The Small Ball Trillion Dollar Coin Seigniorage Exception

By Joe Firestone

The exception to the general pattern focusing on the Trillion Dollar Coin (TDC) as the solution to the debt ceiling problem I outlined and critiqued in my last post, is in Joe Wiesenthal ‘s posts here and  here. Wiesenthal alone criticizes, rather than ignores, other options than the TDC, namely the $16 T and $100 T options, on grounds that they are no more effective at meeting the debt ceiling crisis than the TDC. He says that the issue is not a lack money but the debt ceiling law, and also that if a coin that large were minted and used to pay back the debt, then the result would be inflation or hyperinflation because of the flow of the large quantity of reserves into the economy, and the ensuing great expansion in the money supply.

I think that Joe Wiesenthal is both showing his bias towards solving the smaller, more immediate (debt ceiling), rather than the larger (austerity) problem, and also that he’s dead wrong about the impact of a $100 T coin on inflation. On his bias: I can only say, that I don’t agree that “we” are talking about a legal problem rather than a money problem.

If all “we” are concerned with is the debt ceiling, then Wiesenthal is right; we need only consider the TDC option, which the President can use either once, or until the House gets tired of his minting TDCs, and raises the debt ceiling. But I think that most Americans, if they understood Platinum Coin Seigniorage (PCS) and its possible meaning for fiscal politics would go beyond debt ceiling concerns to the issue of austerity. And they would also realize that the face value of the PCS option chosen by the Secretary of the Treasury is of enormous importance for removing any perceived need for austerity arising from the level of the national debt or the debt-to-GDP ratio.

Wiesenthal’s main additional stated objection to extremely high value PCS on the order of $50 – $100 Trillion is the inflationary impact he expects it to have. I’ve already analyzed the likely impact of a $60 T coin on inflation in a fair amount of detail in an earlier post, based on Scott Fullwiler’s comprehensive framework. My analysis shows that there would be no inflation due to the effect of $60 T PCS itself on the economy. I can summarize the argument this way.

The credits in the Treasury General Account (TGA) ultimately resulting from using $60 T PCS aren’t immediately spent. So, they don’t all enter the economy immediately, but over a very long period of time from 15 – 25 years in duration. So, to gauge the inflationary impact, you have to analyze when and how the credits would be entering the economy. At the end of the last fiscal year, $6.4 Trillion in debt subject to the limit was owed by the Treasury to other agencies and to the Fed itself. That debt could be redeemed in the same week after minting a $60 T coin. But the payments wouldn’t be inflationary because they would not enter the non-government economy. Nevertheless, these payments would cut back debt subject to the limit by close to 40%, because of the ridiculous quirk in the law that counts intra-governmental debt toward the debt ceiling.

Next, the 10 T or so of debt held by private corporations, individuals, and foreign governments would only be paid as it falls due. Much of it would be paid over the first three years. But as I’ve argued above, the additional reserves placed in the system by paying the debt, and not issuing new debt instruments would be less inflationary than bonds would be.

Also, their presence in the banking system, would clearly flood it with reserves and drive overnight interest rates down to zero, rather than raising them. For the Fed to hit any non-zero rate targets it would have to support them either paying IOR, or issuing debt instruments of its own to drain the excess reserves. In either case, there’s no inflationary impact from repaying debt instruments as they fall due by adding reserves to the banking system.

That leaves deficit spending. In the case of a $60 T coin, and a national debt of $16.4 Trillion, we’ll assume that $43.6 Trillion would be left in the TGA for future deficit spending. However, the fact that the credits are in the TGA doesn’t mean that the Treasury could spend them. In fact, it can only spend them if Congress appropriates deficit spending. So, the bottom line is that the $43.6 T doesn’t go into the economy until it’s appropriated. Then some portion of it can be inflationary if Congress deficit spends past the point of full employment; but if it doesn’t, then there won’t be demand-pull inflation. And, if it does, then the inflation will be due to unwise Congressional appropriations and not to using PCS.

In short, there’s no way that PCS in itself can have an inflationary impact, no matter how high the value of the platinum coin is. That’s because repayment of already held debt is less inflationary than continuous rollover of and gradual increase of debt, repayment of debt to government agencies including the Fed doesn’t enter the economy, and using PCS-generated funds to cover deficits is not in itself inflationary unless deficit spending is so large that it continues past full employment.

So, that’s the true narrative about PCS and inflation. Not, ZOMG “Weimar, Zimbabwe.” That’s nonsense! Let’s hope that Joe Wiesenthal, and other MSM bloggers who have jumped into the PCS pool in the past few weeks read it and cease to spread “the silly idea” that PCS, in whatever denomination greater than say a few Trillion Dollars may be used, is inherently inflationary. It is nothing of the kind! Inflation, due to Government spending, is always and everywhere, in the rare instances that it occurs, a Congressional phenomenon!

22 responses to “The Small Ball Trillion Dollar Coin Seigniorage Exception

  1. Half of the US Treasury debt of $16 trillion is intergovernmental, which leaves approximately $8 trillion in both private and foreign government hands, which would be held as US Treasury Bills. Do we know the maturity date of these Bills i.e. , when are they coming due for payment ?

    If in future the US Treasury created money debt free, instead of borrowing it from the Federal Reserve, they could pay off the Treasury Bills coming due and no one would be the wiser. Thus the inflation rate would not deviate from its current rate. The degree of inflation of the currency is determined by the amount issued into the economy, not by whom it is created.

  2. joe good piece, hope joe w. reads it to expand his understanding. i don’t know why those who support, like krugman/joe w feel the need to dismiss it silly even though they agree it works. its a huge opportunity.

  3. Joe, did you see that PCS made it on the Cobert Report last night (surely you did, but I haven’t seen any mention of it on NEP yet)? I especially like his question at the end of the segment.

  4. Joe,
    “Then some portion of it can be inflationary if Congress deficit spends past the point of full employment; but if it doesn’t, then there won’t be demand-pull inflation. ”

    I’ll be happy if they just spend enough to get employment to 4% and keep spending to keep it there! still leaves them room.

    i’m just so tired of them finally spending enough to get the unemployment down, then they stop. then repeat all over again.

    • The US government assertion that unemployment is 7.7% is fictitious. They ignore people who are out of work, but have given up looking for a job and also use seasonally adjusted numbers, aka “fudged”, to claim more jobs are being created. The reverse is actually true. The actual number of people employed in November 2012 was 143.549 million and in December it was 143.060, which is a decrease 0f 489,000 rather than the increase they are claiming.

      The real unemployment rate is 18.77% of the workforce. The number of unemployed is 33.44 million. This also ignores the fact that over 10 million people are working part time.

      The minimum wage of $7.25 per hour has not increased since Obama took office, while the cost of living has increased significantly. By comparison, the minimum wage in France was increased recently to the equivalent of $12.33 per hour.

      • Don’t know where your numbers come from. U-5 is 9.2%, U-6, which includes people working part time who want to work full time, is 14.4%.

        The numbers are all too high, for sure. But clean up your overblown language about the ‘real unemployment rate.’ There is no ‘real unemployment rate.’ The government publishes an ‘official unemployment rate’, and it is not fictitious, it just doesn’t capture all of the relevant information about unemployment and the economy, especially in our extreme circumstances. As you know, the alternative unemployment measures U1-U6 are published with the official unemployment rate U3.

    • I won’t be happy w/o a job guarantee. FDR’s second bill of right, ya know!

  5. Thanks Joe, keep em coming.

  6. If Europe had minted a few effing coins they could have kept taxes low and put money into the economy but noooooo, they were worried about the debt and deficit. Well then. They suffer for it. Mint an effin Euro, and stimulate that beotch

    we could do the same #minthecoin

    Oh and that could help ease China’s troubles.

  7. What would happen if the Fed refused to accept the,coin from the Treasury?

    • The Secretary can order the Fed to accept the coin. The Fed Act says that when the Fed Chair and The Sec’y disagree the view of the Sec’y shall prevail. I don’t even think the Fed can take it to Court and get standing.

  8. Congratulations, BBC is running the story of the Trillion Dollar Coin:

    and the report is lucid as well.

  9. The Trillion dollar coin represents a de facto promissory note.

    In fact all money is promissory notes, whether US Treasury Bills or Federal Reserve Notes

  10. I promise to pay the bearer on demand…..

  11. I think we are at a time in history where it is worth some effort to really understand hyperinflation. I have written up a Hyperinflation FAQ that I think can help people understand it.

  12. Here’s an illuminating discussion of the most famous 20th century instance of hyperinflation; it may be of interest:

    An intriguing aspect of Parameswaran’s analysis is that in the Weimar hyperinflation, the central bank accommodated asset grabs by those able to borrow at the large negative real interest rates it was offering.

    I like Steve Waldman’s proposal for incremental PCS to fund the deficit over short time horizons. It seems more politically feasible than the “big solution” of prefunding the deficit for decades, and perhaps less likely to frighten markets than a big solution.

    • Though, being an incremental solution, Waldman’s proposal doesn’t leave a lot of room for the pursuit of Progressive agendas such as full employment; it’s simply a way of working around the current constipated condition of Federal governance.

    • Incremental solutions won’t work because they’ll still alarm TPTB, and lead to very vicious propaganda campaigns without DEMONSTRATING that Government can never run short of money. To you and I it may seem that they illustrate the principle of the thing just as well as the $60 T coin. But the problem is that they don’t allow one to create the solution to insolvency as a fait accompli, that cannot be undone or taken back, and they don’t allow one to DEMONSTRATE to casual observers that the debt is being paid off, will be totally paid off as it falls due, and will no longer be a problem again. Then people will be free to turn to other political concerns.

      Political feasibility should not be a concern here. It would be one if the coin has to go through Congress; but it doesn’t have to. Now it’s up to the President to use the power. He, and he alone, can decide to mint that $60 T coin and change the whole political context.

      What would happen? A big propaganda explosion of course. But, when the smoke clears; the move to get rid of the debt and end austerity politics will be popular as long as there is no demand-pull inflation. Within 6 months everyone would see that it doesn’t, and regular people wouldn’t miss debt issuance in the slightest.

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