Is the Trillion-Dollar Platinum Coin Clever or Insane?

By :: January 8th, 2013

Jim Hamilton's Mock Up of a Trillion Dollar Coin

Jim Hamilton's Mock Up of a Trillion Dollar Coin

Policy wonks are debating whether a trillion-dollar platinum coin would be a clever or insane way for President Obama to play hardball with Republicans in the upcoming debt limit battle. Here’s what you should know about this crazy-sounding idea:

1.     A legal loophole gives the Treasury Secretary apparently unlimited authority to mint platinum coins.

Treasury is forbidden from printing money to cover government deficits. Treasury must issue debt, while the Federal Reserve independently controls our nation’s monetary printing press.

That is exactly as it should be. But there is an arcane exception for platinum coins. To serve coin collectors, Treasury can issue platinum coins of any denomination. That creates an intriguing loophole: Treasury could bypass the collector market and mint a trillion-dollar platinum coin. By depositing it at the Federal Reserve, Treasury could keep paying bills after we’ve fully exhausted our borrowing limit.

2.     Most observers think this is a terrible idea, but the legal arguments against it are weak at best.

A who’s who of commentators has already objected to the coin on legal, economic, political, and image grounds (see, for example, John Carney, Matt Cooper, Tyler Cowen, Kevin Drum, Jim Hamilton, Heidi Moore, and Felix Salmon). I’m no lawyer, but the legal arguments seem wholly unconvincing. The language of the statute is clear, and in any case, the executive branch gets away with expansive actions in extreme times. During the financial crisis, for example, Treasury aggressively interpreted its authorities in order to bail out GM and Chrysler and to backstop money market funds. If default became a real possibility, the same expansiveness could easily justify a platinum coin.

3.     The economic arguments against the coin are stronger but manageable.

There’s a good reason that Treasury is forbidden from printing money to pay our debts: inflation. Many economies have been ruined when profligate governments turned to printing money. But minting the platinum coin needn’t mean monetizing our debt. The Federal Reserve has ample ability to offset any inflationary impact by selling some of the trillions in Treasury securities it already owns. As long as the Fed does its job, inflation would not be a risk.

4.     The best arguments against the platinum coin involve image and politics.

Minting a trillion-dollar coin sounds like the plot of a Simpson’s episode or an Austin Powers sequel. It lacks dignity. And despite modern cynicism, that means something.

It would also be premature. President Obama and the Republican and Democratic members of Congress have roughly two months to strike a debt limit deal. There is no reason to short-circuit that process, as painful as it may be, with preemptive currency minting as the now-famous #MintTheCoin petition to the White House suggests.

5.     Nonetheless the platinum coin strategy might be better than the alternatives if we reach the brink of default.

Analysts have considered a range of other options for avoiding default, including prioritizing payments, asserting the debt limit is unconstitutional, and temporarily selling the gold in Fort Knox. All raise severe practical, legal, and image problems.

In this ugly group, the platinum coin looks relatively shiny. In particular, it would be much less provocative than President Obama asserting the debt limit is unconstitutional. That nuclear option would create a political crisis, while a platinum coin could be a constructive bargaining chip. As Josh Barro notes, President Obama could offer to close the platinum coin loophole as part of a deal to raise or eliminate the debt ceiling.

6.     If necessary, Treasury should mint smaller platinum coins, not a trillion-dollar one.

A trillion-dollar coin is eye-catching and ridiculous. That’s why it’s filled the punditry void left by the fiscal cliff. But a single coin makes no policy sense. No federal transactions occur in trillion-dollar increments.

Among the largest transactions are Treasury bond auctions, which today raise about $25 billion at a time. If necessary, Treasury could issue individual $25 billion coins, each in lieu of a needed bond auction. Still ridiculous, to be sure, but less so as it would calibrate coin issuance to immediate financing needs.

Steve Randy Waldman suggests as even more granular approach: issuing coins denominated in millions not billions. Such “small” denominations would be even less ridiculous and could potentially be used in transactions with private firms, not just Fed deposits.

Of course, the best path would be a bipartisan agreement to increase the debt limit, address spending cuts, and strengthen our fiscal future, all settled before the precipice. If we reach the brink, however, minting million- or billion-dollar platinum coins would be better than default.

17Comments

  1. Michael Bindner  ::  2:08 pm on January 8th, 2013:

    I think the constitutional optional option has merit, although minting platinum coins and trading them to other central banks certainly poses some interesting possibilities. Think of China with a few of these.

  2. Nancy Vanden Houten  ::  3:57 pm on January 8th, 2013:

    Uh-oh…by weighing in, you just raised the credibility of this idea by several notches.

  3. Former Bush II economist: Trillion-dollar platinum coin ‘better than the alternatives’ if we reach brink of default | AEIdeas  ::  4:20 pm on January 8th, 2013:

    […] Marron was a member of President George W. Bush’s Council of Economic Advisers. Currently he’s director of the Tax Policy Center. Regarding the trillion-dollar platinum coin idea, he find the legal arguments against it […]

  4. » $1 trillion coin is nuts but not $25 billion twentyfivedollarbill  ::  7:37 am on January 9th, 2013:

    […] Tax Policy Center and a former acting director of the Congressional Budget Office. A version of this commentary first appeared on the center’s TaxVox […]

  5. $1 trillion coin is nuts but not $25 billion – Opinion : Life is Like a Box of Chocolates  ::  7:40 am on January 9th, 2013:

    […] Tax Policy Center and a former acting director of the Congressional Budget Office. A version of this commentary first appeared on the center’s TaxVox blog. […]

  6. HOW THE COIN MIGHT WORK — Financial Press  ::  11:28 am on January 9th, 2013:

    […] Tax Policy Center and a former acting director of the Congressional Budget Office. A version of this commentary first appeared on the center’s TaxVox […]

  7. Vivian Darkbloom  ::  12:41 pm on January 9th, 2013:

    I would recommend that the title of this post be amended to read “Is the Trillion-Dollar Coin Clever, Insane or Just Plain Criminal”.

    Here’s an example of the persuasive argument Mr. Marron is apparently impressed by from the Former Head of the US Mint under the Clinton administration as reported by WonkBlog (google it):

    “First, the law is not “poorly written”. The language accomplishes precisely what was intended, though it also had unforeseen consequences; but then how many other laws have had unintended consequences?”

    “The language accomplishes precisely what was intended, although it also had unforeseen consequences”? One wonders how one can write those two completely inconsistent clauses in the same sentence with a straight face. Also, the law would only have unforeseen consequences if the Executive Branch were to attempt to carry out this gimmick (future conditional tense).

    As argumentation for the “trillion dollar coin trick”, this one is apparently considered “Best of Class”. Also, apparently, Mr. Marron finds this type of reasoning legally (and ethically) persuasive. But, to do so, he would have to acknowledge, as above, that Congress had no intent to allow Treasury to mint a $1 trillion coin to achieve an Executive Branch seizure of Legislative Branch constitutional powers and responsibilities with regard to the federal debt. Further, he’d have to argue that Congressional intent is irrelevant in interpreting a statute (a novel idea in the real world, to be sure, but that certainly doesn’t stop our economic bloggers from waiving it away).

    One wonders what place a discussion about the “platinum coin trick” has here in a taxpayer-subsidized, not-for-profit , ostensibly non-partisan organization devoted to tax policy: “The Urban-Brookings Tax Policy Center aims to provide independent analyses of current and longer-term tax issues and to communicate its analyses to the public and to policymakers in a timely and accessible manner.”.

    Is this what the TPC’s mission statement says it should be devoting its time and budget to?

    However, as regards a relevant parallel to the tax system, there are currently a few folks serving jail time for their unwarranted and irresponsible reliance on a literal interpretation of the tax code when such a literal interpretation flew in the face of Congressional intent. There’s also the obligation to ensure that the actual facts of the situation are consistent with their idealized “facts. But, I guess the prevailing view is that a different standard applies to other areas of the Code, and certainly to economic bloggers.

    As regards the factual circumstances of the case, it has been suggested that Treasury can book a profit for a sale that will never occur and that the participants in the scheme acknowledge in advance will never occur, as candidly admitted below (from the same source):

    “The accounting treatment of the coin is identical to the treatment of all other coins. The Mint strikes the coin, ships it to the Fed, books $1 trillion, and transfers $1 trillion to the Treasury’s general fund where it is available to finance government operations just like with proceeds of bond sales or additional tax revenues. The same applies for a quarter dollar.

    *Once the debt limit is raised, the Fed could ship the coin back to the Mint where the accounting treatment would be reversed and the coin melted. The coin would never be “issued” or circulated and bonds would not be needed to back the coin.”

    Apparently, under this line of thinking, one is allowed (under the well-known political expediency exception to the law) to ignore the substance of the transaction in favor of its form. Again, more than a few persons are in jail for following that line of thinking but apparently this is also considered acceptable very calculated and premeditated behavior on the part of our “public servants”. To my knowledge, the GAO has not weighed in on this; however, I would be greatly disappointed if they were to hold our government officials to a far lower standard than Jeffrey Skilling of Enron and others in a long line fanciful bookkeepers.

    To get a flavor for how this might (not) work in the real world (the world outside the Beltway and the partisan economic blogosphere echochamber), just Google something like “accounting fraud” and “inflated sales”. Here’s an excerpt from the SEC complaint in a case titled SEC v. NutraCea and several of its principals, including a one Mr. Edson (under indictment, but case apparently still pending):

    “18. The next quarter, Edson was determined to recognize revenue from the sale of these same products. Specifically, in the second quarter of 2007, Edson approached Bi-Coastal’s president and asked him to issue purchase orders for $2.6 trillion of product. This transaction was a complete sham. Bi-Coastal had no intention of purchasing and selling these products. Edson told Bi-Coastal president that “he had several avenues of potential distribution for these products and that Bi-Coastal was never going to take possession of them and that a later date Edison was going to sell the products to a third party.

    19. NutraCea then improperly booked the entire sale in the second quarter. Staff Accounting Bulletin (“SAB”) No. 104 references four basic criteria for revenue recognition as follows: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to buyer is fixed or determinable; and (4) collectability is reasonably assured. In this instance, collectability from Bi-Coastal was not reasonably assured.”

    If the case is still pending, I’ve got a suggestion for his counsel, inspired in part from this blog post—argue that the only thing wrong with the scheme was the “optics”. Clearly, the scheme was needed to achieve the desired end, to wit, inflating NutraCea’s revenues and balance sheet which was necessary in order to drive up its stock price, deceive creditors and temporarily avoid bankruptcy. In fact, why not argue that, far from a criminal prosecution, the client should be given a public service award.
    Again, to quote from our former Head of the US Mint:

    ““The accounting treatment of the coin is identical to the treatment of all other coins.”

    Except that you want to have wildly different facts from the fictional case that you are supposedly rendering an opinion on than the one foreseen by the statute, but with the same accounting treatment. In a “normal” transaction regarding a numismatic coin (1) the face value of the coin bears a reasonable relation to its fair market value; (2) there is an bona fide intent to sell the coin to the public and obtain the actual revenue from a bona fide third party and that amount will actually be transferred to the General Fund; and (3) there is no intent that the coin will be returned to the Mint and destroyed.

    This is the TPC we deserve?

    The TPC has reached an all-time low on this one and it comes from a source that should know much better.

  8. Former Bush Economist: Trillion Dollar Coin Is ‘Better Than The Alternatives’ | ImpressiveNews  ::  5:40 pm on January 9th, 2013:

    […] Currently, he’s director of the Tax Policy Center. Regarding the trillion-dollar platinum coin idea, he finds the legal arguments against it “weak at best,” and the economic arguments against it “stronger but manageable.”  […]

  9. Former Bush Economist: Trillion Dollar Coin Is ‘Better Than The Alternatives’ | The Las Angeles Times  ::  5:44 pm on January 9th, 2013:

    […] Current, dude’z directa uv da Tax Polisee Centa. Regardn' da trillyun-dollah platinum coin idea, dude findz da legal argumentz agains' it “weak at bes',” an' da economic argumentz agains' it “stronga but manageable.”  […]

  10. Former Bush Economist: Trillion Dollar Coin Is ‘Better Than The Alternatives’ | New Yerk Times  ::  7:13 pm on January 9th, 2013:

    […] Current, dude’z directa uv da Tax Polisee Centa. Regardn' da trillyun-dollah platinum coin idea, dude findz da legal argumentz agains' it “weak at bes',” an' da economic argumentz agains' it “stronga but manageable.”  […]

  11. Michael Bindner  ::  9:29 pm on January 9th, 2013:

    Your credibility would be enhanced if you did not use a pseudonym from fiction.

  12. Where’s the beef? | Z's free Stock Market Advice Site  ::  1:34 am on January 10th, 2013:

    […] there is an arcane exception for platinum coins. To serve coin collectors, Treasury can issue platinum coins of any denomination. That creates an intriguing loophole: Treasury could bypass the collector market and mint a trillion-dollar platinum coin. By depositing it at the Federal Reserve, Treasury could keep paying bills after we’ve fully exhausted our borrowing limit. READ MORE […]

  13. Vivian Darkbloom  ::  1:38 am on January 10th, 2013:

    Michael,

    Feel free to make a substantive response.

    Viv

  14. Vivian Darkbloom  ::  1:25 pm on January 13th, 2013:

    From Reuters December 13, 2012

    “The Treasury Department and the Federal Reserve, both independent of one another, each concluded this was not a viable option.

    “Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit,” said Treasury spokesman Anthony Coley in a statement.”

    “The idea behind the platinum coin was that Treasury would mint a coin or coins from the precious metal and that the value would be placed at $1 trillion.

    For the plan to work, the Federal Reserve would have to deposit it in the Treasury account and credit the account $1 trillion that could be used to pay the nation’s bills.

    But if the Federal Reserve does not believe that the coin is worth $1 trillion and refuses to buy it, then the plan falls apart.”

    Well, I hope it didn’t take the Treasury Department and the Federal Reserve very long to conclude that this scheme was illegal (and that even if it were legal it should not be used). As I indicated in the prior comment, crediting an account for $1 trillion for something that is admittedly not worth that and could not be sold for that amount is clearly illegal, and arguably criminal, as demonstrated in the example I previously gave. While I cited an example from the private sector, we should expect no less from our government officials. The Treasury Department and the Federal Reserve have shown a level of maturity here that is sadly lacking in a lot of other quarters. Kudos to them.

    Let’s hope that adults take over the conversation and come up with a solution that not only does no damage to our economy, but also does not permanently damage our system of Constitutional government under which the various branches of government respect that document as well as existing laws, despite whatever short-term political advantage might be gained by ignoring them. While the debt limit statute is not ideal, it’s the law of the land. Failure to respect that would cause much greater damage, institutional and economic, than any temporary setback to the economy as a result of requring that government cut back on discretionary spending to avoid exceeding the debt limit.

    If the TPC wants to veer outside its stated mission on this issue again, a constructive contribution might be to suggest more viable alternatives to the existing debt limit statute, such as making sensible amendments to that statute, or adopting other rules such as the Constitutional limit used by Germany or the “debt brake” employed by Switzerland. Most successful alternatives aim to prevent deficits *before* decisions are made to spend more than government takes in, rather than after the fact. History has shown, however, that some self-restricting mechanism is needed in order that short-term political considerations overwhelm long-term fiscal responsibility.

  15. tattoogall.com ideas  ::  3:30 am on June 7th, 2013:

    In the big event you’re significant about finding tattooed – Health Conditioning Content articles, it’s best to check out somebody of the many good quality
    custom tattoo artists in Sydney who may have developed a reliable good name for making high-quality skill additionally as quality custom
    tattoos. When your tattoo is simply finished gone will be the oozing initially
    along with the surface within your skin are going to be dry.
    Read it today at Source: CAVE ART is usually a Canadian owned and operated family business
    promoting and producing artwork, products, and also
    other creations developed by the integral talent that founded and
    also the organization. Sharks and lizards are popular Hawaiian tribal motifs.
    Most often, tattoo kits include tattoo guns which might be constructed from steel, iron, or aluminum since these are non corrosive.

    Feel free to surf to my homepage; tattoogall.com ideas

  16. Semantic Web Optimization Expert  ::  5:47 pm on April 28th, 2014:

    Semantic Web Optimization Expert

    TaxVox » Blog Archive » Is the Trillion-Dollar Platinum Coin Clever or Insane?

  17. อุปกรณ์สักคิ้ว  ::  1:55 pm on August 15th, 2014:

    Woah! I’m really enjoying the template/theme of this website.

    It’s simple, yet effective. A lot of times it’s difficult to get that “perfect balance” between superb usability and
    appearance. I must say you have done a excellent job with this.

    Additionally, the blog loads super fast for me
    on Chrome. Exceptional Blog!