The trillion dollar coin is not about "printing away the debt".

[DanTex]

I was disappointed in the Chris Hayes segment on the trillion dollar coin this morning. First, he gave a right-wing guy too much time and latitude, and also there was a woman pushing Modern Monetary Theory-ish views, so the thing kind of devolved into a discussion of whether we should or could just print money and ignore debt.

But the trillion dollar coin is not about printing money to pay off the debt.

It is simply an temporary accounting tool to avoid the debt ceiling. The money supply will not actually go up -- the Fed can and will sell some of its bonds to compensate for the new money that the government spends, which means that the macroeconomic effect would be identical to if the Treasury had sold the bonds to raise the money.

[Squinch]

1. I was yelling at the screen a little too. I hate it when I do that.

[politicaljunkie41910]

5. Agreed. Proceed Mr. President.

I believe President Obama should do so right away and print at least 4 coins ($4 trillion) to ensure that we don't have to revisit the debt ceiling debate again through the remainder of his presidency. This will neuter the rabid GOP for the remainder of his term and they will have to find a way to legislate without holding the government hostage every few months.

http://www.democraticunderground.com/1251274936#post5

[Squinch]

8. LOVE that idea.

[DanTex]

12. Well, there is a limit.

In order to avoid any potential inflationary effects, the Fed has to be able to sell enough Treasury securities to cover the amount of money that the Government spends from minting these coins. Otherwise, we actually would be "printing away the debt". At present it looks like the Fed has about $1.67 trillion dollars of Treasuries, so that's a cap on how much spending can be done in this way.
http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab2

Basically, the trillion dollar coin is a short-term fix. Eventually we would have to raise the debt ceiling.

[FarCenter]

2. The trillion dollar coin doesn't have to be paid back.

The difference between the face value of the coin and it cost of production is "seigniorage".

So long as the Fed holds the coin, the government has an extra trillion dollars to spend which it has no obligation to pay back.

This is different from when the Fed buys a Treasury bond on which the government is obligated to pay interest and principle.

[DanTex]

3. But it will be payed back.

The actual amount of money that the government spends is determined by congress, as usual. As long as the Fed compensates by selling some bonds it would be identical, from a macroeconomic point of view, to if the government sold the bonds directly to raise the money. The money supply will be the same, and the amount of debt held by the public (by the public I mean anyone other than the Fed) will be the same. Then when congress decides to give up the charade and raise the debt ceiling, the treasury buys the coin back and melts it down.

We aren't talking about one trillion dollars of seigniorage. It's a temporary accounting maneuver.

[FarCenter]

4. Only if the debt ceiling is raised can the coin be bought back

Otherwise the trillion dollar coin stays at the fed forever, and the money supply is raised by that amount.

Actually, that is not as inflationary as treasury selling $1 trillion of bonds to the Fed and the Fed selling them on to the primary dealers. The bonds become bank reserves and increase the money supply by more than $1 trillion due to fractional reserve banking.

[DanTex]

6. That, or eventually when we start running a surplus, we pay it back in that way.

Simply minting the coin alone does nothing to the money supply. The money supply only goes up when the government spends the money. If the Treasury decides to mint the coin but then just keeps the $1 trillion balance sitting in the Federal Reserve without spending it, that changes nothing. Well, OK, technically this might count as a $1 trillion expansion of the monetary base, but as long as that trillion sits in the Treasury's account it has no macroeconomic effect at all. Basically, there would be a database entry on a computer that says "$1 trillion", but nothing else would be different.

If the government spends any of that $1 trillion, it could potentially be inflationary, because then some of that money reaches the public. So, in order to keep the "effective" money supply stable, the Fed would have to sell bonds, like you say. But they don't need to sell $1 trillion of bonds, they only need to sell enough bonds to cover the amount of extra money that has actually been spent.

Since the government isn't going to spend all $1 trillion at once, then this wouldn't require any massive sales of bonds. In fact, the amount of bonds that the Fed sells would be exactly the same as the amount that the Treasury would sell if they had a bond auction to raise the money. So basically, the only difference is that it would be the Fed now holding the bond auctions instead of the Treasury, but the size of the auction would be identical. Macroeconomically, this again makes no difference at all.

I'm not saying that there is no downside at all to this. I'm sure the markets would have a reaction. But there would be no direct macroeconomic effects.

[FarCenter]

7. But the government has to spend the trillion dollars

The trillion dollars are needed in order to continue deficit spending once the debt ceiling is reached. In effect, the government is minting a trillion dollar coin and making change for currency that it can spend at the Federal reserve.

The trillion dollar coin is deposited into Treasury's account at the Fed, adding a trillion to the Treasury's account. Then the Treasury writes checks. The Fed cashes the checks and deducts them from the Treasury's account.

Checks written by Treasury to pay Government bills do not return to Treasury. They go the the Fed where they are cashed.

[DanTex]

9. Right, but not all at once.

In order to keep the money supply stable, the Fed only needs to sell bonds at the same rate that the Government spends the money from the coin. So it's not like the Fed needs to sell $1 trillion worth of bonds on the very same day that the coin is minted. It would be a gradual process, and like I said, if the Fed does it properly it would be indistinguishable from having the Treasury auction off bonds in order to raise money.

[FarCenter]

16. The Fed doesn't need to sell bonds at all in order for the Treasury to spend the deposited coin

It just cashes Treasury's checks drawn on the account into which the coin was deposited.

The Fed does not issue bonds for sale by itself. It does sell bonds on Treasury's behalf, but Treasury cannot do so until the debt ceiling is lifted.

[DanTex]

18. It doesn't need to, but it can (and it will).

The Fed does not issue bonds, but it does buy and sell them -- currently the Fed holds $1.67 trillion in US Treasury bonds on its books. And there is no difference between the bonds that the Fed holds and new bonds that the Treasury issues. As far as the economy is concerned, the Fed selling bonds off of its books and the Treasury issuing new bonds, both of these are simply "more bonds".

Let's look at two different scenarios:
1) The Treasury issues $50 billion dollars in new bonds, and sells them to the public.
2) The Fed sells $50 billion dollars of bonds to the public, and, at the same time, the Treasury mints a $50 billion dollar coin and deposits it with the federal reserve.

In both cases, there are $50 billion dollars of extra bonds in the hands of the public, and there is $50 billion dollars more in the Government's account at the Federal reserve. For all practical purposes, the two scenarios are equivalent.

When it comes to the $1 trillion dollar coin, since the $1 trillion isn't going to be spent all at once, it is not necessary for the Fed to sell $1 trillion dollars in bonds up front. Instead, whenever it cashes a check drawn on the Treasury's account, it can also sell bonds worth the same amount (on the open market), thereby exactly replicating what would have happened had the Treasury raised the money by issuing new bonds.

[FarCenter]

19. The Fed is actually buying bonds every month in order to implement quantitative easing

Clearly, I can't explain open markets operations and the Treasury payments system to you.

[DanTex]

21. So? What difference does that make?

Believe me, I understand how open market operations work. The fact that the Fed is implementing QE has absolutely nothing to do with whether it can sell bonds off of its books to compensate for the trillion dollar coin, in order to simulate the effect of bond auctions.

The point is, the trillion dollar coin would not be inflationary, and it would not be seignorage. But don't take my word for it. Maybe you should tell Paul Krugman that he doesn't know how open market operations work either...

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.

http://krugman.blogs.nytimes.com/2013/01/08/rage-against-the-coin/

[FarCenter]

23. Fed selling of bonds doesn't change the debt ceiling

The Fed would be selling existing bonds. Yes, it would not be inflationary to a greater extent than raising the debt ceiling and spending according to approprations and ongoing committments.

On the other hand, it does not increase the debt ceiling, and I see no reason why congress would raise the debt ceiling if the coin is minte.

Further, the debate is certainly whether government spending at the appropriated and committed rate is inflationary.

[DanTex]

25. That's the point -- the Fed can sell bonds without raising the ceiling. Read Krugman again.

The Fed currently has $1.67 trillion dollars in US bonds on its books. So that's $1.67 trillion dollars of bonds that can be sold to the public without raising the debt ceiling. From the macroeconomic point of view, there is no difference between having the Fed sell $50 billion dollars in bonds, and having the Treasury issue $50 billion dollars in new bonds. Either way, that's $50B more bonds in the hands of the public.

The whole point of this is that it allows the government to continue operating as it is now, without worrying about the debt ceiling. You are right that eventually the debt ceiling would have to be raised. For example, we can't raise more than $1.67 trillion dollars in this way without expanding the money supply (or without having the Fed sell non-Treasury securities).

But the idea, or the hope, is that once we do the trillion dollar coin thing and get past the debt ceiling crisis, then the Republicans will see that they don't actually have the leverage they thought they had, because it's not like the world ends when we hit the debt ceiling.

Further, the debate is certainly whether government spending at the appropriated and committed rate is inflationary.

Why would it be inflationary?

[Common Sense Party]

24. Surplus?

What makes you think we'll ever have a surplus again?

[backscatter712]

10. It's a legal and economic hack, and an effective one, which is why the right-wing's going apeshit.

They're hoping to be able to continue holding hostages for the rest of Obama's presidency, and assuming Obama screws his testicles on and goes through with this like he should, he'll have eliminated one of the GOP's biggest hostages.

[hughee99]

11. Sweet, if it has no ill effects, lets print out hundreds of those fuckers

We can pay for health care for all, Guarantee everyone a more-than-living wage, and start sending money off to Greece so they don't have to implement the austerity measures.

[DanTex]

13. Well, it's not "free money". Eventually it has to be payed back, just like real debt.

It's basically an accounting trick that allows us to sell bonds that are currently being held by the Fed in order to raise money, rather than issuing new bonds. But it is effectively equivalent to borrowing the money by issuing new bonds.

[hughee99]

14. So it's an accounting trick that temporarily allows us to appear to have more money

than they we actually do?

Maybe the guys at Enron were on to something.

[DanTex]

15. No. It's an accounting trick that allows us to borrow money without issuing more bonds.

Thus allowing the government to pay its obligations even if congress doesn't raise the debt ceiling. Obviously, it would be better to just sell bonds the normal way, but if congress doesn't allow this, then we have to find another way, otherwise the government will default and the consequences will be catastrophic.

[FarCenter]

17. No, it is an accounting trick that allows us to create money out of nothing.

Or more precisely, it is creating money out of seigniorage due to the mismatch between the coin's face value and it's bullion value.

[DanTex]

22. Umm, yeah, all fiat money is created out of nothing. We're not on the gold standard any more.

Paper money is also worth a lot more than its material value. Your point?

The relevant question is whether doing this would have any unfavorable macroeconomic effects (e.g. inflation). And the answer is that it wouldn't. Provided that the Fed decides to sell some bonds to compensate for the newly created money, it would not increase the money supply, and it would not be inflationary.

[Jim Lane]

27. That doesn't happen if the Treasury uses the coin(s) only to retire existing debt.

As pointed out upthread, the total government debt of $16 trillion + includes a bit less than $2 trillion that's held by the Fed. If the Treasury gives the Fed one or coins, in exchange for the IOU's held by the Fed, then the Treasury can issue new debt without bumping up against the debt ceiling.

One version of the proposal is that, instead a trillion-dollar coin, the Treasury mints several hundred-billion-dollar coins. Then it could use them, one by one, to buy back debt from the Fed, as the debt ceiling was reached. A political advantage is that each $100 billion exchange (roughly one per month) could be the occasion for Obama to point out that Congress hasn't acted on the debt ceiling yet.

The effect is the same as if the debt ceiling were raised.

[DanTex]

28. Yeah, I don't see where the $1 trillion number came from.

It's really bad marketing. I think that they should call it something like a "platinum bond".

[brandonk]

20. It starts as one trillion dollar coin

but where does it end?.....

[Kalidurga]

26. For you probably pizza.

Or maybe a long nap. I am not sure. Post some more so we can find out.

[Throd]

29. They should mint a quadrillion dollar version so we don't have to worry about debt for a long time!

[Yo_Mama]

30. How on earth could the Fed sell those bonds?

That's about 59% of what the Fed currently has in Treasuries. And it would sell the Treasuries and get money, which it would then give to Treasury? Leaving the Fed with nothing in assets but a worthless trillion dollar coin in exchange for that trillion dollars of bonds?

That's the oddest thing I've ever read. You want to bust the central bank as a temporary accounting mechanism?

In any case, both the Fed and the Treasury are saying "no":
http://www.bloomberg.com/news/2013-01-12/treasury-fed-oppose-using-platinum-coin-to-avoid-debt-limit-1-.html

[DanTex]

31. What do you mean "how"? On the open market.

It wouldn't be $1 trillion all at once. It would be gradual, just to keep pace with the additional spending. You do realize that if we do raise the debt ceiling, then the Treasury is going to have sell the exact same amount of bonds. How on earth do you think the Treasury can sell those bonds if the Fed can't?

And another thing, the central bank wouldn't "bust". What does that even mean? The central bank can print money. And the coin wouldn't be "worthless". It would be worth a trillion dollars. It would be identical to holding 10 billion $100 bills. We're not on the gold standard -- all of our money is fiat money. What difference does it make whether the Fed is holding bonds or currency? What is important is the money supply and the amount of Treasury bonds that are held by the public, and those two quantities would be identical, whether we mint the coin or raise the debt ceiling.