Friday, January 11, 2013

Trillion Dollar Coin

The last couple of days I've seen stories on Google News about the trillion dollar coin.  This is the idea that the Secretary of the Treasury has the power by law to mint platinum coins. The Obama administration could create a $1 trillion coin, deposit it with the Federal Reserve and thereby render Republican refusals to lift the debt ceiling meaningless.  The stories I've read online always conclude by dismissing the trillion dollar coin option as fantastical nonsense -- but not Paul Krugman.  In his column today, "Coins Against Crazies," Krugman embraces the idea.  Here's how he explains it:
As it happens, an obscure legal clause grants the secretary of the Treasury the right to mint and issue platinum coins in any quantity or denomination he chooses. Such coins were, of course, intended to be collectors’ items, struck to commemorate special occasions. But the law is the law — and it offers a simple if strange way out of the crisis.
Here’s how it would work: The Treasury would mint a platinum coin with a face value of $1 trillion (or many coins with smaller values; it doesn’t really matter). This coin would immediately be deposited at the Federal Reserve, which would credit the sum to the government’s account. And the government could then write checks against that account, continuing normal operations without issuing new debt.
In case you’re wondering, no, this wouldn’t be an inflationary exercise in printing money. Aside from the fact that printing money isn’t inflationary under current conditions, the Fed could and would offset the Treasury’s cash withdrawals by selling other assets or borrowing more from banks, so that in reality the U.S. government as a whole (which includes the Fed) would continue to engage in normal borrowing. Basically, this would just be an accounting trick, but that’s a good thing. The debt ceiling is a case of accounting nonsense gone malignant; using an accounting trick to negate it is entirely appropriate.
But wouldn’t the coin trick be undignified? Yes, it would — but better to look slightly silly than to let a financial and Constitutional crisis explode.
Yesterday there was an opinion piece by Edward Kleinbard, a USC law professor, outlining another option -- scrip.  I.O.U.'s.  It has been done before -- by the state of California in 2009:
Beginning in July of that year, California addressed its budget crisis by issuing 450,000 registered warrants, totaling $2.6 billion, to individual and business claimants, including recipients of aid programs, recipients of tax refunds and government contractors. Those holders who needed immediate cash were usually able to sell their registered warrants to banks at face value, though some institutions limited such purchases.
Whether as a result of public shaming, pressure from banks or a newfound sense of responsibility, the Legislature quickly worked out a budget deal and the scrip was then redeemed for cash. 
Throughout the ordeal, California continued to pay its public debt service in cash and on schedule and never lost an investment-grade credit rating. 
A federal scrip program, importantly, would not explicitly challenge any constitutional allocation of powers. Nor would there be confusion in the marketplace between valid Treasury bonds and this new paper, which would have a different name, financial terms and legal status. And because the scrip would be transferable, claimants forced to accept it would be able to turn it into immediate cash in private markets, for as long as the Treasury was unable to issue new debt. 
Would a federal scrip program be a painless way of resolving a debt ceiling crisis? Hardly. But it would be the least awful way to defang the most extortionate demands of Congressional hard-liners — and one that would not permanently damage America’s fiscal standing in the world.
Ideas are out there on how we can defuse the GOP's debt ceiling ticking time bomb; I'm sure we'll hear of more in the month ahead.

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