technicality we could choose to record differently without changing any operation. Our current counting scheme is analogous to removing money from my right pocket with my right hand and handing that money to my left hand to put into my left pocket, and then claiming my left hand owes the right hand! You can count like that I guess, but it’s all a bit silly given it’s ultimately the same entity.

    In any event, his argument against the TDC is unsound for the reason you noted; one of his premises is technically false–the Treasury has to redeem its own debt under current accounting practices, even if that debt is owed to another Federal government agency. It might be stupid accounting, but it is the accounting currently used. The TDC is a solution for the situation as it currently exists in terms of operations and how the government views them.

    It’s unfortunate the populace lacks an awareness of the fact the Federal government owes itself a fair bit of money, as we’d have much less hysteria about a “debt crisis,” which equates to a boogie man ghost story told to the kiddies at summer camp. The only crisis in this “crisis” is a crisis of ignorance and the sub-optimal actions which arise from it.

    FYI MMTdebtkiller, there are 21 primary dealers currently:

    http://www.newyorkfed.org/markets/pridealers_current.html

  11. beowulf says

    You’re all over the map with your terminology. Only the party that issues debt can redeem it (which means trading reserves for a bond and then canceling it). Authorization is a term of art for Congress providing legal authority for a govt program; appropriations are then made to fund authorized programs (no real reason for it be a two step process except it gives the House & Senate Appropriation committees a finger in every pie). The Secretary of the Treasury’s bonding power has a statutory debt limit, but if he redeems debt, he can use the freed up space under the debt ceiling to issue new obligations.
    I’m sympathetic to the argument that the Fed is part of the govt and should be counted as part of the Tsy balance sheet. Unfortunately, Congress thinks otherwise. Besides, before canceling out Fed debts on Tsy books, a better start would be canceling out Social Security trust funds since obligations held by Secretary of the Treasury are exempt from debt ceiling and, after all, he is managing trustee of SS trust funds… Congress doesn’t like that argument either.

    Finally, you should check out JKH’s piece “Treasury and the Central Bank – A Contingent Institutional Approach”. As F. Scott Fitzgerald would say, he’s got the whole equation*.
    http://monetaryrealism.com/treasury-and-the-central-bank-a-contingent-institutional-approach/

    *”You can take Hollywood for granted like I did, or you can dismiss it with the contempt we reserve for what we don’t understand. It can be understood too, but only dimly and in flashes. Not half a dozen men have ever been able to keep the whole equation of pictures in their heads.” The Last Tycoon

  12. MMTdebtkiller says

    I’d like to add, that to require the Fed to borrow many billions of dollars to redeem certain mature securities at the Fed, which have already been redeemed is absurd. If the only purpose is to allow the Treasuries to be issued again with new maturity dates, a simpler mechanism might be to stamp a new maturity date on them and reissue them at whatever time the Fed desires. The Fed and the Treasury are both arms of the government.

    Also I argue that any Treasury security purchased by the Fed has its debt obligation to whomever purchased the security redeemed. But the buck stops here at the Fed. As government and money creator it redeems whatever security of the Treasury it purchases.

  13. MMTdebtkiller says

    I originally was drawn to Scott Fullwiler’s advocacy of the trillion dollar platinum coin as a way to cancel the national debt at the Fed. Since then I’ve also looked into the basis for the national debt, and I think it doesn’t exist. The Fed is an agency of the government and it buys securities with fiat money it creates (out of thin air), which is a power the Constitution only gives to Congress and any institution Congress delegates it to. So, if the Congress has a deficit in its appropriations, Treasury has to come up with money to cover the deficit. It issues T securities and sells them at a public auction at which about 35 dealers in government securities for various banks participate. Some of the dealers buy the securities. And that at this point constitutes a debt of the United States to whatever bank holds the securities in question. When the Treasury gets its money from the bank in return for the securities, the banks’ reserves drop, perhaps precipitously. The Fed comes along and at some point buys these securities from the banks to restore their reserves. But it buys them with money it creates out of thin air (government power). That clears the original debt of the government to the banks in question, because the banks surrender the securities to the Fed. But does the Treasury owe the Fed for buying and holding the securities? I would argue it does not, because whatever else the Fed may be with respect to certain private banks, all of these operations are covered by Federal law, so this is government acting. Hence the Fed simply redeems the
    debt obligation in the securities to any private entity that could trace itself back to the original purchase of the securities through some chain of private purchases. And the Fed is not private. It is the redeemer for the government. Hence there is no national debt at the Fed.
    Now, that said, suppose we come along and use a $10 trillion coin to get Federal Reserve dollars credited to a Treasury account at the Fed. That’s O.K.. But should we buy the securities in order to clear a supposed debt? If the debt has already been redeemed, then there is no authorization for the second purchase. The securities at the Fed can be retired or reissued with new maturity dates to new private banks, in order to take money out of circulation to control inflation. But the Fed would be the originator here of this, not the Treasury. The debt obligation is just between the United States and any entity not the United States. So, I do not see the use of the platinum bullion coin as legal, since it would involve spending by the Treasury without Congressional authorization. The authorization only covered the security originally issued until it was redeemed.
    However, redeeming the national debt at the Fed, may not be the only use for the coin account at the Fed. The Treasury can draw on it to cover future deficit spending with debt-free money. It can use it to buy up the securities at the Social Security Trust Fund and other agency Trust Funds. These are true government obligations that can be redeemed.
    There is another reason to consider it folly to reimburse the Fed for its purchase of the T securities from the banks that got them from the Treasury. Why would we need to reimburse an entity like the Fed that creates its money out of thin air in any quantity desired? The concept of a debt here to someone who does not draw on a prior existing source of money for its purchases, has lost some of its essential ingredients. It creates the money out of nothing. It did not exist before it purchased the securities. That’s another reason to question whether there is a true debt here at the Fed.

  14. beowulf says

    Thanks for your comments Robert here. And thanks to Ramanan as well. He’s not an American so I’m always astonished how well read he is in US law. So while we disagree on some things here or there, I find I agree with him on most things at least twice the standard deviation. :o)

  15. Michael Sankowski says

    lol! Man, I got wound up by James. Turns out getting accused of being anti-democratic makes me angry. I did not know this about myself.

  16. Greg says

    Actually I think we need to add more “unit of exchange”, dollars.

  17. Greg says

    “If you want to know my agenda, here it is: high levels of economic growth for the middle class. That’s my agenda. Nearly all of my writing and thinking at MR is informed by this agenda. Please feel free to let people know I want high levels of economic growth for the middle class.”

    I knew it !! You have finally been exposed! You think we are a better place to live when 300 million of our citizens can be consumers and help businesses grow than when we only have 35 million!

    Socialist lite!

    Socialist lite!

  18. Michael Sankowski says

    wow. Just wow.

    I have no idea where you are getting such crazy ideas. It’s bizarre, James, really bizarre. I propose ideas, I don’t try to enforce them with a gun, with bullying rhetorical techniques, with back-door persuasion on people in power, or even with passive-agressive comments.

    My blog and writings are public. People can adopt them or use them as they see fit. I fully expect people to debate these ideas. It’s the reason I have a public blog, where I state my ideas as well as I can!

    Change requires actual change. We don’t have the same system we had in the 1870’s, or the 1970’s and we are better off for it. The system changed because some people dared to make suggestions about how the way things could be done.

    Unfortunately, someone already made a massive change the way things are done. It may require some huge change in the way things are done to undo the damage and change which has already been done to our existing institutions. The usage of the debt ceiling to extract political compromise is a huge, huge change in our institutions. It’s a terrible mistake.

    You don’t like the coin – great! But please don’t hide behind “We haven’t done it that way in the recent past, so anyone who suggests different is trampling our institutions.” The economic status quo of 2005 was trampled on in 2008 by a huge crisis. The political status quo of 2010 was trampled by some people who did not realize the long term impacts of their change.

    What we did in the past is no longer working very well. That’s fine, but don’t expect me to support the status quo when it was already busted.

    If you want to know my agenda, here it is: high levels of economic growth for the middle class. That’s my agenda. Nearly all of my writing and thinking at MR is informed by this agenda. Please feel free to let people know I want high levels of economic growth for the middle class.

  19. Jose Guilherme says

    I think I can see your point now and would sum it up in the following, non technical form:

    The Treasury was born a virgin and should never – never – be allowed to mess around with the Fed :)

  20. James A. Kostohryz says

    Michael:

    This quote of yours sums up the whole motivation of behind the TDC proposal:

    “The old ways do not work for this problem. If the old ways worked, the debt ceiling would not be a problem.”

    Proponents of TDC thing the system is dysfunctional, because they are not getting their way. Therefore, they are willing to destroy fundamental institutions in order to get their way on this.

    I can understand your frustration, Michael. But if people want stable and strong liberal institutions, they are going to have to put up with the “inconveniences” of such a system.

    If you want quick and easy policymaking run by technicians then American-style representative democracy — with all of its inconveniences such as separation of powers, bicameral legislature, executive veto, judicial review and etc. — is not your cup of tea.

  21. James A. Kostohryz says

    beowulf:

    You know better than than that. Of course the Department of the Treasury is an established institution. But the term “institution” does not refer to the mere entity. It refers to a whole web of laws, regulations, practices, policies and culture that enables this entity things to get done. The bottom line here is not that the law you cite exists; we all agree it exists. The bottom line is that the law has been on the books and has NEVER been utilized nor interpreted in this way. Furthermore, it was never intented to be used in this way. In fact, it is abundantly clear that virtually all of the norms governing the Treasury were intended to prevent the Treasury from doing folks are proposing it do via the TDC. Thus, it is a clear violation of the Treasury’s own institutional norms — not to mention a whole slew of other norms.

  22. James A. Kostohryz says

    Michael:

    I agree with most of what you say here. However:

    1. From an accounting standpoint, QE and TDC are NOT identical for reasons that I posted in the JKH article today. They have the same short term impact on the money supply, but they are NOT identical in terms of accounting.

    2. The accounting identity issue only scratches the surface of a policy analysis. Just because two policies are the same in terms of balance sheet analysyis does not mean that they will have the same effects. Quite appart from the accounting identity issue, I think I provide ample reasons that demonstrate that the effects of TDC and QE would not be the same.

  23. Robert Rice says

    For those interested, Balkin on the TDC, the debt ceiling, as well as his political and legal recommendations to the President (which the President appears to be following):

    July 28th, 2011

    &

    December 9th, 2012

    For the second link, you may need to scroll down to the title “How to Head Off the Debt Ceiling Crisis in 2013″.

  24. Michael Sankowski says

    James,

    We had 28% real growth during some periods of WWII. Real wage declines were swamped by massive increases in the standard of living with a decade of growth happening every year.

    http://monetaryrealism.com/wwii-astonishingly-high-growth-with-10-inflation/

  25. Michael Sankowski says

    The colossal mistake was politicizing the debt ceiling debate. I want to be 100% clear about this – the mistake has already been made

    We cannot put the debt ceiling genie back into the bottle. It’s already out. The debt ceiling is now in play, right now, in 2012, and it will be in play until some new precedent is set on how to deal with the debt ceiling.

    This is the problem – the mistake has already been made. We can’t go back to deal with this problem in the old way, because the #$@up already happened. The old ways do not work for this problem. If the old ways worked, the debt ceiling would not be a problem. Yet, it’s a real and large problem. I read about this problem and see it every day, on every level of the news – from good morning america to the most sophisticated analysis by people like Goldman’s Jan Hatzius.

    Now, in someways, I hate the Trillion Dollar coin. I wish we did not have to use it, or even consider using it. It is horrible that we’re forced to use such a clownish tactic. You can ask beowulf – I was 100% against the Trillion Dollar coin at the beginning when he first suggested it. I thought it was a farce and diminished the idea of state issued money. Unfortunately, it happened that we actually need the freakin’ coin in order to abide by the constitution. I almost fell out of my chair when this debt ceiling crisis came along – who would have thought people could be so short sighted as to think questioning the debt of your home country would be a winning political ploy? I’m disgusted the debt ceiling came under political fire. This to me is very close to treason.

    But in other ways, I love the coin. It’s bringing the debate about money issuance into the minds of economists and central bankers. Governments have the right and ability to create money. Of course they do. We’ve just completely abdicated that power and responsibility to the private sector, through modern banking. Should all money be privately issued, and then have the government get the scraps? No, probably not in my MR-informed book. And can we trust the government. Yes, yes, we can. See this onion article for reasons why I think we can trust the same guy with his finger on the button with our money supply.

    http://www.theonion.com/articles/obama-makes-it-through-another-day-of-resisting-ur,20364/

    “Did you know that if you sort of put enough weight on the button with your fingertip, you can feel a little slack there before it actually clicks?” Obama added. “Thank you, and God bless America.”

    “After just one year in office, Jimmy Carter wrote in his diary, “You don’t leave a man alone in a room with a button like that,” and two years later the pages were simply covered with the word “button” over and over again. In 1974, Richard Nixon rapidly pressed the button 12 times just prior to his resignation, but Pentagon officials had already disconnected its triggering mechanism.”

    If we trust the government to not unleash nuclear war, we should trust them with at least some ability to issue money.

    Please don’t bring up Weimar. I’ll bring up Brazil. We can trust the government, at least some.

  26. Oilfield Trash says

    Greg

    “Why do you use entitlements to describe paid benefits?”

    An entitlement is a guarantee of access to benefits based on legislation. The key wording in this definition is access as defined by legislation.

    “In addition, an increase in those payments most definitely would be stimulative.”

    Well I agree it may stimulate something but if the current monetary institutional arrangements are what determines the ‘measure of value’ in the medium of exchange for the unit of account. Simply adding more unit of account does not translate into a stable or growing ‘measure of value.

  27. Michael Sankowski says

    This is the crux of the matter. The debt limit questions the debt of the united states, the 14th precludes questioning this debt, the coin gives a legal path to avoid violating the 14th.

  28. beowulf says

    If the Department of Treasury, our second oldest cabinet department, isn’t an established institution, nothing is. There is a fedreal law on the books that will allows the Secretary to deal with a crisis situation lawfully and effectively.

    If the debt ceiling is raised in the meantime, that would be great news. If the debt ceiling isn’t lifted, the Secretary of the Treasury will have a choice between violating his statutory duty to issue appropriation warrants, the debt limit or using a legal tool at his disposal to avoid both violations of the law.

  29. Robert Rice says

    With your vote! We must all act as responsible citizens and elect officials concerned with the good of the country. If we don’t, the one thing we can count on is degenerate politicians doing what degenerate politicians do.

  30. beowulf says

    “Argentina in the 1970 and 1980s sold mounds of debt denominated in their own currency. Wiemar also issued local currency denominated debt, though this was less of a factor.”

    Just for the record that’s not what I said, I specifically said “fiat currency”. Argentina pegged the peso on a 1 to 1 basis with the US Dollar, and Germany was on the gold standard (with the exchange rate fixed by the Treaty of Versailles).

  31. James A. Kostohryz says

    Greg:

    Our established institutions can handle this. Using a loophole to give us an escape route from having to do the hard work of making those institutions work would be a collosal mistake.

  32. Robert Rice says

    You forgot to answer the question James:

    “Let’s keep it simple; why was the 1st Congress given the authority to coin money? What was the spirit of the relevant clause in Article 1, Section 8?”

    I sit waiting with baited breath for your answer. It was conspicuously absent amongst your rambling nonsense about how I haven’t even addressed your arguments or refuted any of them, blah, blah, blah. You haven’t established that my position is legalism. You continue to mischaracterize it as such, conveniently of course. But then that just begs the question, doesn’t it? And do you know which question it begs? See above.