Aa
Magic coin' debt ceiling solution not worth much
http://www.nbcnews.com/business/economywatch/magic-coin-debt-ceiling-solution-not-worth-much-1B7889123
With the debt ceiling debacle looming, there's a move afoot to urge the Treasury to skirt the painful spectacle with a sleight of hand, by using its power to mint money to create a single, $1 trillion platinum coin.
It turns out the magic trick would be a lot harder to pull off than its proponents would have you believe.
The idea was originally floated in July 2011, the last time lawmakers deadlocked over what had been, until then, a routine vote on the government’s borrowing authority. Now that political battle lines are being drawn as the Treasury once again needs to raise its credit limit, the idea is gaining momentum again.
In the past week, a petition on the White House website has gained more than 6,000 signatures in support of the idea. Blog posts are popping up for and against.
An Oregon congressmen has vowed to introduce a bill banning the magic coin. No less than Nobel Prize-winning economist Paul Krugman has endorsed the idea.
“By minting a $1 trillion coin, then depositing it at the Fed, the Treasury could acquire enough cash to sidestep the debt ceiling — while doing no economic harm at all,” Krugman explained.
In theory, the idea has a lot going for it.
Magic coiners say their goal is to eliminate a repeat of the July 2011, near-self-induced default by the U.S. Treasury. That last debt ceiling go-around crashed the stock market, cost the U.S. its Triple-A credit rating and produced the still ticking “fiscal cliff" budget time bomb that has justifiably sapped business and consumer confidence for months.
The government once again is bumping up against its credit limit, which it's expected to hit sometime next month. The exact date is hard to nail down because, just like a household having trouble paying the bills, the Treasury can juggle a bit to stretch its dwindling tax dollars. It's also hard to predict the flow of fresh receipts as taxpayers begin filing their 2012 returns.
Contrary to its critics' fears, the magic platinum coin would not fuel runaway government spending. If the idea worked, the Treasury would only be allowed to write checks against the coin for expenses already authorized by Congress. No more.
Nor would the minting of the magic coin spark runaway inflation. The coin wouldn't be introduced into circulation, so it wouldn't devalue the bills and coins already flowing through the economy. (Even if it were allowed to circulate, it’s hard to imagine it changing hands very often.)
So far, so good. Actually creating the coin, though, wouldn't be as simple as its proponents would have you believe.
For starters, there isn't enough platinum in the world – either above or below ground – to create a $1 trillion coin.
There’s roughly 3.2 million ounces of platinum in the world, according to estimates by the European Union. At the current market price of about $1,500, that comes to roughly $500 billion, or enough for about half a magic coin. (This is also, by the way, why the world will never return to the gold standard. There’s not enough gold to back the paper wealth created since the U.S. closed its gold window for good in 1971.)
Even if you could scrounge up enough platinum, you’d be looking at a really big coin. At $1,500 an ounce, you’d need a little more than 40 million pounds of platinum – which works out to about more than 1,000 cubic yards of the precious metal. If proportioned like a quarter, the magic platinum coin would be (roughly) five and a half feet high and about 76 feet in diameter. Not something you could use at the laundromat.
But the “magic” of this trick, say its backers, is that the coin can be any size you like. It doesn't even have to be worth $1 trillion. Thanks to an obscure clause in the U.S. Code, specifically Title 31, Subtitle IV,› Chapter 51, Subchapter II, paragraph 5112(k), Treasury Secretary Timothy Geithner can direct the U.S. Mint to create a platinum coin in any denomination he so chooses. At anytime he likes, no questions asked.
That means the magic coin could be as small as a dime – which works out to about an ounce of platinum, worth $1,500. But even if the government declared the coin worth $1 trillion, it still wouldn't get very far trying to pay its bills with it, according to Drew Matus, an economist at UBS.
“If the government made a wooden nickel and carved $1 trillion on it and hands it to you, are you going to take it?” he said.
This is where the Treasury pulls off its most ingenious sleight of hand, according to the platinum coin crowd. Secretary Geithner simply sends the coin over to the Federal Reserve and swaps it for cash – just like the paper securities the Fed routinely buys from the Treasury. Presto! Uncle Sam now has another $1 trillion in cash to pay the bills.
To be sure, the Fed has pulled some unusual stunts since the financial collapse of 2008, including mopping up billions of dollars worth of toxic mortgage bonds to clear them out of the system. To do so, Chairman Ben Bernanke and his colleagues had to reach deep into the 90-year-old Federal Reserve Act to a previously unused clause that gives the central bank broad powers “under exigent circumstances.” (A Treasury default would probably meet that definition.)
But the rule (Section 13, paragraph 3) says only that the Fed can lend out “notes, drafts, and bills of exchange.” Nothing in there about taking platinum as collateral. When asked to clarify whether the central bank would accept the magic platinum coin, Fed officials said they were unable to comment on hypothetical cases.
If the Fed won’t take the coin, debt ceiling magicians have one more trick up their sleeve. Under the Fourteenth Amendment, they argue, the president has the power to declare the entire borrowing limit process unconstitutional.
That idea also came up during the last debt ceiling debacle but was dismissed as too extreme. Some 18 months later, the idea isn't so radical to some congressional leaders, include House Minority leader Nancy Pelosi, D-Calif.
“I were president, I'd use the 14th Amendment, which says that the debt of the United States will always be paid,” she told CBS "Face The Nation" on Sunday.
Under this plan, the Treasury would simply continue churning out paper debt, sell it to investors and use the cash to pay its bills. But it’s not at all clear those investors would go along with the idea, said Matus.
“As an investor, I don’t want to own a piece of debt that might be ruled illegal three months in the future,” he said.
With the debt ceiling debacle looming, there's a move afoot to urge the Treasury to skirt the painful spectacle with a sleight of hand, by using its power to mint money to create a single, $1 trillion platinum coin.
It turns out the magic trick would be a lot harder to pull off than its proponents would have you believe.
The idea was originally floated in July 2011, the last time lawmakers deadlocked over what had been, until then, a routine vote on the government’s borrowing authority. Now that political battle lines are being drawn as the Treasury once again needs to raise its credit limit, the idea is gaining momentum again.
In the past week, a petition on the White House website has gained more than 6,000 signatures in support of the idea. Blog posts are popping up for and against.
An Oregon congressmen has vowed to introduce a bill banning the magic coin. No less than Nobel Prize-winning economist Paul Krugman has endorsed the idea.
“By minting a $1 trillion coin, then depositing it at the Fed, the Treasury could acquire enough cash to sidestep the debt ceiling — while doing no economic harm at all,” Krugman explained.
In theory, the idea has a lot going for it.
Magic coiners say their goal is to eliminate a repeat of the July 2011, near-self-induced default by the U.S. Treasury. That last debt ceiling go-around crashed the stock market, cost the U.S. its Triple-A credit rating and produced the still ticking “fiscal cliff" budget time bomb that has justifiably sapped business and consumer confidence for months.
The government once again is bumping up against its credit limit, which it's expected to hit sometime next month. The exact date is hard to nail down because, just like a household having trouble paying the bills, the Treasury can juggle a bit to stretch its dwindling tax dollars. It's also hard to predict the flow of fresh receipts as taxpayers begin filing their 2012 returns.
Contrary to its critics' fears, the magic platinum coin would not fuel runaway government spending. If the idea worked, the Treasury would only be allowed to write checks against the coin for expenses already authorized by Congress. No more.
Nor would the minting of the magic coin spark runaway inflation. The coin wouldn't be introduced into circulation, so it wouldn't devalue the bills and coins already flowing through the economy. (Even if it were allowed to circulate, it’s hard to imagine it changing hands very often.)
So far, so good. Actually creating the coin, though, wouldn't be as simple as its proponents would have you believe.
For starters, there isn't enough platinum in the world – either above or below ground – to create a $1 trillion coin.
There’s roughly 3.2 million ounces of platinum in the world, according to estimates by the European Union. At the current market price of about $1,500, that comes to roughly $500 billion, or enough for about half a magic coin. (This is also, by the way, why the world will never return to the gold standard. There’s not enough gold to back the paper wealth created since the U.S. closed its gold window for good in 1971.)
Even if you could scrounge up enough platinum, you’d be looking at a really big coin. At $1,500 an ounce, you’d need a little more than 40 million pounds of platinum – which works out to about more than 1,000 cubic yards of the precious metal. If proportioned like a quarter, the magic platinum coin would be (roughly) five and a half feet high and about 76 feet in diameter. Not something you could use at the laundromat.
But the “magic” of this trick, say its backers, is that the coin can be any size you like. It doesn't even have to be worth $1 trillion. Thanks to an obscure clause in the U.S. Code, specifically Title 31, Subtitle IV,› Chapter 51, Subchapter II, paragraph 5112(k), Treasury Secretary Timothy Geithner can direct the U.S. Mint to create a platinum coin in any denomination he so chooses. At anytime he likes, no questions asked.
That means the magic coin could be as small as a dime – which works out to about an ounce of platinum, worth $1,500. But even if the government declared the coin worth $1 trillion, it still wouldn't get very far trying to pay its bills with it, according to Drew Matus, an economist at UBS.
“If the government made a wooden nickel and carved $1 trillion on it and hands it to you, are you going to take it?” he said.
This is where the Treasury pulls off its most ingenious sleight of hand, according to the platinum coin crowd. Secretary Geithner simply sends the coin over to the Federal Reserve and swaps it for cash – just like the paper securities the Fed routinely buys from the Treasury. Presto! Uncle Sam now has another $1 trillion in cash to pay the bills.
To be sure, the Fed has pulled some unusual stunts since the financial collapse of 2008, including mopping up billions of dollars worth of toxic mortgage bonds to clear them out of the system. To do so, Chairman Ben Bernanke and his colleagues had to reach deep into the 90-year-old Federal Reserve Act to a previously unused clause that gives the central bank broad powers “under exigent circumstances.” (A Treasury default would probably meet that definition.)
But the rule (Section 13, paragraph 3) says only that the Fed can lend out “notes, drafts, and bills of exchange.” Nothing in there about taking platinum as collateral. When asked to clarify whether the central bank would accept the magic platinum coin, Fed officials said they were unable to comment on hypothetical cases.
If the Fed won’t take the coin, debt ceiling magicians have one more trick up their sleeve. Under the Fourteenth Amendment, they argue, the president has the power to declare the entire borrowing limit process unconstitutional.
That idea also came up during the last debt ceiling debacle but was dismissed as too extreme. Some 18 months later, the idea isn't so radical to some congressional leaders, include House Minority leader Nancy Pelosi, D-Calif.
“I were president, I'd use the 14th Amendment, which says that the debt of the United States will always be paid,” she told CBS "Face The Nation" on Sunday.
Under this plan, the Treasury would simply continue churning out paper debt, sell it to investors and use the cash to pay its bills. But it’s not at all clear those investors would go along with the idea, said Matus.
“As an investor, I don’t want to own a piece of debt that might be ruled illegal three months in the future,” he said.
This is VERY interesting. Here is more on this.
This morning, Joe Weisenthal and I took our message in favor of minting a trillion-dollar platinum coin to "Bloomberg Surveillance," where we were met with the usual shock and horror from hosts Tom Keene and Sara Eisen. Platinum coin opponents are so distressed that one, Republican Representative Greg Walden, has said he will introduce legislation to ban the coin, citing my post from last week as a dangerous instigation.
Walden, Keene and Eisen are all wrong. Here are my responses to the most common objections we are getting to the platinum coin proposal, in increasing order of persuasiveness:
About Josh Barro»
Josh Barro is the lead writer for the Ticker, Bloomberg View's blog on economics, finance and politics. His primary ... MORE
FOLLOW ON TWITTER
More from Josh Barro:
Platinum Coin Is Less Silly Than Its AlternativesQ
The Federal Government Is Not a Small BusinessQ
Why We Must Go Off the Platinum Coin CliffQ
1. "That's silly/zany/juvenile!" This is probably true, but it's not a dispositive objection. Republican intransigence over the debt ceiling is juvenile. There is no particular reason that the president should not use a juvenile strategy in response.
The key question to ask about the platinum coin is not "is it juvenile?" but "will it work?" Minting the coin will allow the federal government to continue to meet its spending obligations despite hitting the debt ceiling. It will allow President Barack Obama to pressure Congress to repeal the debt ceiling. That -- not whether it seems silly -- is the important thing.
2. "Where will we get all the platinum?" I'm honestly surprised by this question, but I'm hearing it a lot, including from the Guardian's Heidi Moore and from Keene this morning.
To be clear: We do not need a trillion dollars' worth of platinum to make the trillion-dollar coin -- less than an ounce will do. This is not a move to a "platinum standard," and it shouldn't even have any impact on the markets in platinum. There will be no need for dump trucks full of precious metal to head toward the mint.
3. "But that will be inflationary!" This is a more serious objection, and it gets at what the platinum coin strategy really is -- financing the federal government's operations by printing money instead of borrowing it. The trillion- dollar coin will never circulate, but it will be used to back cash payments coming from the Treasury that would have otherwise been financed by bond purchases.
If the government financed itself this way in general, that would absolutely be inflationary. But the president can hold inflation expectations steady by making absolutely clear that the policy will not lead to a net change in the money supply over the long term. Obama should pledge that once Congress authorizes additional borrowing, he will direct the Treasury to issue bonds to cover the government's coin-backed spending and then to melt the coin.
The concern about inflation actually gets at why the platinum coin strategy will work to defuse the debt-ceiling crisis. Minting a platinum coin will demonstrate that Congress accidentally gave the president direct control over monetary policy, allowing him to inflate if he wishes. The need to neutralize that threat will motivate Republicans to raise the debt ceiling.
Like the debt ceiling itself, the platinum coin exercise is an asymmetrical, negative-sum game. Nobody wants to hit the debt ceiling, but it bothers conservatives less because they view increasing government dysfunction as useful for achieving their policy goals. Nobody wants the president to pay the government's bills by printing money, but it bothers conservatives more because they are more afraid of inflation.
If the president is clear about his lack of any long-term intention to interfere with the money supply, I don't expect the platinum coin to cause a spike in prices. But if it does, that will only add more motivation for Congress to end the crisis by passing a law that both removes the president's authority to print money and abolishes the debt ceiling.
4. "This will undermine confidence in the U.S. government/dollar/central bank." Well, it's all relative. The best solution, from a confidence perspective, would be for Congress to simply repeal the debt limit, or at least increase it without conditions, thus eliminating this manufactured "crisis" and any need for a trillion-dollar coin.
That's what Matt Cooper calls for, but it's not going to happen. Remember, the Republican conference is a bunch of babies.
Instead, we need to compare the platinum coin option against others on the table. For example, we could hit the debt ceiling and the government could start leaving about 40 percent of its bills unpaid.
The president could accede to Republican demands for near-term spending cuts (of an as-yet-unspecified nature) in addition to the amounts from the Budget Control Act sequesters, which would cause another recession.
Or he could assert authority under the 14th Amendment to continue issuing debt, notwithstanding the debt ceiling, which would lead to court battles and probably impeachment. (The 14th Amendment play sounds less "silly" than the platinum coin, but it's actually on much shakier legal ground.)
Minting the platinum coin would be less economically damaging than any of the above options, which is why Obama should announce he will pursue it if the debt ceiling is not raised. Hopefully, inflation hawks will be so alarmed by the president's intention to use his direct monetary authority that they will choose to cut a deal and we'll never actually get to the minting stage.
But if Republicans call Obama's bluff, he should be ready to mint that coin - - and to save the economy by doing so.
(
This morning, Joe Weisenthal and I took our message in favor of minting a trillion-dollar platinum coin to "Bloomberg Surveillance," where we were met with the usual shock and horror from hosts Tom Keene and Sara Eisen. Platinum coin opponents are so distressed that one, Republican Representative Greg Walden, has said he will introduce legislation to ban the coin, citing my post from last week as a dangerous instigation.
Walden, Keene and Eisen are all wrong. Here are my responses to the most common objections we are getting to the platinum coin proposal, in increasing order of persuasiveness:
About Josh Barro»
Josh Barro is the lead writer for the Ticker, Bloomberg View's blog on economics, finance and politics. His primary ... MORE
FOLLOW ON TWITTER
More from Josh Barro:
Platinum Coin Is Less Silly Than Its AlternativesQ
The Federal Government Is Not a Small BusinessQ
Why We Must Go Off the Platinum Coin CliffQ
1. "That's silly/zany/juvenile!" This is probably true, but it's not a dispositive objection. Republican intransigence over the debt ceiling is juvenile. There is no particular reason that the president should not use a juvenile strategy in response.
The key question to ask about the platinum coin is not "is it juvenile?" but "will it work?" Minting the coin will allow the federal government to continue to meet its spending obligations despite hitting the debt ceiling. It will allow President Barack Obama to pressure Congress to repeal the debt ceiling. That -- not whether it seems silly -- is the important thing.
2. "Where will we get all the platinum?" I'm honestly surprised by this question, but I'm hearing it a lot, including from the Guardian's Heidi Moore and from Keene this morning.
To be clear: We do not need a trillion dollars' worth of platinum to make the trillion-dollar coin -- less than an ounce will do. This is not a move to a "platinum standard," and it shouldn't even have any impact on the markets in platinum. There will be no need for dump trucks full of precious metal to head toward the mint.
3. "But that will be inflationary!" This is a more serious objection, and it gets at what the platinum coin strategy really is -- financing the federal government's operations by printing money instead of borrowing it. The trillion- dollar coin will never circulate, but it will be used to back cash payments coming from the Treasury that would have otherwise been financed by bond purchases.
If the government financed itself this way in general, that would absolutely be inflationary. But the president can hold inflation expectations steady by making absolutely clear that the policy will not lead to a net change in the money supply over the long term. Obama should pledge that once Congress authorizes additional borrowing, he will direct the Treasury to issue bonds to cover the government's coin-backed spending and then to melt the coin.
The concern about inflation actually gets at why the platinum coin strategy will work to defuse the debt-ceiling crisis. Minting a platinum coin will demonstrate that Congress accidentally gave the president direct control over monetary policy, allowing him to inflate if he wishes. The need to neutralize that threat will motivate Republicans to raise the debt ceiling.
Like the debt ceiling itself, the platinum coin exercise is an asymmetrical, negative-sum game. Nobody wants to hit the debt ceiling, but it bothers conservatives less because they view increasing government dysfunction as useful for achieving their policy goals. Nobody wants the president to pay the government's bills by printing money, but it bothers conservatives more because they are more afraid of inflation.
If the president is clear about his lack of any long-term intention to interfere with the money supply, I don't expect the platinum coin to cause a spike in prices. But if it does, that will only add more motivation for Congress to end the crisis by passing a law that both removes the president's authority to print money and abolishes the debt ceiling.
4. "This will undermine confidence in the U.S. government/dollar/central bank." Well, it's all relative. The best solution, from a confidence perspective, would be for Congress to simply repeal the debt limit, or at least increase it without conditions, thus eliminating this manufactured "crisis" and any need for a trillion-dollar coin.
That's what Matt Cooper calls for, but it's not going to happen. Remember, the Republican conference is a bunch of babies.
Instead, we need to compare the platinum coin option against others on the table. For example, we could hit the debt ceiling and the government could start leaving about 40 percent of its bills unpaid.
The president could accede to Republican demands for near-term spending cuts (of an as-yet-unspecified nature) in addition to the amounts from the Budget Control Act sequesters, which would cause another recession.
Or he could assert authority under the 14th Amendment to continue issuing debt, notwithstanding the debt ceiling, which would lead to court battles and probably impeachment. (The 14th Amendment play sounds less "silly" than the platinum coin, but it's actually on much shakier legal ground.)
Minting the platinum coin would be less economically damaging than any of the above options, which is why Obama should announce he will pursue it if the debt ceiling is not raised. Hopefully, inflation hawks will be so alarmed by the president's intention to use his direct monetary authority that they will choose to cut a deal and we'll never actually get to the minting stage.
But if Republicans call Obama's bluff, he should be ready to mint that coin - - and to save the economy by doing so.
(
"Even if you could scrounge up enough platinum, you’d be looking at a really big coin. At $1,500 an ounce, you’d need a little more than 40 million pounds of platinum – which works out to about more than 1,000 cubic yards of the precious metal. If proportioned like a quarter, the magic platinum coin would be (roughly) five and a half feet high and about 76 feet in diameter. Not something you could use at the laundromat.
But the “magic” of this trick, say its backers, is that the coin can be any size you like. It doesn't even have to be worth $1 trillion. Thanks to an obscure clause in the U.S. Code, specifically Title 31, Subtitle IV,› Chapter 51, Subchapter II, paragraph 5112(k), Treasury Secretary Timothy Geithner can direct the U.S. Mint to create a platinum coin in any denomination he so chooses. At anytime he likes, no questions asked.
That means the magic coin could be as small as a dime – which works out to about an ounce of platinum, worth $1,500. But even if the government declared the coin worth $1 trillion, it still wouldn't get very far trying to pay its bills with it, according to Drew Matus, an economist at UBS.
“If the government made a wooden nickel and carved $1 trillion on it and hands it to you, are you going to take it?” he said.
This is where the Treasury pulls off its most ingenious sleight of hand, according to the platinum coin crowd. Secretary Geithner simply sends the coin over to the Federal Reserve and swaps it for cash – just like the paper securities the Fed routinely buys from the Treasury. Presto! Uncle Sam now has another $1 trillion in cash to pay the bills. "
If the repubs want to hold the debt ceiling hostage like they are saying, then I say use the magic coin and the 14th Amendment. They leave the President no choice...I find it funny now all of a sudden the repubs want to change the rules about it...
But the “magic” of this trick, say its backers, is that the coin can be any size you like. It doesn't even have to be worth $1 trillion. Thanks to an obscure clause in the U.S. Code, specifically Title 31, Subtitle IV,› Chapter 51, Subchapter II, paragraph 5112(k), Treasury Secretary Timothy Geithner can direct the U.S. Mint to create a platinum coin in any denomination he so chooses. At anytime he likes, no questions asked.
That means the magic coin could be as small as a dime – which works out to about an ounce of platinum, worth $1,500. But even if the government declared the coin worth $1 trillion, it still wouldn't get very far trying to pay its bills with it, according to Drew Matus, an economist at UBS.
“If the government made a wooden nickel and carved $1 trillion on it and hands it to you, are you going to take it?” he said.
This is where the Treasury pulls off its most ingenious sleight of hand, according to the platinum coin crowd. Secretary Geithner simply sends the coin over to the Federal Reserve and swaps it for cash – just like the paper securities the Fed routinely buys from the Treasury. Presto! Uncle Sam now has another $1 trillion in cash to pay the bills. "
If the repubs want to hold the debt ceiling hostage like they are saying, then I say use the magic coin and the 14th Amendment. They leave the President no choice...I find it funny now all of a sudden the repubs want to change the rules about it...
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