Yet Another Debt Ceiling Crisis! Or, How Joe Biden should Learn to Stop Worrying and #MintTheCoin
by Nathan Tankus / September 27, 2021
“After the Georgia runoff elections many had high hopes for fiscal policy. But instead, we have hit very rough terrain. President Biden’s whittled down infrastructure spending plans are in critical danger (weary readers may recall these plans started life as a much more expansive approach to “building back better” and what “infrastructure” meant). As time has dragged on, the fights over the Biden administration’s spending agenda have crashed head first into our recurring cycle of debt ceiling crises.
To recap, for obscure reasons in fiscal history, congress has decided to pass appropriations bills which authorized and required spending, while imposing arbitrary limitations on how much debt the treasury can incur in meeting the obligations which congress has imposed on the Treasury. Congress then raises this debt ceiling periodically (or suspends it altogether…). But this is not permitted before making raising it a place for partisan political grandstanding. This spectacle has gotten more serious as partisanship sharpened, and the Republican party became more single-minded in its policy-invariant opposition to Democratic presidents in the 1990s.
Special bonus release!
✨ Chekhov's Coin w/@rohangrey ✨
Please listen & share! https://t.co/1npWr5AW2d
— Money on the Left Editorial Collective (@moneyontheleft) September 28, 2021
This is the most serious debt ceiling crisis yet — today there is not even a pretense of negotiations between the parties. Worse, the Democratic party controls the senate by the thinnest of margins, giving right wing Democrats enormous leverage. Many in Washington see what’s at stake as nothing less than the ability of those in the majority to govern and pass the agenda they were elected to pass — a reasonable perspective, to my mind. For my purposes, what is sufficient is that either some legal or financial technicality will bypass the obstructions, or the Biden administration’s spending agenda will need curtailing — or even to be abandoned altogether. I think that is a high cost to bear, especially since there are alternatives. I’ll leave aside the complicated legislative maneuvers happening now since others are covering these in great detail. As others are focusing on the legal technicalities, I will focus on my specialty: the financial technicalities.
As President Joe Biden gears up to fight for a $1.9 trillion stimulus bill, we look back at a radical plan to add $2 trillion to the economy … just by printing a couple coins. Weird? Yes.
Listen now. https://t.co/QUX0KS7nwK
— Radiolab (@Radiolab) January 22, 2021
Avoiding the Ceiling Altogether
Before we discuss a certain coin of … ample denomination, it’s worth taking a step back to think of other available options. There are more conventional measures that could have been done to avoid, or at least delay, this eventuality. But how seriously were these being considered? One option is to simply keep the balance in the Treasury General Account (essentially the U.S. Treasury’s “checking” account) at the Federal Reserve very high. In thinking about this, I was very surprised to find that as soon as Janet Yellen became Treasury Secretary, the TGA began precipitously dropping. This is partially understandable: funds from various recently passed legislations presumably began to be dispersed in large quantities. Nonetheless, this could always be offset by more treasury auctions.
— Pavlina R Tcherneva (@ptcherneva) September 29, 2021
Of course, the downside to sustaining the Treasury’s general account at such high levels would normally be that you reach the debt ceiling limit that much sooner. However, this is not the problem it appears at first sight because the debt ceiling no longer works this way. In the last few rounds of debt ceiling fights, congress abandoned simply raising the debt ceiling limit. Instead, they “suspended” the debt ceiling. That means that if no solution was reached by the time of the suspension’s expiration, the new debt ceiling simply became however many treasury securities were in the hands of “the public”. (The debt ceiling resumed at the end of July 2021, which is why we’re talking about all this now.) The “extraordinary measures” the Treasury uses to avoid missing payments (whether they be interest payments or social security payments) has carried it this far.
#GISPscholar Rohan Grey joined Stephanie Kelton and Rep. Rashida Tlaib on the Appeal to discuss the #ABCAct proposal to #MintTheCoin.@rohangrey @StephanieKelton @RashidaTlaib @theappeal #MMThttps://t.co/fQi8hUP70D
— Global Institute for Sustainable Prosperity – GISP (@GISP_Tweets) May 8, 2020
But those stopgaps are expected to run out sometime in the next month or so. Thus, the new structure of temporarily dealing with the debt ceiling obstacle has fundamentally changed how the U.S. Treasury can deal with the situation. Since the debt ceiling, if it should return, will just apply to whatever treasuries are outstanding, the Treasury department could have issued 10 trillion dollars worth of securities. As we’ve talked about at great length, the Federal Reserve ensures that Treasury security issuance doesn’t interfere with its monetary policy objectives. That means there are no concerns over the liquidity of these treasuries, or the overall level of interest rates. Of course, on a day to day level there would have to be a significantly increased level of coordination between the Treasury and the Federal Reserve, but this would be a difference of degree and not of kind.
— Joe Weisenthal (@TheStalwart) September 29, 2021
I realized as I wrote this piece that this option created by the new legal structure of the debt ceiling has never been properly articulated publicly (at least as far as I’m aware). That is likely a big reason why the general account wasn’t sustained at high levels — or even greatly increased from the “lameduck” Trump era. Still, I do find myself somewhat disappointed that Secretary Yellen didn’t do more to make the resumption of the debt ceiling a politically less painful experience. I can’t help but wonder if her historical deficit hawkishness prevented her considering an option that would have technically meant more debt outstanding sooner.
I’ve discussed this option informally with a number of people in economic policy circles over the last couple of years. I have taken to calling it the “Poor man’s Trillion Dollar Platinum Coin”. While this option is an interesting conceptual exercise, it is a moot point now. The debt ceiling has resumed. The platinum coin however, is a live option. Which brings us to our big boy, the Platinum Coin. Yes, #MintTheCoin. Could a trillion dollar platinum coin solve our cycle of constitutional crisis from causing intractable financial chaos? Let’s recap! I’ve discussed this intriguing technicality in U.S. coinage law at the very beginning of Notes on the Crises.
As I go into detail here, this is backwards. Coin seigniorage is a centuries old practice and generates hundreds of millions in seigniorage every year, *legally*. Deliberately violating statutory directives and risking a separation of powers crisis is far more complicated https://t.co/os7fRwdr6I
— Rohan Grey (@rohangrey) September 19, 2021
At the time, it served as a kind of “fiscal rhetoric”. A rhetorical tool clear to the public that responding to the Coronavirus Depression was financially feasible. However, the coin began life as a discovery by an enterprising independent lawyer named Carlos Mucha, who was researching ways to get around Obama’s debt ceiling crisis. Thus, we have swung back around to the “classical” platinum coin debates (and yes, they’ve gone on long enough to have “classical” debates!). It is important to emphasize in the context of these “classical” debates that this is a currently available financing instrument which can be used at any time.
Giving a shoutout to @rohangrey who had the foresight to take the trillion dollar platinum coin seriously, do a lot of legal research on it and the debt ceiling more generally, and went on the job market with entire paper on it. It's a great paper. #MTFChttps://t.co/WIFH2yzspy pic.twitter.com/Gs3UxWY2Br
— Nathan Tankus (@NathanTankus) September 21, 2021
The debt ceiling only caps how much debt can be outstanding and not all liabilities count for that purpose. An obvious example of a liability that doesn’t count would be the Treasury’s obligation to pay social security payments to retirees. Even some currently circulating instruments don’t count under the debt ceiling. For example, the Treasury has the ability to issue its own paper money (called “Treasury Notes”) which does not count under the debt ceiling. However, paper issuance has its own particular cap of 300 million — an antiquated limit which dates from the 19th century! Coin issuance has no such cap.
— Nathan Tankus (@NathanTankus) September 29, 2021
However, coins are usually statutorily limited in what denomination they can be issued. It would be technically unfeasible (to say the least!) to issue dollar coins in sufficient quantities to cover modern deficit spending. There is however, one exception. Section 5112(k) of the U.S. Code authorizes the mint and issuance of: “…platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.”
EVERYTHING YOU NEED TO KNOW ABOUT THE TRILLION DOLLAR COIN
— Joe Weisenthal (@TheStalwart) September 23, 2021
It may seem absurd when you first think of it — but according to this provision the U.S. mint can legally mint platinum coins in denominations of the trillions, or more. So, why not? My colleague Rohan Grey has written the definitive law review article on its legality and implications. Grey’s piece features an extensive response to all the currently made objections, and likely consequences for the debt ceiling. Moreover, the Treasury Secretary has not only the option, but the constitutional obligation to use this coinage power.
This isn't a matter of what Yellen wants, it's a matter of what she's legally obligated to do.
Default isn't permissible. Coin seigniorage is.
If the choice is between the two of them, it's not a choice. https://t.co/51TTS1Q5M7
— Rohan Grey (@rohangrey) October 5, 2021
Coinage must be deployed if it stands as the only option available to her for avoiding default — and so it seems to be! This constitutional obligation is one reason why it is very concerning that the Biden administration has publicly declared that this option is not on the table. The other reason it is concerning is that it means they are willingly ceding leverage to Republicans. What will they give up in order to avoid using the coin option? Democrats very understandably want to generate a political narrative around Republican intransigence — and in fairness, there is a lot of intransigence to point to. However, it is also intransigent to ignore and leave aside these alternative solutions in favor of a political showdown.
IT'S NOT TRUE that the US has never defaulted on its debt–it technically defaulted on T-bills in 1979, but pretty quickly cured the default. It paid the price in the form of higher interest rates. Here's a description of that history (written in 2011): https://t.co/j8BNZqd6eu
— Caitlin Long 🔑 (@CaitlinLong_) September 29, 2021
I also think Democrats overestimate the political benefit they get from highlighting how difficult republicans are making legislating. Potential voters are just as likely to drop out and feel voting is pointless as they are to feel extra motivated to vote and oppose Republicans. Spending, however, can motivate people. And the best hope for Democrats passing a big spending bill is for accounting gimmicks to be dealt with by accounting gimmicks, rather than lowered expectations. The debt ceiling is an accounting problem, calling out for an accounting solution. That’s a lot of words to say something simple: Mint the damn coin! And then let’s refocus on the real crises.”
Worth noting Tsy keeps a lot of platinum coin blanks handy. The West Point Mint will strike 15,000 1 oz platinum coins this yr. Since it’d be something of an artisanal effort, TDCs can be struck one at a time in Philly Mint’s R&D lab. And then, as they say, Bob’s your uncle. pic.twitter.com/Jgxcvnz9hH
— Carlos Mucha (@mucha_carlos) September 23, 2021
All Your Questions about the Trillion Dollar Platinum Coin Answered
by Nathan Tankus / March 23, 2020
“There are many proposals coming out of congress for how to respond to the Coronavirus-induced depression and deliver economic relief to households. Only one however, involves sending and/or delivering a debit card to every single resident of the United States and funding this expenditure by minting a trillion dollar platinum coin. This is Representative Rashida Tlaib’s proposal, co-authored by my colleague at the Modern Money Network, Rohan Grey. Rohan actually wrote his entire job market paper on the Platinum Coin, which I encourage you to read if you’re really interested in the technicalities, but I wanted to cover some basic details.
How was the debt limit crisis of 1953 resolved when the U.S. Senate blocked it?
Similar to how #MintTheCoin would work: Treasury sends Fed trillion-dollar platinum coins & Fed returns the U.S. bonds it has already bought and holds on its books.https://t.co/oJlDtwIBpD pic.twitter.com/NKeSjmAbQ5
— Steven Dennis (@StevenTDennis) September 21, 2021
Why a Platinum Coin? Because there is a provision of the U.S. code known as 5112(k) which lets you mint a platinum coin of any denomination. Other coins have their denomination fixed so there is a limit to how much you can practically finance using other coins. More generally, it’s important for people to understand that government spending is backed by money creation and the simplest way to understand that (far simpler than understanding how the Federal Reserve works) is to see it. The coin is visceral and powerful in a way that other things aren’t, as the hashtag #MintTheCoin shows. The coin was a pre-existing and known tool from the debt ceiling fights in the Obama years and thus is far more familiar (especially to journalists) than a brand new financing mechanism would be.
"Such a move would be ridiculous, of course, but the whole standoff on the debt is ridiculous. If … Republicans insist on pushing it, Biden could well decide to get out the platinum coin. "https://t.co/UA2kalb0JD
— Rohan Grey (@rohangrey) September 28, 2021
Does the coin need to be very large? No. The language of the statute says that “The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time”. This means that all the coin needs to have is some quantity of platinum and that quantity’s market value doesn’t bear any relation to the face value of the coin. The mint regularly creates commemorative platinum coins, it would just instead be minting 2 one trillion dollar coins.
— Nicolas Ward (@UltraNurd) September 28, 2021
Isn’t the coin “printing money” which makes us like Zimbabwe or Venezuela? No. Using the coin is no more inflationary than issuing bonds. If there is too much liquidity in the banking system as a result of the coin the Federal Reserve will sell treasury securities in its portfolio and “sterilize” the impact. The point of using the platinum coin is to articulate to the public A) we’re using our power of public money creation and B) to avoid the debt ceiling which is suspended until next year but may lead to another set of grueling negotiations. It is also important in order to preempt debates over austerity which inevitably emerge after crisis spending and lending, just like the Tea party emerged in 2009. More generally, we need to fill the financial hole in people’s pockets. We have no choice but to go big or the economy will collapse far more (and the deficit will grow even bigger regardless).
Like everything else in the world – @SecYellen's trillion-dollar coin (#MintTheCoin) reminds me (& the author of this 2013 @NYMag article – another time the US approached the edge of the fiscal cliff) of an episode of The Simpsons😅https://t.co/vhJC2fuxGxhttps://t.co/E0VXXjT7ZT
— Christopher Tharp (@TheChrisTharp) September 28, 2021
Will sending 2000 dollars to everyone cause inflation? Doubtful. The point of this legislation is to help people pay their rent, mortgage, credit card, utility bills and other contractual obligations. People have debts which they need to pay to make ends meet and especially in this time of extraordinary economic uncertainty, are not likely to spend money that they don’t feel is absolutely necessary to spend. It is unlikely that “dollars will go chasing too few goods” more because of this proposal. Even if they do, we need to address them on the production side and not address them by letting the incomes of the most needy collapse.
The argument is quite simple:
1) Congress has passed four related laws that govern how the executive branch must act:
a) spend X amount
b) tax Y amount
c) do not issue public debt in excess of Z amount
d) mint coins of whatever denomination/quantity the Tsy Sec wishes
— Rohan Grey (@rohangrey) September 28, 2021
Doesn’t this interfere with Federal Reserve Independence, which is important for fighting inflation? While it is debatable that the Federal Reserve’s “independence” is important for responding to inflation, the platinum coin doesn’t interfere with the conduct of Monetary Policy. Even if the Federal Reserve didn’t sell securities to drain liquidity from the banking system (which it can), the fact that it now pays interest on its own liabilities (called “settlement balances”) means the coin can’t prevent the Federal Reserve from setting interest rates. The coin also stays on the Federal Reserve’s balance sheet, so it doesn’t affect the Federal Reserve’s net-worth.
From 2013 by @TheStalwart, but still relevant #MintTheCoin #DebtCeiling 🪙"Why The Fight Over The $1 Trillion Coin Is The Most Important Fiscal Policy Debate You'll Ever See In Your Life" https://t.co/bcM9UtJQWc
— Marianna Kat (@kat_marianna) September 22, 2021
The key to understand the implications of the coin is to recognize that we’re using the Treasury’s power of money creation, not the Federal Reserve’s.The platinum coin is probably better for Federal Reserve independence than other proposals which would entangle fiscal policy with the Federal Reserve’s balance sheet and obligate it to buy treasury securities in order to pursue “money finance”. Using the Treasury’s own power of money creation is cleaner and simpler. I’ll be covering monetary operations more in the future and get into these kinds of issues in more detail.
#MintTheCoin – Treasury dept can make these whenever they want. Deposit them at the Federal Reserve which has to accept them and wipe out the deficit (actually could turn it into a surplus if they delivered 29 coins). https://t.co/yyRXvOGpQW
— Roy More (@tspaRoy) September 28, 2021
Why two coins rather than one coin? The point of two coins is precedent. We’ve done it not just once, but twice. As Daniel Craig says in the movie Casino Royale, the second one is always the hardest. This moves us over that hump and makes the 3rd, 4th and 5th coin far easier. Can’t we just have a 100 Trillion dollar coin? Sure, but it’s easier for the public to first get their head around a couple of coins for a specific program, particularly one intended to give universal relief to all.
The 14th Amendment says it's illegal for the US to default on its debt. So…
Further, the debt ceiling is an anachronism from the gold standard and should be abolished. It's just used 4 political theater at this point.
More info here: https://t.co/cQW8ZE8ugl
— Lana Dell #MMT (@organicfanatic5) September 29, 2021
What Stops the Treasury from just spending 100 Trillion dollars then? The Treasury doesn’t have the authority to spend whatever money it wants to. It needs congress to authorize spending from some government agency. The Treasury’s job is simply to make sure the spending and lending congress authorizes is financed. We don’t have to be concerned about “overspending” by the treasury. Meanwhile congress can barely agree to spend one Trillion dollars during an economic crisis worse than the great depression.”
DEBT FREE CURRENCY