What Does The Trillion Dollar Coin Do?
The Trillion Dollar Coin proposal for solving the debt ceiling problem is again experiencing a blogosphere explosion this past week. The precipitating factor may be that people are starting to believe that the Republicans will come to a “fiscal cliff” settlement with the Democrats including very little in entitlement spending; but will then come back, in 2013 with a very tough position on the price they want to agree to raise the debt ceiling to give the Executive operating room for any length of time. Bruce Bartlett had this to say on the issue:
In my opinion, the fiscal cliff is akin to the so-called Y2K problem in late 1999, when many people worried that computers would freeze, elevators would stop running and planes would fall from the sky. Of course, nothing of the kind happened.
So if the fiscal cliff is a faux problem, why do we hear that industry and financial markets are deeply fearful of it? The answer is that there is a very real fiscal problem that will occur almost simultaneously – expiration of the debt limit. Much of what passes for fiscal-cliff concern is actually anxiety about whether Republicans in Congress will force a default on the nation’s debt in pursuit of their radical agenda.
I think Bartlett is right about attention shifting to the debt ceiling now, and that's why we have a sudden explosion interest in high value platinum coin seigniorage having face values mostly in the low trillions, once again. Since the Trillion Dollar Coin (#TDC) is being vetted again, I wanted to make a brief point about it that is not well understood by the mainstream bloggers who have been stampeding to blog about the Platinum Coin Seigniorage (PCS) solution this week. Let's lay out the context.
Most people who've thought about how the Government creates money know that Congress delegated the primary power to create currency to The Federal Reserve Banks, the system of which combined with the Board of Governors and the Federal Open Market Committee, form the central bank of the United States. In modern times, currency means not only printed money, but also electronically created credits, reserves held in Federal Reserve accounts.
The reserves that have been created by the Fed at any point, are many multiples of the amount of paper currency in existence produced by the Mint on orders from the Fed. So, most of the currency created by the Fed is in the form of reserves rather than paper currency. Also it's well-known that when the Fed creates reserves, it does so “out of thin air.”
In our fiat currency system there is no “backing” for either the reserves or the paper currency. In exactly that sense, all of our currency is now “printed,” and has been since we went off the gold standard in 1971. There is no distinction between existing currency, whether paper, or reserves, and newly created currency in that respect.
The Fed however, doesn't make all our money. The Treasury too, has its role. Congress delegated the US Mint the authority to coin fiat money, the value of whose metal content, with respect to certain types of coins, need have no relation to its face value, which can be as high or low as the Mint wants to make it. However, this has created a problem.
If the Mint coins money in denominations appropriate for commonplace retail transactions than the coins involved can be exchanged among parties as needed. But what happens if the Mint coins platinum money with face values in the trillions of dollars? Then that money can't be used for exchange as a practical matter, because there are no buyers who will accept the trillion dollar coins in exchange. So, if the Treasury wants to use such coins to fill the public purse with money it can later spend on debt repayment or Congressional deficit appropriations, it must transform high face value coins into divisible money; i.e. reserves in its Fed spending account.
Fortunately, since high value coins are legal tender, the Mint, and the Treasury, can force the Federal Reserve to transform high value coins into reserves, by just depositing them into the US Mint's Public Enterprise Fund (PEF) account, which the Fed must credit with reserves in return for the high value coins.
For example, if the Mint deposits a $One Trillion coin in the PEF, then the Fed must accept the coin and credit the PEF with an equivalent value of electronic credits in reserves. Then, the Treasury has the authority to “sweep” the PEF of all seigniorage, i.e. profits resulting from the Mint/Fed transaction.
In the case of $One Trillion proof platinum coin, the profits are its face value minus a few thousand dollars. So that amount would be “swept” into the Treasury General Account (TGA), which is the account used by Treasury to perform Government spending.
A very good way to look at high value platinum coins is that they are legal instruments for the Treasury to use the unlimited “out of thin air” reserve creation authority of the Fed to fill the public spending purse, the TGA, for public purposes. In effect, platinum coin seigniorage involves the Treasury commandeering the power of the Fed to create reserves and place them in the TGA, perhaps, depending on what the Treasury chooses to do, in the many Trillions of dollars. Functionally, it produces the same result as if the Fed were subordinate to the Treasury within the Executive Branch, and the Treasury had unlimited authority to create both currency and coins by fiat. Is this good?
I think it is. The vaunted independence of the Fed has not served us well over the years. What it has amounted to is that the Fed has not been accountable to the public. Its independence has meant independence from the Treasury and, largely, from Congress. But it has not meant independence from the big banks and Wall Street, which the Fed fails to regulate to any visible extent to protect the economy and the public, and whose interests the Fed has served ahead of the interests of the public at large.
In short, I am all for the President ordering high value platinum coin seigniorage, because I think the constraints imposed by that upon the Fed, and also the filling of the public purse to such an extent that it will be clear to people that the US can never run out of the currency it alone can issue, will make the Congress, the Fed, and the Executive Branch all much more accountable to the wishes of the American people.
The Congress and the Executive won't be able to hide behind "we're running out of money" anymore, when they refuse to enact that majority support among the people. And the Fed won't be able to hide behind its "independence" to justify its doing the bidding the big private banks. Using proof platinum coin seigniorage, will be better for supporting a progressive democracy; and ultimately, that is why I favor it!
(Cross-posted from New Economic Perspectives.)