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How could Washington avoid a debt ceiling default? Mint a few trillion dollar platinum coins. Seriously

Image Credit: Kevin Dooley (Flickr) (CC BY 2.0)

Image Credit: Kevin Dooley (Flickr) (CC BY 2.0)

While raising the US debt ceiling has not gotten as much attention — yet — as the risk of falling off the fiscal cliff, it soon will. The limit will likely be hit by year end. And if Congress fails to raise the borrowing cap, the Treasury would likely run out of money-management options to avoid a default some time in the February.

So what to do? Analyst Chris Krueger at Guggenheim Securities’s Washington Research Group outlines four options. Pay particular attention #4:

 1. Traditional Raise.  This would involve a straight raise in the debt ceiling without any Congressional strings or new/alternative mechanisms.  By using “back of the envelope accounting” the USA burns approximately $100B in debt per month.

 2. Raise by Congressional Disapproval.  This is the system engineered last summer.  Essentially, the Congress passes a motion of disapproval to raise the debt ceiling, Obama vetoes, and the Congress fails to override the veto.  Assuming there is not enough votes to override the veto (there are not), the debt ceiling is raised.

3.  Constitutional Option.  The debt ceiling forcing mechanism could be demolished if Obama invoked the “constitutional option” and unilaterally raised the debt ceiling.  The 14th Amendment of the Constitution states the validity of the public debt shall not be questioned.  Under this option, Obama would invoke the 14th Amendment and unilaterally raise the debt ceiling – a move that was encouraged by former President Clinton last summer in the height of the debt ceiling stare down.  This option would trigger a wave of lawsuits and a likely Supreme Court decision.  The biggest problem with going this route would be to – in effect – set up two tranches of Treasuries.  Those that are not subject to a legal challenge (issued under the old debt ceiling) and treasuries that are subject to a legal challenge, which would likely trade at a discount.

4. Platinum Coin Option.  This is even more theoretical than the Constitutional Option, though some argue that it is a stronger legal option.  There are limits on how much paper money the U.S. can circulate and rules that govern coinage on gold, silver, and copper.  BUT, the Treasury has broad discretion on coins made from platinum.  The theory goes that the U.S. Mint would create a handful of trillion dollar (or more) platinum coins.  The President would then order the coins deposited at the Fed, who would then put the coin (s) in the Treasury who now can pay all their bills and a default is removed from the equation.  The effects on the currency market and inflation are unclear, to say the least.  You would also likely trigger a wave of lawsuits similar to the Constitutional Option and create two tranches of treasuries.  Both this option and the Constitutional Option are VERY low probability options

OK, you got me. The platinum coin option is a new one on me. I agree with Krueger that  the “effects on the currency market and inflation are unclear, to say the least.” I would rather not find out.

262 thoughts on “How could Washington avoid a debt ceiling default? Mint a few trillion dollar platinum coins. Seriously

  1. Platinum $1T coins? Interesting…

    It seems like it would just be another option of kicking the can down the road for a few years. Ultimately, all this bond manipulation and currency manipulation will catch up.

    • Where does the $1T in platinum come from. The government doesn’t have this stashed away at Ft. Knox. In fact, there isn’t even $1T in platinum currently being traded in the markets today.

    • It’s an elegant one – default without the legal mess. The mess it would make in the bond markets, even though they would get fully-paid, on the other hand,… (and yes, I did read the modifier).

      • Oh yes. The bond market would freak. Not to mention the bad precedence it sets for the government (if we rack up enough debt, we can get people to forgive it!)

        • It’s not elegant, and it won’t work. The Treasury Bonds held by the Federal Reserve are not owned by the Board of Governors or the Federal Open Market Committee. They are owned by the regional Fed banks. Those banks are privately owned and the bonds are among their assets. Privately owned companies will not sacrifice their assets forgiving the Government’s debts. Nor should they! The Government is obligated to pay those debts by the Constitution!

  2. try to think of inflation as too much demand chasing a stagnant or declining supply.

    With unemployment being high businesses slow down production because no one is there to buy it, this was causing deflation at the time of the crash.

    Now if you increase employment, you increase production because more people are able to buy more things, and businesses will pump up their factories to produce those things.

    The only point at which printing money would cause inflation is if production reaches it’s full capacity.

    *with machines and robots doing most of our “producing”, there is the possibility of having unlimited supply for some things.

    • True. But the government can demand goods with currency that did not exist yesterday.

      As an example, imagine the entire economy is composed of exactly 4 dollars (currency) and 4 cookies (products). Each cookie is worth $1.

      Now say the government prints 4 more dollars. Afterwards, there are a total of 8 dollars, and so each cookie is worth $2.

      All of the first 4 dollars have had their purchasing power halved. They are worth less now than they were before the government printed more money.

      When the government prints currency, it is essentially a tax on everyone who has money, to allow the government to pay more bills. The currency you earned yesterday now has less purchasing power today.

      • You make the incorrect assumption that in an economy with high unemployment the amount of cookies would remain constant.

        It is more accurate to say this:

        There are 10 people in the economy, 8 have jobs, and 2 don’t.

        With the 10 people, there are 10 cookies, with $10 in the economy. The richest two of the employed have $2, the rest have one, and the 2 unemployed have 0. So naturally the richest person has 2 cookies, the rest of the employed have 1 and the unemployed has 0.

        Now the government steps in and hires the unemployed (adding $2 to the economy). The unemployed now has $1, and they go to the cookie store and the cookie maker makes another cookie for $1.

        • Okay. But more variables doesn’t change the end result; all currency is devalued when more currency is printed.

          At the end of your story, there are 10 unconsumed cookies, and $12 (including the $2 the government gave to the unemployed, who bought cookies from the baker), meaning everyone who previously held currency has an effective purchasing power of 5/6 what they had before the government printed more.

          Even if you assume the original 10 cookies were also consumed, what about tomorrow? Now there are $12, 1 baker, and 10 customers, including 2 government workers, instead of only 7 customers. Before, the baker and his 7 customers would trade services and goods on a daily basis. Now, all parties, including the baker, are forced to accept goods and services the government chooses to provide (loss of choice), and cookies cost more, thanks to increased demand. Even if you assume the baker had a surplus of time and capital he could use for baking each day, there is an opportunity cost being paid of less time with his family, and/or less time spent creating wealth in some other way in the town. (Unless you want to argue that the government should force people to spend less time with family, and more time working to earn the same amount of wealth. But I think that’s more of an social policy question than an economics question.)

          All currency holders in your story effectively paid an immediate tax of 1/6 on every dollar when the new currency was introduced. Additionally, the baker will need to update his menu prices, which means either more vigilance on his part or a temporary shortage.

          If printing money had no negative side effects, why not print an unlimited amount, and always give it away to the poorest existing party?

          • Sam -

            Take a look at the 5yr graph of DXY. The USD is trending up against other currencies, even with all the new spending.

            “If printing money had no negative side effects, why not print an unlimited amount, and always give it away to the poorest existing party?”

            Too much gov’t spending can cause demand-pull inflation. Too little will result in recession and deflation.

          • “all currency is devalued when more currency is printed.”

            Wrong, wrong, wrong. Unless you believe that gold mining was always and everywhere inflationary in, e.g., the 19th century?

          • Arturo: I agree with what you are saying: The net price change doesn’t rely on supply alone. Price moves to where supply meets demand.

            This is government’s claim to print money; to keep up with an increasing demand for currency.

            But I believe we should not be tinkering with these values. Policy makers printing money is like class of kindergarteners changing the brakes of an automobile. They don’t fully understand what they are doing.

            Instead, we should allow the market to take care of itself. Repeal laws against privately minted currencies, and approve some private currencies for taxation. The free market will then generate a balanced amount of inflation, via competition between private currencies.

            But policy makers would be against such a plan, because they know much of their power is dependent on being able to print money and pay interest on government debt. Until they decide otherwise, these policies will continue to grow the fiat currency bubble.

          • All our money is “printed” right now. It’s all fiat. If we’re not to “print” anymore than democracy demands that the previously produced money be redistributed and that tax rates revert to 1959 levels. Do you really want that?

          • Joe: You’re right, history shows that democracy inevitably leads to redistribution.

            And redistribution leads to poverty and authoritarianism.

            There is no such thing as a free lunch.

            About $4T of the US debt is intra-governmental. The remaining $11T is public debt.

            There is currently an estimated $1T of currency in circulation.

            Printing and spending even just enough to cover the existing public debt, $11T, would cause massive upheaval and devaluation of existing US notes. (QE3 was only $400B, and our credit rating was downgraded for it)

            When the bubble finally does burst, how will the electorate respond? Will we see the error of our ways?

    • One iron/nickel near-Earth-asteroid has enough platinum-group metal to completely deflate all the bullion markets.

      Gold, Silver, Copper, Lead, Uranium…the price of all of them would collapse if someone with 4-10 times current global inventory started selling off their holdings.

      No I’m afraid the industrial, not bullion, potential of asteroids are where it’s really at. Build with them, don’t consume them.

  3. There’s a literature out there on Platinum coins, and also on the possibility of inflation if they’re used. See: http://www.correntewire.com/beyond_debtdeficit_politics_the_60_trillion_plan_for_ending_federal_borrowing_and_paying_off_the_nat http://www.correntewire.com/coin_seigniorage_a_legal_alternative_and_maybe_the_presidents_duty
    http://neweconomicperspectives.org/2011/08/coin-seignorage-and-inflation.html

    and the links in these posts. Platinum Coin Seigniorage hit the blogosphere mainstream in July 2011, and then receded again when the debt ceiling deal was done. It’s being mentioned again, because the debt ceiling is again imminent. The first link above; takes care of the debt and the debt ceiling problem for the foreseeable future.

    • They argue in the link you provide that this would not be inflationary. If this is true, I ask you, why do we have any taxes at all? Shouldn’t the US Government simply mint a coin every year to cover that year’s expenses and deposit it into the Federal Reserve?

      • Their argument is that the difference between tax revenues and expenditures (“the deficit”) is the part that is inflationary, but since we deficit spend today (via debt financing) and don’t see a major inflationary hit, this would be no more inflationary than today’s policies.

        Eliminating taxes entirely sets the “deficit” equal to the entire amount of appropriations every year, which would have a much, much stronger inflationary effect.

        (Note: this is their argument, not mine, so please don’t ask me to defend it…)

      • No. Taxes are needed for at least three reasons:

        1 — The Government’s fist currency has to have value. The the currency’s value is established by requiring people to pay taxes using the currency. Once that’s done, people need the currency and will work to get it.

        2 — Taxes are also needed for controlling inflation; and they’ll need to raised when demand-pull inflation threatens. And:

        3– Taxes are needed for leveling. If the distribution of wealth in a society is too unequal then political democracy is threatened.We’re seeing that all around us now. It has to stop or American Democracy will be a thing of the past. In fact, many people think it already is.

        Finally, I don’t advocate minting a single coin every year. What I propose is minting a $60 T platinum coin now. The seigniorage created should allow us pay off the debt subject to the limit and to cover deficit spending for 15 – 20 years. That should give us enough time to reorganize the Fed under the Treasury Department, and then the unlimited currency creation authority of the Fed could be used to let Treasury deficit spend without issuing debt.

        • “If the distribution of wealth in a society is too unequal then political democracy is threatened.”

          Nonsense.

          Back up that ludicrous claim if you think you can, because I’m quite sure you won’t be able to present an argument, let alone evidence to support it, almost certainly because you’re wrong.

  4. Except for the fact that it’s Congress that has the authority to mint coins, I only see hyperinflation as the problem.

    Then again, given Obama’s general disregard for the Constitution and hyperfinlation,….

    • Read my first comment and my posts. Congress has delegated its power to mint coins to the US Mint. Congress can take back that power; but until it does so it resides in the Executive Branch.

      On hyperinflation, I’ve outlined in my first link above why there would be no inflation even with the $60 T plan, and Scott Fullwiler, in the third link, has done a comprehensive job of discussing the issue of inflation. If you don’t agree with our arguments, then please say what you think is wrong with them. But until you do that I don’t see why anyone ought to take your hyperinflation bogeyman seriously. You can scream Weimar or Zimbabwe all you want; but that doesn’t make the United States similar enough to those cases to conclude that hyperinflation would be the result on minting the big coin.

      The key point here is that minting the coin isn’t spending. All it does is force the Fed to credit the Mint’s account with $60 T, which is then transferred to the Treasury General Account (TGA). At that point the reserves can be used to pay down the debt, as it falls due, and to cover deficit spending appropriated by the Congress without issuing further debt. Paying down the debt just involves an asset swap — debt instruments for reserves. So what, that’s like QE; not inflationary. As for deficit spending; unless there’s too much of it, past full employment, why should it be inflationary?

      Finally, I agree that Obama disregards the Constitution and also the Laws in many instances. I wish Congress and the Courts weren’t going along with him in these violations.

      But, my platinum coin proposal doesn’t involve any constitutional or legal violations. In fact, it’s one option for getting around the debt ceiling in a way that is both legal and constitutional. I explain why that is in the second link given above. But the bottom line is that the US is prohibited from defaulting on its debts by the 14th amendment. Since that’s the case the debt ceiling legislation would be unconstitutional if Congress had not also provided legal ways to circumvent it.

      One of those ways is Proof Platinum Coin Seigniorage (PPCS). I like it best because it lays to rest the lie told by both parties, and most of the media, every day that we are running out of USD, or can ever do so involuntarily.

      • Put the people’s platinum coin on the desk of the people’s president with an sign stating: “The buck starts here, we own it”. Send a note to the Fed about where to find it.

        Maybe add: “Desk occupant likewise” on the chair.

  5. Hitting the debt ceiling does not create a default. The only thing that happens is that the government can not spend more then it takes in. It’s the exact same effect as passing the balanced budget amendment. A default would occur if the US stopped making interest payments on our bonds. The revenue to interest payment ratio is approx. 4 to 1. There is no chance of a default.

    • Sorry, the US is obligated under the 14th Amendment to pay all its debts including pension debts, and principal repayments on the debt, as well as interest payments. Interest payments were $245 B in 2012. Debts coming due will total at least $2.6 T. Then, SS and Medicare payments have to be made, when the Trust funds call for funding. Then there are contractual obligations of the US Government that must be paid. No, I think that without rolling over the debt or paying it out of seigniorage, the US will default inside of a year, if Congress insists on acting unconstitutionally!

  6. $Trillion coin – Weimar Republic. Because Obama is implementing Cloward-Piven with remarkable success and swiftness, this seems like the most likely option. (Laughing? Think this is funny? Open your eyes…)

  7. Wee problem with the 14th amd. route: it says the validity of the debt shall not be questioned, it does not authorize creating new debt. That power is expressly given to Congress in Art. I, section 8, to whit: [the Congress has power to] “Borrow money on the credit of the United States”.

    • Wee problems with your wee problem. First, the 14th Amendment supercedes article 1, since it’s later in time. Second, it doesn’t authorize new debt; but it compels all Federal officeholders who have taken the oath to do what’s necessary to uphold the 14th Amendment. If that required Congress lifting the debt ceiling; then Congress would be obligated to do that, and if it didn’t act on that them, in theory, the Supreme Court could uphold the Constitution by ordering them to. However, third, Congress does not need to abolish or raise the debt ceiling to uphold the Constitution, because it has already given the Executive the authority it needs to circumvent the debt ceiling in providing it with the platinum coin seigniorage option. Since the President has that option, under the Constitution, he must use it or another to uphold the 14th Amendment and avoid the debt ceiling.

      • I disagree that the 14th supercedes Art. I simply because it came later; they are *both* in force as the 14th does not explicitly cancel or modify Art I as, e.g., the 16th does to Art. I sec. 3, and Amd. 21 does with Amd. 18. Moreover, while the Congress is obligated to pay the debts, raising the debt ceiling does no such thing; it allows Congress to issue more debt. Paying debts with more debts does not satisfy the 14th, it in fact violates the 14th by *not* paying the debt. The same could be said of any method of “circumventing the debt ceiling”, i.e., the object is to avoid actually paying the debt.

        • I think when an amendment comes later and portions of it are in conflict with portions of an earlier amendment, then those portions of the earlier amendment are superceded. I don’t think I said that the 14th repealed Article 1. Of course, it doesn’t.

          Also, Congress doesn’t issue debt, it authorizes Treasury to do that and Treasury issues the debt. On the point that:

          “Paying debts with more debts does not satisfy the 14th, it in fact violates the 14th by *not* paying the debt.”

          You’re kidding, right? There’s nothing in the Constitution that requires the Congress to pay off all the debts of the US, and Congress obviously has the authority to run debt continuously, so long as it provides for itself or a delegated authority to redeem debt instruments either before or as, they fall due. To deny this is to deny the whole history of Constitutional Law since the founding of the Republic.

          Finally, this:

          “The same could be said of any method of “circumventing the debt ceiling”, i.e., the object is to avoid actually paying the debt” depends on what you mean by “circumventing.” I was using the term in the sense of using a law Congress had passed to pay off all the debt, and in that sense “circumvent” the debt ceiling. If you do that PCS, the debt ceiling remains in place. It is not breached. But it becomes a dead letter, because all the debt instruments will eventually be paid off and the $16.6 Trillion debt ceiling will remain in place. I’m sure no one who’s debt instrument and interest due is paid with seigniorage profits will object to receiving their debt repayment on time and in full. Every legal requirement of teh debt instrument contract would be fulfilled. So, where’s the problem?

          • “You’re kidding, right? There’s nothing in the Constitution that requires the Congress to pay off all the debts of the US, and Congress obviously has the authority to run debt continuously…”

            NO, the Congress can certainly run continuous debts. But the purported object of your plan is to retire at least the bulk of the debt, if not there’s no point to your proposal. But creating more fiat money, which is what you propose in effect, will not do it; there is no substantive difference between printing trillions of paper dollars and minting trillions of platinum ones. Unless they are backed with goods and services, the money supply is vastly inflated, aka, the dollar is devalued.

          • Well, first paying off the debt with fiat, is just exchanging one type of fiat money, reserves, for another type of fiat money, the debt instruments. It’s a swap of financial assets, there are no new net financial assets created other than the interest.

            And second, while I agree with this:

            “there is no substantive difference between printing trillions of paper dollars and minting trillions of platinum ones,”

            I don’t see the problem with that. Our money is now fiat money; so all our money is “printed,” i.e. issued by fiat, whether it’s the Federal Reserve creating it out of thin air, or the mint creating it from coins. Our existing money was issued by fiat, and all new money will be issued by fiat. So what this comes down to is whether the creation of new net financial assets without issuing corresponding debt will be inflationary or not. In the $60 T plan I linked to earlier and in Scott Fullwiler’s post I also linked to, we’ve explained why PCS won’t be inflationary barring Congress appropriating deficit spending past what is necessary to get to full employment. If you disagree with our reasons for thinking this, then let’s see your reasons wy you think it will be inflationary. But let me warn you, if you’re just going to spout the bankrupt Quantity Theory of Money the Austrians still cling to, then save your self some time and read this: http://neweconomicperspectives.org/2011/07/two-theories-of-prices.html

            Finally you said:

            “Unless they are backed with goods and services, the money supply is vastly inflated, aka, the dollar is devalued.”

            That’s the QTM again, also who said anything about issuing money not backed by goods and services. I want to issue it to deficit spend to increase the production of goods and services, so it’s not your case at all.

      • Oh, and do we already possess the requisite amount of platinum? If not we will need to purchase it. If we have revenues sufficient to purchase large amounts of platinum, we would not need the platinum; we could just pay the debt with the revenues. Or, we can purchase the metal with more debt, but that defeats the purpose of the purchase. Finally, huge purchases of platinum will provide suppliers and traders with an enormous incentive to drive up prices; each additional ton of platinum will cost much more than the last, again defeating our purpose.

        • Nonsense, 1 oz. proof platinum coins are already being produced as collectors items. The Mint is scheduled to produce 15,000 of them, and the materials have already been secured. The templates have also been created and are ready to use. The two, count ‘em (2), platinum coins we need to implement $60 T PCS, will cost about $3300 each. We don’t need tons of platinum to do this and the material is already at hand.

          Do a little research, will you? We’ve long since considered and answered all the objections you’re going to arrive at off the top of your head. To dismiss this out of hand, you’re going to have to do some research and more than a little thinking.

  8. Why not have a couple of trillion dollar jars of urine with crucifixes in them, or a five trillion dollar paper mache George W Bush mask. Why bother minting something?

  9. As of today’s close, a $1T coin would need to weigh just over 18.6 tons. So that’s what? 55.8 tons for three? Sounds like a great idea. Of course, what the Treasury would really do is mint three platinum coins marked $1T, regardless of weight, and then point at the them and say, “See? These are worth three trillion dollars! We’re solvent!” Might as well carve them out of wood and avoid the expense.

    • Well, the law authorizes minting coins whose face value has no relationship to the market price of the materials used in them, so as you suggest, the big coins would not weigh 55.8 tons. Nor would the Treasury point at them. What it would do would be to deposit them at the NY Fed and get electronic credits in its accounts in return. The coin(s) would then stay at the NY Fed in one of its vaults, as a Fed asset. At the end of the process there would be nearly $60 T in the Treasury General Account (TGA). In the first week thereafter, the President could pay off all intra-governmental debts, as well as its debt instruments held by the Fed. That would lower the debt subject to the limit by $6.7 T or so, creating that much room between the outstanding debt and the debt ceiling. Note that the $6.7 T repaid would not be spent (so no inflation); but would just sit in various Trust Fund accounts at the Fed which the Government would have to establish.

      Then the President could proceed to pay off the rest of the debt, as it fell due, or even offer to purchase it from private sources and other nations at a premium, if it wanted to retire it early. But there’s no reason to do that. If it paid it off as it came due, then it would pay off another 1- 1.5 Trillion in the first year, and over the next 10 years another $6.5 – 7.5 Trillion. The only remaining debt after that would be perhaps another $1.5 T in debt with a term greater than 10 years.

      Now I don;t know about you; but I think that when the US starts and continues to repay its debts gradually, using the seigniorage funds, and doesn’t float any new debt, any and all doubts about our solvency will be gone; and the recipients of our payments will be both glad to have their debt instruments redeemed and also more than a bit angry because of our refusal to float any more debt and provide them with a risk-free giving them “welfare” (oops, interest) payments, they do not deserve.

  10. The trillion $ coin option is an absolute insult, and whomever thought of that needs to be beaten up. I mean seriously, the feds are spending fast enough as it is, making a trillion dollars represented as a coin would make it even more like candy to the kids in Congress and Senate!

    • Who’s it an insult to, the boobs who want to make the US an international laughing stock by refusing to raise the debt ceiling unless the social safety net is destroyed? Look, get a clue. The money can only be spent to meet our debt obligations and to cover deficit spending appropriated by Congress. The main effect of it would be to deprive the rich and foreign nations of the opportunity a risk-free investment. Why aren’t you in favor of that?

    • Typical conservative response….just refusing new ideas as usual…closed mindedness is the trademark of conservatism after all American Exceptionalism is rooted in its Liberal Tradition..while in fact there has never been a Conservative Era (except the guilded age)

  11. I love how people invoke the “constitutional” option. Actually, I hate it. It’s imbecilic.

    The 14th amendment was one of the 3 civil war amendments. Does it take a rocket scientist to decipher that the language was intended to prevent the southern states, forcibly reunited with the union, from balking at paying debts incurred by the north during the war or attempting to have confederate war debts paid by the north? Read the full text of the amendment.

    Putting aside the plain language, consider the patently absurd notion that it somehow authorizes the president do anything. Raising the debt ceiling allows the federal government to BORROW more – i.e. incur more debt. So not questioning existing debt means the feds must not be prevented from creating more of it? And where is that power invested in the executive branch? Answer: nowhere.

    If there is any sense left in the world, this “constitutional” option will be belly-laughed out of serious consideration. The proper invocation of the 14th amendment, as it concerns debt, would be to prioritize payment of existing debt ahead of other government bills. Period.

    • Re: James – “…will be belly-laughed out of serious consideration.” I would have used ‘should be’.
      and
      “…prioritize payment of existing debt ahead of other government bills. Period.”

      Spot On.

  12. Platinum is not some magic metal. It is currently worth slightly less than an equal measure of gold; it is traded on the open world markets. Traded by governments and individuals. It has been minted — in Proof and bullion — into U.S coins since 1997 (Act of 1996), for both collectors and metal traders.
    Seigniorage is collected by the mint at the time of sale; fiat value, currently $100 for a one-ounce coin, is placed on it mostly to establish authenticity.
    Placing a trillion dollar fiat value on an ounce of platinum is fanciful. You just made a metal backed bond.
    The metals market would go berserk. Fanciful notion, though.
    On a more practical note, pun intended, just who would buy this $60T coin or coins? Every year the Mint melts thousands of coins it can’t sell.
    And, Zimbabwe did print some $1 trillion notes . . .

    Good luck with that one.

    Next . . .

    • Nope. That’s the point, the coin isn’t “metal-backed.” It’s fiat currency. It’s legal tender. The Fed must credit it! After that happens the Government never uses that particular coin again, because the Fed fills the Mint’s account with reserves which are then swept into the TGA. I’ve already replied to the nonsensical “Zimbabwe” and “Weimar” memes. When you’ve read the Parenteau and Mitchell pieces and if you still don’t agree that Zimbabwe and Weimar are inapplicable than I’ll be happy to exchange on the matter with you. Until then, I’ll conclude that “Zimbabwe” and “Weimar” mean that you don’t like this proposal but won’t say exactly why.

  13. Option #3 is a very dangerous idea and it ion top of that is an inaccurate statement because it is not Constitutional. When the country was founded Congress was given the sole authority for many things, most notably the budget. The 14th Amendment, section 4 (which is the law that is being bypassed) specifically states:

    “Section 4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.”

    This amendment was ratified on July 9, 1868 with the modern day democratic party voting against it. Unanimously. Every single voting Republican (128 of 134 — with 6 not voting — in the House, and 30 of 32 — with 2 not voting — in the Senate) voted for the 14th Amendment. Not a single democrat (zero of 36 in the House, zero of 6 in the Senate) voted for it. Which is kinda ironic that the democratic party is coming back after that section of the Constitution, again. The purpose of section 4, which was created by Congress, is to guarantee that there are limits on spending which is the responsibility of the House. The House is responsible for submitting the budget to the Senate and the President.

    But the idea is dangerous that any president, using an excuse like this, wants to take the power of Congress away. As this is a Republican form of government we the people will lose that much more power over our government. Allowing for this opens the door for tyrants to come and take our freedoms away. Look to Egypt and how the president Mohamed Morsi is using their Constitution to take power away from the Judicial system. This is happening right now. If successful, Morsi will be above the law. Remember, freedom is only one generation away from extinction.

    • Jim, the Fed’s not constitutional. It’s a violation of separation of powers; but the Court won’t take that up; so we have to live with it unless Congress decides to make it part of the Executive Branch. Anyway, option 3 isn’t one the President should use because as long as option 4 and other options are available he can’t claim that the debt ceiling is unconstitutional, because the debts can be paid without breaching the debt ceiling.

  14. Our currency is completely fiat.

    That is the one and only bottom line (and it is as imaginary a line as the equator, and establishing a fixed, real-terms value or position of it is as essential as being able to accurately answer the question of how many angels could dance on the head of a pin).

    Fiat is fiat, regardless its form or defined value.

    The Trillion $ coin is no different than a 1901 USD vs. a 2012 FRN.

    We argue over the semantics of the value of “money,” as if we were talking about something tangible.

    • I think there actually is a difference, and looking at the associated legislation makes it pretty clear. If the Congress had the intent that the Secretary should be able to create an practically-infinite amount of fiat currency at his own discretion, there would be no legislation on the books which limits the total amount of paper currency in circulation.

      But there is such a limit. It seems pretty clear that the legislative intent of that is to prevent precisely this sort of maneuver by simply “printing” our way out of problems.

      The legislation on coinage granted flexibility to the Secretary on precisely what face values and quantities of PPC the Secretary could create, but it looks to me like the Congress simply didn’t anticipate the kind of audacious move that might be performed via something like this PPCS maneuver. That’s why I classify this as a “loophole”.

      It doesn’t seem at all clear to me that the Congress thought through the implications of trillion dollar coins (or even any coins that were of substantially greater face value than the largest units of paper currency). It simply hasn’t been done before.

      There’s no reason to assume that Congress WANTED the ability for hyper-expansion of the currency supply to be possible via coins but not possible via paper currency. That’s a pretty incoherent position to take, in my opinion.

      Had the legislation regarding restrictions in currency creation been written properly, such a loophole would not exist, since it would specify a maximum amount of total legal tender that can exist, rather than tying it only to paper currency per se.

      If the Congress had wanted the Secretary to be able to create a massive new surge of currency at his own discretion, there would have been no caps put in place with respect to paper currency, and the Secretary could simply order the creation of a single 100 Trilllion Dollar bill, and have it deposited instead.

      There is nothing inherent in platinum which alters the intent of Congress in the amount of currency that can be created without additional legislation.

      This is a gimmick and an oversight, and I predict that if it is used, the consequences will be staggering almost beyond imagining.

      • It is a loophole. The law was badly written. But that doesn’t make it unconstitutional or illegal for the Executive to use it to fill the public purpose. People constantly use loopholes in badly written legislation for their own purposes or public purposes both in and outside of the government.

        If Congress doesn’t like the law as written, then it can try to write a new law. However, in my view, the debt ceiling law is an improper piece of legislation that augments the power in Congress of conservatives who wanted two bites at the apple of appropriations. The way things are developing Congresspeople can vote for deficit spending, going on record as favorable to certain policies and then come back later for a second bite at taking back their appropriation under cover of deals done to get them to raise the debt ceiling. That’s another confusion and complication in democracy we don’t need.

        So, I’d like to see the debt ceiling become a dead letter. The Congress can do it by just repealing the legislation. Or the President can do it by filling the public purse with seigniorage. I actually prefer the second, because it makes the fact that the Federal Government can never run out of money visible to all. We live in a democracy; and I think that for it to be effective, people need to know that we have as much money as we need. Certainly when Medicare for All, or full employment bills come up for consideration people should not have to live with the lie that we are running out of money. Then having the truth about fiat money; they’ll be in a much better position to decide on how they want their Congresspeople to vote on these and other matters.

        • “It is a loophole. The law was badly written. But that doesn’t make it unconstitutional or illegal for the Executive to use it to fill the public purpose.”

          Just because something is technically legal, that doesn’t mean it is a good idea. There are a staggeringly large number of things that are extremely bad ideas, without being technically illegal or unconstitutional.

          “People constantly use loopholes in badly written legislation for their own purposes or public purposes both in and outside of the government.”

          Seriously, a tu quoque argument? Other people doing inadvisable things is not a good reason to encourage more of the same. See: Mothers everywhere, ‘If Jimmy jumped off a bridge…’

          “So, I’d like to see the debt ceiling become a dead letter. The Congress can do it by just repealing the legislation. Or the President can do it by filling the public purse with seigniorage. I actually prefer the second, because it makes the fact that the Federal Government can never run out of money visible to all.”

          Do you honestly think that you know with any degree of certainty what unintended consequences might arise from such a vivid demonstration of that fact… and do you honestly think that every single one of those possible consequences is worth risking coming about just to make your point about a law you don’t like?

          “We live in a democracy”

          Since we’re talking about the United States here… no, we don’t. We live in a republic, and in my opinion more people need to grok that fact in fullness.

          • Well we disagree about what we live in or at least ought to live in. Apart from that however, of course, I don’t know what the unintended consequences will be; but I do know what the consequences of the present system and neoliberalism have been and I think they’re awful.

            So, yes, I’d like to have the public purse filled, or, if you like the Treasury to be able to operate without issuing debt instruments and to be able to spend what Congress appropriates no more and no less. A $60 T coin will allow that to happen. Congress still controls the purse strings and that’s good enough for me to strat with!

  15. the fifth option would be for the Fed to incinerate that part of the debt they own…its seriously discussed at the BofJ & BoE for their currencies…

    • Again, the bonds the Fed holds are the assets of the privately owned regional banks. They’re not going to incinerate their assets, so this won’t work. The BoJ and the BoE aren’t private banks. So, we can’t always do what they can do without nationalizing the Fed first, which requires legislation and would be anathema to a majority of Congress.

      • Could you answer a clarifying question please, Joe? I’ve done as much reading as I can on this subject, and I commend you on your impassioned defense of the idea, if only for the rigor you have shown in your argumentation.

        Here’s where I’m puzzled: On the one hand, you assert that the Fed is a private bank, and their balances are an asset that they wouldn’t willingly destroy. Seems logical on its face.

        Yet on the other hand, you assert that they would willingly take on an “asset” in the form of a $60T coin which would translate all of their other assets into the ultimate in illiquid investments. That $60T coin cannot ever be spent, or traded, or anything else. No one could possibly “make change for it”, after all.

        This strikes me as logically equivalent to taking not only every asset that the Fed has, but every asset the Fed WILL EVER HAVE, and permanently freezing it in carbonite, to use a Star Wars analogy. Those assets are forever “locked up” in that coin. That removes all flexibility from the Fed in perpetuity.

        How is that not FUNCTIONALLY equivalent to destroying all of their assets in perpetuity by burning them? If they are, in effect, locked up in a manner such that they can never be accessed or utilized for their own purposes, is the asset really “theirs”?

        If you want to treat the Fed as private entity from the perspective of not wanting to destroy their assets (in their own self-interest, as any other private party would have), why then would you assume that accepting the coin for deposit at the Fed would be in the Fed’s self-interest as a private party?

        This doesn’t strike me as logically coherent. What aspect of self-interest as a private party does the Fed have for accepting such a plan? I see where it’s a useful idea from the perspective of the government, but not for the party on the other end of the transaction.

        What’s in it for the Fed?

        If you’re going to assert that the Fed will simply do whatever the government wants them to do, no matter how much it harms their self-interest, don’t you need to logically give up this notion that the Fed is actually a private entity, motivated in the same way as other private entities (i.e. not wanting to see their assets destroyed)?

        Please help me understand the apparent inconsistency here. Thanks in advance!

        • Thanks, VekTor, that’s really a well-reasoned and well-put question. My answer is that I can’t defend the logic of Congressional legislation, Government accounting, or the customs that have developed over the years governing the relations between the Fed and the Treasury. But I can describe what I think the existing situation is.

          First, the Fed viewed as a whole system with the Board of Governors, the FOMC, and the Regional Banks in interaction is part of the Government and the Central Bank of the United States. Yet each of the Regional Banks is privately owned, so each bank has assets and liabilities like any other private bank. But each Fed banks also has a power, delegated by the Congress, that other banks don’t have. That power is the authority to create currency and reserves out of thin air without actually simultaneously creating a loan contract to have as an asset.

          Second, the Fed Regional Banks are the Treasury’s bankers, and the Treasury General Account, which is the spending account, resides at the New York Fed. The Mint’s account called the Public Enterprise Fund (PEF) also resides at the New York Fed. It’s the law that the NY Fed must accept all legal tender deposits including coins into the PEF and credit those coins at their face value.

          When the New York Fed does that, those coins become assets of the New York Fed, i.e. the GAO requires that they be considered assets, while the credits issued in return for them by the New York Fed are liabilities of the Fed, the same way all bank deposits are liabilities.

          So, third, in the $60 T coin case the Fed now has an asset, and the reserve deposits it created in crediting the PEF and eventually the TGA when that account is “swept” for seigniorage by the Treasury, are its corresponding iiabilities.

          Now, fourth, please note that no other Fed assets or liabilities are implicated in this transaction or underwrite it in any way. So, the $60 T asset remains at the Fed in its vaults. Its liabilities get liquidated over time as the Government spends down the TGA. Eventually, the NY Fed is left with an asset it can do nothing with. But, from an accounting point of view this doesn’t affect the NY Fed’s profits, most of which get refunded to the Treasury anyway. Nor is the NY Fed’s capability to create future reserves and currency impeded in any way. That’s the significance of the Fed and its regional banks having the currency creation power delegated to it by the Congress.

          You ask above:

          “Yet on the other hand, you assert that they would willingly take on an “asset” in the form of a $60T coin which would translate all of their other assets into the ultimate in illiquid investments. That $60T coin cannot ever be spent, or traded, or anything else. No one could possibly “make change for it”, after all.

          “This strikes me as logically equivalent to taking not only every asset that the Fed has, but every asset the Fed WILL EVER HAVE, and permanently freezing it in carbonite, to use a Star Wars analogy. Those assets are forever “locked up” in that coin. That removes all flexibility from the Fed in perpetuity.

          How is that not FUNCTIONALLY equivalent to destroying all of their assets in perpetuity by burning them? If they are, in effect, locked up in a manner such that they can never be accessed or utilized for their own purposes, is the asset really “theirs”?”

          It’s not simply because the NY Fed’s other assets are just not impacted by its acceptance of the coin. It still has its other assets. And it still has its unlimited authority to create currency and reserves.

          You also say:

          “If you want to treat the Fed as private entity from the perspective of not wanting to destroy their assets (in their own self-interest, as any other private party would have), why then would you assume that accepting the coin for deposit at the Fed would be in the Fed’s self-interest as a private party?

          “This doesn’t strike me as logically coherent. What aspect of self-interest as a private party does the Fed have for accepting such a plan? I see where it’s a useful idea from the perspective of the government, but not for the party on the other end of the transaction.

          “What’s in it for the Fed?”

          The Fed is obeying the Law and performing its function as the Treasury’s Banker by accepting the Government’s coin money and crediting it in Treasury Accounts. That’s what’s in it for them. They must obey the law and they must perform their function.

          And you end with:

          “If you’re going to assert that the Fed will simply do whatever the government wants them to do, no matter how much it harms their self-interest, don’t you need to logically give up this notion that the Fed is actually a private entity, motivated in the same way as other private entities (i.e. not wanting to see their assets destroyed)?”

          The Fed as a system isn’t a private entity. They’re part of the Government. They say that right on their web site. But each of the regional banks are privately owned organizations that have stockholders and make very limited profits from the overhead charges (about 6% if I remember) subtracted from total profits, before they remit the remainder of their profits, some $80 Billion per year currently, to the Treasury. Now, in order to become regional Fed Banks, each one had to accept the constraints written into the Federal Reserve legislation, and among their mandates is to serve as the Treasury’s bankers. That wasn’t an option for the banks when they were formed; and it’s not an option now.

          Btw, there’s even a provision in the Fed Law that says that if there’s a difference in interpretation of the Law between the Fed Chairman and the Secretary of the Treasury, then the Secretary’s view shall prevail. So even, if the Chairman objected to crediting the big coin, the Secretary can override his objection.

          • So, if I read that right, at the end of the whole thing, the Fed is left with a $60T asset they can never use, and since Secretary can legally “force” the situation… the Fed needs to ‘lie back and think of England’?

            I’m a bit puzzled as to how this circumstance could exist and somehow not affect any of the regional banks at all, once everything is full said and done with respect to “paying off the debt”.

            Is it all smoke and mirrors at the end, with the $60T “asset” acting as a funny-money accounting gimmick to somehow justify a massive ex nihilo creation of new electronic currency (wealth) out of thin air (via the crediting of the huge seigniorage profit/balance instantly to Treasury the moment the accounts are swept?

            I suppose from one respect it’s better to be open and honest in this way about the fiat nature of massive currency creation through a legislative loophole like this, but I can’t help but think that so vigorously snatching the veil away in this kind of fashion will have such a shocking effect on the conscience of the people… that the repercussions from a crisis of confidence that event could engender might have staggering unanticipated consequences.

            The system runs in great degree because the people trust that it runs, and will continue to do so. If that trust is taken away from them, even if they are learning the technical truth in the process… do you honestly think you can accurately predict the fallout from that?

            I don’t like the fiat system, don’t get me wrong. But I also don’t like the notion of the utter chaos that might arise if everyone is suddenly and abruptly forced to ‘wake up’ to the realities of the system, and their cherished illusions are taken away. That can’t be undone once it happens.

  16. Unlike gold and silver, the US produces, smelts and refines it from existing mines here. Stillwater Mining is the only platinum producer in US and produces a modest amount. It was controlled 51% by Norilsk until late 2010 as most of the world’s platinum is produced in Russia and South Africa. It is a silly notion for USG to buy foreign platinum and mint it here. Content of coinage is generally sourced in the USA.

  17. I would put john boehner’s head on the front of the platinum coins and the american eagle on the back. a nice kick in the shorts for the republicans who want to destroy our economy.

  18. There is actually another option. The Federal Government could stop spending money it doesn’t have and the Federal Reserve could stop inflating our currency through Quantative Easing. That would be the most elegant solution of all.

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