Friday, October 04, 2013

How I Learned to Stop Worrying and Love Trillion Dollar Platinum Coins

Back in January, when it looked like there might be another debt ceiling showdown, it seemed like all anyone could talk about was trillion dollar platinum coins (for those not familiar with the platinum coin idea and how it relates to the debt ceiling, read this and then come back). Most of the discussion was derisive, and I confess that at the time I was among the scoffers and mockers.

Now, with yet another debt ceiling crisis looming, I'm beginning to have second thoughts. It's true that, at least at first blush, the coin solution seems absurd. Part of that absurdity is probably based on misunderstandings about what the plan would entail (some people, for example, seem to have been under the impression that it would require the coin contain a trillion dollars worth of platinum). The important thing to remember is that there's nothing special about platinum coins per se; its just a legal loophole that allows the president to evade the debt limit. It's a bit like if there was an obscure statutory provision allowing the government to borrow unlimited amounts so long as the Treasury Secretary dressed like a pirate. It would be undignified and humiliating, but at the end of the day it would be better than risking default.

President Obama confers with an economic advisor. 

Or would it? My original concern with the coin idea was that it might precipitate the sort of crisis it was supposed to prevent. Ultimately, bond holders don't care about whether this or that solution to the debt ceiling crisis is "dignified." They just want to get paid. If the Administration were committed to using the coin if necessary, that might reassuring markets that default was not likely. On the other hand, it's also possible that committing to the coin might paradoxically make the risk of default seem more likely. After all, if a government has to resort to such tricks to keep paying its bills, how confident can we be that it will continue to do so, coin or no coin?

While the legal case for the coin may seem strong, it's not air tight. Courts have been known to imply limitations not explicitly in statutes based on concepts like "reasonableness," and it's clear that the intent of the law was not to allow the government to evade the debt ceiling. Given that a court would only be dealing with the matter after the fact, there would be enormous pressure to uphold the government's actions to avoid a financial crisis (in the Gold Clause Cases, for example, the Supreme Court basically eviscerated an entire provision of the Constitution to avoid a similar crisis). But what really matters is not my assessment, but rather the collective assessment of the market.

So the title of the post is (as yet) not quite accurate. I am still worrying, and I don't love trillion dollar platinum coins, though they may end up being the best of a bunch of bad options. Were I the president, I might leak that I was considering the idea as a means of testing the market's reaction.

Hopefully, though, it won't come to that. Hopefully the Congress will conclude that, however strongly they might disagree over policy, the disagreements aren't worth risking the full faith and credit of the United States. For in the words of Group Captain Mandrake, "we don't want to start a nuclear war unless we really have to."  

UPDATE: On Twitter, John Hendrickson points me to a post of his arguing that the coin could result in more inflation, even if the Fed attempts to offset it, because of the way that monetizing the debt rather than buying more bonds could affect market expectations. Of course, a little more inflation right now wouldn't be such a bad thing, but this is another reason why you would want to test the waters first.  


  1. cahuenga7:19 AM

    Treasury has already stated they will take no part in the "coin" tactic. And more importantly, the practice of hostage taking every few months must be made as politically painful as possible or we will never see the end of it.

  2. As I see it, the Presidents problem is that Congress mandates limits on three things:

    spending - revenues = deficit (or borrowing)

    These are apparently Constitutional powers. When Congress limits the deficit and raises spending - revenues, Congress has created a problem.

    The president has the Constitutional power to control a fourth thing, minting. Thus, he could always balance the equation:

    spending - revenues = deficit - minting

    1 trillion dollar coins in whatever number can resolve the problem without Constitutional problems. Whether that is an intelligent thing to do is another question.

    1. Or to use the actual numbers, Congress has demanded that Obama make this true:
      $2.7 trillion - $3.8 trillion = $0.

      Those demands are at least as absurd as minting a $1.1 trillion coin - they make as much sense as repealing the law of gravity.

  3. Anonymous11:04 AM

    look at this:

  4. Supposing Obama thought using the coin or invoking the 14th Amendent were feasible, the White House doesn't want to admit that because it would ease the pressure on the Republicans.

    And this tough strategy might have worked seeing as the papers are reporting that Boehner told Republican moderates he wouldn't default on the debt and would violate the Hastert rule again if necessary.

    But say somehow Boehner or another speaker does force a default, I think Obama should do the coin or invoke the 14th amendment or something instead of defaulting.

    I believe the market isn't freaked out because they believe that the situation will be resolved by either Boehner or Obama and they'll get paid.

    The Platinum Coin does have some interesting implications if the thinking is followed through to its logical conclusion. That's why the Fed says it wouldn't do it.

    The government's defict doesn't go up, but the Fed's balance sheet expands. At the Zero Lower Bound inflation won't increase. Eventually it will though if they keep at it.

  5. My father spoke to me:: "Do the right thing at all times - even when you feels no one is observing." So I expect it of myself and I seek it in others.

  6. Wonks Anonymous3:20 PM

    The platinum coin must be "bullion" or "proof", so Fox News may not be wrong when it assumes that would require vast amounts of platinum:

  7. While they shouldn't make it too big, it would be pretty awesome if they made it larger than usual. I'm thinking a foot-wide coin, with a picture of Alexander Hamilton giving people a thumbs up and winking.

  8. If I'm a market participant, and the coin comes around, I'd gladly bid down the price of treasuries and expected inflation.

    Not out of patriotism ... but rather because there's no way the SCOTUS would issue a ruling that forced a default. Under no circumstances would bondholders not get paid, and if some did believe that, I'd be happy to hedge my way into a profit by betting against them.

    I'm not a billionaire market maker ... but I imagine they see things the same way. The debt ceiling can create some strife and uncertainty, but the coin tamps it down to a manageable level.

  9. Anonymous10:27 PM

    President Obama with the stroke of hid pen (an Executive Order) has the opportunity to insure the financial success of the U.S. And the World's economies now and for hundreds of years into the future by implementing "The 990,000 Trillion Dollar Coin Solution"--SEE Comments Section of "The Economist"...

  10. Anonymous10:31 PM

    President Obama with the stroke of his pen (an Executive Order) has the opportunity to insure the financial success of the U.S. And the World's economies now and for hundreds of years into the future by implementing "The 990,000 Trillion Dollar Coin Solution"--SEE Comments Section of "The Economist"...

  11. Noah--I don't think leaking to the press/markets necessary to gauge reaction. If the Federal Reserve accepts the coin, the market will accept the coin. Presumably Obama knows how the Fed would react--even though the Fed said in January publicly that they wouldn't accept the coin, it's hard to believe that after 9 months of this nonsense it would rebuke Obama and reject the coin and allow default.

    For updates on what people are saying about the platinum coin, and @mintthiscoin

  12. Samuel Conner12:40 PM

    Minting a big coin (zero maturity money) and spending it to fund government operations ought not be significantly more inflationary than issuing term debt (an asset swap of finite maturity money for zero maturity money) to fund the same operations. The additional aggregate demand produced by resuming the currently suspended government operations shouldn't induce inflation in the current well-below-productive-capacity economy.

    But it's certainly an odd and unfamiliar procedure.

    Perhaps better would be for Treasury to start issuing non-maturing debt, which (per Beowulf, who called the Platinum Coin feature of the US Code to public attention) does not count against the limit. The Fed could monetize this at any price it wished, rewarding its friends in the finance industry, and never fear realizing a loss.