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Minting the $1 Trillion platinum coin would NOT be inflationary.

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girl gone mad Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 05:49 PM
Original message
Minting the $1 Trillion platinum coin would NOT be inflationary.
Edited on Sun Jul-31-11 05:52 PM by girl gone mad
Since this idea went mainstream, the reaction has consistently been: ZOMG! Inflation!!1!

This response seems to be based on the misconception that the money being created is going to be "spent" in the economy, but that's not what actually happens.

For the uninitiated, the basic idea is:

The US Constitution gives Treasury the authority to mint coins, and there is no legal limit on the face value Treasury can set for platinum coins.

Treasury can mint a platinum coin and stamp $1 Trillion on the face, then swap the coin for $1 Trillion USD credits from the Fed. The coin will be stored in Treasury's vault at the Fed where it will never circulate.

Treasury would then use those USD credits to retire $1 Trillion worth of US Treasury bonds. This is the key to understanding why the operation is not inflationary. $1 Trillion in US dollars are going into the private sector while $1 Trillion in Treasury bond holdings are being removed.

No net financial assets have been created in the private sector. The net effect is actually slightly less money in the private sector because once the bonds are retired, they no longer bear interest and cash reserves pay a much lower interest rate.

This procedure would give the government the ability to pay its debts, but again, this is not inflationary since they are merely paying for spending that was already approved back when the budget passed and not doing any additional spending now. The entities to which money is owed already expect to be paid and have budgeted according to that expectation.

Just wanted to make an OP since this comes up in every single thread on the subject. Feel free to correct any errors or add more details.

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amborin Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 05:50 PM
Response to Original message
1. K&R
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steve2470 Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 05:55 PM
Response to Original message
2. The other concern is the platinum/precious metals market. Can you address this, please ?
Thanks.
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JVS Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 06:03 PM
Response to Reply #2
4. The effect on the precious metals market is no different than any individual buying an oz or so of..
platinum.

Just the way that the paper market is not radically changed by the printing of bills or the price of copper and nickel is not radically effected by minting our current coins.
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Egalitariat Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 06:08 PM
Response to Reply #2
6. They could use about $100 worth of platinum to create a coin with a $1 Trillion face value
No impact on the commodities market.
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Ruby the Liberal Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 06:35 PM
Response to Reply #2
14. No effect. This is coinage, not volume/weight.
Like giving the Fed a Picasso. Coinage value does not equal metals value. It is more like art.
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OrwellwasRight Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 06:56 PM
Response to Reply #14
23. I heard that there are standards for the vaue of the coin
compared to its face value (these are in our coinage laws) and the trillion dollar coin might have to weigh several tons . . . that would be kinda funny.
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Ruby the Liberal Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 07:09 PM
Response to Reply #23
25. I think this is why the requirement for platinum was added
Edited on Sun Jul-31-11 07:10 PM by Ruby the Liberal
Someone should check me on this, but it is my understanding due to the (at the time) rarity of platinum, that it is codified that they can stamp any dollar amount on a minted coin that they want.

Edit to add - but it MUST be minted of platinum.
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dkf Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 05:55 PM
Response to Original message
3. How does that get any of the bills paid?
All the money went to the private sector.
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girl gone mad Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 06:06 PM
Response to Reply #3
5. When a bond is retired/redeemed, the debt is removed from the books.
Instead of raising the debt ceiling, this would lower the debt level so we're back under the ceiling with room to spare.
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dkf Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 06:14 PM
Response to Reply #5
11. Why stop at $1 trillion?
Why can't you do the entire amount if it has no impact on inflation?
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Zebedeo Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 06:37 PM
Response to Reply #11
15. Why stop at the entire amount ($14T)?
Why not mint a quintillion dollar coin. That should give us lots of free money for the foreseeable future. We'll all be living the high life. See Zimbabwe for an example of this. 100 trillion
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dkf Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 06:48 PM
Response to Reply #15
20. The argument is if you use it to retire current debt you cause no inflation.
So the most you could do is outstanding debt.
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girl gone mad Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 06:48 PM
Response to Reply #15
21. It looks like you answered your own question.
The government can generate excessive inflation if it adds more money to the economy than our capacity to produce goods can bear.

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drm604 Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 06:08 PM
Response to Reply #3
7. When we retire $1T worth of debt
we are then $1T below the current debt ceiling. We then no longer have to raise it as we have plenty of room to borrow before hitting it again.

This of course would drive the Republicans, and the tea partiers in particular, nuts because they no longer could hold important government programs hostage to the debt ceiling.
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woolldog Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 06:08 PM
Response to Original message
8. Question
Edited on Sun Jul-31-11 06:09 PM by woolldog
nm I see your response.
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drm604 Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 06:10 PM
Response to Reply #8
9. No. Retiring the bonds would put us $1T below the current ceiling,
Edited on Sun Jul-31-11 06:11 PM by drm604
thus letting us continue to borrow as normal.
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woolldog Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 06:14 PM
Response to Reply #9
10. I saw your repsonse to the other poster after I posted my question.
Edited on Sun Jul-31-11 06:14 PM by woolldog
thanks!

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woolldog Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 06:17 PM
Response to Reply #9
12. one more question:
then why not print a few more of those coins and retire all 14 trillion of the debt? heh
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drm604 Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 06:30 PM
Response to Reply #12
13. Good question.
Why not?

I would say that, if we did this it would be a desperate move in response to a desperate situation. We don't really know what the side effects might be, if any. So we should only do it for the minimum amount necessary to resolve the current crisis, at least until we know what happens.
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Zebedeo Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 06:38 PM
Response to Original message
16. Great
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BzaDem Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 06:38 PM
Response to Original message
17. I agree with you for the most part. However, there is a limit to this, and that is the amount of
Treasuries the Fed already has. If the Fed has 2 trillion of treasuries, but we need 3 trillion in "jumbo coins," then the difference WILL go into circulation. (Of course, the actual coins won't leave the vault, but the credit to the Treasury general account of 1 trillion will.) That difference will go into circulation with no bonds to balance it out (and with no way for the Fed itself to unwind it later).

Now, I don't think that this will cause inflation in the near term (considering how far we are from full capacity). But it can theoretically cause inflation in the medium/long term, if the economy bounces back and the difference can't be unwound.
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drm604 Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 06:46 PM
Response to Reply #17
18. Dupe. Sorry.
Edited on Sun Jul-31-11 06:47 PM by drm604
Ignore.
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drm604 Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 06:48 PM
Response to Reply #17
19. I think you may be misunderstanding the idea.
The bonds don't have to necessarily be bought from the Fed. They just have to be bought, from whoever, and thus retired.

The coin would be minted with a face value of whatever amount of bonds we intended to retire and then that full amount would be spent on bonds, leaving no difference. Why would we mint more than was necessary to do that?
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BzaDem Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 07:04 PM
Response to Reply #19
24. The problem is that if we buy the bonds from any non-Fed entity, that is injecting a huge amount of
Edited on Sun Jul-31-11 07:07 PM by BzaDem
cash into the economy, and the money supply increases by that amount. The advantage of buying from the Fed is that the cash just goes to the Fed's vault (not into the circulating economy).

I'm not opposed to this (it would essentially be QE3), because in the near term the economy is so depressed that inflation can't really happen, but it does theoretically cause inflation in the medium/long term. I think international currency markets would react very differently to a bond-exchange with the Fed (which is essentially a nothing-burger) than with a bond-exchange with the private sector (which would for the first time involve a politically accountable Treasury unilaterally increasing the circulating money supply, setting a dangerous precedent for the world and potentially causing medium/long term inflation).
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girl gone mad Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 07:18 PM
Response to Reply #24
27. Money supply would be unchanged.
Edited on Sun Jul-31-11 07:34 PM by girl gone mad
Dollars are traded for Treasury bonds. Since Treasury is buying back the bonds, not the Fed, the debts get canceled.

The market for Treasury bonds is already extremely liquid. Bondholders can sell their bonds to any of 23 dealers virtually any day of the week. One has to assume from this fact that the bondholders' money is not being involuntarily tied up (i.e. this is money they are intentionally saving and plan to keep saving).

ETA: When a bondholder sells to a bond dealer, the dealer creates money out of thin air using the bond as leverage to credit the bondholders reserve account. That results in an increase in the money supply. This is another reason why the coin seigniorage plan is deflationary. When these securities are canceled, dealers will have less leverage to use for credit creation in the money markets.
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BzaDem Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 07:55 PM
Response to Reply #27
29. If the Treasury uses the trillion dollar coin to buy bonds from private markets, it will increase
Edited on Sun Jul-31-11 08:00 PM by BzaDem
the amount of money in circulation. When you give the private economy a trillion dollars in exchange for a bond that is then destroyed, that is by definition increasing the money supply. I know MMT doesn't really think increasing the amount of money (relative to bonds) in circulation isn't inflationary, but for everyone else under any normal economic school of thought, it is inflationary after the economy gets back to capacity. Every other economic school of thought realizes that treasury bonds and hard cash are only equivalent in a liquidity trap (after which the "net financial assets" formulation that equates bonds and hard cash is basically useless).
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girl gone mad Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 09:46 PM
Response to Reply #29
33. It has no impact on money supply.
Edited on Sun Jul-31-11 10:44 PM by girl gone mad
The bonds are already very liquid and can be traded in the money markets. They function almost exactly like the cash reserves they'd be replaced by, but they earn more interest. That's why this can be viewed as deflationary rather than inflationary.

You'd have a point if it were the Fed buying these bonds since that would involve an increase in money supply, but this is Treasury. The debt instruments belong to Treasury and when Treasury buys back the bond using dollar credits, the debt obligation gets destroyed. An equal amount of money is credited to and removed from the private sector. That's kind of the whole point of this coin work around plan.
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BzaDem Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 11:08 PM
Response to Reply #33
34. Your entire theory relies on bonds being equivalent to cash, and that is ONLY true in a liquidity
Edited on Sun Jul-31-11 11:09 PM by BzaDem
trap.

When we leave the trap, that will not be true, and an increase in dollars relative to bonds will be inflationary.
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girl gone mad Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 11:36 PM
Response to Reply #34
36. No, it doesn't and no it isn't
Edited on Sun Jul-31-11 11:39 PM by girl gone mad
Bondholders can always sell their Treasury bonds when they desire to do so. They may take a loss, but that's neither here nor there.

When the bondholder sells to a bond dealer, the dealer creates money in the form of a credit, using the bond as leverage.

If you want to argue that Treasury buying up bonds is inflationary, you need to explain why exactly you think it's inflationary. "increase in dollars relative to bonds" is meaningless since the bonds are just as liquid as the dollars at all times except in a liquidity trap (you got that backward) and they are even more essential for the facilitation of credit creation (thus inflationary) than dollars.
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drm604 Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 07:51 PM
Response to Reply #24
28. I think buying them from the Fed is the better idea.
The Fed has at least $900B from QE and QE2 and probably more than that. Maybe we can mint an amount equal to whatever the Fed owns and retire it all. That means of course that whatever amount the Fed created for QE and QE2 ends up staying in the economy, but it hasn't caused inflation so maybe that wouldn't be a problem.

Of course this is all hypothetical since there's no way they'd do something like this.
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BzaDem Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 07:56 PM
Response to Reply #28
30. Exactly. It would result in QE/QE2 staying in the economy, which is likely what the Fed was going to
Edited on Sun Jul-31-11 07:56 PM by BzaDem
do anyway. So it wouldn't be inflationary (at least until the Fed needs to unwind it and can't). Going above and beyond that though could very well be inflationary.
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girl gone mad Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 08:05 PM
Response to Reply #28
31. That's another option..
just canceling the $1.6 Trillion we "owe" to ourselves.

If push comes to shove, Treasury has to be prepared to use one of these bullets, imo. We can't afford the fallout of a default, and I don't mean because of the ratings downgrade, which I think is relatively inconsequential.

If a lot of money which was expected in the economy suddenly disappears, we could see a big spike in the dollar, a big drop in equities markets, further deterioration in housing and employment, and a sudden increase in trade imbalances. It would basically set off a chain reaction that could grow out of control very quickly.

If you're Tim Geithner and you understand this (I'm assuming he must), you're going to do the right thing. As much as I detest him, I can't imagine that he would risk political and economic collapse because of teabagger tantrums.
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BzaDem Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 11:10 PM
Response to Reply #31
35. Yes, exactly. Buying them from the Fed would truly have no effect, and the Fed would be FORCED to
accept the trillion dollar coin (since it would be legal tender). So long as we didn't go above and beyond the bonds we had at the Fed, and so long as the debt ceiling were eventually raised to allow the reverse transaction to happen in time for the Fed wanting to unwind, it won't affect the economy at all.
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OrwellwasRight Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 06:52 PM
Response to Original message
22. PS Inflation is good for people who owe money (i.e., US) . . .
when this country went wrong is when the Fed stopped caring about full employment and started caring about controlling inflation instead. Keeping inflation in check benefits the creditor class, but the debtor class--because it ensures the money we pay them back is not worth less then the money they loaned us. Don't by the corporatist spin on inflation. Think about it . . .
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iris27 Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 07:13 PM
Response to Reply #22
26. That's great in theory, however, it's not like everyone's wages
are going to increase accordingly. "Real wages" have been falling as compared to inflation for decades; why would that change? Doesn't do the average person much good that they now owe comparatively "less" on their house, when they're trying to buy a now-more-expensive cart of groceries with a paycheck that hasn't increased.
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OrwellwasRight Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Jul-31-11 08:07 PM
Response to Reply #26
32. It's not theory, it's economic facts.
Do you really think it is important to somebody who has no job cares if there is inflation or not? If you have no income, it does not matter what the dollar is worth. Moreover, why do you think wages have been STAGNANT since the 70s? Because we don't have full employment. When the employers can play us off each other because there is a huge surplus population of workers, of course wages won't grow. If we stop focusing on controlling inflation and focus on creating full employment, people WILL have enough money to pay for groceries.
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