Guan’s blog


Assorted #mintthecoin thoughts

07 Jan 2013

The US debt ceiling is a very silly idea (unlike the Danish debt ceiling), so Joe Weisenthal and others are pushing for an equally silly way to defuse it: the Treasury should mint a trillion dollar platinum coin, deposit it in its account at the Fed, and use the money to fund the federal government. Steve Randy Waldman proposes to mint a million million-dollar coins instead and pay creditors with them directly, what you could call the #mintthecoins solution.

The power to mint platinum coins is pretty clearly laid out in 31 USC § 5112 (k):

The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.

It’s true, as many critics have pointed out, that the intent of subsection (k) is for the US Mint to produce bullion coins for investors and proof coins for collectors, such as the current $100 platinum coin. But the Mint doesn’t do this to be nice to platinum bugs or because it’s fun. The intent was always to raise money for the Mint, and if there’s anything left over, for the Treasury at large. In 2012, the Mint made a operating profit of $37 million and $128.7 million in seignorage, and transferred $77 million to the Treasury. You know what’s cooler than 77 million dollars? How about a trillion dollars.

A lot of #mintthecoin supporters have pointed out that it won’t cause hyperinflation or even regular inflation. I want to spell out the reason. The Fed ultimately controls how much inflation there will be in the US. How would they do that if the Treasury starts minting trillion or even million dollar coins? They would sterilize the extra money being created. Take a look at the Fed’s balance sheet. They hold $1.7 trillion worth of Treasury bonds. When the Treasury needs to pay a bondholder or a defense contractor a million dollars and sends them a platinum coin, the Fed can sell a million dollars worth of Treasury bonds from its portfolio. The net effect is that no new money has been created, but a million dollars of T-bonds have been sold. That’s exactly what would have happened without a debt ceiling.

What if the House Republicans let this go on for years and the Fed runs out of T-bonds? Well, they have another $927 billion in mortgage-backed securities that they can sell. The effect on the markets won’t be exactly the same, but at least inflation will be under control. After its entire $2.9 trillion balance sheet is exhausted, which may not even happen if deficits are under control by then, the Fed would have to undertake extraordinary measures to sterilize #mintthecoin, and would essentially replace Treasury borrowing with Fed borrowing. It’s not totally accurate to say that #mintthecoin would be the President making monetary policy because the Fed would still retain a lot of control over monetary policy, but the Fed would have to change its policy to account for the platinum coins.

Keep in mind that the Fed has already committed to buying $85 billion in assets per month as part of QE3, so for the first $85 billion of monthly platinum minting, they can just reduce those purchases to sterilize the platinum coins.

Tim Fernholz at Quartz explains that the Obama administration won’t actually mint the coin—which is true, but we’re trying to persuade them to!—but goes wrong here:

Those who fear that President Obama lacks leverage in negotiations may be over-estimating Republican willingness to take the blame for a default, financial crisis, austerity-driven recession, or some combination of the three.

Except some Republicans welcome a default, and President Obama has already caved once on the debt ceiling. If the platinum option is abandoned, Republicans will know Obama will cave since he wants to avoid a default or a financial crisis regardless of who is blamed, and so he will have no leverage. This is very different from a govenrment shutdown scenario or the recent fiscal cliff showdown, where the consequences of failing to reach a deal are bad, but not disastrous.