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.