I was watching Bloomberg this morning, and the trillion dollar coin came up again. Joe Weisenthal and Josh Barro were both on discussing the merits of their case in the following clip:
If you’re unaware of the situation, Ryan Avent at The Economist sums it up briefly:
America’s government is full of oddities, and here’s one: it is possible for the government to pass spending and tax bills which lead to an illegal amount of accumulated debt. The government’s borrowing results from all the tax and spending choices made by past and present elected officials and leads to annual deficits that add to a strock of public debt. Once the tax and spending choices are made, the resulting debt load is a fait accompli, a residual. Yet said elected officials have also seen fit to pass a law declaring that debt must fall below a specific limit. From time to time, then, Congress has to pass a law raising the limit—essentially, declaring its past choices legal—or face dire fiscal consequences. If the limit is reached and not raised government outlays must be cut immediately and dramatically or the government must default on some of its debt-interest payments.
The idea to get around the debt limit is the minting of a trillion dollar coin, which would allow the US government to write checks against that coin, instead of borrowing money. This idea has received quite a bit of discussion, and Barro has written again defending the proposal and tackling most of the rebuttals, which gives me a nice platform to discuss the issues with the idea.
Here are my responses to the most common objections we are getting to the platinum coin proposal, in increasing order of persuasiveness:
1. “That’s silly/zany/juvenile!” This is probably true, but it’s not a dispositive objection. Republican intransigence over the debt ceiling is juvenile. There is no particular reason that the president should not use a juvenile strategy in response.
The key question to ask about the platinum coin is not “is it juvenile?” but “will it work?” Minting the coin will allow the federal government to continue to meet its spending obligations despite hitting the debt ceiling. It will allow President Barack Obama to pressure Congress to repeal the debt ceiling. That — not whether it seems silly — is the important thing.
I personally don’t care about how juvenile the situation is. Quite frankly, the idea that everyone who happens to disagree with you is juvenile in some way is itself juvenile. Those sorts of remarks have been made by people writing from all of the mainstream viewpoints in recent weeks and months. But regarding whether or not the idea will work, if by ‘work’ what is meant is the continuation of increased government spending, the answer is yes. Barro is right in that regard. Continuing:
2. “Where will we get all the platinum?” I’m honestly surprised by this question, but I’m hearing it a lot, including from the Guardian’s Heidi Moore and from Keene this morning.
To be clear: We do not need a trillion dollars’ worth of platinum to make the trillion-dollar coin — less than an ounce will do. This is not a move to a “platinum standard,” and it shouldn’t even have any impact on the markets in platinum. There will be no need for dump trucks full of precious metal to head toward the mint.
This is also correct. Moving on:
3. “But that will be inflationary!” This is a more serious objection, and it gets at what the platinum coin strategy really is — financing the federal government’s operations by printing money instead of borrowing it. The trillion- dollar coin will never circulate, but it will be used to back cash payments coming from the Treasury that would have otherwise been financed by bond purchases.
If the government financed itself this way in general, that would absolutely be inflationary. But the president can hold inflation expectations steady by making absolutely clear that the policy will not lead to a net change in the money supply over the long term. Obama should pledge that once Congress authorizes additional borrowing, he will direct the Treasury to issue bonds to cover the government’s coin-backed spending and then to melt the coin.
What Barro misses is that the bold will effectively happen even if the operations are financed by borrowing, because the borrowed money will coming from the Federal Reserve by way of Quantitative Easing. To elaborate, if the debt ceiling is raised by $1 trillion, the Treasury will be able to issue more debt which will be purchased by Primary Dealers. These Primary Dealers turn around and sell those Treasuries to the Fed – which purchases them with newly printed money. Either way, $1 trillion of mostly new dollars will be entering the US economy, which will be problematic as Barro implies. The real issue here is that by doing this via a $1 trillion coin as opposed to through the issuance of Treasuries, there is no way for the Federal Reserve to ‘mop up’ the liquidity should inflation (as defined by the CPI) rise.
In the above clip, Weisenthal suggests that the coin wouldn’t be inflationary because it wouldn’t be a ‘helicopter drop’ on the economy. But that is precisely what it would be, given there is no security issued and bought by the Fed which could be then sold at a later date to remove that money from the system. The coin itself is not like a Treasury Security – the coin is supposed to be money itself. (Edit: many have suggested that the Fed could offset this by simultaneously selling some of the Treasuries it already owns. This tightening completely defeats the purpose of the coin in the first place, which is to ‘finalize’ spending which has already been approved, largely in the name of stimulus. At best there will be no net stimulus to the economy – which I doubt Weisenthal wants. Thus the coin will have to be implemented with no subsequent selling of Treasuries by the Fed for the ‘stimulative’ impact to sustain.) Barro seemingly understands this point, which is why he writes that Obama should pledge instant replacement of the coin with Treasury issuances, precisely so the ability to withdraw the new liquidity from the system exists. Ostensibly this withdrawal will happen when the economy recovers.
However, as I wrote yesterday, economic recovery in the context of the US model for economic growth means ever increasing the level of debt to finance spending. With the household sector being unable to shoulder that burden, the Federal Government is the only entity in the position to do so. This means that large deficits and increased debt issuances are to be the norm going forward, as will be the purchases of Treasuries by the Federal Reserve and subsequent injections of new money into the system. In other words, the Fed will never be able to sell the increasing stock of Treasuries it owns back into the market, because the ‘recovery’ itself exactly depends on the increase of debts in the first place. Not to mention the devastating effect on large institutions which have loaded up on fixed income at low interest rates when the largest player in the bond market unloads on it. But that’s for another day. Barro’s last remark, pertaining to confidence:
4. “This will undermine confidence in the U.S. government/dollar/central bank.” Well, it’s all relative. The best solution, from a confidence perspective, would be for Congress to simply repeal the debt limit, or at least increase it without conditions, thus eliminating this manufactured “crisis” and any need for a trillion-dollar coin.
Whether trillion dollar coin or increased debt limit, more money will be introduced into the US economy, with the purpose of paying for spending which Congress has approved. Both Weisenthal and Barro make this point in the clip. Failure to raise the debt ceiling would mean that some of that spending would have to be cut, or that some of the debt would have to be defaulted on, as Avent states. We have three ways to pay for spending: taxation, borrowing and printing. The American populace at large resists increased taxation, as does the political class, evidenced by the fiscal cliff negotiations last month. Therefore borrowing and printing are the two options open to the US government to pay for the spending it has undertaken. Printing and borrowing is slowly becoming one and the same, given the Federal Reserve is playing a larger role, and is celebrated for doing so by the likes of Weisenthal and Barro. The payment of interest with newly printed money is tantamount to default, as receiving currency that is worth less than was borrowed results in a loss of purchasing power to the lender. This is functionally no different to receiving less nominally, as one would through an explicit default.
The benefit of an implicit default from the prospective of the borrower is the fact that confidence is upheld: the implications of not receiving any payment are much worse psychologically than receiving a devalued payment. As written in my piece yesterday, that sort of psychological appeasement does not represent a solution in the long term. The ultimate problem is rooted in an economic system that requires debt to increase in perpetuity in order to achieve growth. Such a system inevitably runs into a point which the amount of debt taken on can’t be serviced by the existing income. The fact that governments can temporarily circumvent that issue by transforming nominal declines into real declines is of no solace. The end result is a prolonging of the problem, as opposed to a real, lasting resolution.