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Trillions And Trillions

It is being reported by The Washington Post (among others) that President Barack Obama could order two platinum coins to be minted, each with a designated value of one trillion dollars.  That’s $1,000,000,000,000.00 each.  Or 10^12 dollars each, if you prefer.

These trillion dollar coins would have one purpose … to be deposited into the Federal Reserve as a payment against the debt of The United States of America, which is currently just over sixteen trillion dollars. By law, The USA can borrow up to a certain limit ($16.4 trillion.) This is known as “The Debt Ceiling”. This is no more complex than understanding how the credit limit on a credit card works – something almost all of us can relate to.

So by depositing the 2 coins, The USA will have paid $2 trillion of it’s debt, and will have no immediate need to worry about reaching its credit limit until late 2014. (As it stands today, The USA will reach its credit limit this coming February.)

According to Yale Law Professor Jack Balkin, there are no laws prohibiting The President from ordering the production of this type of currency (there are legal limitations on the production of other forms of currency.) Economist Joseph Gangon of The Peterson Institute sees nothing economically problematic with this suggested “solution” to America’s debt ceiling problem.

I have no problem admitting my ignorance on many of the nuances and specialty-areas of economics. However, with skepticism as my footing, and with my basic understanding of economics, I see a pretty significant problem.

As far as the USA’s debt is concerned, I see no difference between printing a trillion dollar coin and printing a trillion one-dollar bills. This is called inflation. It makes every dollar in circulation less valuable (the more abundant something is, the less it is worth.)

By contrast, others argue that there is no inflationary effect on this maneuver because the coins would never make it into general circulation. It is effectively a kind of barter trade between 2 government entities (The Fed and The Treasury), albeit an entirely unequal trade. (Would you satisfy two trillion of debt someone owes you in exchange for a pair of platinum coins?) Also, if this were a legitimate way to handle debt satisfaction, why stop at $2 trillion? Why not make one coin and assign it a worth $16 trillion?

The value of a dollar is based on ‘faith” (not the most favorite of words in skeptical circles.) But this is essentially the truth. If people have faith that a one-dollar bill is good for one-dollar worth of services, then it is so. But does this kind of maneuver, printing trillion dollar coins, instill more or less faith in the value of a dollar? So it doesn’t make it into circulation – does that make it any less real that there suddenly exists an additional $2 trillion? Do other countries, some of whom we take to task for ‘currency manipulation’ (cough … China … cough) feel they are getting better value when investing in our country’s treasury bills? Could The USA not be accused of  its own form of manipulation?

Carl Sagan famously asked us all what the difference might be between an invisible, incorporeal, heat-less, floating dragon in a garage versus no dragon at all.  The answer is … not a bit of difference.  It forces me to ask what the difference might be  between inventing  two trillion dollars of currency to pay a debt versus not paying the debt at all. Is there any difference?

So what is the likelihood of this happening? From a political standpoint, it would be considered a very bad (and unpopular) move for The President to make. As such, it is unlikely to occur. 

But the fact that Yale professors and professional economists can not see the intrinsic inflationary issues is somewhat astounding. So I am calling economic shenanigans on this idea, at least until I am shown alternate evidence so I can adjust my understanding.

Footnote:  Platinum, in of itself, has value to it.  You can trade one ounce of pure platinum for about $1,600. If The USA were to actually try and come up with two trillion dollars worth of platinum, that would equate to about 78 million pounds of platinum.  Unrealistic, seeing as how all of the platinum mined to date equals a cube about 25 feet per side. (One cubic foot equals about 1330 pounds.)  That’s, roughly, 21 million pounds of platinum mined and collected in all of human history.

11 comments to Trillions And Trillions

  • Alternatively…OK, this is a admittedly wacky idea and I’m sure to be laughed at…we could start paying down the debt with Congress doing the job they were voted in to do.

    I know, stupid, right?

  • Blaise Pascal

    Two obvious first questions I can see are:

    1. How much US Debt does the Federal Reserve own? If it doesn’t own $2T in US debt, then it can’t possibly accept $2T in platinum coinage to cancel that debt.

    2. If it did own $2T in US debt, would it accept the platinum coinage anyway? The contract on the bonds do not obligate a bondholder to accept early payment, so the Fed can say “no” to the request. Currently, the Fed buys and sells federal debt obligations as a primary tool for managing the US monetary supply. Not having debt on hand to sell may compromise it’s ability to do so. Besides, the interest paid on bonds held by the Fed get returned to the Treasury, so bonds held by the Fed are effectively interest free.

    The size of the monetary supply is controlled by the Fed, not by the Treasury. So the statement that minting a trillion-dollar coin and giving it to the Fed will not cause inflationary pressure seems reasonable to me.

    But it probably would be easier, and less politically controversial, if the Fed simply said it was forgiving the debt, rather than having Obama order the minting of special non-circulating coinage.

  • JonBlumenfeld

    So Evan, you must be asking yourself, if only I knew someone who knows about this stuff… well, it’s your lucky day.

    You’re correct to say that printing these coins would be just like printing two trillion one dollar bills, but where you go astray is by saying that ‘this is called inflation,’ at least in any meaningful sense.

    Increases in prices are what inflation is really about, and for this to happen there must be demand. Increases in the supply of money can drive this demand, but there must be a mechanism by which this occurs. If the government prints a trillion one dollar bills and buries them in the ground, there is no increase in demand, no increase in prices, and no inflation.

    So what’s really wrong with this scheme? Well, what it really does is ratify what the Federal Reserve has already done, by electronically ‘printing’ money to buy the debt in the first place. That money then gets spent by the Treasury, increasing money supply and potentially sparking demand. That’s what so-called ‘Quantitative Easing’ is all about. The problem is that this has not done a good job of sparking demand, but if the economy catches fire, there will be lots of extra money sloshing around, and THAT could and should lead to inflation. If the Fed – which has bought Treasury instruments, remember, that the Treasury must eventually pay back – anyway, if the Fed fails to demand repayment, that extra money stays in the system, and inflation becomes a problem.

    Giving the Fed these coins means they’ll never ask for repayment of the bonds, and so never drain out that extra money. Not an immediate problem, but potentially a big one down the road.

    Oh, and if you ever want to talk about what underwrites our money (hint: not faith), I’m your man (he said smugly and with a bit of a sneer).

  • Thanks for the feedback – these are confusing topics, and I know I could have delved into many nuances – which I am sure would have rendered the post unreadable.

    Jon – you are right, I should have used a term like “inflating the currency” instead of the shorthanded “inflation”.

    And yes, please tell me what underwrites the currency. I spent hours reading up on it yesterday, and the term faith (or equivalent) came up a great many sources.

  • tudza

    So far as I can tell, the value of the currency is underwritten by the demonstrated ability to trade it for useful goods and services. It is less faith than an exercise in analysis of GDP, taxes, etc.

    There are companies after all that give alphabetic grades to the value of whole countries. Greek debt at the moment is rated at CCC by Standard and Poor’s because they expect from the data they have that there is a low possibility of getting value back for value given in buying their debt.

  • geogavino

    This was floated by some after the last debt ceiling sideshow. Economist Bob Murphy mentions it in the first part of this article (http://mises.org/daily/5515/Saved-by-a-TrillionDollar-Coin). I wonder if the reporting on this was just the result of blowing up an idea someone threw out. A trillion is an enormous amount. If I’m reading the balance sheet of the Fed right (http://www.washingtonpost.com/blogs/wonkblog/wp/2012/12/07/could-two-platinum-coins-solve-the-debt-ceiling-crisis/), then the total U.S. securities held at the Fed is about 1.6 trillion, less than what is owed to social security. I presume that such an act would accompany or follow a new round of QE, so the extra 0.4 trillion could be deposited into the treasury.

    The use of platinum for such an act is no different than using paper or dog poop since the value of any of these products is negligible in relation to a trillion. If this is given credit by experts, then it should be a clear message that the federal gov’t will default continously on debt in order to kick the can down the road.

  • PaulVCope

    The problem is this is essentially what the US has been doing. The best criticism of the Fed, and US monetary policy in general, come from the Libertarian party.

  • geogavino

    I find the last comment odd, as I’ve seen very little criticism of the Fed, or even understanding of monetary policy, from the Libertarian Party. The last two LP candidates have engaged in this debate little or not at all. The more recent criticism of monetary policy stems largely from the more recent prominence of Ron Paul. While this criticism has historically come from libertarian circles, such think tanks as the Cato Institute have rarely engaged on monetary policy in a critical way. Such academics as Ludwig von Mises & Murray Rothbard were the most prolific on criticism of monetary policy and they were largely on the fringe of academia and even on the fringe of the broader libertarian movement.

  • I would suggest googling “liquidity trap” and reading everything Paul Krugman has said about the issue. All evidence points to the fact that we have been in a liquidity trap for some time and Keynesian economic theory says that being in a liquidity trap prevents inflation that would normally occur from “printing” money. That’s why, despite the trillions of dollars that have already been “printed”, inflation is pretty low and governmental borrowing costs are almost zero.

    That isn’t to say that this won’t change and today’s “printing” of $2 trillion may cause problems for the future, but near term,there’s no evidence that it will. And that’s all the back door $2 trillion platinum coin issue is, near term. It’s to get around actually defaulting on our debt which would be very bad for the economy near term.

    I doubt it will come to that, but if President Obama does go that route, he can just as easily revoke the $2 trillion coins after the debt ceiling is actually raised.

  • JonBlumenfeld

    Evan – I was going to write a long reply about money, but instead I’ll just refer to post I put on ‘The Long Run Blog’ back in 2008. It’s a good start. http://thelongrunblog.wordpress.com/2008/08/23/what-is-money/

  • PaulVCope

    @geogavino, When I said Libertarian party I grouped Ron Paul in mentally. Yes, I know he is a Republican, my mind made the grouping automatically and I failed to catch it. Much of Ron Paul’s criticism has become the position of the Libertarian party, so I mistakenly attributed more credit in my statement to the party.
    I think that there is a lack of in depth study into the matter. Most of the criticism is more conceptual than I would like and fails to give realistic alternatives, but the issue of monetary policy has never been as front and center as it is now. I do not agree that Cato is uncritical in the examination of the situation however, they have several books, articles, and written arguments against the current policy linked on their webpage for the issue.

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