Minting a trillion dollars

One reader asked me to comment on the talk about the US Treasury and Federal Reserve minting a platinum coin with a face value of $1trillion to provide funds for the government to spend if the Republican-controlled Congress blocks an increase in the public debt ceiling and brings US public services to a halt.  Is this possible and what implications does it have for the economy?

Well, in a way the issue is now dead.  Over the weekend, the US Treasury department issued a statement to say that the loophole in federal law that would allow the government to mint this coin would not be applied for the purpose of avoiding an increase in the debt limit.  So it ain’t going to happen.  The Federal Reserve was not going to credit the government’s accounts with $1 trillion if the Treasury department had minted the coin.  So minting money (as opposed to printing it) as a way of funding government borrowing has been ruled out.

And that is what it was.  The platinum coin was just another way for the government to borrow money through the Fed creating it in the government’s accounts.  The government was being blocked from issuing any more ‘debt’ i.e. bonds or T-bills, but it could mint a coin and thus bypass the so-called ceiling on debt set by Congress each year.

Keynesians like Paul Krugman were all gung-ho about minting the coin so that the bluff of the Republican veto on government borrowing and spending could be called.  “Minting the coin would be undignified, but so what?” said Krugman.  “it would be economically harmless and help head off government by blackmail”.

Economically harmless?  Well, yes.  If the Fed created a credit line of $1trillion for the government in return for a platinum coin as an asset that would not necessarily be inflationary.  First, the Fed could sell off other assets like the huge amount of government bonds it already holds to fund the new government borrowing.  In that way it would ‘soak’ up the extra cash going into the economy from new government spending.  If it did not do this, then there would be extra money in the economy.  But then that would happen anyway when the debt ceiling was raised, as it will have to be if the Federal government is to function beyond next month.  So there is nothing new there.

But there were two objections to the coin minting plan that were raised.  The first was that it made a laughing stock of the US government in the eyes of potential purchasers of US government debt, especially foreigners who already hold 40% of it.  How does it secure confidence that America’s officials are managing their public finances properly when Congress goes into paralysis and President Obama then announces that he has minted a $1trn coin to cover things?

Indeed, for the first time, the Federal Reserve would be creating money explicitly to fund the government’s deficit and not just to expand the money supply in attempt to boost the economy, as with QE measures.  This would be monetising the debt by doing the bidding of the government and not remaining ‘independent’ as mainstream economists prefer the Fed to be.  The consensus among pro-capitalist economists is that by minting the coin, the Fed would be jeopardising its role as the lender of last resort for all the capitalist economy in return for helping one particular government out of its hole.  A bad precedent indeed.  No wonder, Bernanke said, no way Barack.

The second objection was that ‘down the road’, unless this extra funding is paid for through more taxes or less government spending, the extra borrowing (that would happen anyway if the debt ceiling is raised) would eventually drive up inflation.  Keynesians like Krugman said that is ridiculous in the current environment with 8% unemployment rate, inflation well below 2% and interest rates ‘zero bound’.  That’s surely true – right now.  The real issue is not inflation as such – but the fight between those who reckon that rising government spending will boost economic growth and those who reckon that it will only squeeze the private sector and lower profitability.  On that issue, neither the Keynesians nor the Austerians can mint a coin.

9 Responses to “Minting a trillion dollars”

  1. Shane Mage Says:

    Governments have always used seignorage to fund themselves. A legally minted coin of any denomination is legal tender and the Fed cannot legally refuse to accept it, no more than the Secretary of the Treasury, a creature of the President, can refuse a directive from the President to mint the coin. The political point you miss is that Obama is determined to introduce more austerity through a “Grand Bargain” of “deficit reduction,” with the “debt ceiling” as excuse. It worked the first time, because in 2011 MMTers were completely excluded from the public debate. But it can’t work now because the case has been made beyond any doubt that Obama has all the legal and constitutional authority to avoid any form of default no matter what the GOP refuses to do. The child has pointed out the Emperor’s nakedness and all eyes (except those intentionally shut) have been opened.

    Of course minting one coin is no solution to any nut a self-created problem. But thanks to the idiocy of the GOP and the stupid cleverness of Obama, after 75 years Functional Finance is reborn and available for use by whatever populist movement arises to solve the real preoblems.

    • michael roberts Says:

      Shane
      Of course, you are right. Obama could spend and create money to do it if he wanted. But he wont. My point was that the Fed has also made its position clear, namely, that it looks after the interests of the capitalist economy as a whole, and in particular the financial sector that owns it, not the interests of any government trying to provide services and welfare for its people. So if there is any radical movement that develops, it should not concentrate just on demanding spending through functional finance but on control and ownership of the financial system itself.

  2. Choppa Morph Says:

    Please, Mike, tell us about money and gold and platinum from a Marxist perspective – metal, paper, government fiat, what difference does any of it make?

    • michael roberts Says:

      choppa
      That’s another big piece of work – people write books on this! I’ll see what I can do along with all the other things in the pipeline. Two points from a Marxist perspective: 1) capitalism is a monetary economy, not an economy with money on top as a veil 2) money as a physical commodity does have different effects from fiat money or credits on an account.

      • John McLeod Says:

        I too would love to hear your thoughts on this Michael, as well as any recommendations for further reading (I’m sure there are plenty of books and dissertations on this subject). I don’t know much about money theories and learning a bit about the MMT crowd has sparked my interest. It seems that the debate is between two sides, the conservative, Austrian tradition types, who cling with religious devotion to the idea of money/gold having some sort of absolute value, and people from the Keynesian tradition, who think governments can spend or print money at will if it has monetary sovereignty (the Post-Keynesians and MMTers being even more radical about this, arguing that governments can run up the national debt indefinitely). I want to hear more about the Marxist tradition on money theory (not sure who to read). Maybe it’s irrelevant but I’ll never forget this quote from one of my favorite works:

        “Belief in the gold standard was the faith of the age. With some it was a naive, with some a critical, with others a satanistic creed implying acceptance in the flesh and rejection in the spirit. Yet the belief itself was the same, namely, that bank notes have value because they represent gold. Whether the gold itself has value for the reason that it embodies labor, as the socialists held, or for the reason that it is useful and scarce, as the orthodox doctrine ran, made for once no difference. The war between heaven and hell ignored the money issue, leaving capitalists and socialists miraculously united. Where Ricardo and Marx were at one, the nineteenth century knew not doubt. Bismarck and Lassalle, John Stuart Mill and Henry George, Philip Snowden and Calvin Coolidge, Mises and Trotzky equally accepted the faith. Karl Marx had gone to great pains to show up Proudhon’s utopian labor notes (which were to replace currency) as based on self-delusion; and Das Kapital implied the commodity theory of money, in its Ricardian form. The Russian Bolshevik Sokolnikoff was the first postwar statesman to restore the value of his country’s currency in terms of gold; the German Social Democrat Hilferding imperiled his party by his staunch advocacy of sound currency principles; the Austrian Social Democrat Otto Bauer supported the monetary principles underlying the restoration of the krone attempted by his bitter opponent Seipel; the English Socialist, Philip Snowden, turned against Labor when he believed the pound sterling not to be safe at their hands; and the Duce had the gold value of the lira at 90 carved in stone, and pledged himself to die in its defense. It would be hard to find any divergence between utterances of Hoover and Lenin, Churchill and Mussolini, on this point. Indeed, the essentiality of the gold standard to the functioning of the international economic system of the time was the one and only tenet common to men of all nations and all classes, religious denominations, and social philosophies. It was the invisible reality to which the will to live could cling, when mankind braced itself to the task of restoring its crumbling existence.”

        Karl Polanyi, The Great Transformation

      • michael roberts Says:

        John

        I have covered some of these points in previous posts. Have a look at

        https://thenextrecession.wordpress.com/2012/08/29/the-republicans-and-the-gold-standard/

        https://thenextrecession.wordpress.com/2012/04/27/effective-demand-liquidity-traps-and-debt-deflation/

        https://thenextrecession.wordpress.com/2012/04/21/paul-krugman-steve-keen-and-the-mysticism-of-keynesian-economics/

  3. John McLeod Says:

    Another great post, thanks so much for writing about this Michael!

  4. Mike Ballard Says:

    The US dollar is pegged to gold. It’s just that the market value of the dollar has been eviscerated since Nixon closed the gold window. There just ain’t enough gold to back it physically. The workers are producing way more wealth than can be represented in the supply of gold. In any case, It used to take $35 to buy an ounce of gold. Now, it takes $1,700 to equal the value of one ounce of gold.

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