Krugman: Rage Against the Coin

Posted by AzBlueMeanie:

Paul Krugman nails it again in his most recent blog post, Rage Against the Coin:

Well, the trillion-dollar-coin thing — deal with the debt ceiling by exploiting a legal loophole to have the Treasury mint one or more large-denomination coins, deposit them at the Fed, and use the cash in the new account to pay bills — has really taken off. Last month I spoke with a senior Fed official who had never heard of the idea; these days it’s all over.

There seem to be two kinds of objections. One is that it would be undignified. Here’s how to think about that: we have a situation in which a terrorist may be about to walk into a crowded room and threaten to blow up a bomb he’s holding. It turns out, however, that the Secret Service has figured out a way to disarm this maniac — a way that for some reason will require that the Secretary of the Treasury briefly wear a clown suit. (My fictional plotting skills have let me down, but there has to be some way to work this in). And the response of the nervous Nellies is, “My god, we can’t dress the secretary up as a clown!” Even when it will make him a hero who saves the day?

The other objection is the apparently primordial fear that mocking the monetary gods will bring terrible retribution.

Joe Weisenthal says that the coin debate is the most important fiscal policy debate of our lifetimes; I agree, with two slight quibbles — it’s arguably more of a monetary than a fiscal debate, and it’s really part of the broader debate that has been going on ever since we entered the liquidity trap.

What the hysterics see is a terrible, outrageous attempt to pay the government’s bills out of thin air. This is utterly wrong, and in fact is wrong on two levels.

The first level is that in practice minting the coin would be nothing but an accounting fiction, enabling the government to continue doing exactly what it would have done if the debt limit were raised.

Remember that the coin is supposed to be deposited at the Fed, which is effectively just a semi-autonomous government agency. As the federal government proper drew on its new Fed account, the Fed would probably respond by selling off some of its $3 trillion balance sheet. In effect, the consolidated federal government, including the Fed, would be financing its operations by selling debt instruments, just as always.

But what if the Fed decided not to shrink its outside balance sheet? Even so, under current conditions it would make no difference — because we’re in a liquidity trap, with market interest rates on short-term federal debt near zero. Under these conditions, issuing short-term debt and just “printing money” (actually, crediting banks with additional reserves that they can convert into paper cash if they choose) are completely equivalent in their effect, so even huge increases in the monetary base (reserves plus cash) aren’t inflationary at all.

And if you’re tempted to deny this diagnosis, I have to ask, what would it take to convince you? The other side of this debate has been predicting runaway inflation for more than four years, as the monetary base has tripled. The same people predicted soaring interest rates from government borrowing. Meanwhile, the liquidity-trap people like me predicted what would actually happen: low inflation and low rates. This has to be the most decisive real-world test of opposing theories ever.

So minting the coin would be undignified, but so what? At the same time, it would be economically harmless — and would both avoid catastrophic economic developments and help head off government by blackmail.

What we all hope, of course, is that the prospect of the coin or some equivalent strategy will simply take the debt ceiling off the table. But if not, mint the darn coin.

UPDATE: The National Republican Campaign Committee has launched an attack on the platinum coin. But it doesn't seem to understand how coins work. The worst objection to the platinum coin idea.

UPDATE: Neil Irwin: "The best reason to oppose the platinum coin idea is this: It is not the
way we do business here in the United States. It is the kind of insane,
seemingly extra-constitutional gambit one expects of banana republics,
not the wealthiest and most powerful nation to ever stride the earth. It
is demeaning to all of us." The platinum coin idea is idiotic. That is the point.

Hmm. hmm. Like the Tea-Publican economic terrorists' extra-constitutional gambit to take the country hostage and demand a ransom for doing what they are constitutionally required to do, turning this country into a banana republic for terrorists. As Irwin concludes, "This is a moment for Republicans to take responsibility for governing
and to accept the fact that their leverage is limited with control of
only one house of Congress. But if the alternative truly is default, a
crazy coin option may indeed be less bad than the alternatives."

UPDATE: Scott Lemieux joins the #MintTheCoin discussion and argues that whatever it’s other merits, the trillion dollar platinum coin is absolutely legal.

UDATE: Ryan Cooper interviewed Harvard Law Professor Laurence Tribe, who agrees. Harvard Law School Professor Laurence Tribe on the Legality of #mintthecoin:

[Professor Tribe] graciously allowed me to reprint his response in full. Here it is, unedited save for the added link to the statute:

I don’t think it makes sense to think about this as some sort of
“loophole” issue. Using the statute this way doesn’t entail exploiting a
loophole; it entails just reading the plain language that Congress
used. The statute clearly does authorize the issuance of trillion-dollar
coins. First, the statute itself doesn’t set any limit on coin value.
Second, other clauses of 31 USC §5112 do set such limits, but §5112(k)—dealing with platinum coins—does not. So expressio unius strengthens the inference that there isn’t any limit here.

Of course, Congress probably didn’t have trillion-dollar coins in
mind, but there’s no textual or other legal basis for importing this
probable intention into the statute. What 535 people might have had in
their collective “mind” just can’t control the meaning of a law this
clear.

It’s also quite clear that the minting of such a coin couldn’t be challenged; I don’t see who would have standing.

Bottom line: This is a situation where the political and economic
considerations, not the legal considerations, have to drive the
decision-making about this option. It’s certainly a lot better from just
about every perspective than having the nation stuck on either horn of
the very real dilemma you outlined below, which I agree offers no
plausible way out as long as enough leaders in Congress insist on
playing Russian Roulette with our economy and risking our full faith and
credit by using the debt ceiling as a bargaining chip as they are
threatening to do.