Is this how the debt ceiling issue will be resolved?
Last year, Republicans in Congress resisted lifting the debt ceiling until the last minute — and then only in exchange for spending cuts. Panic ensued. So what happens if there’s another showdown this year?
Enter the platinum coins. Thanks to an odd loophole in current law, the U.S. Treasury is technically allowed to mint as many coins made of platinum as it wants and can assign them whatever value it pleases.
Under this scenario, the U.S. Mint would produce (say) a pair of trillion-dollar platinum coins. The president orders the coins to be deposited at the Federal Reserve. The Fed then moves this money into Treasury’s accounts. And just like that, Treasury suddenly has an extra $2 trillion to pay off its obligations for the next two years — without needing to issue new debt. The ceiling is no longer an issue.
It seems to be entirely in accordance with the letter (if not the spirit) of the law. So while it is more likely that Boehner and Obama (the Boner-Droner connection) will work something out (as they did on the “fiscal cliff”, and in 2011 on the debt ceiling), the Platinum Coin Option is the ace up Obama’s sleeve if negotiations break down.
I don’t think it would have any real immediate effects different to just raising the debt ceiling through an Act of Congress. It is just opening a loophole to continue doing what America has been doing for the last four years (and Japan for the last twenty) — aggressively offsetting the private debt deleveraging with public debt.
The American government is a strange, multi-headed creature. One of its (partially private) heads — the Federal Reserve — retains the exclusive right (delegated from the Treasury by an Act of Congress) to create money. The rest of the American government pretends to be revenue-constrained, and subject to a debt ceiling.
This is obviously a charade. If one part of the government is not subject to a debt ceiling, then none of the government is subject to a debt ceiling. Loopholes — whether they are platinum coins, or something else — can be found.
The key component of any fiat system is trust. What the Platinum Coin Option would demonstrate is a lack of coherency and a state of fiscal disarray, which could easily in the longer term lead to a loss of trust, and further moves — beyond those already initiated by the BRIC nations — away from the dollar as a reserve currency.
Yeah, we would all just accept the face value of those coins as real. We’d all just convince ourselves it wasn’t just one lousy pantomime step away from overt monetization. And one day, a lemming will fly.
If an ounce of platinum is worth $1 trillion, and gold is worth 10% more than platinum, my ounce of gold should be worth $1.1 trillion, right?
As you note at the end of your post, such a platinum coin pantomime would pull the rug out from under the entire government fiat Ponzi. In such an event, I’d wager your ounce of gold would be worth innumerably more than a mere $1.1 trillion 😉
Unfortunately you don’t know what you’re talking about so I wouldn’t be making any such bets.
No, the ounce of platinum is not worth $1 Trillion. The coin is worth $1 Trillion if that is what is says on its face. Money is tokens in units of account of debt obligations between parties in the economy. The tokens physically can take many forms and be interchangeable on the basis of their ‘monetary value’ not their metalic or physical value.
When coins contained a specified amount of a precious metal that was equal to or pegged to a certain monetary value, then counterfeiters would shave off amounts from the edges of the coins, debasing slightly the value of the coins. They would take their shavings from many coins and melt them down and sell them on the market at prices pegged to the price of the metal. They would exchange debased coins for undebased coins. So coins were edged with gear-like forms to expose any shaving. But counterfeiters could then create a new edging machine to edge the coins again… If the price of the metal exceeded the face value, the counterfeiters would simply melt down the coins and sell them on the market. So, coins are made from metals that are much less expensive than their face value (with only pennies and nickels today the exception). I think a dollar bill costs only 6 cents to make, including the paper cost. A $100 bill also costs about the same to make. Same for a $10,000 bill.
If you look at the charts you will see that platinum is usually worth more than gold. If you go back to 2008 you see a 2 to 1 difference with platinum on top.
$500 billion would also be a satisfactory price for selling an ounce of AU.
I think you’ve created (or brought to light) a WOW here, John! While the platinum coin solution is facetious, you’ve used it to make real, timely and momentous wake up calls:
The US government is a “multi-headed creature” (I would prefer “monster”, a la Greek mythology). US government machinations are “charades”. “The KEY component of any fiat system is TRUST” (caps are mine). The linked BRICS report confirms that the US$ as Reserve Currency is living on borrowed time/life-support.
It’s the old OUGHTs vs. ISs/Possibilities. It’s obvious (a least to some of us) what ought to be done, but how in hell can it BE done?!?
if it’s living on borrowed time, then that would be because of the fact that we are progressively having a lower standard of living year after year due to insufficient aggregate demand and investment that keeps people unemployed, and then you come out and moan and cry about the government being the reason this is all happening. Well you’re right, it is the government’s fault, it’s their fault for listening to people like you who think that government spending, which increases private sector investment and employment, is going to destroy everyone and everything. Yet what you don’t realize is that this adds up: adds up in lost GDP, lost productive capacity, loss in adequate infrastructure, loss in advanced technologies, etc etc etc . Yeah, eventually we won’t matter anymore because we won’t have shit to matter, just like in Africa. never mind all of the other problems that people like yourself have been responsible for (related problems, that is), like the widening distribution of income between the rich and poor. Hell, the poor didn’t even have enough money to buy toys for their families last christmas, according to Family Dollars’ internal reports on what goods these families did and didn’t buy. Keep swinging at windmills, Thanks Don Quixote.
Where can I get a 100k Government job, shuffling paper and harrassing small business and kids with Lemonade stands. I want to add to aggregate demand. No money you say? Well borrow it from China. Or raid it from tomorrows unborn.
This is chicken little economics.
How about a Confederate lead bullet with the words, “In the Constitution we trust”?
I am seeing a massive spike in Google trends words relating to secession and a basic split of the union centred around fly over states. Keep an eye on that Black Swan.
Buddy, emigrate to the USA! But, first, clone yourself 10,000,000 times. Secession is the final step in what ought to be done. But, first, there is a lot of work to be done.
I am restoring a 1979 AMC Jeep Wagon, and I am shopping online for parts made in the USA. 401 CI V8 Forged Pistons Cranckshaft and Rods. Nitrous Oxide. one mean SUV.
I need the power for Ranch work towing etc. Nothing like USA quality and classic cars. This is the USA manufacturing saviour. I am doing my best to support US quality. The US needs to retool and supply the world with the classic styling, the Germans and Japanese just do not get.
I would love to live and work in the USA. Today we have 45 degree temperatures, hot winds, high fire danger. Would not mind a Ski trip right now!
May I add Don, that it is people with your value system, and the founding father’s logic in creating the spirit and intent of the Constitution that gives me faith in the decree of the US government, i.e. The US dollars strength as a holder of value. As soon as I see the value system lost, it is good bye from me as an investor of US dollars.
If these smaller manufacturers of these US parts that I order complain that business is being suffocated by regulation, then the hope of the US recovering as a manufacturing base is finished.
if these pistons fail on me in the middle of the outback at 50 degree temperature and 1000 km stops between town, then I trust the word of a US supplier over a Chinese supplier any day.
Buddy: Heartfelt thanks for your confidence in me and the USA. But I must remind you that almost everything you value here — adherence to the Constitution, faithfulness of the US government, a sound dollar, freedom from regulation — is in jeopardy and headed for extinction unless We the People rebel against collectivist (elite+mob) political power.
Please read my comment posted on another Azizonomics thread:
…. to answer “why would (we) allow such incredible concentrations of power to exist”:
Your “no rational person” describes at least half of US voters, and includes those valuing instant gratification, something for nothing, to hell with anybody else including their own descendents. Their delusions include “thinking*” that they are “beneficiaries of the rigged system”.
The rational citizens — those who DO realize that “greed and incompetence and dishonesty are with us all the time” — divide into three groups: (1) a small number (“elites”) who both possess and exploit** greed and dishonesty; (2) a small number who know, care and
fight back to limit damage (e.g., tea parties); and (3) the majority who are too “busy”, lazy, selfish, complacent, spoiled and/or pessimistic to do anything***.
* “Fool me once, shame on you; fool me twice, shame on me” — But WAIT: our government checks and food stamps don’t bounce and we pay no taxes, so we weren’t fooled!
** “Right” is what we can get away with; the only “Wrong” is getting caught.
*** “All that is required for evil to triumph is for good people to do nothing.”
Check this guy out
Perhaps freedom loving sound currency limited government types will tour the USA just before the breakup and will be issued with Confederate Passports.
Can you imagine the outrage from the Libtards due to frisking the Libtards at the Border.
There are a couple of ways for the government to get money. Another is to have Ben sell his bonds back to the treasury for a dollar. The treasury will then pay Ben the small amount of interest that he lost and still be up a trillion or two.
Let’s say we get new [and improved!] money and “they” figure out a way that it’s completely [100%] sound. Each unit is tied to an equivalent amount of goods and services produced in the economy, therefore producing a natural deflationary effect [tied to increasing productivity].
Now, how many other ways are left for the elite to steal from everybody else? 100? !000? 10,000? 10,000,000?
See, there are more leaks in the dike than there are patches [because the elite have legions of full time geniuses fastidiously working on ever newer and more creative methods to create leaks].
The problem isn’t necessarily unsound money, but rather, unsavory people who are given too much power. If it isn’t f****** around with the money, it’ll be some other damn thing.
Minimizing the power of the elite should be the most important job any citizen has in any society. If the opposite is taking place, then you know bad times are just around the corner.
I am content to let the value of the dollar be the result of millions of negotiations over prices in the market place. In that way the dollar doesn’t depend on a single commodity or service (like 1 hour of man-labor). So the dollar is anchored to something in reality of value none-the-less.
What everybody seems to be missing here is that the platinum coin concept equates to the ACTUAL real solution. Consider this: Minting the coin and assigning it a value is no different in any fundamental way than the US Treasury simply minting FIAT and assigning it a value… as such, all we’re really talking about here is a back-doors method of the Government issuing SOVEREIGN money directly at cost with NO INTEREST, rather than the current Federal Reserve process. The US could simply take back money creation responsibilities, print what was necessary to service and quickly pay off all outstanding national debt, and circulate that sovereign fiat through the financial markets and nation to distinguish all at-interest debt.
This is the ultimate solution if looking at the problem through they eyes of the entrenched power structure. At the end of the day, it is still fiat and anything touched by the government is severely and forever corrupted, so it is not a utopia solution, but the point of this post is that this platinum coin idea is just a different way to say something much more simply… the US can print sovereign money and eliminate all debt IF IT WANTED TO DO SO. Yet they do not? Why do you think that is?
This WHOLE economic/financial catastrophe is an ILLUSION foisted on the unsophisticated in order to create the conditions for the ultimate goal. What is the ultimate goal? Well, I can tell you this…. at least one step before that goal is the need to disarm the population.
God save the Republic. Let’s Roll…
But how will the Federal Reserve Bank earn a risk free 6 percent for its member banks?
We have had Sovereign Fiat Coinage since 1965 in the form of the clad quarter and dime.
The Copper was pulled out of the penny in the last decade and they are now discussing what to do about the nickel.
Bravos and Attaboys!:
Imp — “Minimizing the power of the elite (is) the most important job any citizen has.” [Note: the opposite IS taking place!]
SA — “God save the Republic. Let’s roll!”
P.S. Is a platinum coin easier to counterfeit than “paper” currency?
I’m assuming you guys come at this from an austrian angle, except you only introduce the idea but not any particular theory to back it. I guess you guys think this is economics we should be listening to? Your comment about a long term lack of trust has no basis in anything, for example you don’t talk about operational realities, you also don’t talk about income effects, which are duly ignored almost all of the time among not only neoclassicals but austrians…and you call yourself heterodox? Don’t make me laugh.
Here is an operational reality for you:
Unlike MMTers, I don’t claim to be able to generalise income effects from a few tautological accounting identities.
China is not buying securities issued to provide funds for Congressional deficit spending. It is taking dollars it has earned at stores like WalMart and Target and invested them in time deposits at the Fed in return for securities
issued for that investment purpose. As time deposits go, most of the money needed to return the deposits continues to exist and has not been spent away by the government. It is to the advantage of the government to issue securities for private and foreign investors. It takes their money out of circulation and sequesters it away in some time deposit. So it is a way to fight inflation. The government can always get whatever it money needs for its spending from the banks by issuing the same kinds of securities. But that money gets spent. And the Treasury usually rolls over the securities as a way of avoiding ever to have to pay back the banks. The banks love it because it is a perpetual source of debt-free interest. The Treasury does this by issuing new securities at discount and swapping them for the mature securities at the banks. The new securities and the old have the same face values and are dollar equivalents.
So, the platinum coin idea is unnecessary as a way to solve the national debt problem.
The true solution to the debt ceiling is to see that it is Unconstitutional. The Constitution, Article 1, Sec 8 says that Congress “shall have the power…to pay the debts … To borrow Money on the credit of the United States.
Those are absolute (unlimited) powers. A debt ceiling is a general limit placed on a power. Congress does not have the power to put a limit on a Constitutional Power. It takes a Constitutional Amendment. If Congress could go through and put limits and ceilings on times and amounts throughout the Constitution, the Constitution becomes meaningless as a Constitution of basic law. For example, could Congress say “Congress can provide and maintain a navy between 1895 and 2015.” Or Congress can provide and maintain a navy as long as it does not cost more than $1 billion.” This is different from allocations and authorizations for spending on specific items in a given budget, because it is not a law passed in advance that applies generally to all spending, no matter what and when.
So, let’s take the debt ceiling to court and expose its unconstitutionality.
The problem I have with MMT proponents is that they assume changes in interest rates influence economic (human) behaviour. In reality a business man takes the opportunity as it arises, with interest rates being one of many factors and necessarily way back in the variables influencing that decision. Consumers buy a home based on need (marriage or a spouse threatening separation if she does get that new car, holiday, home etc etc etc)
If anything changing rates to manage the economy causes many unintended consequences, such as delaying investment decisions, taking on more debt than necessary or other “unsettling” behaviours. Just look at the Australian Reserve Bank and how it rarely changes rates up or down, unlike the Federal Reserve, and you will see empirical proof.
I prefer Austrian over Keynes or MMT as it is logical. Assuming you can manage the Macro economy with Fiscal or Monetary policy is illogical.
The biggest advancement in the human race came before the theory of MMT. How far ahead would we be today if these “Theories” never saw the light of practice?
What is MMT? And does anybody know whether platinum coins are more or less vulnerable to counterfeiting?
Modern Monetary Theory — I wrote a post on it a few days ago.
I am watching a very detailed and accurate documentary “Apocalypse: The Rise of Hitler”
it thoroughly discusses the causes of hyperinflation in Germany. A must watch.
thanks buddy, downloading now… this is a cinematic dramatisation about young people being punished for speaking up to the Nazis during their reign
Thanks for the link. I knew an old German WW2 veteran, he said everybody got caught up in the frenzy and it was very difficult to have overt disdain for the regime. Peers would quickly berate you or worse inform superiors. A very difficult time to speak out.
This atmosphere must be curtailed preemptively. It can happen again.
Yeah, that’s why I think having (pure) disdain for regimes of any kind is often, if not always, stupid…because at the end of the day people working for government have family and friends and a mouth to feed for which they need an income, and by and large people (rightly or wrongly) tend to always think that they are right
This is political La La land stuff IMHO, goverment by loophole just isn’t sustainable and I’m sure the conservative press would tear Obama to shred if he embarked on it.
we live in nature. all humans live in nature. the universe in which all humans are is in nature. we live in nature’s shadow, all of us. we can learn from nature, but we cannot teach it a single thing. to go against the nature of things is not a wise idea.
All modern economic systems have built into them, shunts, values, loops, connectors, bleeders, etc., which divert labor-value owned to [fill in the blank…government, finance, and of late, cartels of all flavors].
Because of this monetary deflection [viz., theft], it is job #1 of academics to create mathematical formulas and such that explain how perfectly natural this theft really is, that is, that the hand constantly in your change-pocket is the hand of [fill in the blank…God, social justice, whatever explanation works].
They call it, this, that, and the other theory, but it’s simply the contemporary version of rationalizing the grandest theft of all-time. People like Ben Bernanke can stand up before the entire world and invoke [to billions] that, “I am stealing from you because this theory tells me it is the right thing to do.”
And the people bow down to the grand finance god and say, “Amen.” And he goes into the back room and wonders how people can possibly be so incredible ignorant. And the people go about their daily business, and with what little time they may possess, study the formulas and theories so they can better understand exactly the position they must assume.
All systems are designed by the few for the benefit of the few. Reality is eminently simple. If it is complex, then it is bullshit, by definition.
Systems break down very quickly once people are hungry and angry enough to listen. The system needs to pluck the feathers of the goose without making it hiss so to speak.
we have one bald goose! Must have been the pain killers!
Watch “Apocalypse: Rise of Hitler” 2011 Documentary series. Best I have seen for detailed analysis and never before seen footage remastered in colour. It shows how the system breaks down.
Here is Bruce Krasting’s take on the platinum coin.
I know I am late but hopefully someone will read it.
Wouldn’t this cause rapid inflation?
No, not more rapid than otherwise (and the trend at the moment is basically deflationary deleveraging) because it wouldn’t become part of the public’s money supply.
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While early I was enamoured with the idea of the trillion dollar coin (I liked $10 Trillion coins) as a way to eliminate the national debt by buying up all the T securities at the Fed, I began to question whether such a purchase would be authorized for the Treasury, IF the debt had already been redeemed in each of those securities. The Treasury cannot buy or pay for anything or any debt that has not been previously authorized by Congress. It would not authorize buying a redeemed security a second time, just to redeem it. It might to get rid of the securities at the Fed and elsewhere so as to reduce the security supply below the definition of the ‘debt’ as the quantity of securities at various locations in the economy. But that would take a new authorization by Congress.
My current position is that there isn’t a debt at the Fed. The Fed is an agent of the United States (government) performing certain actions and services for the United States. It buys securities from banks with money it creates out of thin air. This is government money because only government, via the Congress, has the power to create (coin) money. It is not fractional reserve lending either, because when spent there is no debt to be repaid by the recipient. It is pure credit. So, if you see these purchases as the purchases of a government agent using government money to make the purchases, you see that the agent cannot claim for itself a debt equal to the value of the purchase. It would be like a bank clerk claiming to be redeemed for buying a bank customer’s security with bank money. And that is absurd and illegal. So, there is no national debt in all those securities in the big pile at the Fed. But the Fed is also authorized to use those securities to fight inflation by selling them. But it is selling them for the United States and the United States will have to redeem them later on, and, if there is not ready cash at hand, the Fed will always buy them back with government money made out of thin air.
Just want to add, because I’ve learned this since: The Fed can swap mature securities it holds for new securities with the Treasury. The Fed has bought those securities from banks during deflations (recessions, depressions). It bought them with money it created out of thin air. It did it to help banks restore their reserves allowing them to lend more against their reserves. That is how new money gets created by the government. By the Fed. Since the money is used to purchase something and not a loan to the banks, it is debt-free (except for the general obligation of the government to honor payments in US dollars of fees and taxes and exchange of dollars for dollars).
But I’ve always wondered does the implicit debt obligation on the securities ever get extinguished? I think when it comes back to the Treasury in a securities swap with the Fed, Treasury has the option to extinguish the security. Burn it! Turn it into confetti. Treasury will likely not want to sell a mature security, because why should a bank simply want an exchange of its dollars for an equal amount of dollars in a mature, completely negotiable security? Treasury wants to sell securities at discount, because banks will then have to pay less for full face value and buy them to earn interest. Later when the Fed buys a mature security it will pay full face value.
Also when the Fed buys a security from a bank that presumably got it from the government in return for money from the bank, that redeems the debt of the government to the bank associated with the security. If the money was used by the Treasury for deficit spending, that makes that money debt-free. And it is as if the Treasury had issued the money itself directly instead of borrowing it when it deficit spent. This is because of the ‘fungibility’ of money–being completely exchangeable for other money. So our system works essentially like the old green-back system of A. Lincoln, where the Treasury just created its dollars as US Treasury Notes and spent them when authorized by Congress. There is no borrowing from banks, which all began (again) by law in 1917. But because the Fed is selective in when it buys and sells securities, you don’t see a direct and immediate connection between deficit spending and debt-free money creation by the Fed. So its all smoke and mirrors. But the Fed uses securities to augment and drain money to and from reserves of the banking system. It buys securities from banks during recessions and depressions and sells them (required) to banks in inflations to drain their reserves and constrain their lending which otherwise would create new money into circulation and make inflation worse. So, the Fed needs to acquire securities for this purpose. But ultimately if a bank does not want to roll-over the government’s debt to it by a security swap with the Treasury–new security from Treasury for mature security of bank–it can always sell it at public auction and the Fed may buy it with money it creates out of thin air, redeeming the government’s debt to the bank. But the Fed can then do a securities swap with the Treasury, trading its mature securities for new ones from the Treasury. This is the only legal exchange directly between Treasury and Fed, which is legal because there is no direct exchange of Federal Reserve Notes for securities from the Treasury, which is forbidden. It is forbidden because then the Treasury would ignore the banks and simply sell securities to the Fed to acquire new, debt-free money. Since both are part of the same government, the Treasury would not need to pay back the Fed for the securities, because the Fed created the money out of nothing to begin with and the government does not owe itself. Treasury could just trade new securities for mature ones at the Fed and extinguish the mature ones it gets back. Fed could use them to sell them to banks during inflations and buy them back during depressions and recessions.
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