Monetary Realism

Understanding The Modern Monetary System…

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.”


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.

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.”


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144 Responses

  1. Robert Owens says

    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:

    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.

  2. Michael Sankowski says

    That’s pretty good.

  3. Tim Ayles says

    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!

  4. Michael Sankowski says

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

  5. Jose Guilherme says


    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.

  6. Dan Kervick says

    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.

  7. Jose Guilherme says

    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.

  8. Dan Kervick says

    What is the impact on private sector balance sheets?

  9. Jose Guilherme says

    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.

  10. Dan Kervick says

    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.

  11. Dan Kervick says

    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.

  12. Dan Kervick says

    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.

  13. Jose Guilherme says

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



  14. Jose Guilherme says

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

  15. beowulf says

    “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.”

  16. JKH says

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


  17. JKH says

    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.

  18. JKH says

    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.


  19. Jose Guilherme says

    “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.”


    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.

  20. James A. Kostohryz says

    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.

  21. James A. Kostohryz says

    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.

  22. JKH says

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

  23. JKH says

    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.

  24. beowulf says

    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.

  25. Dan Kervick says

    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.

  26. beowulf says

    “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.

  27. JKH says

    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.

  28. Dan Kervick says

    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.

  29. Clonal Antibody says

    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.

  30. JKH says

    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

  31. Michael Sankowski says

    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.

  32. JKH says


    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)

  33. James A. Kostohryz says

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

    I welcome your comments in the article.

    James A. Kostohryz

  34. Clonal Antibody says

    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!

  35. Jose Guilherme says

    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.

  36. Dan Kervick says

    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.

  37. Dan Kervick says

    “… 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.

  38. Dan Kervick says

    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.

  39. Robert Rice says

    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.

  40. Michael Sankowski says

    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.

  41. Geoff says

    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.

  42. beowulf says

    “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

  43. JKH says

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

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


  44. beowulf says

    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.

    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)