On a trillion dollar platinum coin
This week I also got a question about the “trillion dollar platinum coin.” Sadly, we did not have space to put it in the WSJ column, so here it is:
Hi Dan,
Yet another random person on the internet who finds your research interesting and illuminating.
The current bit of economics controversy in the news left me wondering about your take on the trillion dollar platinum coin as a means for avoiding a US default via the debt ceiling. There’s debate on the legality, but there’s also the broader political question of whether or not it’s a “good idea” — which depends on what principles you work from to measure how “good” a consequence is. This leaves me wondering about YOUR expectation about the possible outcomes of such a move.
—abb3w
In my mind, the real issue here is trust. After all, with the amount of debt that the US has right now, we are at the hand of our creditors. If one day they decided to knock on our proverbial door and ask for their money back, we would be in deep trouble. From this perspective, the question is whether such a “trillion dollar platinum coin” would make us appear more trustworthy (as a creative nation that comes up with innovative solutions), or less trustworthy (as a nation that has to resort to shady maneuvers to manage its internal debates). If I had to bet, I would guess that other countries would take the less favorable interpretation of such a move. Moreover, as we know, ones’ initial perspective colors the interpretation of new data, and given the economic hernia that the US has created or contributed to, my guess is that trust in our financial system is not something to write home about.
With all of this in mind, I would try to make the next financial deal one that improves the way that the world looks at our financial health.
(Plus, you can buy a trillion dollar platinum coin for $19.95 on ebay)
The Honest Truth About Dishonesty: How We Lie to Everyone - Especially Ourselves
I trust a country that prints/mints new money to payback debt more than one that simply borrows further.
Both are inflationary but created money can always be uncreated, where as borrowed money will have to be paid back at some point.
Agree with Tom
They usually to both: first borrow more, then print. More bang for the new bucks.
I trust countries that tax their rich more than their poor, it is the sign of a healthy democracy. I trust the US to do what makes the top 1% in America the most money, regardless of the results to the rest of the world. This trillion dollar hypothesis is laughable. They need to do what they did under World War 2 and the decades after it, tax tax tax the rich until Warren Buffett punch food stamps for half a decade and its fixed. Then regulate the amount of money the banks can invest on every dollar their account holders have (If 10% of their account holders withdraw their money in a day the bank should not go bankrupt, and if 10% of the loans default the bank should not go bankrupt, if 10% of the banks go down, the insurance company covering the banks should not go bankrupt).
It seems to me the problem is not the platinum coin itself, but the GOP being willing to use the debt ceiling for political extortion. A platinum coin in the case of not raising the debt ceiling, is clearly better than default.
It should also be noted this is a highly complicated issue. We don’t know how much debt the US can accrue before the markets really begin to worry. It’s however clear the US is not Greece and rather a lot like Japan, who can still borrow extremely cheaply although its got the highest debt to GDP ratio in the world. The US itself is borrowing at historically low costs, so it’s hard to argue there is immediate reason for concern.
The US has real fiscal concerns, but they are very manageable with good policies. The toxic environment in Washington might actually be a larger reason to worry than the deficit itself. The GOP is highly unwilling to raise revenue, even though raising taxes on the rich is very popular among voters. And then there is the issue of what spending cuts to make in the medium-long run. In the short run it’s very dangerous as it will weaken demand and cannot be offset by monetary policy. When the US is out of the liquidity trap, austerity will however be in order.
But what cuts to make? The GOP has an obsession with making the spending cuts that hurt the most but makes the least difference. There are issues with social security, but the alarming rise in costs of health care is much more important. The US has got to get those under control. The GOP is however a large obstacle. The ideal solution is single-payer, but the GOP will keep pushing against it and for non-evidence based “market” solutions. Cutting the defense budget is another obvious policy that should be implemented.
Frode has totally got it all right. Once creditors agree to hold debt n the currency controlled by the debtor, their primary concern is default, not the entirely predictable minting of additional money via whatever means the Treasury does it – it matters not at all to them whether it’s 1 trillion in $100 bills or in a single platinum coin. I would expect the creditors to be breathing a sigh of relief that the Obama administration has found a legal means to avoid default regardless of what the insanely stupid GOP does.
Dan, obviously macroeconomics are not your “thing” based on your comment: “my guess is that trust in our financial system is not something to write home about.” – ignoring for a moment the possible topic shift from the credit of the US govt to the “financial system” writ large, and sticking to the original issue, there’s no need to guess, because this is one area in which we have a completely reliable global free market to tell us the answer, known as the bond market. And as Frode points out, the historically low interest rates that the US govt has to pay right now is the clearest proof you could ask for that the trust of those who actually matter to this sector of the economy, the creditors, is most definitely something to write home about.
First of all, the concept of trust more and more sounds archaic. There are more or less corrupted countries. Secondly, if minting a coin is according the law, the law that has been already in force, I really do not seen what this act is a big issue at all. We have already witnessed selling and buying factories for a cent or for an euro, havent we?
China has stopped buying our treasuries, I think about two years ago.
Thank you! We need your clear vision in the White House.
Still, as long as politicians insist on bringing in their cronies in as advisors rather than gathering all the wise minds in the nation to help him, rather like the Biblical King Rehoboam who listened to his cronies rather than the wise, and with the same outcome, Those who never studied history and given it thought are doomed to repeat its mistakes–and garner the same ends.
Instead of just printing money, does the US government have any sizeable assets that they can sell off to reduce their debts? One crazy theory that I saw floating around the internet was that they should sell Alaska. That’s pretty wild, however surely there are a lot of underutilised army bases and government land holdings that can be sold off to reduce the debt levels?
The current US debt itself is not a serious enough problem to warrant that kind of action. The US’s long term problem is entirely one of out of control health care costs – if the US paid per person what most western European countries did, the US budgets would be in surplus, not deficit, and we’d be lowering the debt in absolute dollars, not just relative to GDP. Before we go selling off Guam or Puerto Rico, maybe we could fix the health care system?
I agree.
Dear Dan,
I cannot agree with the statement that “with the amount of debt that the US has right now, we are at the hand of our creditors. If one day they decided to knock on our proverbial door and ask for their money back, we would be in deep trouble”.
Let’s talk about China. They ran a trade surplus for years, accepting payments in USD for the goods they exported and then refusing to buy a corresponding quantity of goods and services from the US. This helped achieving certain economic and political goals (we can debate whether this was optimal or suboptimal from their point of view). At the same time real goods kept arriving in the US in exchange for US currency – what was good for the American customers. The Chinese Central Bank was maintaining a peg, buying up all the USD at a certain price in the local currency. The Chinese Government decided to buy American Treasury bonds (the US debt) spending their currency.
What would happen if the Chinese (or Russians) wanted to liquidate their holding of US T-bonds? Well, all they can get are USD (another form of financial assets – or US Govt liabilities, looking from double-entry accounting point of view). The Fed can always defend the bonds yield curve without compromising its monetary policy stance (that is overnight deposit rate at the interbank market – the quantity of currency is irrelevant, both cannot be controlled at the same time as there is only one degree of freedom).
Nothing bad will happen. No “deep trouble” at all.
All the Chinese, Russians and other trade surplus countries can do in order to get rid of the USD is to reverse the process which led to the accumulation of the assets that is to run trade deficits with the US. This would only stimulate US export industries.
Please have a look at “The 7 Deadly Innocent Frauds of Economic Policy” by Warren Mosler (available on Amazon or from his personal website).
Of course one can imagine a politcally-motivated action aiming at the destabilisation of global trading and financial markets. Wouldn’t this hurt the Chinese or Russians more than the Americans? This has nothing to do with the issue of losing “trust” mentioned in the article and can be defeated by introducing capital controls.
The mechanics of Fed operations maintaining overnight rate are explained by prof Scott Fullwiler in the following article:
http://neweconomicperspectives.org/2013/01/understanding-the-permanent-floor-an-important-inconsistency-in-neoclassical-monetary-economics.html
Finally let me explain why I wrote some comments on your blog. I really have enjoyed reading your books in which you thoroughly debunked myths constituting the foundations of neoclassical (and Austrian) microeconomics. I strongly believe that you will never be able to retrofit or reconcile behavioural microeconomics with the neoclassical or Neo-Keynesian macroeconomics. The ideas of human “predictable irrationality” (or “sur-rationality” for the good and the bad – aren’t we more than dumb automated devices maximising the utility function?) are only perfectly compatible with Post-Keynesian school of economic thought.
It’s time to rediscover Abba Lerner, Michal Kalecki and Hyman Minsky.
“with the amount of debt that the US has right now, we are at the hand of our creditors.”
The US government is a sovereign issuer of its own currency. It does not have to worry about running out of money or ever being forced to miss a payment.
Bonds are not means of financing government activities from the private sector per se. Their real function is to control the short-term overnight interest rate, not put money in the government kitty. Treasury has the unique ability to roll over these bonds into perpetuity, at whatever interest rate it desires.
All of the above has been clearly and explicitly echoed by such flaming radicals as Ben Bernanke, Alan Greenspan, and the Veep of the St. Louis Fed.
There is not, and there never will be, a sovereign debt crisis. The only debt problem to worry about is private debt. That is what is killing the economy and must be fixed.