Coin Seigniorage: A Legal Alternative and Maybe the President’s Duty

By Joe Firestone
(Cross-posted from Correntewire.com.)

(Author’s Note; Many thanks to lambert strether, beowulf, and Yves Smith for their reviews of this post)

Well, the debt limit crisis is upon us. Treasury Secretary Geithner says the US Government will not be able to meet all its obligations on August 3, unless the debt ceiling is increased by Congress. The Secretary says he is out of moves to extend this date. I don’t think that’s true. I think he can use proof platinum coin seigniorage to supply all the money needed to spend Congressional Appropriations. I do not know if the Administration knows about this idea yet. It may, and it may simply have been unwilling to mention it for its own reasons. But just in case it doesn’t know, and also for the sake of the rest of us, I’m making another attempt to state the case for using coin seigniorage, so that as many people as possible know that the President has an alternative to the “shock doctrine,” make a deal approach to cutting essential spending and services including the social safety net, in return for getting $2.6 Trillion more in debt issuance authority.

The idea of using coin seigniorage to remove the need for issuing debt, and so to always stay under the debt ceiling is due to a commenter (and occasional blogger) on economics and politics blogs whose screen name is beowulf. He first presented the idea in comments and then posted the seminal blog on coin seigniorage.

Throughout the next six months, a number of other posts appeared at various sites (See here for links) with increasing frequency as the debt limit problem received more attention.

In the last few days, as coin seigniorage itself climbed up the hierarchy of public awareness, Felix Salmon and Matt Yglesias, both well-respected, mainstream, and professional bloggers, have mentioned the proposal while taking issue with it for reasons I’ll analyze below. Before, I do that however, here’s what’s involved in proof platinum coin seigniorage,

Congress provided the authority, in legislation passed in 1996, for the US Mint to create platinum bullion or proof platinum coins with arbitrary fiat face value having no relationship to the value of the platinum used in these coins. These coins are legal tender. So, when the Mint deposits them in its Public Enterprise Fund account at the Fed, the Fed must credit that account with the face value of these coins. This difference between the Mint’s costs in producing the coins and the credit provided by the Fed is the US Mint’s profit. The US code also provides for the Treasury to periodically “sweep” the Mint’s account at the Federal Reserve Bank for profits earned from these coins. Coin seigniorage is just the profits from these coins, which are then booked as miscellaneous receipts (revenue) to the Treasury and go into the Treasury General Account (TGA), narrowing the revenue gap between spending and tax revenues. Platinum coins with huge face values e.g. $2 Trillion, could close the revenue gap entirely, and technically end deficit spending, while still retaining the gap between tax revenues and spending.

Recent Comments from the Mainstream

Here’s Felix Salmon’s treatment at Reuter’s:

Even if Treasury can still sell bonds, however, that doesn’t mean for a minute that breaching the debt ceiling is something which should be considered possible for the purposes of the current negotiation. Tools like the 14th Amendment or even crazier loopholes like coin seignorage would be signs of the utter failure of the US political system and civil society. And that alone could mean the loss of America’s status as a safe haven and a reserve currency. The present value of such a loss? Much bigger than $2 trillion. (Coin seignorage, if you’re wondering, is the right that Treasury has to mint a couple of one-ounce, $1 trillion coins and deposit those coins in its account at the New York Fed. It could then withdraw cash from that Fed account to make all the payments it wanted.)

Felix Salmon does give an acceptable one sentence overview of the proposal, but doesn’t make clear that there could be even a single coin (not a “couple of coins”) of arbitrary value produced by the US Mint. More importantly, he doesn’t make clear why using coin seigniorage would be a sign “. . . of the utter failure of the US political system and civil society,” or why using it would be “. . . breaching the debt ceiling.” He also doesn’t say why he lumps in a 14th Amendment challenge to the debt ceiling with coin seigniorage as crazy ideas.

Addressing these points one by one, first, it’s true that the Congress hasn’t been able to come to agreement on the debt ceiling, but it’s hard to see why this is a sign of “the utter failure” . . . “of civil society.” Even more, the US political system has provided the tool of coin seigniorage as a legal, if not customary, way of generating revenue in addition to taxing and borrowing. Why does this count as “crazier” idea or a failure of the political system? From my point of view the only failure here is the President’s in not using coin seigniorage, or perhaps not yet even knowing about it. But if this is a failure, I don’t see that it’s a systemic one as much as it is a failure of this Administration to look for alternative views that go beyond its own knowledge and imagination.

Second, it’s hard to see why using coin seigniorage would be “breaching the debt ceiling.” Certainly, challenging the Constitutionality of the debt ceiling and overturning the legislation mandating it might be described as “breaching” it. Also, just ignoring it on grounds that it is unconstitutional might be described in the same way. However, using proof platinum coin seigniorage with very high face value coins just spends Congressional appropriations, including paying down debt so that it’s way below the debt ceiling, or even completely eliminated, using perfectly legal means. It’s hard to see how this can be legitimately described as “breaching the debt ceiling.”

And, third, why does Felix Salmon think that using coin seigniorage “. . . could mean the loss of America’s status as a safe haven and a reserve currency. ” Why should a demonstration, using coin seigniorage, of the Treasury’s power to meet US obligations even when Congress is in deadlock, lead to a loss of confidence, making investment in the US look any more dangerous than it is at present, or disturbing the status of the US dollar as the reserve currency? Surely if Felix Salmon wants to make such a serious charge he should at least give readers his reasoning.

It is possible that if coin seigniorage were used on a continuing basis to close the gap between taxes and spending, then US Treasuries would no longer be a safe haven for investing USD reserves, simply because, if no more debt is issued, then no investment in Treasuries is possible. But even if that happened, a low level of interest paid by the Fed on USD reserves would still leave US dollar reserves as safe a haven for holding “risk-free” US financial assets as short-term Treasuries are right now.

It is also hard to see why coin seigniorage, if used, would interfere with the status of USD as the reserve currency. Why should it, since continuous use of seigniorage would result in gradually eliminating the national debt? And what other reserve currency would the world use? The UK pound? The Euro, with its great potential instability? The Yuan, which if it became the reserve currency would force China to give up its peg to the Dollar and to even acquire a bit of a disadvantage in trading with us? What about the Yen? Sounds OK to me, but the world seems convinced that Japan, with its 200% debt-to-GDP ratio might have runaway inflation anytime now. So, will the world take the Yen? Probably not.

What about a market basket of freely floating currencies? Well, that would be fine, but it’s hard to see how that would disadvantage us or cost us $2 Trillion. I also wonder where Felix Salmon got that estimate from. Also, is the $2Trillion an interest cost, a reduction in GDP? Is it over one year, or a decade? Isn’t it a fact, that being the reserve currency costs us exports and jobs? How does that get factored into Salmon’s $2 Trillion cost of not being the reserve currency?

Matt Yglesias is the second popular blogger mentioning coin seigniorage last week. Matt says:

This is an idea that’s circulating in Modern Monetary Theory circles, and I believe that it’s legally mistaken.

Perhaps it is. But don’t you owe it to readers to tell them why?

That said, conceptually it highlights a very accurate point. If you think of the United States government as a consolidated entity, it’s not possible for us to “run out of money” or “go bankrupt.” The government of Ireland owes euros, but it lacks the legal authority to create Euros. Governments of small developing countries often owe dollars, but lack the legal authority to create dollars. Under a gold standard, a government might owe gold and lack the physical capacity to create it. But the United States is owed dollars, and can create dollars, so it’s absurd to think that we might not be able to pay our bills.

Matt understands this very basic point of MMT, and that puts him miles ahead of most who pronounce on solvency. But it’s also important to emphasize that Governments like our own can become insolvent voluntarily. That is, if Congress fails to raise the debt ceiling, or if, in the event they fail, the President fails to use coin seigniorage or another Treasury tool to create a positive balance in the Treasury General Account (TGA) at the Fed, then we can become voluntarily insolvent – a self-inflicted wound caused by a collective failure to understand our fiat currency and monetary system.

Now what might happen is that people lose willingness to lend us dollars in the future. We also might have inflation. Money was lent in the past on the assumption that dollars would be able to purchase real goods and services. Monetization of debt would reduce the real purchasing power of dollars, and might call into question the wisdom of agreeing to lend dollars in the future. But these are different issues.

First, if, as Matt recognizes, we can’t “run out of money” then why do we need people to lend us our own currency in the future? Why can’t we use coin seigniorage indefinitely for “deficit spending?” (From a technical point of view continuous use of proof platinum coin seigniorage would end deficit spending because it would close the gap between spending and taxes with miscellaneous receipts, a class of revenue. However, the gap between taxes and spending would remain and that “deficit” represents a surplus for the non-Government sector.) If we did that we’d avoid, as time went on, most spending on interest costs projected by CBO over the next 10 years. Indeed, if we project out to 15 years based on CBO 10-year numbers, we’d avoid nearly $12 Trillion in projected interest costs. Why borrow our own money back at all? The answer is we don’t need to. So, we don’t really have to care whether people want to lend us back our own money, or not.

Second, why would coin seigniorage in itself cause inflation? Coin seigniorage creates money to spend Congressional appropriations. As long as those appropriations are not so great that they exceed the potential productive capacity of our economy — and right now our output gap is around 30%, and there is no sign of Congress deciding to spend enough to close that gap — there will be no demand-pull inflation.

Would there be cost-push inflation? Not from coin seigniorage. The coins would just go into a Fed vault forever, and again the spending will be only what Congress appropriates. Coin seignorage will add to aggregate demand whenever spending exceeds taxes; but it will not cause cost-push inflation. That is caused by suppliers or speculators who are distorting markets. And the remedy for that is criminal investigations, price controls, rationing, and a thoroughgoing belief that markets must be very closely regulated by independent adversarial enforcers if they are to remain free.

Third, “money was lent in the past on the assumption that dollars would be able to purchase goods and services in the future.” But, again, why should the simple fact of using coin seigniorage debase the currency? Matt needs to explain the transmission mechanism from using seigniorage to spend Congressional appropriations and pay down debt, to currency debasement. Saying that “we also might have inflation” is easy. But one really has to show that the likelihood of inflation is greater if we use coin seigniorage than it is if we issue more debt instead. My view is good luck with that, because there are very good reasons for thinking that coin seigniorage would actually be less inflationary than issuing debt to close the gap between taxes and spending would be.

Fourth, “monetization” is a term that is frequently thrown around whenever the Government wants to use its Constitutional power to deficit spend and create money in the process. But “monetization of debt” has a strict meaning in modern economies. It refers to the purchase of debt instruments by the Central Bank from the Treasury. That wouldn’t be happening here.

Here’s how coin seignorage works: Legal tender, money, in the form of proof platinum coins, not legally viewed as debt, is being exchanged for USD credits in the US Mint’s Public Enterprise Fund account. The money goes into the Fed vaults, the USD credits go into the Mint’s account. The profits from seigniorage go into the TGA. This is an asset swap, between the Fed and the US Mint, of money in the form of a coin, for money in the form of bank reserves. Both sides of the swap are money; so there is no “monetization of debt” involved.

[UPDATE] I now think this might be legal after all, provided the coin is made of palladium.

Palladium coins won’t do; we need coins that can be legally given an arbitrarily high face value. The palladium coins are specified by Congress at $25 in face value. The platinum coins being discussed in the coin seigniorage proposal are proof platinum coins. The face value of these coins is arbitrary and has nothing to with the value of the metal. Platinum proof coins are strictly fiat money, and they can have as a large a face value as the Mint likes. Just like the USD reserves the Fed creates for quantitative easing, or to increase the money supply.

So, after months of blogging, commenting, and tweeting about the coin seigniorage option, it seems that enough activity has been generated in the blogo- and twitter-spheres to have attracted at least the passing attention of well-respected bloggers such as Felix Salmon and Matt Yglesias. It’s pretty clear from my analysis, however, that both of them are offering conclusions about coin seigniorage that aren’t based on careful analysis of the literature that’s developed on the subject.

Put simply, they don’t seem to have thought things through, and they don’t seem to be in a position to guide their readers in learning about the coin seigniorage option. It’s good that they’ve recognized that coin seignorage is, at least, analytically sound enough to merit attempted refutation, and have opened the door to discussion of it in the wider discourse. Thanks to both of them for that, and especially to Matt for pointing out that involuntary solvency isn’t a problem for the US. Exposure for a policy proposal is always better than just continued burial in the non-visible portion of the blogosphere. Nevertheless, it would be so much better for all of us if well-known bloggers who take up a new proposal would investigate it with care before they pronounce a verdict on it.

What harm would have been done if Felix Salmon and Matt Yglesias had just mentioned coin seigniorage and admitted that they still had to research it before deciding on whether it would work, and that they were keeping an open mind pending that research? Certainly, the potential of coin seigniorage as a solution to our revenue problem merits that kind of consideration. How important is it?

The Importance of Coin Seigniorage to the President

I’ll end this post by showing how important it is through an examination of our present situation with respect to the debt ceiling and the potential obligation of the President to use coin seigniorage to cope with it.

1. Congress has appropriated Federal spending for FY 2011 which the Executive is mandated to spend.

2. These appropriations exceed the tax revenue the Government is collecting. This was expected at the time the appropriations were passed. So Congress appropriated deficit spending.

3. Congress has mandated that whenever the Government plans to deficit spend, it must first issue and sell debt instruments in an amount a least equal to the planned deficit spending. In this connection, the Treasury is prohibited from having an overdraft in its TGA at the Federal Reserve Bank.

4. Congress has mandated a debt limit such that the Administration must stop issuing debt when that limit is reached. (The limit was reached in early May). Given the Congressional requirement that deficit spending must be accompanied by debt issuance, the debt limit, in the absence of other countervailing factors puts a stop to deficit spending, until the limit is increased. There is a very important countervailing factor. But it is not recognized or used. So, for the moment, at least, the debt limit has stopped any further deficit spending

5. The 14th Amendment, section 4, requires that the validity of the “debts” (broadly construed) of the United States never be questioned, and since the President has sworn an oath to uphold the Constitution, he is obligated to do all he can to see to it that these “debts” are paid. In fact, he’s obligated to see to it that these debts aren’t even “questioned.” His suggestion that Social Security and other key payments won’t be made on August 3, isn’t living up to his obligations. Of course, he’s not alone in this, since many law makers have been warning about the likelihood of a default for many months now.

6. Congress has provided the authority, in legislation passed in 1996, for the US Mint to create platinum bullion or proof platinum coins with arbitrary fiat face value having no relationship to the value of the platinum used in these coins. The US code also provides for the Treasury periodically sweeping the Mint’s account at the Federal Reserve Bank for profits earned from coin seigniorage. These profits are then booked as miscellaneous receipts (revenue) to the Treasury and go into the TGA, narrowing the revenue gap between spending and tax revenues. Platinum coins with huge face values e.g. $2 Trillion, would close the revenue gap entirely, and technically end deficit spending, while still retaining the gap between tax revenues and spending.

7. If used routinely to close the revenue gap, such coin seigniorage would eventually reduce the national debt to zero, and remove it as an issue in US politics. In addition, the existence of platinum coin seigniorage as an option, removes the tension between the mandated debt ceiling and the 14th Amendment. It is the countervailing factor I mentioned earlier, because it provides a way to spend Congressional appropriations without issuing further debt.

8. The President has sworn to uphold both the Constitution, which prohibits a default, and also the laws of the United States including the mandates just mentioned.

9. These mandates, along with the platinum proof coin seigniorage authority, make using seigniorage, or another option like it that allows the Treasury to create revenue without either taxing or borrowing, the only viable options to: continue spending appropriations without violating the debt limit; fulfill all the other mandates, both legal and constitutional; and still be able to spend the money Congress has appropriated.

10. So, if no action by Congress raising the debt limit is forthcoming, it will be the President’s sworn DUTY AND OBLIGATION to either use platinum coin seigniorage, or some other revenue creating tool legislated by Congress in past years, to make the money necessary to avoid default, since his failure to use an available way of creating revenue for continuing to spend appropriations, which he is mandated to do, would be a violation of his oath of office.

So, coin seigniorage isn’t some crazy idea. Instead, it is a legal instrument that the President may, depending on how things work out, have to use in a bit more than two weeks to comply with his oath of office. It may be the only way for him to avoid breaching one of the laws which he is supposed to enforce. As such, it has to be taken seriously, and treated with more than just a few dismissive conclusions, accompanied by a lack of explanation.

Many writers on the current debt ceiling crisis have been taking the view that the 14th Amendment constitutional challenge route is the best thing for the President to do if there is no agreement on the debt ceiling. In e-mail communication yesterday, beowulf offered the following opinion on why this will not work, given the existence of coin seigniorage.

. . . No federal judge — Supreme Court justices included — will take the extraordinary step of enjoining an Act of Congress if the President who asks them to had an opportunity to sidestep the constitutional issue lawfully but neglected to do so. . . . .

. . . The moral of the story is if the Court thinks there is no alternative to breaching the debt ceiling, it probably would find it unconstitutional (or rather, it would decline to hear the case on Standing grounds, leaving the President’s decision to ignore the debt ceiling in place). On the other hand, if the Court thinks the President had a lawful alternative– like coin seigniorage– but neglected to use it, they’re not going to bail him out.

This argument is compelling to me given the history of the Court. The Court defers to the legislature if it possibly can, and prefers the President to avoid constitutional challenges if he has a means of doing so. In this case, he does, and the means is platinum coin seigniorage.

Appendix: The Coin Seigniorage Idea in the Blogosphere

The idea of using coin seigniorage, the profits made from minting proof platinum coins, depositing them at the Fed, and receiving electronic credits in return, to remove the need for issuing debt, and so to always stay under the debt ceiling is due to a commenter (and occasional blogger) on economics and politics blogs whose screen name is beowulf. The first comment of beowulf’s I noticed on coin seigniorage was at New Deal 2.0 http://www.newdeal20.org/2010/11/04/obama-faces-his-own-teachable-moment-25819/#comment-9831 and I mentioned his proposal in a post I did on a possible Government shutdown due to the debt ceiling a couple of weeks later. http://www.correntewire.com/constitutional_crisis_over_debt_ceiling_does_government_have_shut_down

Beowulf continued his work on the coin seigniorage proposal as the weeks went by in various comments made at blog sites such as this one at FDL. We also began to exchange messages on coin seigniorage. On January 3, 2011, he posted the seminal blog on coin seigniorage. I followed two days later, raising the question of whether President Obama would use it to forestall an attempt to use the debt ceiling to extract cuts in the social safety net or not.

These posts were noticed by Warren Mosler, one of the originators of the Modern Monetary Theory (MMT) approach to economics, who sponsored what turned out to be a wide-ranging and very high quality discussion of the coin seigniorage option at his site. Beowulf contributed extensively and very creatively to this discussion, which remains one of the most important resources on the coin seigniorage option.

Throughout the next six months, I pushed coin seigniorage in blog posts at Correntewire, FDL, and DailyKos from time-to-time and in comments at various sites. Then, in late June and July a spate of posts on seigniorage appeared beginning, I think, with wigwam’s at FDL and DailyKos. He’s followed up since with a number of other posts including this one with a variation on how coin seigniorage might be applied by buying $2 Trillion in debt from the Fed to create “head room” relative to the debt limit. Other important posts have appeared this month by Mahilena, DC Blogger, Cullen Roche, Scott Fullwiler, and Trader’s Crucible. Accompanying the last two are extensive discussions of coin seigniorage and constitutionality of the debt ceiling with contributions from beowulf. Scott’s post also received extensive discussion with beowulf contributing at Cullen’s site. In addition, I’ve added two of my own posts, another on the President’s obligation, if no agreement on the debt ceiling is forthcoming.

So, the proposal to use coin seigniorage to both comply with the debt ceiling and still spend Congressional appropriations has by now enjoyed the support of a growing number of bloggers. It has also received a great deal of discussion; receiving 246 comments at Warren Mosler’s site; 206 comments spread over two post’s at Cullen Roche’s site, and 89 comments at Naked Capitalism. Readers checking out these discussions can see that the coin seignorage proposal has stood up very well to some very aggressive and forthright criticism.

(Cross-posted from Correntewire.com.)

36 Responses to Coin Seigniorage: A Legal Alternative and Maybe the President’s Duty

  1. "But one really has to show that the likelihood of [price] inflation is greater if we use coin seigniorage than it is if we issue more debt instead."I'll try this again.How about … -spending without issuing bonds is not any more [price] inflationary [in the present but could be in the future] than spending with bond sales?Scenario 1: Apple saves $100 in a checking account. The gov't deficit spends with a bond attached. Apple buys the bond for 1 year.$100 of medium of exchange (Apple) was saved (velocity 0) and then destroyed. $100 of medium of exchange was created for the gov't deficit. At the end of the 1 year, $100 of medium of exchange is destroyed from gov't debt payback and $100 of medium of exchange is created for Apple. Apple then spends the $100.I set up the gov't budget to make both interest payments and principal payments. I ignored the interest payment transfer between borrower and lender.Scenario 2: Apple saves $100 in a checking account. The gov't deficit spends $100 with no bond attached.$100 of medium of exchange (Apple) was saved (velocity 0). $100 of medium of exchange was created for the gov't deficit. No one really notices the extra $100 of medium of exchange because of the saved $100 (velocity 0). At the end of 1 year, Apple spends the $100 of medium of exchange. Now there is $200 of medium of exchange with a velocity.

  2. "Second, why would coin seigniorage in itself cause [price] inflation?"Scenario: Apple saves $100 in a checking account.Medium of exchange supply is the same. Medium of exchange supply in circulation goes down by $100.The gov't deficit spends $100 with a bond attached. Apple buys the bond for 10 years.The $100 of medium of exchange (Apple) that was saved (velocity 0) is destroyed.Medium of exchange supply goes down by $100. Medium of exchange supply in circulation this time stays the same. Apple now has a $100 bond as its asset that serves as its "savings vehicle".Next, the medium of exchange supply goes up by $100 (spending for the gov't deficit), AND the medium of exchange supply in circulation goes up by $100.At the end of 1 year, the $100 coin is minted.The Treasury buys back the $100 bond from Apple (thereby retiring it)."Non-bank sellers of the bonds purchased by the Treasury now have deposits earning essentially 0%."OK. Apple now has $100 more in its checking account (markup), which increases the medium of exchange supply by $100. I'm thinking the reserve account of Apple's bank got a $100 reserve markup too, but I could be wrong about that."Second, the seller of the security now holding a deposit is earning less interest can convert the deposit to an interest earning balance. Just as one holding a Treasury can easily sell, one holding a deposit can easily find interest earning alternatives. Some make the argument that the security can decline in value and so this is not the same as holding a deposit, but this unwittingly supports my point here that holders of deposits aren’t necessarily doing so to spend. Deposits don’t spend themselves, after all."I believe here is where the disagreement is. If Apple decides to save the demand deposit for the next 9 years, then there is no problem (the medium of exchange supply in circulation stays the same). If Apple decides to spend it or "save" it in oil by raising the price $20, then there could be a price inflation problem (the medium of exchange supply in circulation goes up by $100). I assumed the oil price sticks with no big change in real GDP but some change downward (oil supply and oil demand mostly inelastic).I ignored the interest payment transfer between the borrower and the lender. I assumed no principal payment in the first year. If so, the $100 coin would be less. I believe it is possible that the gov't could deficit spend $100 and then sell the bond later to Apple. Let's skip that timing issue.Here are a couple of other things. In your coin example, the bond was retired. It does not seem to me that QE2 is about retiring the bond(s).Lastly, I believe the $100 Apple demand deposit in its checking account is "backed" by the coin, while all other medium of exchange (currency plus all the other possible demand deposits) are "backed" by a bond. I'm thinking there is a difference there.

  3. "Non-bank sellers of the bonds purchased by the Treasury now have deposits earning essentially 0%."And, "Second, the seller of the security now holding a deposit is earning less interest can convert the deposit to an interest earning balance. Just as one holding a Treasury can easily sell, one holding a deposit can easily find interest earning alternatives. Some make the argument that the security can decline in value and so this is not the same as holding a deposit, but this unwittingly supports my point here that holders of deposits aren’t necessarily doing so to spend. Deposits don’t spend themselves, after all."Those two(2) quotes are from Scott's QE3 post.Also, I believe some of this comes down to whether there was an aggregate demand shock or an aggregate supply shock.

  4. So your argument that this won't cause inflation is that the size of the new money created is small in comparison to the total monetary base, and other factors would be more significant? But it wouldn't stay like that would it?

  5. Anonymous: No, not really. Coin seignorage is a means to carry out the spending that Congress commanded while staying within other baroque and unnecessary legal constraints on spending. This spending could be inflationary, if Congress decided to give $1 million to everyone, say. Such overspending would be the engine of inflation. But right now we are in terrible danger of underspending.Coin seignorage would have the same effect as "printing money". The current mystical-mainstream-economic superstition is that "printing bonds" – what is called government borrowing is somehow less inflationary than just "printing money". Printing bonds / "borrowing" raises interest rates. "Printing money" or "debt monetization" lowers interest rates. So using coin seignorage instead of borrowing would be carrying out business as usual, with the sole effect of lowering rates, especially after the Fed ran out of its inventory of Treasury bonds it might use to counter the effects.The relation between interest rates and inflation is complicated, although with low rates it is not likely to be very large – low interest bonds or currency are much the same. The mainstream belief, based on bad logic and economics, is that raising interest rates / selling bonds fights inflation. The long-term evidence is that this is completely wrong. The evidence is that printing money (as in coin seignorage) / debt monetization / low rates is deflationary. Again – it is printing bonds / government "borrowing" as we do nowadays / high rates which is inflationary.

  6. It`s an interesting point of view.It deserve a lot of thinking…

  7. "If Apple decides to save the demand deposit for the next 9 years, then there is no problem"They've already decided to save. Otherwise the money would have been spent, taxed and there wouldn't be the need to do anything as the deficit would have shrunk."If Apple decides to spend it or "save" it in oil by raising the price $20, then there could be a price inflation problem"That can only work if there is a supply blockage in oil and people are allowed to hoard oil without using it. The solution is to make sure there are better uses for the cash in the economy than blowing bubbles in supply-limited assets *or* getting free hand outs of interest from government in bonds.

  8. Suppose Treasury mints and deposits the 1-oz or 1-lb or whatever size platinum coin dutifully stamped "U.S. Platinum $1,000,000,000,000 Legal Tender"…Why wouldn't the value of platinum bullion jump to $1,000,000,000,000 per unit Treasury used? On the expectation that Treasury would not do it again?If it did so jump, then the solution proposed could be done as often as Treasury has platinum in stock to do it?Or would/could it buy more platinum? With Fed Res Notes "withdrawn" from accounts upon depositing a $1,000,000,000,000,000 (yep, just string on the zeros)….Don't get me wrong, I'm a commie "d" democrat – I am not here to be stupid, but Lordy, something about this makes me feel so. I cannot fathom the political repercussions of such a move. The people I'd just as soon load onto a barge and sink in the middle of the Atlantic would gut Obama and Geithner and feed them to crows – and I'm not going to try to defend the latter or the feckless Dems either, I just don't know that I want to drown them… yet ….

  9. Dave Raithel,Cost of coin production for the US mint# Dime – 4 cents# Quarter – 10 cents# Dollar (Coins) – 16 centsDoes that make the price of metals used in the coinage sky rocket?Does the price of currency paper sky rocket because we use the paper to print both $100 bills and $1 bills?Further, the $10T platinum coin never sees the light of day. It never circulates. It goes straight from the US Mint to the Federal Reserve. If a person ever obtains it, and goes to his bank to deposit it, he will be arrested for grand theft or forgery!It is just like the the social security trust bonds – an accounting entry between the treasury and the Fed.The coin gambit is to bypass a 1917 (gold standard era) law that outlived its usefulness mostly in 1935 (when the US went off the gold standard domestically), for all intents and purposes in 1964 (when the US went off the silver standard – there was a silver standard!) and absolutely in 1971 when not a shred of any commodity currency remained.

  10. I'm not a monetary economist, but given a monetary base of $800B, wouldn't one naturally expect minting $1T in reserves to have a pretty substantial inflationary impact? I guess the idea is that, like the reserves from QE, they'd just sit on banks' balance sheets with an effectively zero velocity of money. What happens if the banks decide to use these reserves? Still, something smells bad here. Call me old-fashioned, but it seems that almost every past hyperinflation has been caused by governments exploiting seigniorage in lieu of addressing structural budget issues. It may be ignorance on my part, but I don't know of a single case where this sort of approach didn't lead to substantial inflation. Certainly, no such case is mentioned here. This has been tried before, and it'd be nice to know if it worked even once. Given the historical record, it seems the burden of argument that inflation wouldn't happen this time lies on its proponents.

  11. Banks are never reserve constrained for their lending.They haven't been for quite a few years. They are capital constrained. So excess reserves does absolutely nothing.See Bill Mitchell's -Lending is capital- not reserve-constrainedQuote:We should start by making sure we don’t get into the confusion that seem to commonplace in this sort of debate. There is a fundamental difference between capital adequacy requirements on banks in a regulatory framework and reserve requirements. The two sorts of rules are quite distinct but are often conflated by those who do not know how the monetary system operates….Reserve requirements are an artifact of the old gold standard and are irrelevant in the current monetary system. They do not reduce bank risk nor do they comprise a buffer that can be drawn on when there is a run on a bank.

  12. Dave Raithel :Why wouldn't the value of platinum bullion jump to $1,000,000,000,000 per unit Treasury used? On the expectation that Treasury would not do it again?Clonal's answer is good, but you have a point here. If the laws dictate that the coins for the jumbo coin caper be made of platinum, then the government better make sure it has "enough" platinum to make the coins, as I am sure it does. If it had no platinum at all, then the minting would increase the market price of platinum, though hardly anywhere near 1 trillion per coin, unless it had to deal with a Platinum King that perfectly monopolized the supply. And it would have to be a foreign Platinum King, or Uncle Sam could just grab his supply, without letting him enrich himself. The courts would surely allow this. The coins could be of any size, so the value of the platinum contained could be arbitrarily small, but Uncle Sam would look silly if the coins were microscopic. Anonymous 2:42 PM: The rule that the mainstream gets everything backwards does not fail here. As Clonal says, increasing reserves has nothing to do with inflation. And as I said above, the historical evidence is that for a given size deficit, "financing" it by printing bonds is more inflationary than "financing" by printing money. And this is actually what the naivest quantity theory reasoning suggests.The US & UK experience with low inflation considering the size of the war during WWII is a good example – rates were capped, so much of the big deficits were effectively financed by printing money. The low interest, money printing policy was consciously and effectively designed to fight inflation, following Keynes – his name for essentially this phenomenon was Gibson's Paradox.

  13. Calgacus,In case of platinum hoarding, there is always the option used by FDR – Executive Order 6102

  14. Hmmm. Isn't there material for a movie here? About Aristocles Platfinger. "Platfinger, such a fat finger…" The Platinum Age will be inaugurated when he says: "No, Mr. Bond, I expect you to die!"

  15. Treasury already owns a half-trillion (at current prices) in gold, both outright and by way of swaps from Fed.Treasury could issue gold- backed 'paper' from its gold basis. It could discount/offer premiums for other assets as it pleased. It could replace all Federal Reserve currency w/ gold backed greenbacks or allow FRN's to circulate as 'demurrage money'.Demurrage money is anti-inflationary. Meanwhile, a hard 'savers currency' would destroy the banks, president's nemesis.President Steve would get on teevee and tell the Congress jackasses to go ahead and default: the Steve administration will take the opportunity to completely restructure the US economy and write off all 'dead money' debts. "Thanks for the gift (opportunity) stupid losers!"Dead money: fraud, 'mark to fantasy', collusion, derivative, naked short, theft from govt. etc. Dead money: anything related to auto industry (peak oil is behind the crisis, not too much debt. 4 Saudias and the US is solvent.)Prez could simply ignore congress and borrow/spend as needed: an administration that fights three wars w/o Constitutional authorization (declarations of war) can do as it pleases.

  16. Neil Wilson's post said: ""If Apple decides to save the demand deposit for the next 9 years, then there is no problem"They've already decided to save. Otherwise the money would have been spent, taxed and there wouldn't be the need to do anything as the deficit would have shrunk."Minting the coin and giving them back their demand deposit could get them to change their mind about saving. The other issue is what they decide to do to get a return on their savings (what financial asset they buy) since they no longer own the bond, their "savings vehicle".And, "If Apple decides to spend it or "save" it in oil by raising the price $20, then there could be a price inflation problem"That can only work if there is a supply blockage in oil and people are allowed to hoard oil without using it."Is revenue maximization a supply blockage? Saudi Arabia, Iran, Venezuela, and/or Exxon-Mobil want to maximize revenues now and in the future. They all make the decision that leaving oil in the ground is the best investment. Then there is gold.And, "The solution is to make sure there are better uses for the cash in the economy than blowing bubbles in supply-limited assets *or* getting free hand outs of interest from government in bonds."How about some wage increases even if it allows people to save enough to retire?

  17. Clonal said: "Further, the $10T platinum coin never sees the light of day. It never circulates."But does the demand deposit based on it (a medium of exchange) circulate?And, "It goes straight from the US Mint to the Federal Reserve. If a person ever obtains it, and goes to his bank to deposit it, he will be arrested for grand theft or forgery!"So I can't redeem my demand deposit for currency/coin?

  18. Had EnoughThe treasury's spending account now has a Trillion dollars in it , that is then used to pay the private sector, by spending for goods and services. The treasury is just meeting its obligation to spend as authorized by the congress. So if anything is inflationary, it is the spending authorized by the congress, and not the means that the treasury used to incur that spending.On the Fed side, the coin just sits in its vault as an asset. It is just a way to balance the books!As per MMT, government creates money when it spends, and destroys money when it taxes. If it "borrows money" to spend, then it just incurs an additional cost of interest, which adds some more to the money supply. It has been shown in studies that government financing by borrowing is slightly more inflationary than just "printing" and spending.The Treasury could just as well print and spend. However, the Congress has legally forbidden it to finance deficit spending that way. This was done to prevent the government from temporarily over leveraging its gold supply when the currency was anchored by a gold standard. Those same conditions no longer hold, but the law remains on the books, and can and is utilized as a political football to hold a nation hostage. It is a form of terrorism!

  19. The US Mint is schedule to mint 15,000 1 oz Platinum American Eagle coins this year for sale to collectors. The Secretary has set the face value at $100. The law (31 USC 5112(k)) gives him absolute discretion as to platinum coinage designs, denominations and quantities.I think its fair to presume the West Point Mint has enough platinum on hand to mint enough $1 trillion coins (Platinum Reagan Centennial?) to last all of our lifetimes, regardless of world platinum prices.

  20. It's wonderful to come to a blog, where all my MMT friends have already satisfactorily answered objections to my proposal. I would like to offer a comment on beowulf's last remark, but it will have to wait for my next comment since including the above in it would exceed my 4096 character limit.

  21. Why stop with $1 Trillion coins? Why not mint a $30 T coin and another one in case the Fed gets obstreperous and presents its own coin that was deposited in the Mint PEF account for redemption? If that's done, then the Government needs only 2 1 oz. proof platinum coins. It can get those by taking them away from the 15,000 it's already scheduled to mint. So, no supply problem at all.Btw, the President could explain the deposit of the first $30T coin this way (the second coin just stays at the Mint for safekeeping. Its existence can be secret):1) Until now we’ve been borrowing the money the Government created back from the private sector in order to cover our deficits.2) That’s silly. According to the Constitution we, the Government) are the ultimate source of all US money. So why should we ever borrow it back and pay interest on money we can create any time Congress appropriates spending?3) Congress has imposed a debt ceiling, so we can’t borrow back our money anyway.4) So, on my order, the US Mint issued $30 trillion in a single platinum coin and deposited it at the NY Fed. It’s legal tender, so the Fed credited the PEF with about $30 Trillion in USD credits.5) This is not inflationary because the Fed will put our coins in a vault and keep it there permanently, and we will use the $30 T in Fed credits only to spend what Congress has already approved, which is only a fraction of these credits and far from the amount needed to cause inflation.6) Of course, my action ends the debt ceiling crisis, because we have no further need to borrow our own money back in the markets, so we don’t need the tea party or other Republicans to agree to raise the debt ceiling.5) Now we, the Government, have plenty of money, much more than we need, in fact, to pay for all appropriations Congress has already approved for 2011, and, again, we won’t have to borrow our own money back.6) So we will pay all Government debts which will come due in 2011. Treasury securities and all other debts included. When we do this we will lower the national debt by Y amount, reducing the “debt burden,” and again, to do this we don’t have to borrow our own money back, and we will also reduce our interest costs on the outstanding national debt.7) None of the $30 Trillion in new credits created by our actions is “money” in the economy until the Treasury spends it. For now it is just capability to spend awaiting the authority of Congress to deficit spend.8) We have created $30 Trillion in new credits even though we needed only $3 Trillion to cover anticipated deficit spending and debt repayment until 2013. The reason for this, is that I wanted to have enough capability created in the Treasury account, so that the national debt could be completely paid off, and all projected Federal deficits covered over the next decade.9) Of course we can always make new coins if our projections turn out to be wrong; but I thought it would be best to ensure that the “debt burden” can be completely eliminated, and also to provide enough funds in our spending account so that it would be very clear to Congress and all newly elected Representatives and Senators, that even though they, according to the Constitution, continue to control the purse strings, the national purse is very, very full, and that we will be able to afford whatever deficit spending for the public purpose that Congress, in its wisdom, chooses to approve.Good night, my fellow Americans and Sweet dreams! Rest well knowing that our beloved country won't be defaulting on its debts and that I've prevented this without going over the legal debt ceiling, by providing money for spending mandated appropriations, in compliance with the laws authorizing coin seigniorage, while supporting the Constitution's prohibition against our Government ever defaulting on its debts. I hope that in the future everyone will obey the 14th Amendment's prohibition against questioning the validity of Federal Government debts.Good night, once again!

  22. Sorry. I screwed up the numbering above.

  23. Who appointed Felix Salmon an expert on much of anything? The mere fact that he wrote an article about the Gaussian copula doesn't mean he understands anything about it (He blames the formula itself for the crash, not the manipulation of the formula to mask systemic fraud. Brilliant.). Whether the debt ceiling is constitutional or not, it's still just an arbitrary limit set by political horsetrading, not economic reality. It's even more arbitrary than a gold standard. There is little reason for it to exist, even less for it to be given any deference, and no reason at all for it to be allowed to wreck the global economy.

  24. Knute, That's all true. We live in an irrational political system and often have to do things that make no sense to cope with it.

  25. I double dog dare the President to do this. On second thought, make that a triple dog dare.

  26. I picked Apple for a reason."Apple Could Buy Goldman Sachs With Its $76 Billion in Cash"http://www.theatlantic.com/business/archive/2011/07/apple-could-buy-goldman-sachs-with-its-76-billion-in-cash/242219/"With $76 billion in "cash" (or cash equivalents and securities), Apple has enough money in the bank to purchase Goldman Sachs at its current market value … and still have change left over to buy LinkedIn and Twitter. Seriously."If someone can convince Apple to buy GS and then shut it down, would they be doing the world a HUGE favor?

  27. Clonal's' post said: "Had EnoughThe treasury's spending account now has a Trillion dollars in it , that is then used to pay the private sector, by spending for goods and services. The treasury is just meeting its obligation to spend as authorized by the congress. So if anything is inflationary, it is the spending authorized by the congress, and not the means that the treasury used to incur that spending."I keep coming back to "Non-bank sellers of the bonds purchased by the Treasury now have deposits earning essentially 0%." and what happens if they decide to stop saving with debt. Plus, if they decide to buy something like oil, will the goldman sachs commodity trading desk jump in to raise the price of oil too using debt (especially with low interest rates)?And, "On the Fed side, the coin just sits in its vault as an asset. It is just a way to balance the books!"What happens if a lot of people decide for whatever reason to redeem their demand deposit(s) for currency?And, "As per MMT, government creates money when it spends, and destroys money when it taxes. If it "borrows money" to spend, then it just incurs an additional cost of interest, which adds some more to the money supply."It seems to me what usually happens is someone is taxed more or spending is cut to make the interest payment.And, "The Treasury could just as well print and spend."I believe there are better ways to get more medium of exchange into circulation.

  28. Had Enough,I think you are misunderstanding the whole purpose of the coin strategy.Let us take it step by step.1) The US Congress has passed a spending budget. This budget has an "on-budget" deficit.2) Congress by laws previously passed requires that such deficits be financed by issuing tsy's, and not by "printing" ( – i.e. by the treasury marking up its spending accounts) money. These tsy's are considered to add to the Federal Debt.3) Further, there exists another law, that puts a limit to how big this accumulated "debt" can be – the debt ceiling.4) Still another law of the congress limits the "coin and currency" in circulation to be $300 billion.The issue is getting around the debt ceiling, or alternatively "retiring" the Federal Debt.One very important thing to be noted. Currently, the FED has on its books, approximately $2 Trillion worth of treasuries that it acquired by buying tsy's from the private sector. In other words, $2T of "digital cash" went out and purchased these tsy's. Where is the inflation?However, back to our argument. $2T of tsy's are owned by the FED (to all intents and purposes, a branch of the US Federal government.) This $2T of debt is owed by another branch of the government, the Treasury. Thus, it is the government owing money to itself. Hence Ron Paul's suggestion of just nullifying these treasuries.But the question is "How do we do this legally?" and also how can this be done within the political constraints today, where one party is being obdurate about something as simple as raising the debt ceiling.The coin stratagem is one simple legal way of retiring these tsy's currently owned by the Fed. The Fed exchanges these tsy's for two tiny, shiny coins of $1T each, that the Secretary of the treasury can legally mint given the laws on the books. These coins go from the US Mint (an arm of the Treasury) to the nearest Federal Reserve Bank, where they sit for eternity in the vault. Viola, no more Federal debt. These two coins will be considered to be M0, and cannot legally be converted to M1 (see the limit of $300B on circulating currency and coins!) Problem of the debt ceiling is now resolved!Alternative is to consider such coins as sales to the FED, and then be considered as "Miscellaneous Receipts" for the US Treasury. Thus no new debt! Again, these coins cannot legally be circulated.

  29. "One very important thing to be noted. Currently, the FED has on its books, approximately $2 Trillion worth of treasuries that it acquired by buying tsy's from the private sector. In other words, $2T of "digital cash" went out and purchased these tsy's. Where is the inflation?"Right now, I'd say some price inflation in commodities (especially gold), some asset price inflation in stocks, and some is still being saved. The other bond holders have the idea that either real GDP growth returns to at least make the interest payments or if that does not happen, there will be cuts to Medicare, Medicaid, and Social Security after the 2012 elections."These two coins will be considered to be M0, and cannot legally be converted to M1 (see the limit of $300B on circulating currency and coins!)"So there are going to be some demand deposits that aren't guaranteed with 1 to 1 convertibility to currency?

  30. My mistake. I misread the limit on US Notes as a limit on currency in circulation The coin could theoretically go into circulation, but will not because there will be no demand for it. However, it will remain as a vault asset of the FED, no different than the assets it acquired through QE2, or the Social Security trust fund bonds. The FED's asset is the Treasury liability, and the FED's liability becomes the treasuries asset. This is just a legal stratagem to complete an accounting entry, and to give the Treasury a legal way to spend money on the activities that have been authorized by the congress.

  31. Here’s another consideration:Foreign governments who are no longer able to purchase US Debt will instead purchase US Goods and Services.

  32. Thanks to Clonal and the rest who explained more of the mechanics. Now I cannot decide which of two experiments I'd like to see conducted: 1) Let the Teabaggers have their way so that people can experience what things are like when they get it, or 2) Let Treasury mint the coin, buy up the debt held by the Fed Res letting the Fed Gov go on with business as usual, and can see how THAT plays…

  33. There is one, nasty, little loose thread that could unravel all this if Obama pushed either the 14th Amendment or the coin seigniorage points: The dispute would ultimately be resolved by the SCOTUS, and we know how that would end up.

  34. About the currency limit and from:http://www.law.cornell.edu/uscode/31/usc_sec_31_00005115—-000-.html"TITLE 31 > SUBTITLE IV > CHAPTER 51 > SUBCHAPTER II > § 5115§ 5115. United States currency notesa) The Secretary of the Treasury may issue United States currency notes. The notes— (1) are payable to bearer; and (2) shall be in a form and in denominations of at least one dollar that the Secretary prescribes. (b) The amount of United States currency notes outstanding and in circulation— (1) may not be more than $300,000,000; and (2) may not be held or used for a reserve."So the limit applies to the U.S. Treasury but not the fed?

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