Economics, Pethokoukis

Bank analyst: Either the 14th amendment or trillion-dollar platinum coin options ‘would be as bad as an actual default’

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

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

Are there other financial options for the US government other than Congress approving a higher debt ceiling? Analyst Jaret Seiberg from the Washington Research Group has looked at two that are being discussed — and he’s dismissive of both:

The President could assert that that 14th amendment negates the requirement for Congress to raise the debt ceiling. Or Treasury could mint a $1 trillion platinum coin and deposit it at the Federal Reserve. Neither are great options. We see chaos if the market has to confront Treasuries where the debt is backed by Congress and those where it is not backed by Congress.

And the $1 trillion coin would expand the money supply by a considerable amount, which could spark serious inflation. And it seems like something out of a Simpson’s episode. So we are not even sure anyone would take this as an actual solution. All of this economic chaos could worsen the economic downturn, which would further weaken credit conditions and impose higher losses on banks.

For banks, this might be as bad as an actual default. The economic uncertainty could cause lending to grind to a halt, the disruptions could cause unemployment to spike which means higher loan losses, and interest rates could skyrocket as the market is unsure whether one of these creative solutions is even legal.

That sounds about right. Far better for Democrats and Republicans to agree on spending and entitlement cuts and raise the debt ceiling.

7 thoughts on “Bank analyst: Either the 14th amendment or trillion-dollar platinum coin options ‘would be as bad as an actual default’

  1. The bank analyst is wrong. It wouldn’t expand the money supply in circulation by a dime, because the Fed already has trillion of treasury securities. It would just exchange the securities it has in a vault for the coin in a vault. When Congress then raised the debt ceiling, the reverse exchange would happen.

    It would have no economic consequences — just legal consequences (namely, getting around the debt ceiling in a manner explicitly authorized by Congress).

  2. There are specific “COINS” designated in 31 USC § 5112 (a)

    Everything else is “NOT A COIN”, but a numismatic item.
    “(3) Numismatic item.— The term “numismatic item” means any medal, proof coin, uncirculated coin, bullion coin, or other coin specifically designated by statute as a numismatic item, including products and accessories related to any such medal, coin, or item.

    Since the platinum coins must be “platinum bullion coins” or “proof platinum coins”, they are not coins, but numismatic items per 31 USC § 5134. The wording “bullion” and “proof”, in 31 USC § 5112 (k) ensure that these platinum coins are indeed numismatic items.

    Now we need to ask ourselves if every “numismatic item” with a printed denomination is directly convertible into Federal Reserve currency. That answer is no, based on the five issues below.

    1) The Fed can refuse payment for denominations it does not want. In a similar vein, a gas station can refuse to take $100 bills. Especially, since the Federal Reserve is more like a federation, comprised of private banks, than a branch of government.….

    2) It would be equally specious to argue that the Mint had to convert its “numismatic items” at face value with the Fed. In this case, the Fed should order tons of $50 1-oz gold Double Eagles.

    3) If everything that the Mint produces with a printing on it is worth that value, I argue that a printed wrapper, or a box with the symbol “$50″ must be worth $50 in Federal Reserve currency. Accessories and related material to the “numismatic items” should have their printed value just as an arbitrary coin.

    4) If this is “currency”, then the Fed. could immediately return the coin and demand its notes back in conversion.

    5) The Mint only makes profit on seigniorage for “numismatic items” which are sold. These are not forced upon the Federal Reserve for an exchange of dollars. They would need to be purchased by someone who wanted to overpay $999,999,990,000 too much.

    Real coins are real currency and they are really described in 31 USC § 5112 (a). “Numismatic items” cannot be viewed as “legal tender” by the Fed.

    The Fed. would refuse the platinum coin, with no guarantee of currency.

  3. Why just one or two platinum coins? Why not 16 and just erase the national debt? Why not 500 trillion dollar platinum coins to pay off all unfunded liabilities for the next hundred years? Better still, why use platinum? Why not recycled aluminum? Obama can make aluminum just as valuable as platinum by executive order if he wants, just as he can make a coin worth a trillion just because he can. Better still, why not make 330 million trillion dollar coins and give one to each American, and then we’ll all be rich!

    I’m just flabbergasted at the sheer idiocy of this idea.

    • Because that goes beyond the bounds of doable monetary policy. The convenience of the trillion dollar platinum coin is A) platinum is the specific metal authorized by congress for the Treasury to mint and B) the Federal Reserve can (and will, if it lives up to it’s mandate for price stability) ‘sterilize’ up to three trillion by selling off assets on its balance sheet, removing as much money from the economy as the treasury puts in to it. Is it the best way to conduct monetary and fiscal policy? No. Is it better than default? yes!

  4. The Fed does not issue U.S. Treasury bonds, the U.S. Treasury does. The Fed reserve has a couple of trillion in treasury bonds in the vault that they bought with money printed up(electronically and fiat) and spent into circulation by the U.S. govt. So Jon Shield is dead wrong in his analysis as an additional $1T in new currency printed up to buy the coin would, in fact, be spent by the U.S Govt to buy guns and butter and it would be an increase in the money supply relative to GDP.

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