Will Congress (accidentally) double down on The Coin?

Now for something completely out of left field… This. Is. Crazy. There was a congressional hearing last week on a bipartisan bill to replace paper dollars with dollar coins. Swell idea I’m sure, however if it passes (probably too late this year but its budgetary savings might get it slipped into a budget deal), Congress would do the scarcely imaginable, it make the Trillion Dollar Coin an even more powerful tool for the Secretary of the Treasury.

“WASHINGTON – A House Financial Services subcommittee will hold a hearing tomorrow [November 29] to examine the budget savings benefits of modernizing U.S. currency from the one-dollar bill to the one-dollar coin… The Currency Optimization, Innovation and National Savings (COINS) Act (H.R. 2977 and S. 2049), is designed to save the country billions of dollars by eliminating the wasteful, inefficient $1 note. The COINS Act was introduced earlier this year by a bipartisan group including Sens. Tom Harkin (D-IA), John McCain (R-AZ), Tom Coburn (R-OK) and Mike Enzi (R-WY). Congressman David Schweikert (R-AZ) introduced the companion bill to the COINS Act in the House with the bipartisan support of fourteen co-sponsors.”

HOUSE COMMITTEE TO EXAMINE BUDGET SAVINGS IMPACT OF DOLLAR COIN

Now the timing on this is crazy because there’s one provision of the bill (Section 2(d)) in particular you should check out; the part where it amends the Mint Public Enterprise Fund, which has been on the books, minding its own business, since 1995.

“(d) Clarification With Respect to Seigniorage- The ninth proviso of section 5136 of title 31, United States Code, is amended, by inserting after ‘miscellaneous receipts’ the following: ‘and such amount shall be included as an estimated receipt of the Government and a receipt of the Government under paragraphs (6) and (7), respectively, of section 1105(a) in any budget submitted under such section’.” (emphasis added)

The long and the short of it is this: If this bill passes, every dollar created by coin seigniorage REDUCES THE DEFICIT (currently coins sold to the Fed are off-budget, like the proceeds from a bond sale). Ha ha, that’s great, but I would file this under too good a deal.

For our purposes, this isn’t a very good idea since the most straightforward way to treat the Trillion Dollar Coin is as a Treasury bond, not subject to the debt limit, whose de facto interest rate is the Fed’s 0.25% interest on reserves rate (more than double the 3 month T-bill’s 0.10%, yes it is actually cheaper to borrow money than to create it out of thin air). None of us are safe while Congress is in session, I guess. So if the COINS Act passes, minting $2 trillion in platinum coins would eliminate the ($1.2T) budget deficit and leave us with a $800 billion surplus. That makes my head hurt just thinking about. If nothing else it would make the proposed Balanced Budget Amendment kind of a dead letter.

Maybe its just me (and, perhaps, you too), but I just KNOW the Canadians have a hand in all this. Let’s see how last week’s congressional hearing turned out… Yeah, if Lorne Greene ends up on the platinum coin, don’t say I didn’t warn you. :o)

“Many appeared to be awed by the Royal Canadian Mint’s successful move away from paper currency to $1 and $2 coins. In what was a rare appearance of a foreign official before a congressional committee, Beverley Lepine, the RCM’s chief operating officer, captivated the American lawmakers with her account of how smoothly — and profitably — Canada made the transition to coins.”

RCM success steals show at House hearing
Legislators ponder $1 coin versus $1 note opinions
By Bill McAllister-Special to Coin World | Dec. 03, 2012 7:00 a.m.

—– BACKFILL I
Here’s the Mint Public Enterprise Fund statute as it stands now (the COINS Act would add language after ‘miscellaneous receipt’):
31 USC 5136
“There shall be established in the Treasury of the United States, a United States Mint Public Enterprise Fund (the “Fund”) for fiscal year 1996 and hereafter: Provided, That all receipts from Mint operations and programs, including the production and sale of numismatic items, the production and sale of circulating coinage, the protection of Government assets, and gifts and bequests of property, real or personal shall be deposited into the Fund and shall be available without fiscal year limitations… Provided further, That at such times as the Secretary of the Treasury determines appropriate, but not less than annually, any amount in the Fund that is determined to be in excess of the amount required by the Fund shall be transferred to the Treasury for deposit as miscellaneous receipts…”

—– Backfill II
Here’s the statutory requirements for the President’s Budget the COINS Act references (putting coin seigniorage on-budget):
31 USC 1105(a)
“(6) estimated receipts of the Government in the fiscal year for which the budget is submitted and the 4 fiscal years after that year under—
(A) laws in effect when the budget is submitted; and
(B) proposals in the budget to increase revenues.
(7) appropriations, expenditures, and receipts of the Government in the prior fiscal year.”

Comments
  • Clonal Antibody December 7, 2012 at 8:06 pm

    Coining money and not spending it should and would produce a budget surplus, while spending more than coined would produce a deficit. This goes back to old gold standard era thinking – one of the reasons that coinage was not included in the US Treasury limit of 450 million dollars (only US Notes were subject to the limit.)

  • JKH December 7, 2012 at 8:20 pm

    nice work, beo

    So, if the coin were used in a QE sense, the upfront easing would reduce the deficit – when Treasury deposits the coin with the Fed and gets the dollars in its account at the Fed.

    Assuming the Fed commits to unwind all forms of QE, including platinum, the eventual “exit” would consist of Treasury “withdrawing” the coin, with the Fed debiting its account, which would increase the deficit at that time.

    So platinum easing is a marginal current surplus; platinum exit is a marginal future deficit.

    Deficit time travel

    • beowulf December 7, 2012 at 8:51 pm

      Thanks, that’s an interesting way of looking at it.

      The idea of countercyclical spending is so, well, counterintuitive, for most people, maybe we’ve been looking through the wrong end of the telescope. It would be easier to just link Keynesian automatic stabilizers to (on-budget) platinum coin easing. The government could give the poor income security and the deficit hawks psychic satisfaction, all at the same time. :o)

      I don’t think Congress would want to take the back end of that deal when its time to unwind the QE, they’d encourage the Fed to unwind in some other way.

      To that end, am I wrong or did the Fed more or less hijack bonding power for itself with its new Term Deposit Facility program? If so, I say, good job!
      “Term deposits will facilitate the implementation of monetary policy by providing a new tool by which the Federal Reserve can manage the aggregate quantity of reserve balances held by depository institutions. Funds placed in term deposits are removed from the accounts of participating institutions for the life of the term deposit and thereby drain reserve balances from the banking system.”
      http://www.federalreserve.gov/monetarypolicy/tdf.htm

      • JKH December 7, 2012 at 9:26 pm

        great points; as Seinfeld would say – I think you may have something there!

        front end surplus effect; back end neutral – very nifty

        re the bond hijacking – sort of the inverse of the idea of expanding “no bonds” to treasury bills

        • beowulf December 7, 2012 at 10:30 pm

          “sort of the inverse of the idea of expanding “no bonds” to treasury bills”

          Yeah, the Fed isn’t even subtle about it. Have you ever heard of a bank running a Dutch auction to sell 1 month Certificates of Deposit? I believe the ordinary course of business for selling CDs is over the counter in unlimited quantities (you can hardly break a bank by giving it money). Its the T-bill auction that dare not speak its name.

  • Dan Kervick December 7, 2012 at 9:57 pm

    Wouldn’t the receipts from the sale just reduce the deficit by the amount of the minting cost of the coin, not its face value? How much are we talking about here?

    It seems to me the intent is that since the Treasury has to buy the machinery and raw materials to make the coins, which adds to the deficit, then when the Fed buys the coins from the Treasury it should reimburse the Treasury for the manufacturing cost, thus reducing the deficit only by the amount it was increased. The Fed thus bears the full manufacturing cost of the coin, but it doesn’t sound like this is a method for getting a net reduction of the deficit.

    • beowulf December 7, 2012 at 10:15 pm

      Dan, you’re thinking paper currency. Tsy makes more from minting a quarter (10 cents costs, 15 cents seigniorage) than it does from printing a $100 bill.

      “Each year, the Federal Reserve Board projects the need for new currency, which it acquires from the Department of the Treasury’s Bureau of Engraving and Printing at the cost of production [5.2 to 9.2 cents per note]….
      The United States Mint determines annual coin production… Reserve Banks purchase coin at face value from the Mint.”

      http://www.federalreserve.gov/faqs/currency_12771.htm

    • Clonal Antibody December 7, 2012 at 10:27 pm

      Dan,

      The sale of the coins to the Fed is at face value, and not at the cost of the coin to the mint. Thus the receipts are for the face value. Currently, at any time roughly 7 billion one dollar bills are in circulation. Assuming that these get replaced by coins over time, this will mean $7 billion in on budget “revenue” to the US government.

  • Dan Kervick December 7, 2012 at 11:07 pm

    Thanks Clonal. So a drop in the bucket, then? And presumably one reason for moving to metal dollars in the first place is to save money over time, despite the higher per-unit manufacturing cost, because fewer are minted in the long run.

  • Ramanan December 8, 2012 at 1:29 am

    That makes my head hurt just thinking about. If nothing else it would make the proposed Balanced Budget Amendment kind of a dead letter.

    :-) :-) :-) Awesome!

  • Ramanan December 8, 2012 at 1:50 am

    Beowulf,

    The idea of the bill rests on giving the special accounting treatment to coins. At least partly.

    Usually when mints and/or the central bank decides, it is decided by some costs-benefits analysis – such as value of the metal, other costs etc.

    This bill seems to be based on the idea of thinking of the change in accounting as some sort of benefit to the government, which is purely definitional. Isn’t it?

    This one has more insightful things to say:
    http://www.slate.com/articles/business/moneybox/2012/12/switch_to_a_1_coin_gao_study_says_scrapping_dollar_bills_could_save_billions.html

    (Funny how his analysis is way better than any of Wray’s articles on such matters).

    Things such as how the Fed doesn’t need to reprint worn out notes etc.

    That is if you read Matthew Yglesias’s piece, one can think of possibilities where the bill is passed without changing the definition of the deficit (although he didn’t conclude that).

    • beowulf December 8, 2012 at 2:05 pm

      Its just another battle in the age old war between the copper mining lobby in the Southwest (and, of all places, Iowa) and Crane & Co in New England, the monopoly supplier of currency paper.

      This bill, sponsored by McCain of Arizona and Harkin of Iowa, is nothing more than a bit of political gamesmanship. By putting seigniorage on-budget they can demonstrate– in these deficit-conscious times— that dollar coinage is a better value for the taxpayer than paper dollars.

      I’m certain that no one in House or Senate had any intent of providing the Secretary of the Treasury with the power to use platinum coin QE to erase deficits at the stroke of a pen. That would just be the effect of the law if it passed.

  • Matt Franko December 8, 2012 at 7:19 am

    beo,

    the wapo has picked it up here:

    http://www.washingtonpost.com/blogs/wonkblog/wp/2012/12/07/could-two-platinum-coins-solve-the-debt-ceiling-crisis/

    Looks like Klein delegated the story to Plumer. (Too hot for Klein?)

    There are links at the bottom to Cullen’s other site (Prag Cap) and to Joe Firestone’s at Corrente…. those 2 may want to pick it up also…

    rsp,

    • Michael Sankowski December 8, 2012 at 8:03 am

      Matt,

      I just had an online, public conversation with Bruce Bartlett and he said he talked with “very senior white house officials” and they seriously evaluated the TDC last year. His words “very senior” – they mean to me “Tim Geithner”, but it could be anyone.

      The WH/Treasury has come out to say they believe the 14th amendment is not a valid path. But have not uttered a peep about the TDC. This probably means they think the TDC is on solid legal ground.

      Note that many of the big name liberal bloggers have said things like “the Trillion Dollar coin is apparently legally sound”. Who in the world is writing on the legal aspects of this besides beowulf and that one article by Jack Balkin?

      There isn’t enough information on the few blog posts to make a real assessment, and I don’t see Matt Y and Kevin Drum going through the legal code and making the “apparently legally sound” claim because they are honest brokers. They don’t know enough about the surrounding law to start making claims like that, and so they wouldn’t do it.

      • Michael Sankowski December 8, 2012 at 9:01 am

        Probably not Geithner as he is not at the white house. He’s at the Treasury.

      • Dan Kervick December 8, 2012 at 11:08 am

        Given that the legal soundness of the TDC has already been established, as far as I can tell, I’m more interested in the political ramifications than the legal issues and operational mechanics. Any attempt by Treasury to actually take this step will clearly ignite a political firestorm. That results are unpredictable.

      • Clonal Antibody December 8, 2012 at 11:19 am

        This means to me that the current bill that Beo is talking about is a deliberate act, possibly keeping the TDC in mind, and laying a path for it that would reduce legal challenges to its use.

        • Michael Sankowski December 8, 2012 at 12:27 pm

          Clonal, I agree – it seems as though the language change is 100% aimed at making sure the TDC works as intended. If a coin is minted and then purchased by the Fed, the money goes to lower the overall deficit of the U.S. immediately, by law.

      • beowulf December 8, 2012 at 2:09 pm

        Remember too, while I’m just a simple country lawyer, Jack Balkin is renowned as one of the top constitutional law scholars in the country (his work on Reconstruction-era civil rights laws is first rate), I’d absolutely quote him as a source instead of me too. :o)

        • Michael Sankowski December 8, 2012 at 3:10 pm

          You just fell off the turnip truck. I’ve got some very interesting real estate -the brooklyn bridge – you might be interested in reviewing. It is a toll bridge. People have to pay the owner money when they cross it.

    • wh10 December 8, 2012 at 9:18 am

      Anyone surprised to hear Gagnon say he doesn’t think this would be inflationary? What about the fear of having the Treasury spend money without offsetting bond sales?

      • Dan Kervick December 8, 2012 at 11:18 am

        Yes, it’s surprising that he is willing to concede that the result will not be inflationary, even though there will be fewer bond sales, and thus fewer reserves being drained. It’s surprising because he then goes ahead and recommends monetary policy actions as the way to offset any inflationary pressures that might build. If he doesn’t think the draining of reserves to buy treasuries contribute to price stabilization, that can only be because he thinks that treasuries and dollars are near substitutes in terms of liquidity and spending dispositions – so the bond sales are just ” asset swaps”. But in that case, why does he think QE and QE unwinding are effective policy?

        • katie December 8, 2012 at 3:46 pm

          I’m new to economics and MMT. It’s at this level I get so lost. If any one cares to expand to the lay person, I’d appreciate it. If not, I understand, it’s a pain.

          • beowulf December 8, 2012 at 5:02 pm

            Hi, Katie. We do tend to go into the weeds a lot. If you go to the Recommended Readings at the top of the page, our colleague Cullen Roche (the fellow downthread with the photoshopped Pacific Ocean behind him) wrote a great paper worth your time reading, Understanding the Modern Monetary System.
            Before you do that, and I’m not kidding about this, Tay Zonday has a better grasp of the monetary system than most politicians (“This is how money is created from air…”).

            • Cullen Roche December 8, 2012 at 10:05 pm

              Oh, and for the record, that is the real pacific ocean behind me. As someone at Seeking Alpha recently asked, “what kind of douche wears a suit to the beach”. To that, I do not have a good answer. I guess a Cullen Roche type of douche does things like that!

              • Tim Ayles December 11, 2012 at 11:35 pm

                That was a pretty funny comment at first glance. While I don’t agree with that dude, I find it funny that you are so lighthearted in your response. Nice work!

              • Michael Sankowski December 12, 2012 at 7:54 am

                That’s pretty good.

          • Cullen Roche December 8, 2012 at 9:58 pm

            Katie, this is a MR site, not an MMT site. We don’t actually agree with the idea that bond sales are just reserve drains. In fact, the NY Fed wouldn’t agree with that description either. :-)

            Maybe read my primer on the monetary system. It applies to the system we have and not the system MMT claims we have.

            http://pragcap.com/understanding-modern-monetary-system

            • katie December 8, 2012 at 10:27 pm

              Ok, I’ve actually read both here and other MMT sites (yeah, I get the MR thing, but from my perspective, it’s both MMT. Or MMT/MR are close enough for me.)

              Question:

              What are reserves vs. money? Are they the same thing?

              • Cullen Roche December 8, 2012 at 11:24 pm

                Hi Katie. Reserves are what MR calls “outside money”. That is money created outside the private sector. Reserves are deposits held “on reserve” at the Fed banks by member banks. Only banks can use these deposits and they use them primarily to settle interbank payments.

                Also, I think you’ll run into problems if you think of MR and MMT as the same thing. The way we describe the monetary system is pretty different and you’ll get confused if you interchange the two as you’re learning this stuff. In particular, MMT says the govt is not a user of money, but focuses on the got as the issuer. This is not really correct. The govt COULD be a pure issuer, but MR describes the actual arrangement we have where the govt is a user by choice. As in, it outsources the creation of money to a private oligopoly of banks and designates itself as a user of bank money. Get this wrong and you’ll misunderstand the way the whole system works. There’s much more to it than that, but just a heads up….

                Hope that helps.

                Cullen

                • katie December 9, 2012 at 5:15 am

                  It does. Thanks.

                  I just mean MMT and MR are far closer to eachother than, say, Pete Peterson.

                  • Cullen Roche December 9, 2012 at 10:43 am

                    Ah. Yes. That’s certainly true. I usually tell people that while I think MMT gets some things wrong, it’s much better than most of neoclassical econ. And definitely better than most of the austrian/supply side nonsense we’ve all been forced to hear about on TV for the last 10 years.

  • JKH December 8, 2012 at 10:12 am

    “The plan requires the Fed and courts to play along. The Fed would need to agree to credit the Treasury’s account for the deposit of the coins. I doubt the Fed would voluntarily hand over complete control of the nation’s money supply to the Treasury in this manner. And the courts would be asked to confirm that legislation originally intended to satisfy a small group of numismatists in fact ceded authority to the President to monetize the entire outstanding debt of the U.S. government.”

    something I originally wondered about

    please weigh in, beowulf

    • JKH December 8, 2012 at 10:13 am

      that’s from the Econbrowser link provided by Ramanan

    • Ramanan December 8, 2012 at 1:34 pm

      I initially thought it was straightforward but later changed my opinion. I am unsure but tilted to think it is not possible for different reasons.

      The platinum coin is a numismatic coin because an 2000 act of numismatic coin brought 5112(k) into existence.

      Numismatic coins are treated differently as per this:

      http://www.usmint.gov/downloads/about/annual_report/2011AnnualReport.pdf

      Page 33.

      (Although I haven’t made full sense of what is written there)

      • Clonal Antibody December 8, 2012 at 1:58 pm

        There are two types of coins “bullion” coins, which you are referring to, and “proof” coins. “Proof” coins are treated as identical to standard coinage, but “bullion” coins are sold at the price of the metal plus a fee.

        • Ramanan December 8, 2012 at 3:47 pm

          Clonal,

          A separate issue in all this complication. The platinum coin is to be sold at production costs plus costs of marketing according to the Mint.

          • Clonal Antibody December 8, 2012 at 4:00 pm

            Only if it is treated as a bullion coin (A $100 face value platinum coin would be treated this way) – However, a new design for a dollar coin which costs the Mint 15 cents to produce would be treated at the face value of $1. Similarly, a $60 Trillion platinum coin would be treated just like a dollar coin – as a “proof coin.” Proof coins are always sold above the face value by the US Mint. See What is a Proof Coin?

            You should never see proof coins in circulation, because they are made for collectors, and sold by the mint for more than face value.

            • Ramanan December 8, 2012 at 4:02 pm

              The fact that is is called proof coin or not is a slightly different issue. Platinum coin is a numismatic coin and is sold at a value slightly above costs.

              • Clonal Antibody December 8, 2012 at 4:28 pm

                A Proof coin is sold above face value and not above costs. That is the difference!. That is the crucial difference between a bullion coin and a proof coin. Both are numismatic coins, but treated differently.

            • katie December 8, 2012 at 10:30 pm

              Are any coins going to be released into the economy?

              Is any money thing going to be released into the economy?

              • Dan Kervick December 9, 2012 at 11:14 am

                The coin itself wouldn’t be released, but whether the new higher balance in the Treasury account results in Congress getting giddy and feeling free to authorize additional spending is a matter for Congress to decide.

          • Clonal Antibody December 8, 2012 at 4:36 pm

            That is only for the $100 platinum coin. All numismatic coins are always sold above their face value. That is because they are legal tender. You can always turn in your $50 gold coin to the Federal Reserve, and you are guaranteed to get back $50. So if the price of gold drops to below $50 for the coin, you can always get $50 from the US Government.

            • Ramanan December 8, 2012 at 4:52 pm

              There are various things here.

              Some people want to own special coins as a hobby or a show-off and may buy coins at a value higher than the face value.

              I don’t quite understand the relevance of the $50 coin if gold prices drop sufficiently.

              • Clonal Antibody December 8, 2012 at 5:03 pm

                That means that numismatic coins are still legal tender at the face value. Gold bullion coins typically trade above the value of gold in the coin. If the value of the gold in the coin were to drop to say the price of an equivalent amount of lead (some entrepreunering alchemist comes up with a way to convert lead to gold) and the metal worth only 25 cents, you could always go to the local bank and get $50 in exchange!

                • Ramanan December 8, 2012 at 5:15 pm

                  Again, various things starting from minting of the coin and how it is minted and what it is named to whether the sale of the coin is allowed to FRB or directly to the public and when and how it is recognized in financial statements and so on.

                  Yes a $50 dollar coin made of gold will still have a value of $50 if gold prices drop a a huge amount, but that is a separate issue. I am not talking of a reduction in the value of the coin.

                  • Clonal Antibody December 8, 2012 at 5:30 pm

                    As Beowulf has repeatedly said, the seigniorage is realized as soon as the coin lands at the desk of the Mint cashier. The General Treasury account would be credited when The secretary of the Treasury ship it to one of the Federal Reserve Banks.

                    I presume, that since the seigniorage has already been realized, The Fed will treat the coin as an asset, and credit the TSA with an equivalent number of spendable dollars! In other words, the Fed is not really buying the coin from the Treasury, but treating the coin as “dollar” received from the US Treasury.

                    • Ramanan December 9, 2012 at 12:17 am

                      “I presume, that since the seigniorage has already been realized, The Fed will treat the coin as an asset, and credit the TSA with an equivalent number of spendable dollars! In other words, the Fed is not really buying the coin from the Treasury, but treating the coin as “dollar” received from the US Treasury.”

                      Don’t know what it means to say it is not really buying but “treating the coin as “dollar” received”.

                      Also, as per the Mint, some coins are directly sold to the public by the Mint.

                      The Fed cannot purchase coins with arbitrary face values the Treasury cannot make as you seem to think.

                    • beowulf December 9, 2012 at 1:36 am

                      ” Fed cannot purchase coins with arbitrary face values the Treasury cannot make as you seem to think.”

                      Its not arbitrary, see, the Secretary of the Treasury, a very important man, has decreed its face value. :o)

                    • Ramanan December 9, 2012 at 2:37 am

                      All I am saying is that “any denomination” is any denomination within other constraints in the Code which has the price theory for the coin.

                  • beowulf December 8, 2012 at 9:31 pm

                    “the sale of the coin is allowed to FRB or directly to the public.”
                    Legal tender is legal tender. There’s no way that a coin could be sellable to one and not the other without crediting different levels of legal tenderness and that isn’t even a word! :o)

                    This is an unusually well litigated issue because monetary cranks seem to be drawn to courthouses like mosquitoes to bug zappers. After a solid 45 seconds in legal research, here’s 275 court opinions to get you started. The most recent one from 18 days ago.
                    http://scholar.google.com/scholar?q=%22legal%20tender%22%20%22lawful%20money%22&hl=en&scisbd=2&as_sdt=6

                    “Obligations requiring payment “in gold or a particular kind of coin or currency, or in an amount in money of the United States measured thereby” are against public policy, and that U.S. currency is legal tender for all debts”
                    Sanford v. ROBINS FEDERAL CREDIT UNION, Civil Action No. 5: 12-CV-306 (MTT) (M.D. Ga. Nov. 20, 2012).

                    • Ramanan December 9, 2012 at 12:40 am

                      My point is that – although I am not decided – the $1T is not possible. The fact that the law says “denominations … in the Secretary’s discretion” means it can issue coins such as 30p, $1, $2, $100 etc but not $1T.

                      There is a constraint as per US Code on how much face value can be assigned and for how much it can be sold etc for different kinds of coins – in addition to 5112(k).

                      The face value of these coins is much lesser than the intrinsic value. The $100 eagle coin has 1.005 troy ounce of platinum (99,95%) and platinum prices are around $1,600 per troy ounce.

                      Okay I am vague, but there are so many issues here.

      • beowulf December 8, 2012 at 4:41 pm

        Numismatic means its sold to collectors, circulating coins can also be sold to coin collectors. “Specially packaged products containing circulating coins sold directly to the public rather than to the FRB. These products are treated as a circulating and numismatic hybrid product.” (from Ramanan’s Mint link)
        Since numismatic coins are legal tender at face value, no reason not to circulate numismatic coins as as a “numismatic and circulating hybrid product” (Regulation D vault cash definition excludes numismatic coins whose face value is LESS than metal value… no problem there). Six of one, half a dozen of the other, but its curious that Mint Report says revenue realized upon shipment to customer. Per this Tsy accounting memo, realization comes before Mint cashier sells coin, “Transaction N… Coins are shipped to cashier and seigniorage is realized.” http://www.fms.treas.gov/tfm/vol1/v1p2c500.txt

        Finally, this part of the Mint Report kind of drives me bonkers.
        “Unlike the payment of taxes or other receipts, [seigniorage] does not involve a transfer of financial assets from the public. Instead, it arises from the exercise of the government’s sovereign power to create money and the public’s desire to hold financial assets in the form of coins. Therefore, the President’s budget excludes seigniorage from receipts and treats it as a means of financing. Seigniorage is recognized when coins are shipped to the FRB in return for deposits to the PEF.”

        In other words, the Federal Reserve is the public when Tsy issues debt– Fed holdings counted in debt held by public– but is NOT the public when Tsy issues coins. If platinum coins were exchanged for T-bonds, Tsy’s legal position would be that the Federal Reserve is simultaneously transferring a financial asset from the public and not transferring a financial asset from the public. To my limited imagination, quantum mechanics has no place in accounting.

        • Ramanan December 8, 2012 at 4:44 pm

          “Finally, this part of the Mint Report kind of drives me bonkers.”

          But it is exactly right, isn’t it?

          • beowulf December 8, 2012 at 5:51 pm

            Its right in the sense that it reflects current Tsy accounting rules. Its just internally inconsistent. Like the unemployed geography teacher, I can teach it round or flat. The COINS Act would kill Schrodinger’s Cat by makes both net earnings and coin seigniorage on-budget revenue from the public. On the other hand, since the Fed pays its net earnings to Tsy, is governed by board of presidential appointees and has a .gov website, it seems reasonable to say its not the public. This would mean its debt should be counted as intergovernmental instead of publicly held and its net earnings should be off-budget like coin seigniorage. All I’m saying is that God does not play dice with the accounting. :o)

            • Robert Rice December 8, 2012 at 10:33 pm

              Not to mention the Federal Reserve refers to itself as a Federal government agency.

              “The Board of Governors of the Federal Reserve System is a federal government agency.” (page 4)

              When I was giving this topic some thought a couple weeks back, it struck me as rather odd the GAO includes the debt the Treasury owes the Fed as part of the public debt rather than as part of intragovernmental holdings. The latter would seem correct.

              I see your point about the Treasury’s apparent inconsistency, although I do believe they have an answer; should the Treasury utilize coining to “purchase” Treasury bonds from the Fed, is it really purchasing those bonds? In other words, is it not retiring the debt–a debtor sending the creditor presumably early final payment on a loan? It seems more natural the debt the Treasury issued is extinguished/canceled/retired upon payment to the debt-holder.

              So everyone’s clear, there’s a distinction between the Treasury sending a TDC to the Fed for the Fed to deposit it into the Treasury’s general account(s) so the Treasury can spend the deposited money on whatever, and the Treasury sending a TDC to the Fed to retire some of the Treasury’s “Fed-debt”.

              As an aside and related to some of the other comments here, with the Treasury owing the Fed about 1.65 trillion and with the Fed being a Federal government agency, one can conclude the Federal government owes itself at least 10% of the aggregate Federal government debt outstanding. Here we have an entire nation in a dither over a “debt crisis” when the Federal government owes itself trillions. On its face, it seems like it would be relatively straight forward to retire this debt using TDCs, or U.S. notes (assuming Congress changed, or the President issued an executive order changing the $300 million limit), or the Fed canceling the majority of the debt the Treasury owes it. However, should the Fed never unwinded the LSAPs (QE), the primary dealers will be stuck with a large quantity of reserves. What will they do with all that money? They could purchase more bonds at a Treasury auction, although that would sort of defeat the point of the Treasury retiring its Fed debt. They might spend it I guess, although I suspect there are rules on how they can spend it–this sort of freedom with the money could cause moral hazard. They could sit on it. Or perhaps Congress could implement an “excess reserve tax” whereupon the Treasury could use it for spending ;-)

              • Robert Rice December 8, 2012 at 10:43 pm

                “So everyone’s clear, there’s a distinction between the Treasury sending a TDC to the Fed for the Fed to deposit it into the Treasury’s general account(s) so the Treasury can spend the deposited money on whatever, and the Treasury sending a TDC to the Fed to retire some of the Treasury’s ‘Fed-debt’.”

                In other words, the former is a deposit, the latter a debt payment.

                • katie December 8, 2012 at 10:57 pm

                  THIS is what I;m trying to understand.

                  Thanks, is there agreement about this?

                • beowulf December 9, 2012 at 1:44 am

                  There’s a question (which I will let Ramanan chew on) whether the requirement the Fed only trade Treasuries on the secondary market would apply here. Tsy wouldn’t be buying the debt so much as redeeming it, something no one on the secondary market can do. I can see both sides of it (and its no deal breaker for Tsy to buy back debt on the secondary market), however it wouldn’t matter if Tsy took the path JKH suggested.
                  “The other option, preferable in my view, is for Treasury to conduct already authorized spending from a now flush bank account balance at the Fed. Then, that money would gradually find its way into the deposit liability and reserve accounts of the banking system.”
                  http://monetaryrealism.com/platinum-arrow-in-quiver-now-take-aim/

                  • Robert Rice December 9, 2012 at 2:37 am

                    I believe it’s only the initial issuance of debt which is regarded as the primary market. The secondary market is the purchase of already issued debt. If this is correct, even if sending a TDC to the Fed is constituted as “purchasing” bonds (which I think we agree is more naturally regarded as redeeming/retiring/satisfying the bond), it’s still the secondary market; that debt was previously issued. In fact, the Fed can only trade Treasury bonds on the secondary market since any bonds it purchased were previously issued and came to the Fed via middle men.

                    Ultimately though, I don’t think the above is even an issue given the debtor (Treasury) is crediting the creditor (Fed), which sends the bond to bond heaven. As you put it, it’s redemption.

                    Big picture, it seems to me the Treasury deposits a TDC or 10 and uses it to:

                    1. Eliminate the deficit (i.e., Federal government debt no longer increases from hence forth; it has at least plateaued).
                    2. Perhaps retire some of its debt in advance of its maturity.

                    Regarding 2, there are any number of ways to do this given the Treasury owes many entities money (e.g., the Fed, private investors, foreign governments, etc.). For example, about 1/3 of the debt held by the public is held by private investors. I’m sure at a sufficient profit these investors could be encouraged to offload some of their bond holdings.

                    I think 1 is the main issue. It would “stop the bleeding” in the eyes of those paranoid about becoming the next Greece.

                  • Dan Kervick December 9, 2012 at 11:35 am

                    Here’s a question: Suppose that as a result of these coin operations the Treasury has a massive account balance that lets it continue to run a deficit without issuing more debt, and that Congress does not alter either tax or spending policies. Would Treasury continue to issue lots debt anyway? It wouldn’t have to do so to fund spending, but might it not do so as a continuation of its dollar policy?

              • beowulf December 9, 2012 at 4:15 pm

                “(assuming Congress changed, or the President issued an executive order changing the $300 million limit)”
                The President can’t change an Act of Congress by executive order.

                • Robert Rice December 9, 2012 at 9:41 pm

                  Sure, although I doubt you are unaware of the rather colorful history of executive orders. It’s the only reason I left the door open as a possibility. It wouldn’t be the first time a President used such authority liberally.

        • JKH December 8, 2012 at 5:14 pm

          “simultaneously transferring a financial asset from the public and not transferring a financial asset from the public”

          reads to me like “not transferring a financial asset” refers to the fact that taxes extinguish non government assets (reserves/deposits) – which is the equivalent of an asset “transfer” (actually its the transfer of an asset to a liability reduction) – but the issuance of coins is an asset swap from a non-government perspective (swap of reserves/deposits for coins)

          similarly, coins for bonds is an asset swap, but not an asset transfer in the above sense

          (also, taxes are a transfer of non-government equity to government equity)

          but I’m neither a lawyer nor a quantum physicist, so that could be wrong
          :)

          • beowulf December 8, 2012 at 5:59 pm

            So when a collector buys coins (those sales proceeds are on budget), is that an asset swap or an asset transfer?

            • JKH December 8, 2012 at 6:27 pm

              I would have thought asset swap, but I must be confused:

              “Therefore, the President’s budget excludes seigniorage from receipts and treats it as a means of financing. Seigniorage is recognized when coins are shipped to the FRB in return for deposits to the PEF.”

              that says seigniorage is not part of the budget, but you’re saying the sales are part of the budget

              I’m thinking of this as a generic capital account transaction (which is an asset swap)

              (except for this new proposal)

              • JKH December 8, 2012 at 6:32 pm

                as a broader statement, I’m under the impression that the accounting income result of seigniorage in general shows up as a future interest margin and income effect – i.e. an increase in future interest margins due to the effect of the lower cost liability – not in the economic or present value of the asset swap

                i.e. the up front seigniorage gain is really the present value of the future interest margin seigniorage gain

                and it seems to me that this proposal is about taking that up front present value into income

              • JKH December 8, 2012 at 7:13 pm

                Maybe another way of thinking about this (this is really thinking out loud and maybe out of the box):

                The government deficit spends by issuing bonds – normally – for the most part.

                But it also issues some reserves in effect, considering that the Fed buys some of the bonds. Excess reserves now pay interest so they’re like low interest rate bonds in a way.

                So the government (either simple consolidation or the CTRB idea) deficit spends by issuing bonds and reserves.

                But it also issues banknotes at zero interest.

                And it issues coins at zero interest.

                So it issues all of these things at a particular rate of interest – which happens to be definitely zero in two specific cases.

                Still, all those things can be considered to be a form of funding.

                And you can view them all together as generating seigniorage in the sense that the seigniorage gain can be viewed as whatever future positive interest margin benefit can be construed from that liability mix. There can’t be any seigniorage benefit if there’s no interest margin benefit – that just doesn’t make sense (to me).

                And on that basis, why should a zero rate of interest be a necessary and sufficient reason for something to be treated as seigniorage?

                What’s so special about a zero rate of interest that it suddenly generates the attribute of seigniorage? Is the math that discontinous?

                All these things viewed as funding are generic capital account transactions.

                And when the government deficit spends, it’s a generic current account transaction.

                You can analogize it to international current account deficits and corresponding capital account reversing flows.

                I.e. deficit spending analogizes to a current account deficit.

                And the issuance of reserves, bonds, banknotes, and coins corresponds to a capital account surplus (from the government’s perspective).

                But everything gets paid for in reserves.

                All those other things – being the private sector “purchase” of bonds, banknotes, and coins – end up being paid for with bank reserves.

                So they are all assets swaps from the perspective of the private sector portfolio mix. It would be like China selling dollars to Germany in exchange for Euros – that’s an asset swap – even though the dollars originated as a current account transaction.

                Anyway, I think all of this stuff can be treated as seigniorage to some degree on a present value basis, depending on its favorable effect on the government’s advantage in funding costs in general. But the accounting for the seigniorage gain, how that’s measured, can always be translated to a future interest margin benefit. But people make a big deal out of the fact that banknotes and coins pay zero interest rather than 25 basis points or 2 per cent.

                So you can view the entire mix as funding the deficit – which means none of it should be taken into government revenue.

                Haven’t totally thought this through but it feels roughly right.

              • JKH December 8, 2012 at 8:16 pm

                So a question is whether the “monetization” of a platinum coin should make any difference to how one views the interpretation of a deficit.

                We know that the government funds or can fund deficit spending in part or in whole (theoretically) with reserves – normally, with QE, and hypothetically in entirety with “no bonds”.

                And we know that platinum monetization still means that the government ends up with the same reserve funding position that it would have had without platinum monetization – to the degree that its intent on funding the deficit with reserves. The only difference is that the money that becomes reserves appears in the Treasury account as a prelude to spending. But there is absolutely no difference in the outcome after the money is spent.

                So, on that basis I’d say platinum easing makes no difference to the fact of a deficit, regardless of any internal present value concept of seigniorage.

                That present value accounting of seigniorage as if it were a “profit” is entirely internal to Treasury and the Mint, but does not fit with the external accounting paradigm for capital, income, and deficits.

              • beowulf December 8, 2012 at 9:57 pm

                I’m becoming more and more sympathetic to the coin lobby (sorry Crane & Co.) because I think its the Mint that’s confused. Seigniorage is off-budget because its not a “transfer of financial assets from the public”. Sales revenue from numismatic products is counted on-budget presumably because it is such a “transfer of financial assets from the public” (e.g. the money to buy the coins)…. Unless the numismatic product is also a circulating coin in which case it is not a transfer of financial assets from the public and is counted off-budget. Someone who buys a gift set of US coins, some numsimatic and some circulating, then would be making a transfer of financial assets from the public and not making a transfer of financial assets from the public. You can try to explain this, but you would just be an enabler. :o)
                “Seigniorage derived from the sale of circulating coins and net income from the revenues generated by the sale of numismatic products containing circulating coins is an off-budget receipt to the Treasury General Fund. Off-budget means that these funds cannot be used to reduce the annual budget deficit. Instead, they are used as a financing source (i.e., they reduce the amount of cash that Treasury has to borrow to pay interest on the national debt).
                Revenues generated from the sale of numismatic products are transferred to the Treasury General Fund as an on-budget receipt. Unlike seigniorage, the numismatic transfer amount is available to the Federal Government as current operating cash or it can be used to reduce the annual budget deficit.”
                Ramanan link, p. 33)

                Even within in the framework of this confusion, the parenthetical “i.e. they reduce the amount of cash that Treasury has to borrow to pay interest…” makes me wonder if Tsy could just use off-budget coinage to pay net interest (what, $200B this year?). Even though seignoirage itself is off-budget, NOT having to pay $200B in net interest would cut on-budget spending by like amount. Just a thought. :o)

                • Ramanan December 9, 2012 at 12:14 am

                  Beowulf,

                  There is no confusion there from the Mint.

                  The deficit is the difference between expenditure and income. The coin is a means of financing this (and so are bonds).

                  The issuance of coins reduces the amounts of bonds issued so it reduces the interest paid on the public debt than otherwise.

                  If the Treasury tries to issue 200bn $1 coins annually, its efforts won’t succeed because the private sector will return the coin to their banks who will return it to the Federal Reserve. The Federal reserve buys enough coins from the Treasury to keep its inventory at normal levels, not more.

                  • JKH December 9, 2012 at 2:41 am

                    “The issuance of coins reduces the amounts of bonds issued so it reduces the interest paid on the public debt than otherwise”

                    I read that not as a reduction of interest, but as a reduction in borrowing to fund the interest – by issuing coins rather than debt

                    that’s as far as current interest is concerned

                    but you’re right, that future interest is also reduced by elimination of future interest compared to the case of issuing debt instead of coins

                    see my comment below

                    • JKH December 9, 2012 at 2:56 am

                      “that future interest is also reduced by elimination of future interest compared to the case of issuing debt instead of coins

                      BTW, R., that IS how I view the actual future accrual income effect of seigniorage – as opposed to economic present value – as per our earlier discussions re Buiter, etc.

                    • Ramanan December 9, 2012 at 2:50 pm

                      Yeah one should view it that way because the future is uncertain.

                  • Jose Guilherme December 10, 2012 at 6:22 pm

                    I thought the Deficit was G minus T where T stands for Taxes :)

                • beowulf December 9, 2012 at 2:20 am

                  “If the Treasury tries to issue 200bn $1 coins annually, its efforts won’t succeed because the private sector will return the coin to their banks who will return it to the Federal Reserve.”
                  Issue it like mailing it to people? Wouldn’t it be easier for Tsy to deposit in TGA and just wire the funds? Remember the Mint determines coin production, not the Fed, (according to the Fed, see quote upthread).

                  • Ramanan December 9, 2012 at 2:35 am

                    The mint produces the coins but it is decided by the public – how much they wish to hold.

                • JKH December 9, 2012 at 2:36 am

                  “reduce the amount of cash that Treasury has to borrow to pay interest”

                  reads to me like reducing borrowing by issuing coins – not reducing payment of interest.

                  i.e. interest is “paid” by coin issuance (not borrowing) instead of debt issuance (borrowing).

                  horribly ambiguous use of the term “pay” here

                  one doesn’t normally describing a funding operation (either debt or coin issuance) as “paying” for something

                  but interest is being funded in both cases

                  in general, this is all about the application of sources and uses of funds accounting in some cases (off budget) and income statement accounting in others (on budget)

                • JKH December 9, 2012 at 5:17 am

                  “This would mean its debt should be counted as intergovernmental instead of publicly held and its net earnings should be off-budget like coin seigniorage.”

                  Again, my view is that they are now treated consistently.

                  The effect of the Fed buying bonds from the market is to replace the fiscal cost of bond interest with that of reserve interest, taking into account the remittance of Fed earnings to Treasury.

                  The effect of the Fed issuing Treasury deposit balances for the coin is first that those balances will eventually end up being spent and transferred into the Fed’s reserve liability position. So the eventual fiscal cost will be the same as it is for bonds – the interest paid on reserves will be lower than what otherwise would have been in bond interest. Meanwhile, the positioning of the coin as an asset of the Fed, rather than bonds, has exactly the same fiscal effect as well. In the case of bonds, interest paid by Treasury cancels against interest earned by the Fed. In the case of the coin, no interest is paid or earned.

                  In both cases, the true seigniorage effect is the reduced interest cost of reserves compared to the alternative of bonds. Thus, the seigniorage income effect in fact only shows up as an opportunity cost/benefit.

                  Suppose the Fed was able to buy new issue Treasuries. The fact that Treasury’s account is credited with funds obviously doesn’t mean that such a credit is revenue and that it reduces the deficit. It’s no different with the coin. Both are funding transactions – not income or budget affecting ones.

                  And the value of platinum coin seigniorage as it is recorded at various accounting stages by the Mint, Fed, and Treasury is only an accounting of asset swap funding entries that do not affect current income.

                  The seigniorage value is really the present value of the difference between the future interest cost of two alternative liability forms – reserves versus bonds.

                  You can also view bonds and coins held by the Fed as an internal funds transfer mechanism, where the transfer price is the interest rate – whatever it is for bonds and zero for coins. That transfer rate determines Fed interest margins, but it is irrelevant to the overall fiscal effect.

                  That’s all apart from the new proposal, of course.

                  • beowulf December 9, 2012 at 4:48 pm

                    OK, I take your point, that does makes sense. I still admire the coin lobbyists’ ingenuity to think of asking Congress to “fix” the accounting to their benefit. :o)

    • beowulf December 8, 2012 at 3:34 pm

      Even if the Fed weren’t on board (and of course it would be), the courts won’t touch it. Even without asserting the President’s National Emergency powers (which are astonishingly broad) or making the 14th Amendment Validity of the Public Debt and Article II Unitary Executive constitutional arguments, the Secretary has unquestionable statutory authority to mint coins and to assert authority over the Federal Reserve on this subject. it wouldn’t even get that far, the matter is a non-justiciable political question and there is no plaintiff which could show the concrete and particularized injury to assert standing to file suit.
      “The Secretary shall…..
      (1) prepare plans for improving and managing receipts of the United States Government and managing the public debt;
      (2) carry out services related to finances that the Secretary is required to perform;
      (3) issue warrants for money drawn on the Treasury consistent with appropriations… ” 31 USC 321
      “The Secretary of the Treasury—
      (1) shall mint and issue coins described in section 5112 of this title in amounts the Secretary decides are necessary to meet the needs of the United States…”
      31 USC 5111

      “The moneys held in the general fund of the Treasury… may, upon the direction of the Secretary of the Treasury, be deposited in Federal reserve banks, which banks, when required by the Secretary of the Treasury, shall act as fiscal agents of the United States; and the revenues of the Government or any part thereof may be deposited in such banks….” 12 USC 391 [I'll note here that seigniorage is actually realized before the deposit, when the newly struck coins are delivered to the Mint Cashier].
      “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.”12 USC 246

  • Dan Kervick December 8, 2012 at 11:45 am

    I wonder about this too. I imagine most people in government who think about this stuff at all have been under the impression that Congress had successfully delegated control of the nation’s monetary policy to the Fed. Treasury would be seen by many as exploiting a legal loophole in an astonishingly dramatic way to wrest power from the Fed, and in a way that violates the intent of Congress. It would be quite a fracas, and for that reason I don’t see “no drama Obama” as ever going along with it.

    That said, on what legal basis could the Fed refuse to credit Treasury’s account? How can they refuse to accept legally issued currency. I would assume that they are bound by law to accept legal tender.

    • Clonal Antibody December 8, 2012 at 12:00 pm

      That is why I think that this bill is crucial to the platinum coin strategy, and likely why it is being pursued so diligently. Laying out a path through the legal minefield – so to say.

  • Clonal Antibody December 8, 2012 at 3:36 pm

    Thank you Beo. Very useful information for those who are cofused as to how much authority the Exsecutive Branch really has!

  • Cullen Roche December 8, 2012 at 3:49 pm

    Nice work Beo. Does the White House know that the most important analysis in economics is presently occurring at this website? :-)

  • Cullen Roche December 8, 2012 at 9:55 pm

    For the record, I never claimed credit for the coin idea. And I have no idea why Joe Firestone would imply such a thing. I’ve been screaming the name “Carlos Mucha” at Pragcap and on Twitter for the last week….I do, however, find it extremely odd that Firestone writes a 20 paragraph post about giving the proper attribution and fails to even mention the name Carlos Mucha….

    http://neweconomicperspectives.org/2012/12/origin-and-early-history-of-platinum-coin-seigniorage-in-the-blogosphere.html

    • Clonal Antibody December 8, 2012 at 10:19 pm

      Cullen,

      My reading of what Joe wrote does not imply that you claimed credit. He said, and I quote

      Joe Wiesenthal, Brad Plumer, and John Carney have been saying that the platinum coin seigniorage idea originates with Cullen Roche’s blog post of 07/07/11 cited earlier with a commenter on that post.
      .
      .
      .
      So, I think that Wiesenthal, Plumer, and Carney, all got it wrong. Probably because they relied on each other, rather than on reading their own links, or on using “the google.”

      So I think you are reading something in it that is not there.

      • Cullen Roche December 8, 2012 at 11:38 pm

        No, see the comments section at NEP where Joe claims I am taking credit for the idea. In fact, I wrote several posts crediting Carlos this week and specifically mentioned that this “Wasn’t my idea” on Twitter. Joe has a well documented history of misconstruing my comments to make them sound like something he wants to think. But whatever, it’s petty BS so let’s not sweat it.

        https://twitter.com/PragCapitalist/status/277139063729963008

        https://twitter.com/PragCapitalist/status/276519880981889024

        • Geoff December 9, 2012 at 7:50 pm

          Yeah, I caught that, too. If you said that the Coin idea originated on your blog, that clearly doesn’t mean that you yourself came up with it. Why Joe would think otherwise, I don’t know.

    • beowulf December 9, 2012 at 2:14 am

      “I’ve been screaming the name “Carlos Mucha” at Pragcap and on Twitter for the last week”. Let us never speak of it again.

  • Dan Kervick December 9, 2012 at 1:59 pm

    Beowulf, I have to confess that I am utterly confused about this passage:

    For our purposes, this isn’t a very good idea since the most straightforward way to treat the Trillion Dollar Coin is as a Treasury bond, not subject to the debt limit, whose de facto interest rate is the Fed’s 0.25% interest on reserves rate (more than double the 3 month T-bill’s 0.10%, yes it is actually cheaper to borrow money than to create it out of thin air). None of us are safe while Congress is in session, I guess. So if the COINS Act passes, minting $2 trillion in platinum coins would eliminate the ($1.2T) budget deficit and leave us with a $800 billion surplus. That makes my head hurt just thinking about. If nothing else it would make the proposed Balanced Budget Amendment kind of a dead letter.

    How , under the present arrangements, could the TDC function as a Treasury bond? And I thought IOR was juts paid on bank reserve balances, not Treasury balances.

    • JKH December 9, 2012 at 2:09 pm

      Dan,

      The coin produces Treasury balances, which when spent become reserve balances – hence ‘platinum coin easing’.

      Reserves are issued instead of bonds (both pay interest), but reserves could be analogized to a floating rate Treasury bond.

      The coin/reserves combination bypasses the debt limit because its actually not a bond.

      And if COINS were to pass, the coins/reserves combination reduces the deficit from what it would have been without COINS (i.e. by the amount of the original Treasury balance credit and the subsequent spending from it).

      • JKH December 9, 2012 at 2:13 pm

        Maybe clearer to say that the coin/reserve combination corresponds to spending that doesn’t add to the deficit – spending in the amount of the original Treasury balance credit corresponding to the coin deposit.

        I.e. without COINS, that spending would have been part of the deficit.

        • Clonal Antibody December 9, 2012 at 2:56 pm

          The TDC deposit into the Fed would become a part of the Monetary Base, being treated no differently than vault cash held at the Fed. I hope I am correct in my interpretation.

          • JKH December 9, 2012 at 3:03 pm

            I think technically speaking that the reserves, which are only created after spending, become part of the monetary base. So neither the coin nor the Treasury deposit would be.

            However, hard ass monetarists might try and revert to a partial metal definition of the monetary base. Wouldn’t that be entertaining? Calling all market monetarists…

            • Clonal Antibody December 9, 2012 at 3:09 pm

              The mint routinely sends coins – pennies etc. to the Fed. The Fed has an inventory of these coins that are “not in circulation” or “not in commercial bank vaults.” Are they a part of the monetary base? Why would the TDC be any different?

              • JKH December 9, 2012 at 4:33 pm

                I don’t believe so in either case – the monetary base consists of Fed liabilities only.
                Including assets would be double counting.

                • Clonal Antibody December 9, 2012 at 4:39 pm

                  So how are they accounted for, and as seigniorage would already have accrued to the US Treasury, how is that profit accounted for. Much depends upon the accounting rules. Could this be one of the reasons for the current bill’s wording?

              • Dan Kervick December 9, 2012 at 4:53 pm

                I would say no. Because as you say, they are not in circulation.

                • Jose Guilherme December 9, 2012 at 10:47 pm

                  When banks need vault cash to satisfy customer demand they credit their deposits at the Fed (reserves). Said coins or banknotes become a liability of the Fed and an asset of the banks, where they replace former reserves. When they are drawn down by customers at bank ATMs they go into circulation and banks see both their assets and liabilities (customer deposits) reduced.

                  But the coins/banknotes are kept as liabilities on the Fed’s books even after they enter the “circulation” phase.

                  Question: how do coins not yet in circulation that initially figure on the asset side of the Fed’s balance sheet finally show up as liabilities of the Fed – once the banks request them to satisfy their customers’ needs for pocket change? What are the bookkeeping, double entry operations involved in this process?

                  I’d say a full clarification on this detail would also help us to understand better all the accounting implications involved in the issue of the Platinum coin.

      • Dan Kervick December 9, 2012 at 4:51 pm

        Well, OK JKH. But depending on the type of spending the outcome could be quite different. Here are three scenarios. There are many more but these three sort of stake out the policy terrain.

        1. Spending and tax policies are unaffected. Debt repayment is also unaffected. Treasury doesn’t buy back existing debt or redeem it any differently than it would do otherwise. However, because it now has a larger account balance it issues fewer bonds. That means the non-governmental sector ends up with more dollars but fewer bonds than it would otherwise.

        2. Tax policies are unaffected but additional spending is authorized in an amount equivalent to the added balance from the deposit of the TDC. As a result, the required level of bond issuance remains unchanged. There are two further possibilities for this scenario:

        A. The additional spending all takes the form of transfer payments. In that case reserve balances are added to the economy, and these balances earn interest. Something like a bond redemption, except that in this case Treasury supplies the principle and the Fed supplies the interest payment. However it is not at all like an ordinary bond sale since there is no corresponding surrender of dollars from the private sector to the government. When Treasury sells a bond, somebody exchanges dollars for it. If the coin generates additional transfer spending, that is more like a bond gift to the private sector, not a bond sale.

        B. Like A, but in this case, the spending takes the form of the government buying things. This is closer to the bond sale analogy, but rather than sending financial assets (dollars) to the government, the private sector surrenders real, non-financial assets to the public.

        • JKH December 9, 2012 at 5:45 pm

          If Treasury spends the balances on anything ranging from pencil sharpeners to battleships, the balances convert to bank reserves. If it sends out cheques representing transfer payments, the balances convert to bank reserves.

          This is what is meant by platinum easing.

          Treasury still has the option of issuing bonds as it spends those balances. That would undo the reserve effect of what would otherwise be platinum easing.

          • Dan Kervick December 9, 2012 at 9:48 pm

            Yes, but that’s why platinum easing is not like issuing treasury bonds, which is what confused me about Beowulf’s statement. When the government sells a bond, the private sector gets a bond but hands over money to get it. If Treasury just spends money into the private sector, there is no corresponding dollar drain from a bond purchaser.

            And by the way, I think the really important thing here is not what happens to reserve balances, but what happens to ordinary household and small business balances. If the government doesn’t spend more money in the real economy, there is likely no effect. Increasing reserve balances directly is what the Fed has been doing for four years now to no avail. Excess reserves have exploded while deposit balances continue to stagnate. If on the other hand, the government spends money directly into the economy, then the recipient of the check gets an augmented bank balance, with the augmentation of the recipients’s bank’s reserve balance occurring as a merely secondary and less important effect.

            Anyway, if Congress would just expand its spending one way or another, all would be fine – coin or no coin. One thing that will be interesting, though, if the coin is ever used, is the political result – which is very hard to calculate. Even if Congress and Treasury just let the balance sit in Treasury’s account, and don’t adjust either spending or taxes, the whole idea that Treasury bond-issuance is inherently a debt burden on future taxpayers goes out the window. Treasury could do its debt service entirely from account balances that the government itself augments. If they wanted, they could even set up a separate account for the platinum coin-generated balance and call it the “Debt Service Trust Fund”. Depending on how many coins they deposit, the account could be declared “fully funded” for X number of years, without a dime of additional tax revenues raised. And without the debt service coming from the general fund, spending could be increased with no other changes to tax revenues or bond issuance.

            If this happened, the public would realize that Pete Peterson, Simpson, Bowles, Obama, Boehner, Reinhart, Rogoff and the whole sordid company have been lying to them all along about our “debt crisis” and the threat of bond vigilantes – which is one reason I don’t expect the coin will ever be issued.

            Another entertaining consequence is that the ratings agencies will be revealed as incompetent boobs.

            • Dan Kervick December 9, 2012 at 10:00 pm

              Let me add about the above scenarios that this is no way for a serious country to conduct its monetary policy. If we get to a situation in which Treasury is effectively net issuing money directly, without the traditional Fed role in the process, then that means monetary policy is a joint Treasury-Fed operation, or maybe even a Congress-Treasury-Fed operation. We then need new systems and targets for monetary policy governance to make sure it is being done right. One thing I would expect if the coin is issued is that there will be a few weeks of near-hysterical global outcry that the US has gone banana republic. It might take a while to soothe the nerves.

  • beowulf December 9, 2012 at 7:04 pm

    Right and the IOR on the excess reserves created by TDC would have the same interest rate cost (at low current rates as well as expected future higher rates) as if Tsy had issued T-bills and continually rolled them over. The only difference being that its actually cheaper to borrow than to create money out of thin air with segniorage! IOR is 0.25%, 3 month T-bilsl are at 0.10%. The only advantage to TDC (unless the coin lobby gets Congress to “fix” the budgetary treatment of seigniorage) is it sidesteps the debt limit.

    Speaking of future higher interest rates, while reading about the COINS Act, I saw that its sponsor, Sen. Tom Harkin, has also sponsored a securities transaction tax (0.03% rate would raise approx $400B over 10 years). IPOs and debt instruments < 100 days would be exempt.
    http://www.harkin.senate.gov/press/release.cfm?i=334643

    What would be clever is if instead of a fixed rate, Harkin (and House sponsor Pete DeFazio) pegged transaction tax rate to interest rates. Scaling up JCT estimate, a 0.10% rate would raise $1.2T over 10 years. Meanwhile, the CBO estimates 10 yr net interest cost at approx $4T. In the CBO's August deficit report, it made the interesting point that every 1% in higher interest rates (over CBO model estimate) would add $1T in net interest. Presumably, 1% in LOWER interest rates would reduce net interest by like amount. So if Harkin pegged his transaction tax to, say, a tenth of previous quarter's (or month's) average 3 month T-bill rate, well, that would certainly throw a boat anchor on interest rates. For Tsy's purposes, it wouldn't matter where rates go, they could stay at 0.10% or go to the stratosphere like in the day of JKH's ancient nemesis Paul Volcker or somewhere in between; over 10 years, Tsy would end up collecting more in transaction tax (boat anchor tax?) revenue than it paid out in net interest. Think of it as the Pigouvian tax version of financial repression. :o)

    • JKH December 9, 2012 at 7:36 pm

      pro-cyclical piling-on of fiscal policy over monetary policy

      Warren M. might have cause to reconsider his zero rate policy
      :)

    • beowulf December 9, 2012 at 7:43 pm

      “Tsy would end up collecting more in transaction tax (boat anchor tax?) revenue than it paid out in net interest.”

      This is inartfully put. What I meant was, compared to CBO’s $4T over 10 year net interest cost baseline, the sum of new revenue from transaction tax and reduced spending from lower interest rates combined should cancel out the baseline amount at any rate of interest. That’s probably not true if T-bills rate don’t move up AT ALL (the transaction tax would then only bring in $10B to $15B a year in revenue) but net interest spending would still be trillions of dollars less than baseline in any event

      • Michael Sankowski December 9, 2012 at 9:31 pm

        Detour: I can’t believe any of these Tobin tax ideas would generate as much revenue as estimated.

        .1% ends up being 10 pips on a EURUSD currency transaction, which is pretty huge. Essentially the entire market making structure of the current FX market would be disrupted by a transaction tax of this size.

        For Treasury Futures I think this would end up being 4.5 ticks. This is huge.

        I guess what I am saying is that volumes would be 100th of the current levels if these transaction taxes were put into place.

        • Clonal Antibody December 9, 2012 at 11:04 pm

          Lower volumes would reduce volatility, and the wild market gyrations, and hence would be beneficial to the financial stability of the nation. Therefore, very worth doing even if it does not produce the revenues, it will reduce the bubble effect!

        • beowulf December 10, 2012 at 2:49 pm

          Clonal’s right, the goal isn’t raising tax revenue but discouraging an unwanted activity. It just so happens that even if the tax raises very little revenue, it will still cut the projected deficit by trillions in reduced net interest spending.

          I was thinking of it as a boat anchor on rates because adding fiscal drag to to every Fed rate hikes would dampen how often and how high rates are increased.
          But from what you said about the Forex and Futures markets, I guess its a boat anchor in another way. There’d be a lot of financial players with an incentive to bid down the T-bill rate to 0% every Monday. After all, a tenth of 0% is…
          Its a Pigouvian tax, society benefits when it collects revenue and benefits even more when it doesn’t.

    • Dan Kervick December 9, 2012 at 9:51 pm

      “… as if Tsy had issued T-bills and continually rolled them over.”

      But Beowulf, Treasury doesn’t just issue T-bills. It sells them. So any spending liberated from the Treasury by the creation of the TDC balance would be a whole different animal.

      • JKH December 10, 2012 at 9:24 am

        Platinum easing creates reserve balances when Treasury spends the money, unless bonds are issued in conjunction with platinum easing.

        It’s the reserve balances that should be compared to t-bills, and the 2 are alike in the following senses:

        a) They have a similar interest rates (but as beowulf points out, not exactly the same)

        b) They have a roughly similar interest rate sensitivity – meaning that the interest rate correlation is meaningful in the long run – when the Fed increases the funds target rate, it will increase the IOR, and the short term treasury bill rate will tend to track this pattern approximately – and when I say roughly or approximately, I mean obviously not perfectly, but much more closely than the correlation between IOR and bond yields for example

        c) most importantly, to the degree that IOR and the treasury bill rate are reasonably close to each other, the cost of reserves to the Fed and treasury bills to Treasury has exactly the same marginal fiscal effect on the budget – because all contributing factors in the Fed interest margin become part of its earnings, which get remitted to Treasury

        • Dan Kervick December 10, 2012 at 12:43 pm

          Again, you seem to be avoiding the fact that Treasury sells T-bills. It doesn’t just issue them. If the Treasury sells a $1000 T-bill for $990, then Treasury has a $1000 liability to some member of the public, but its assets increase by $990 – so after redemption the net cost to Treasury is $10.

          This is completely different than if Treasury simply issued a $1000 T-bill and deposited it in some private sector account. It is also completely different than simply depositing $990 dollars in some reserve account, and the Fed then paid $10 in interest to that account. If Treasury issued a TDC to itself, and deposited it at the Fed, and the Congress authorized $1 trillion in additional spending, this would be analogous to the latter operation. The analogy with T-bills is not very helpful in terms of understanding the economic impact.

          • JKH December 10, 2012 at 1:02 pm

            I’m not avoiding it; I’m ignoring it – because it’s irrelevant.

            First, I’m quite aware of the difference in financial accounting between interest bearing instruments and discount instruments – and that has absolutely nothing to do with a discussion of platinum easing, quantitative easing, bond financing, or anything else here.

            Second, you should know from MMT – notwithstanding its muddled “government neither has nor doesn’t have” presentation of it – that the direct sector NFA interface between government and non-government consists of a mix of bank reserves, banknotes and bills/bonds. Given that, I’m not sure what point you’re trying to make here.

            • Dan Kervick December 10, 2012 at 2:34 pm

              My point is that the fundamental issues here are not legal issues and they are not accounting issues – they are economic issues. If you don’t see there is a relevant economic difference between (a) injecting a trillion dollars into the private sector economy and (b) injecting a trillion dollars into the private sector economy while extracting $990 billion from the real economy, then you are lost in the accounting trees and are missing the economic forest. It’s a 100-fold difference between a trillion dollars of “easing” and $10 billion in “easing”. I would say that is relevant. Selling T-bills with a combined face value of $1 trillion is an operation of type (b). Spending a trillion dollars out of a balance created from scratch by monetary issuance is an operation of type (a). I think you know this, so I don’t know why you have decided to double down on a bad analogy.

              • JKH December 10, 2012 at 3:04 pm

                I’ll overlook the fact that you’re becoming slightly insulting, and try to explain this to you again.

                You don’t seem to understand the relevant comparison here.

                The comparison is between $1 trillion in deficit spending funded by bills versus $ 1 trillion in deficit spending funded by reserves.

                Normal deficit financing involves bills and bonds as the end form of deficit financing.

                BOTH normal quantitative easing and platinum produce reserves as the end form of the same amount of $ 1 trillion in deficit financing.

                Both fund $ 1 trillion in deficit spending when both are compared with each other and with bill or bond financing.

                Within the QE mode, the difference between normal quantitative easing and platinum easing is that the former includes original bill issuance and subsequent bill repurchase, for a net bill issuance of zero and net reserve issuance of $ 1 trillion.

                Platinum easing includes no original bill issuance or subsequent repurchase.

                Platinum easing includes a $ 1 trillion credit to the Treasury account at the Fed. I suspect one mistake you are making is that you are somehow identifying this as a deficit. It is not. It is only a funding transaction. The deficit occurs when Treasury spends that amount. The result is a deficit of $ 1 trillion funded by reserves of $ 1 trillion.

                That is the same deficit of $ 1 trillion with the same reserve result of $ 1 trillion as occurs when the Treasury spends $ 1 trillion, funds it with bills, and then the central bank repurchases the bills. And all that represents conventional quantitative easing.

                And the difference between both of those and bill financing is that the latter results in net bill issuance of $ 1 trillion and net reserve issuance of $ 0.

                That is the proper comparison and it is the one I’ve used across all of these related posts.

                • JKH December 10, 2012 at 3:08 pm

                  And the discount form of the bill is immaterial and absolutely irrelevant to the economics of the proper comparison here.

                • Jose Guilherme December 10, 2012 at 3:29 pm

                  “And the difference between both of those and bill financing is that the latter results in net bill issuance of $ 1 trillion and net reserve issuance of $ 0.”

                  Right!

                  However, at the end of the process I suppose there might be extra demand for some reserves by the banks and banknotes by the public that would be accommodated by the Fed.

                  So in order to be (perhaps obsessively) precise we might put it this way: net reserve issuance will end up to be slightly above zero.

                  • JKH December 10, 2012 at 3:43 pm

                    Sure (and not so obsessively).

                    I think you have to decide on where to establish the boundary outside of which you hold other things equal, in order to demonstrate most effectively the core point you want to make inside the boundary.

                    • JKH December 10, 2012 at 3:45 pm

                      But having determined that boundary, demonstrate the core point, and then once that’s done unleash hell by vaporizing the boundary.
                      :)

                • Dan Kervick December 10, 2012 at 10:35 pm

                  BOTH normal quantitative easing and platinum produce reserves as the end form of the same amount of $ 1 trillion in deficit financing.

                  QE involves the purchase of financial assets – sometime Treasuries, sometimes assets issued by the private sector. Financial assets in the form of dollars are injected into the private sector, but financial assets in the forms of various kinds of securities are extracted at the same time.

                  Within the QE mode, the difference between normal quantitative easing and platinum easing is that the former includes original bill issuance and subsequent bill repurchase, for a net bill issuance of zero and net reserve issuance of $ 1 trillion.

                  You would have to do an insane amount of bill issuance to get a net reserve issuance of $1 trillion. Suppose Treasury sells, say, a trillion dollars in T-bills to primary dealers for, let us say, $990 billion. Then let us, suppose those dealers immediately sell those bonds to the Fed for some price greater than the purchase price but less than the face value – say $995 billion. Then assume Treasury redeems the bills, now held by the Fed, on schedule, and that the interest is ultimately returned, as per law, to Treasury. That means Treasury sends the Fed $1 trillion and the Fed sends Treasury the $10 billion of that amount that constitutes interest. What is the net effect on the dollar balances of the three balance sheets:

                  Treasury +$990 billion – $1 trillion + $10 billion = $0
                  Dealers: -$990 billion + $995 billion = +$5 billion
                  Fed: -$995 billion + $1 trillion – $10 trillion = -$ 5 billion.

                  The net addition to the reserves is 1/200th of the face vale of the T-bills. So to get a net reserve issuance of a trillion dollars by the same operation, Treasury would have to sell $200 trillion in T-bills. Platinum coin issuance is an entirely different animal. If the executive branch issues a $1 trillion platinum coin to itself and deposits it in its Fed account, and then spends the balance, you get a flat $1 trillion in reserves injected. If the Fed pays $.25% interest on those reserves, you get a straight-out government issuance of $1 trillion + $2.5 billion.

                  Similar considerations apply if the Fed does QE buy buying private sector assets. Suppose company A owns $1 billion in bonds issued by company B. Suppose the Fed then buys the bonds at some reasonable market price that is profitable to company A, let’s say $1.001 billion. Then company B pays off the bonds on schedule, sending $1 billion to the Fed. Net result on dollar balances:

                  Company A +$1.001 billion
                  Fed: -$1.001 billion + $1 billion = -$1 million
                  Company B: -$1 billion

                  So, the net impact on private sector dollar balances is +$1 million, or 1/1000th of of the face value of the bonds. The Fed would have to purchase $1 quadrillion dollars in bonds from the private sector to do a $1 trillion dollar injection in this way.

                • Dan Kervick December 10, 2012 at 10:44 pm

                  I suspect one mistake you are making is that you are somehow identifying this as a deficit. It is not. It is only a funding transaction. The deficit occurs when Treasury spends that amount. The result is a deficit of $ 1 trillion funded by reserves of $ 1 trillion.

                  Yes, agreed. Except to point out that unspent treasury balances are not classified as “reserves”.

                  That is the same deficit of $ 1 trillion with the same reserve result of $ 1 trillion as occurs when the Treasury spends $ 1 trillion, funds it with bills, and then the central bank repurchases the bills. And all that represents conventional quantitative easing.

                  No, the result is not the same. As outlined about, the net injection of reserves here will be less. Once the Fed has purchased the $1 trillion in T-bills, Treasury has an outstanding $1 trillion liability to the Fed. If Treasury spends an additional $1 trillion as a result of the sale of bills, it will then need to collect $1 trillion to settle with the Fed. Whether it taxes or sells more securities to do this, it will drain reserves when it does.

          • beowulf December 10, 2012 at 2:25 pm

            “Again, you seem to be avoiding the fact that Treasury sells T-bills. It doesn’t just issue them.”
            All bond issuers are sellers but not all sellers are issuers.

            • Dan Kervick December 10, 2012 at 10:55 pm

              Yes, beowulf, but platinum coin issuance then is like neither. In the end, after the bureaucratic jiujitsu, the platinum coin operation involves the government just unilaterally augmenting its own spending balance by an arbitrary amount, and then spending it. It sells nothing, and so there is no offsetting drain of private sector assets.

              • Jose Guilherme December 11, 2012 at 4:11 am

                You just have to compare the Fed’s balance sheet in the case of TDC issuance versus a direct Bond sale of the Treasury to the Fed (the pure neo-chartalist model).

                Fed BS with TDC issuance:
                Assets – TDC; Liabilities – Trillion Dollar government deposit

                Fed BS with Direct Bond sale to Fed:
                Assets – Trillion Dollar in T-Bonds; Liabilities – Trillion Dollar government deposit

                The two situations are alike except for the fact that the Bond is an interest earning asset.

                • Dan Kervick December 11, 2012 at 9:30 am

                  What is the impact on private sector balance sheets?

                  • Jose Guilherme December 11, 2012 at 11:55 am

                    The second step would be spending by the government.

                    In both (the TDC issuance and the Direct Bond Sale to the Fed) cases the commercial banks’ reserves increase by $1 Trillion and said banks’ liabilities (deposits of household and firms, who are the beneficiaries of government spending) increase by that same amount.

                    Of course, with such a large injection of reserves in the banking system, the overnight rate will tend towards zero. To prevent this, the Fed can either:

                    a) Sell the Treasury bonds to the banks (alternatively, it might also pay IOR) in the Direct Bond Sale to the Fed case.

                    b) Pay IOR in the TDC issuance case (only option available to the Fed here).

                    Anyway, under both scenarios the bank deposits of the private, non-bank sector increase by $1 trillion.

                    • Dan Kervick December 11, 2012 at 7:54 pm

                      Of course in the case where the Treasury sells the Fed bonds, the Treasury then owes the Fed a trillion dollars.

                      Compare these three operations:

                      1. Congress orders the Fed to credit $990 billion dollars to Treasury’s account – end of story. Treasury spends the $990 billion.

                      2. Congress authorizes the Fed to do a $990 billion helicopter drop. The Fed sends checks to households all over the country. Those checks are deposited in bank accounts all over the country, and when the banks present them back to the Fed, the Fed then credits the reserve accounts of those banks to the tune of $990 billion. End of story.

                      3. Treasury sells $1 trillion in T-bills directly to the Fed for $990 billion. This means the Fed credits $990 billion to Treasury’s account, and Treasury then owes the Fed $1 trillion, of which $10 billion is interest. Treasury then spends the $990 billion. It then pays the Fed the $1 trillion it owes it, of which $10 billion is returned to Treasury.

                      I think the difference between these three alternative operations is clear. 1 and 2 are the same. The government issues $990 billion and spends it. It’s just a different branch of the government doing the issuing. Although the private sector gets $990 billion, Treasury’s account balance is $0, so Treasury’s spending space is unchanged.

                      In alternative 3, the outcome is quite different. The net impact on Treasury’s balance is -$990 billion. In operation 3, there is no net issue of money. Fed sends Treasury $990 billion and Treasury then sends Fed $990 billion. Treasury also spends $990 billion. So its account is depleted.

                      Note the net impact of alternative 3 would be unchanged if Treasury spent $990 billion in January, and then Treasury and the Fed did the entire bond sale and redemption part in February. There is no net issuance of dollars; rather the dollars the private sector gets are matched by a $990 reduction in Treasury’s balance.

                      I would submit that the TDC issuance is analogous to 1 and 2, not 3. There is a loophole in the law that allows the Treasury to issue money to itself in the form of a coin, and then deposit that money in its Fed account by swapping the coin form of money with an electronic balance form of money. There is a net issuance of money.

                    • Jose Guilherme December 11, 2012 at 9:21 pm

                      Dan,

                      I would say that if a Treasury can sell Bonds directly to its central bank, then it follows that said Treasury can always finance its expenditures or roll over its debt by borrowing from its central bank.

                      So in the next period Treasury will sell new bonds to the Fed – both to roll over its debt and to finance new deficit spending.

                      And every time Treasury spends it creates money, that is, deposits at commercial banks.

                    • Michael Sankowski December 11, 2012 at 9:46 pm

                      Dan – Watch it. You are a hair away from going over to the MR side. ;)

  • James A. Kostohryz December 10, 2012 at 8:03 am

    For anybody interested, I just published an article on Seeking Alpha on the Trillion Dollar Coin Issue

    http://seekingalpha.com/article/1054491-the-trillion-dollar-coin-idea-beyond-stupid

    I welcome your comments in the article.

    James A. Kostohryz

    • JKH December 10, 2012 at 9:08 am

      Comments:

      Very well written, and I don’t disagree with the thrust of it in terms of a general attitude toward monetary economics.

      (BTW, MR is not an MMT blog)

      “The US treasury must finance any amount of government spending in excess of government revenues via the issuance of debt”

      Case closed then – if the coin doesn’t constitute revenue (and I don’t think it does), and IF what you say is legal fact that overrules the coin legality. But is it?

      “The US Treasury must seek congressional approval to issue debt beyond a certain level.”

      Can you explain why you think that isn’t just as stupid? It’s moot, given required Congressional authorization for taxing and spending.

      “The quantity of the monetary base in the US is to be set by the Federal Reserve”

      Minor point, but I don’t believe Treasury balances at the Fed are part of the monetary base as defined by the Fed. Maybe there’s a Fed definition somewhere to the contrary – if so, would appreciate your pointing to it, thx.

      “Second, if the US Treasury could issue a trillion dollar coin to finance its spending, it would be creating money that has absolutely no fundamental backing. By contrast – and contrary to popular belief – when the Fed engages in QE-type open market operations, it is not “creating money out of thin air.”

      You’re quite wrong on this part. None of reserves, bonds, or banknotes have asset backing, and they rank parri passu in that characteristic.

      he fact that the Fed holds bonds has no bearing on that characteristic.

      Taxes represent contingent future income backing as necessary, but taxes back all of those liability forms parri passu again.

      “Any money issued by the US Treasury under the Trillion Dollar Coin proposal would not have any such backing”

      It has exactly the same backing or lack of backing as noted above, once Treasury balances are spent and become reserve balances.

      “These arguments completely miss the point.”

      No. The point is that the debt ceiling is silly and highly dysfunctional when used politically. That silliness is what the coin proposal responds to.

      The implementation of the coin proposal is in its effect a form of QE, as I’ve described elsewhere. Debating QE is a separate issue, along the lines of your more general observations on monetary economics and policy, which I think are fine – although there is a debate to be had about balance.

      So — perhaps you could explain why you think the debt ceiling isn’t silly – because that is the key to the rationale for the proposal, IMO.

      (Not that I think it will be accepted – but that the thinking behind it should be understood)

      • Clonal Antibody December 10, 2012 at 9:39 am

        I would add one more law that dates back to 1864, which is operational in this context – and that was a direct result of the adherence to a gold standard, and that was the limit (which has never been raised since 1864) on the number of US Notes that could be issued by the Treasury of $450 million. At that time, there was no limit on the amount of coinage. The US Treasury could in fact choose to pay the bills of the US by issuing one trillion $1 coins, and paying everybody by those coins. This option is somewhat constrained because of the tediousness of the issuing. So in principle, the $1 trillion coin is no different than 1 trillion $1 coins.

      • James A. Kostohryz December 10, 2012 at 3:11 pm

        Hi JKH.

        I absolutely think the debt ceiling legislation is bad legislation. But in a constitutional liberal democracy there are procedures established that enable bad legislation to be changed. That is the point. Just because one thinks a law is bad or that the legislative system is dysfunctional does not mean that one can resort to the sort of legalist shenanigans involved in the Trillion Dollar Coin proposal. As I said, if such tactics were considered legitimate, no law or institution would be safe.

        Finally, I never talked about asset backing. I said “backing.” The base money issued by the Fed used to purchase Treasuries is a liability of the Fed. This liability is backed by a valuable asset, which in this example is a US Treasury bond. In the TDC scenario, this principle is not preserved; in this case the money has no corresponding backing. MMT (and MR, I believe) talks about this in terms of “unsterilized” money creation.

        • JKH December 10, 2012 at 3:31 pm

          Hi James,

          Regarding your first paragraph, I agree. And I think that’s exactly how Obama will look at it. (We have information that he is aware of this proposal.)

          For me, there are at least two productive outputs from the entire discussion. The first is that is does draw attention to the political dysfunction potential of the debt ceiling. And even if the counter in this case is tilted in some moral skew, it matches the tilt of the debt ceiling when used in the way that it has been. But it does draw attention to the redundancy and internal contradiction of the debt ceiling process as an inherent component of what should be an integrated expenditure approval and enabling process.

          The second is that the discussion is fairly intense in term of the economic issues that underlie it. Just consider “backing” as one of those issues.

          I’d say a treasury bond held by the Fed constitutes no more economic backing for the reserves it issues than does a piece of overpriced platinum. The fact is that the government budget deficit is being funded by reserves in both cases – from an economic perspective.

          You may have a point to a degree when looking at this from an institutional perspective. But the relevant institutional perspective is inextricably linked to the economic view – and that’s because the United States is not Greece – to use a favorite example originally emitted from St. Croix. The US Congress has total institutional control over the configuration of the Fed and the Treasury and can change it whenever they want. To use a flippant example, they can convert the whole thing into a “central treasury bank” (CTRB), which is an actual fused institution concept that offers liabilities in all forms seamlessly – reserves, banknotes, bills, bonds. And in that form, any asset held that corresponds to a Treasury bond is entirely an internal asset and liability in both economic and institutional terms.

          So on that contingent institutional basis, there is no institutional backing, and because of the power of the US Congress, there is no effective economic backing in terms of that type of asset.

          Cheers

    • Michael Sankowski December 10, 2012 at 9:20 am

      it’s a decent article despite the wrong conclusion.

      1. Totally Disagree. The law is the law. We are a nation of laws.
      2. Disagree. The TDC isn’t necessary unless someone is already “Flagrantly violates democratic principles and institutions”. The debt ceiling has never – never – been used politically to extract concessions. The 14th amendment prohibits questioning the debt of the United States. In short, the only reason the Coin is necessary is because someone else decided to throw out the way things have already been done, get technically legalistic within the existing laws of the land, and then try to jam something down our throats. This is exactly when and how new norms are created. I am not happy we have to go to these lengths to get around a stupid law like the debt ceiling. I am even less thrilled we have to do this in response to some people being complete #$%@s and using the debt ceiling as a negotiating chip. But someone broke precedent, so now the entire process is up for debate.

      3. Nah, but possible. The Central Bank hasn’t been very independent ever. The Fed greatly favors republican presidents through looser monetary policy, which is a form of non-independence. Also, I trust the U.S. President and even congress to do the right thing. (P.S. I fully expect to spend my 80′s writing about high inflation. We’ve got a few decades to live through before that happens.)

      4. Come on. It’s Platinum Coin Easing, because the effects are so very similar to Quantitative Easing. The coin effectively a form of QE.

      • James A. Kostohryz December 10, 2012 at 3:25 pm

        1. There is a difference between the rule of law and legalism. Cultures that do not understand this are dysfunctional because any and all system of laws have conflicts, gaps and ambiguities.

        2. I sympathize with your point, but it is irrelevant. If you don’t like the law, then there are procedures set up in a liberal democracy to change it. Furthermore, it would be far better to reach the debt ceiling (which does not imply default; that is a myth) than to engage in the sort of destructive shenanigans contemplated by TDC.

        3. It’s not either or. There is no such thing as total monetary independence, just as there is no such thing as total judicial independence. That does not mean their are not important.

        4. No. There is a fundamental difference. Even if the short-term “effects” were similar that does not mean the long-term effects are the same. There is a philosophical parallel: utilitarianism versus rule utilitarianism. They are not the same thing.

        • beowulf December 10, 2012 at 4:10 pm

          “There is a difference between the rule of law and legalism. Cultures that do not understand this are dysfunctional because any and all system of laws have conflicts, gaps and ambiguities… There is no such thing as total monetary independence, just as there is no such thing as total judicial independence. That does not mean their are not important.”

          Contrary to what they apparently teach in Economics graduate programs, the Constitution (with absolutely no attention paid to micro-foundations) stops at only three Branches of Government– Executive, Legislative and Judicial.
          The Fed isn’t an independent Branch, its a part of the Executive. The President can fire Fed governors (albeit, “with cause” like its a union gig), he cannot under any circumstances fire judges.

          Its a good thing too because under our Constitution, its up to the Judicial Branch to separate “the rule of law” from “legalisms”.
          Its like Justice Holmes said, “The prophecies of what the courts will do in fact, and nothing more pretentious, are what I mean by the law.”

  • Jose Guilherme December 10, 2012 at 6:26 pm

    JKH
    But having determined that boundary, demonstrate the core point, and then once that’s done unleash hell by vaporizing the boundary.

    </blockquote

    Exactly!

  • Robert Owens December 15, 2012 at 8:20 am

    I am all for thinking outside the box and trying to solve problems. The TDC (non-transferable non-circulating money on deposit at the Fed) sounds a lot like the big rock at the bottom of the ocean described here:

    http://www.thisamericanlife.org/radio-archives/episode/423/the-invention-of-money

    The TDC could just as easily be a non-circulating virtual coin, kept track of the same as all the other electronic money that makes up the vast majority of our “currency”.

    Doesn’t the TDC reinforce that money is just an idea and a creature of law?

    All of the concern, fear mongering, and political wrangling about government debt, deficit spending and slashing budgets seems to be misplaced. Meanwhile, people’s lives are being ruined by personal debt and unemployment, when there is all kinds of work that needs to be done, that could be sponsored by the federal government. No need for taxes (except for inflation control), bonds or budget deficits to pay for it. National wealth, public good, and value creation all come from people working. The TDC concept reinforces the idea that money is a limitless resource, and shows that talk about money scarcity is based on unenlightened thinking. The real finite resource is the number of productive labor hours that each of us has available to earn a living. A lot of those hours are getting wasted right now. That is the real shame in all of this.