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Sunday, March 22, 2020

Primer: The Trillion Dollar Coin

The idea of minting a trillion dollar platinum coin in the United States has once again popped up. This idea is being championed by some Modern Monetary Theory (MMT) proponents. Since this is very popular in online MMT circles, I feel I should say something, although I want to remain very brief. My comments here are based on my earlier understanding of the trillion dollar coin proposal, and not updated to the details of the current proposal. My objective here is to outline the mechanics, without being bogged down in details.

The trillion dollar coin comes out of the legal details of monetary institutional arrangements in the United States. The U.S. Treasury (the fiscal arm of the government) issues coins. For other metals, denominations are fixed by law. However, the Treasury has the right to issue platinum coin in any denomination. (This is already done for collectors.)

The Treasury pockets the profits on the difference between the face value of the coin and the cost to produce it. (It also eats the loss on pennies. Canada abolished pennies since nobody wants to deal with them, and they are produced at a loss.) This is the literal version of seigneurage (also spelled seigniorage) profits. (Economists also refer to the carry profits by the central bank as seigneurage, but that is a different concept. The profits made off of minting coins is the traditional version of seigneurage.)

All the Treasury needs to do is take a small platinum coin (with maybe $200 worth of the metal), slap President's Trump mug on it, and put a $1 trillion face value on it. It then ships it to the Federal Reserve (like it does other coins) --  under very close guard -- and whammo, the Treasury just minted a clear profit of close to $1 trillion. (The Fed would likely put it into Fort Knox, giving rise to future action movie plots.)

This eliminates two institutional barriers to Treasury spending.
  1. There is no need for the Treasury to issue bonds to build up its balance at the Federal Reserve. This means it does not need to issue bonds. (Bye-bye, bond vigilantes!)
  2. By implication, the debt limit is a dead letter. (I believe that it was suspended anyway.)
If Congress gave the Federal Reserve to issue bonds, the Fed could "sterilise" Treasury spending, and pretty much everything could carry on exactly unchanged from before (other than Fed notes would show up as instruments on the risk-free curve).

The only true economic change is that the ridiculous "how will you pay for it?" argument disappears. On paper, elected officials could launch the economy into a hyperinflationary spiral, and the Federal Reserve would not be able to stop them via sabotaging the Treasury market.

However, that is pretty much a non-issue. Believe it or not, elected officials in the United States do not want to cause a hyperinflationary spiral. In fact, elected officials have been more hawkish on inflation than most central banks (bar the ECB) over the past decade.

The main practical argument I see in favour of the trillion dollar coin is that it is a form of political "shock and awe": make it abundantly clear that the availability of dollars is not the issue right now, rather real resources. Given the idiotic ways in which fiscal conservatives crippled the post-Financial Crisis* recovery, that might be necessary.

Footnote:

* I have always referred to the crisis in 2007-2009 as "the Financial Crisis," but perhaps we will have to go back to referring them by year, like in nineteenth century school books. The issue is what years to assign to the crisis; it truly started in 2007, it is just that nobody outside of the funding markets noticed until 2008.

(c) Brian Romanchuk 2020

1 comment:

  1. I love the idea that they put it in Fort Knox and then we have action movies where I guess they try to steal it. That's a kind of economic stimulus in itself. Oh I'm just enjoying the successful thief trying to buy a pack of cigarettes with a trillion dollar coin and how they could make change for it. Thanks Brian

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