Question about the platinum coin?

[Cleita]

If the govt. actually did this, wouldn't it trigger massive inflation making any savings that we have practically worthless? I'm not economically sophisticated, but I sort of recall Germany doing something like this after being stuck with war reparations with the Versaille Treaty. The way they got out from under massive debt was by a drastic devaluation of the Mark by printing more and more money.

http://morethanfinances.com/german-hyperinflation-crisis/

Origins of the Germany Hyper Inflationary Crisis

In 1914, World War I began and Germany suspended the redemption of its currency for gold and gave its government unlimited power to issue more currency. By the end of the war in 1918, consumer prices had risen 140%, and the amount of issued German currency had inflated massively, going from 3 billion to 55 billion Reich marks.

The subsequent imposition of reparation payments after the war, coupled with the continued printing of this fiat currency, eventually led to extreme inflation. By 1922, this situation saw prices in Germany rising in excess of 700% annually in local currency terms.

Instead of checking the fall of its currency’s value by officially devaluing the currency so that it could be issued in smaller denominations, the Reichsbank instead fuelled the inflationary fire by continuing to print more money.

Could someone explain to me why this would be different? Everyone on radio and TV seems to think it's a great idea without thinking about the possible consequences.

[banned from Kos]

1. No it wouldn't. The coin would never go into circulation.

Plus, a trillion dollars by itself is not that inflationary. $15 trillion in M3 evaporated in 2008.

Still, it is a silly idea anyway.

[Warren Stupidity]

2. No. It is no different than congress issuing a piece of paper increasing the debt limit.

The 1T coin would not go into circulation (how could it anyway?)'it just sits in the Feds vault, and by doing so creates a 1T credit at the fed, allowing the government to issue more bonds and keep the government operating and our debt obligations met.

[Cleita]

5. The way Chris Hayes explained it today is that it would be deposited in the bank

and would be used to pay off debt. In my mind this is putting it into circulation. Besides that, let's say you and bfK are right that it doesn't go into circulation, truly there has to be some consequences.

[Warren Stupidity]

7. Chris Hayes explained it wrong.

The "it" being used to issue new bonds is the 1T credit the coin would create. Again, it is no different than congress raising the artificial debt ceiling. If on Monday congress authorized another 1T of debt, as it will eventually, that also would result in another 1T of treasury bonds being issued. The net effect is the same.

The government would not be printing 1T of money and putting it into circulation.

[DanTex]

8. Yeah, I watched that. That segment on Chris Hayes was disappointing.

The woman he had on was actually suggesting printing money as a general tool to finance government spending. Unfortunately, that made it seem like the platinum coin was, in fact, going to be a simple case of printing our way out of debt. But that's not what it is.

Paul Krugman has an explanation here.

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.

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

[DanTex]

3. No. In practice, the economic effects would be indistinguishable from just issuing more debt.

The Fed currently has about $3 trillion of assets on its balance sheet, including about $1.7 in Treasury securities. So, as the Government spends money from the coin, increasing the money supply, the Fed would then sell some of the Treasuries it is holding, decreasing the money supply by the same amount. Basically, instead of having the Treasury issue new debt in an auction, it would be the Fed selling bonds it already owns on the open market. But the net effect is the same -- bonds sold to the public, and money spent by the government.

Of course, this can't go on for ever. Eventually the Fed would run out of assets. But it's not meant to be a long-term fix. It's just a short-term accounting trick to get us past the debt ceiling without defaulting.

[banned from Kos]

6. good post n/t

[Motown_Johnny]

4. We have been off the gold standard since the Nixon administration.

Creating money out of thin air is common and has not caused hyper inflation. We can print money but most of it now is simply created digitally. Enter into a computer that the Federal Reserve has more money and guess what... it has more money.

The platinum coin is just a way for the Executive branch to do it without Congress.


In my opinion, this won't happen anyways. I think it is being floated just so that when the 14th amendment is invoked it will be presented as a "middle of the road" option.

[PoliticAverse]

9. Considering that the Fed is buying most new US debt effectively monetizing it....

it would really be no different that what is currently happening.

BTW the treasury says it isn't happening:
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/01/12/treasury-we-wont-mint-a-platinum-coin-to-sidestep-the-debt-ceiling/

[Cleita]

10. I'm actually happy about that. n/t