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Friday, September 24, 2021

Trillion Dollar Coins And Debt Ceilings (Again...)

The periodic debt ceiling silliness has again erupted in the United States. Since I was feeling mildly unwell this week, I was largely out of the loop. If the reader wants a brief explanation of what the trillion dollar coin idea is about, I highly recommend my brief discussion in my latest book Modern Monetary Theory and the Recovery.

If we go beyond the shameless self-serving plugs, it is quite easy to summarise my views.

  • I am Canadian, and most of my sales come from the United States, and so I see no commercial advantage to lecture Americans about the dysfunctionality of their governmental procedures.

  • The debt ceiling and the trillion dollar coin are both entirely procedural silliness. One is a number on a piece of paper, and the other is a number stamped onto a lump of platinum. Neither represents a real economic issue for a nation of hundreds of millions.

  • Once again, the economic logic behind the coin is discussed in my book.

  • Anyone working in fixed income needs to develop a bit of knowledge about laws — fixed income instruments are legal instruments. That said, nobody in their right mind would ask a quant what they think about a legal issue. In addition to not giving investment advice, I also do not give legal (or tax) recommendations. Although I have always enjoyed going through arcane rules (I played board games with rulebooks that ran into dozens of pages as a kid), I am not an authority to consult on whether the coin “works.” (I have not had a chance to read any recent articles on the topic, so I am not in a good position to cite anything.)

  • I am deeply cynical about most politicians. The principle “money talks” is often a good guide to predicting outcome. Although there are Silicon Valley whack jobs who want to see the U.S. government go down in flames, the traditional “big money” does not want to see a default.

  • At best, there will be little technical issues — which happened in the past. At most, some Treasury bill pricing is affected. Is that important? Well, you need to go to a mirror and ask yourself: am I looking at someone who is employed in a money market fund? If the answer to that question is “no,” then that also answers your other question.

  • Based on past experience, equity markets could be disrupted by all the idiotic theories floated in media commentary. (In addition to not offering investment advice, I also refuse to take equity market movements seriously.) That is one key transmission mechanism from “Big Money” to America’s day-trading Federal legislators. That said, if equity investors were rational, they would just ask how this affects the discounted stream of cash flows of the companies they are valuing.

  • The problems that are happening are a feature of the American legislative system, and I am unaware of other countries that run into similar issues. To what extent there are legal limits on debt issuance, those limits tend to be adjusted simultaneously with the adoption of a budget.


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(c) Brian Romanchuk 2021

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