Here’s Felix Salmon on a crazy idea that’s been making the rounds:
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.)
It seems that some of the MMT-types have been pushing this idea, for instance here’s Joe Firestone:
Throughout the next six months, a number of other posts appeared at various sites 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.
So is this a brilliant masterstroke that will solve all of Obama’s problems, or a loony idea that he should avoid touching with a ten foot pole. Even though I only learned about this idea 30 minutes, ago, I can confidently answer “both.”
Let’s start with the easy part, the idea seems completely nuts. The public would instinctively recoil from this idea, mainly because the public’s instincts are pretty good. Roughly 99% of the time this sort of plan would produce hyperinflation. It doesn’t really matter whether the idea is actually nutty, Presidents simply can’t be seen doing wild and crazy things with the currency. FDR did something analogous (in a milder form) in 1933. His policy led to the resignation in protest of a number of his top aides, including Secretary of the Treasury. In the end FDR was forced to retreat. And his political position was much stronger than Obama’s. So if Obama’s political advisers are reading this, tell him to avoid the idea like the plague.
The harder part is whether it would work. I don’t know if it’s legal, but Firestone seems to think so. If it is legal it could not only solve Obama’s debt ceiling difficulties, it could also allow him to generate a fast economic recovery (in NGDP, or aggregate demand.) In other words, he could do an end run around the Fed and run monetary policy right out of the White House, just as FDR did in 1933. Or he could threaten the Fed to get his way, just as FDR did in 1933. (FDR devalued the dollar, and basically told the Fed that if they tried to stop him he’d start printing fiat money, which was authorized by Congress in the devaluation bill.) Of course either of these moves would delight Paul Krugman, and cause heart attacks amongst all the Very Serious People who run the country. (You know, the ones who don’t understand the distinction between NGDP and RGDP.) Just as FDR’s decision to torpedo the World Monetary Conference was called “magnificently right” by Keynes, but horrified all the Very Serious People of 1933.
I have to admit that as a contrarian, a quasi-monetarist, and a former coin collector, the idea of minting two $1,000,000,000,000 platinum coins as a way of solving our economic problems fills me with delight. Remember, I’m the guy who once claimed the recession was caused by too few nickels. Yes, I am slightly embarrassed to be in with the MMT people. (Firestone seems to think we have 30% excess capacity, and that we could monetize the entire debt without creating hyperinflation.) But not so embarrassed that I’m afraid to risk ridicule from the more respectable bloggers who dismiss this idea.
I hope the Fed has a safe place to store those coins—wouldn’t want to “misplace” two trillion dollars.
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