TF Market Advisors: Two Sides of the Platinum Coin

The “Platinum Coin” and the Debt Ceiling

There is a lot of talk about the trillion dollar coin. That has actually clouded what is an already clouded issue. My understanding is this is how it would work:

• There is a law on the books that allows the treasury department to mint platinum coins – specifically platinum, that is why it is a platinum coin and not gold, or silver, or copper, it is a function of the law/loophole/language that coin minters want to use
• The treasury department pays our bills, and typically relies on borrowing to do so, but in this case, they would mint coins, deposit them with the NY Fed, and have their account credited, which would then be used to pay bills
• The $1 Trillion coin is just hype to have gotten attention. The reality is the treasury department could create whatever denomination coin they wanted (say $1 billion) and use them as needed to create some 1’s and 0’s at the Fed and then pay bills with that “money”
• Once the debt ceiling is passed (and in the end it always seems to get passed) then they could borrow money, take back the coins, and potentially melt them down – or auction them off on e-bay

Congress’s Mouth Writes Checks Its Body Can’t Cash

This all starts because we have a somewhat stupid system. We have a debt ceiling. That is meant to limit how much we borrow. I can see why we have that, since it in theory should stop the government from racking up massive debts. But, in the current system, the government can obligate the country to make payments with full knowledge that we are likely not to be able to pay for them in the future without breaking the debt ceiling. That just seems stupid.

In a proper world, anything that would cause us to breach the debt ceiling in the future shouldn’t be allowed, or we should get rid of the debt ceiling (I prefer the former to the latter), but right now we are stuck in a strange situation.

Government has made promises and created obligations, legally, that we owe, but because of the debt ceiling, we can’t pay for. That has been an off again, on again situation for a long time, but as we become ever more bipartisan and enjoy the brinkmanship, the problem is growing. Since restraining spending isn’t an option (at least not one that politicians will accept easily) we have this bizarre situation

So the argument is that rather than letting congress mess up the country by failing to raise the debt ceiling, the treasury sure mint coins, and use that money (via depositing at the Fed) to pay our bills while congress debates the situation and finally approves something.

So ignoring the $1 trillion hype, it is possible to see why this “plan” could work, and why it wouldn’t necessarily be hyper inflationary.

The Issues

There are a lot of potential issues with this. Some in regards to it actually being able to work, and some in regards to the longer term risk

• The first potential snag is the involvement of the Fed. Will the Fed actually accept these coins on deposit? In theory, they probably have to, though I suspect Ben is working hard to find a more traditional solution than this. It really does further erode any evidence that the Fed is independent of the government, and will certainly give those who decry that the Fed is owned by the banks and run by the President, more ammunition
• Assuming the Fed wants to go along with it, will there be some attempt to create an injunction against issuing it, or some other test of the legal backdrop? It seems strange enough that it wouldn’t surprise me to see legal action against the minting, so I wouldn’t want to use this as the primary solution. We are a society that loves to sue, and Washington has more than its fair share of lawyers, so I would be worried that this policy gets challenged, and possibly ruled against initially, or over turned.
• This seems “ok” if it is for a few weeks, or even months as some measure to force congress to resolve the issue in a pseudo-adult manner. The problem is that congress isn’t able to resolve this. That this step of minting coins to pay for our promises takes all pressure off and both sides dig in. The Democrats like it because they can spend and not have to pay for it (in a real world sense) and the Republicans like it because they can try and attack Obama as taking too much power from the people and abusing the system. Minting coins as a de facto way of funding ourselves means we will hit the $1 trillion mark at some point (in a year?) and then the inflationary risk does grow. The willingness of politicians to effectively buy votes increases since there is no “cost”. The term “slippery slope” exists for a reason: once some things start you run the risk of it getting worse. What doesn’t necessarily cause problems on day 1, can cause massive problems by day 300.
• Do we want to be the “reserve currency” of the world? Many would like our currency to get devalued so that we can grow our way out of problems. That strikes me as so short sighted, since I cannot think of any examples of countries crashing and failing with a strong currency, and yet, can see lots of countries that failed with weak currencies, but why let actual real world practical applications interfere with some simple math equations that economists like so much. But if you want to be the “reserve currency” and you get benefits from that, then this is yet another step in the wrong direction. Being reserve currency resides as much in trust as in any other factor, and taking this step, of minting coins to pay debt and avoiding the political process, will just further encourage other countries to move away from the dollar and dollar based assets (which would suit my call of long Europe/Asia, short the US, very well).

E-mail: tchir@tfmarketadvisors.com

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