Forestall the "Debt Crisis": Mint a 5 Trillion Dollar Coin

http://www.slate.com/id/2300428/

by sunsu • 15 years ago

48 52 15 years ago

burgerbrain7• 15 years ago

If they actually do this I think any faith I have left in the US's monetary system will be gone. This is just too absurd.

tibbon2• 15 years ago

Same here. Can I have my paycheck in Swiss Francs?

burgerbrain7• 15 years ago

Nice that you bring that up. Why can't it work like that? Sure the burrito lunch truck guy would look at me kind of funny if I tried to pay him that way, but that is what we have exchange rates for. Why isn't it a thing that I work out with my employer what currency I want to be paid in?

I don't buy all the mumbo jumbo about different economies rising and falling in different geographic regions and whatnot either. If that were the real reason then we should have seperate currencies for the west, middle, and east areas of the US. Hell, each city should have their own currency in that case, why should Detroit's shittyness drag down the economies of cities thousands of miles away?

Geography is a terribly abstract concept in this world where communication is for all intents and purposes instant and I can get packages to anyone regardless of location in less than 24 hours. Companies paying people with US currency just because that particular building happens to be located in the US is just absurd if you think about it.

rdl• 15 years ago

Essentially, yes.

In the world of ~low friction (fast, low cost) financial transactions and liquid markets, you should be able to separate out the three roles of money: medium of exchange, store of value, and unit of account.

Basically no one keeps substantial amounts of wealth in USD directly as a store of value; you have a bunch of more related or less related assets in an account (money market, treasury securities being more related; equity in foreign businesses with little exposure to the USA being less related).

Medium of exchange usually is fairly instant; you can liquidate money market automatically to pay your debit card/credit card/checking/wire transactions. This could easily be anything mutually agreed by both parties in a transaction, but is almost always USD, unless it's conducted entirely within a foreign currency zone. A Japanese company paying a Chinese company is likely to use USD for the exchange, even.

Unit of account is the tricky one. With the right UI skin over your bank account, you should be able to display your wealth in arbitrary units ("houses", Audi A4s, kilos of cocaine, etc.) based on current exchange rates. You could also have a browser hack which replaces USD prices in pages with EUR or Cocaine-kg prices.

andrewljohnson• 15 years ago

Krugman is even talking about this on the NY Times blog.

http://krugman.blogs.nytimes.com/2011/07/29/lawyers-coins-an...

mvzink• 15 years ago

I love how all of that stuff is legal, and yet inaction could lead to a totally illegal violation of the 14th amendment. Irony at it's most expensive.

georgieporgie• 15 years ago

So, is America now a complete laughing stock abroad? I really wonder what non-USian folks think about all this political posturing and willingness to play chicken with the financial reputation of the US.

burgerbrain7• 15 years ago

Laughing stock abroad? Hell, they're a laughing stock in the US right now.

ugh• 15 years ago

I’m more worried than laughing. I would laugh if what’s happening were inconsequential to me.

tomjen3• 15 years ago

Most people don't, do the newspapers do mention it every couple of days.

Granted I am in Scandinavia so they are likely to be more biased but right now they are far, far more concerned with the terrorists reaction when he heard the number of people he murdered, who was buried first, etc, etc, etc.

anonymoushn3• 15 years ago

I don't think anyone is doing that. There is precisely no risk of sovereign default, even if we don't raise the debt ceiling for a couple years.

mdda3• 15 years ago

The consequences of a downgrade are TERRIBLE : So much of modern finance relies on Treasuries being AAA to act as some kind of bed-rock.

Just like your idea of 'precisely no risk' of default, what would happen if the programming constant ZERO was only guaranteed to be close to 0? And not really a constant?

dhs• 15 years ago

I'm actually quite sad. This seems so unnecessarily self-destructive. It feels like watching a girl cut her forearms with a broken beerglass.

justincormack2• 15 years ago

Its just another blip in the entertaining dysfunction of your politics.

Luc• 15 years ago

It's a major ongoing story in the newspapers here in Belgium (front page, all of p.3 today in mine). Don't worry, we and other countries in Europe that I am familiar with have our own face-palming political situations, though of course our countries are smaller. If anything it makes me feel we're all in the same boat together.

grannyg00se• 15 years ago

I feel like this entire house of cards that is the international financial system is going to completely collapse in my lifetime. I'm not extremely familiar with the details, but the more I learn, the more fragile and arbitrary the whole thing seems.

chopsueyar• 15 years ago

I recently read a fiction book, "The Panic of '89" by Paul Erdman, which discusses a hypothetical terrorist plot to create an international run on US-priced financial instruments and institutions. Interesting hypotheticals abound.

It also mentions the Gramm-Rudman act, which I had not heard of prior to reading the book. It was an 'Emergency Deficit Reduction Act' from 1985.

http://en.wikipedia.org/wiki/Gramm%E2%80%93Rudman%E2%80%93Ho...

sliverstorm• 15 years ago

The really interesting thing is it's probably the most stable house of cards ever built; generally speaking, it is in nobody's best interests for the international finance system to collapse.

nostromo• 15 years ago

It doesn't sound too much different than QE1 & QE2 -- where the Federal Reserve created a trillion dollars out of thin air and used it to buy US debt and mortgage securities.

I'm not a lawyer, but don't the courts usually sort out conflicting laws? It seems that's the case -- congress demanded the executive branch spend money -- and congress has now decided the executive branch can't spend money. Why doesn't Obama take it to the courts?

mkr-hn2• 15 years ago

The SC isn't known for being expeditious. Obama likes to believe congress will work together to solve these things, and it works most of the time. But now we're less than a week from needing a solution with no signs of progress.

_delirium4• 15 years ago

It's quite possible the courts would punt on this one due to separation-of-powers concerns. If Congress passes a law requiring the president to execute some laws, but also refuses to fund him sufficiently to do so, resolving the problem arguably is the responsibility of the executive branch.

kragen2• 15 years ago

http://www.bloomberg.com/markets/rates-bonds/government-bond... says that the current yield on 1-year US treasuries is 0.20%. If I understand correctly, that means that if you plow US$100 000 into 1-year US treasuries in the open market, you get treasuries redeemable (at the Treasury) a year from now for US$100 200. (Thanks for the correction to the number, aquark and perlgeek.)

In other words, the bond market says that the big banks are betting heavily against any kind of hyperinflationary move like this.

aquark• 15 years ago

I think you are missing a 0 ... it would be $100 200.

Still at that rate you'd figure the transaction costs of moving the money around would swamp most of the return

kragen2• 15 years ago

The return is surely already negative if you take into account inflation.

perlgeek• 15 years ago

US$100 200 actually.

gojomo• 15 years ago

If the 'supercoin' is only held by the government, and only used to free up enough of its debt to itself to continue on the same fiscal path as a debt-ceiling-change would allow, then it won't be any more hyperinflationary than a debt-ceiling-change.

Now, if instead they gave the $5 trillion coin to Goldman Sachs... :)

tibbon2• 15 years ago

Wouldn't this cause massive inflation almost instantly? We could have the next Zimbabwean Dollar (http://en.wikipedia.org/wiki/Zimbabwean_dollar). Isn't this extra just 'printing money' the type of thing that you learn in Econ 101 is about the worst possible thing for an economy? Sounds like the medicine will be worse than the disease?

anonymoushn3• 15 years ago

We've already printed and spent quite a bit of money, and while it has produced increases in commodity prices it has not produced hyperinflation. Replacing debt-backed money with debt-free money, while leaving the amount of money more or less the same, would also not cause hyperinflation.

_delirium4• 15 years ago

Not necessarily, though $5 trillion all at once would probably not be a good idea. The money supply is a bit tricky in these days when most transactions (especially large ones) don't actually use cash. Issuing new debt in a sense already is like printing money, because bonds can be used as cash-like instruments in many situations. That's particularly true of U.S. Treasuries, because they're safe and liquid enough that they can be used as quasi-cash, especially for large transactions, e.g. settling part of a debt by transferring title to Treasuries. It's a bit of an open question to what extent just printing $500b would be different from issuing $500b in new bonds, and heavily interacts with the background situation (e.g. prevailing interest rates, demand for Treasuries, liquidity situation).

There are a decent number of economists who think that the U.S. a year or two ago should've fought deflation by just printing $500b or $1 trillion or something, rather than pursuing the quantitative easing (QE) scheme, which uses financial trickery to get some of the same effect without officially printing money. The just-print-money option may have actually worked better, been more transparent, and had the added bonus of reducing our national debt.

sunsu3• 15 years ago

It can only cause inflation when the money actually hits the economy. The effect would be no different than raising the debt ceiling. Some special book keeping (which is what this whole mess is) will do nothing by itself.

wintersFright• 15 years ago

the coin doesn't hit the economy but it enables further borrowing which does.

surprised at all the 'no this is actually quote ok' arguments. you can't print value out of thin air. you only print volume which taxes the holders of existing USD.

mkr-hn2• 15 years ago

The GDP of the US is 2,800 Zimbabwes. A couple trillion is a big number, but it's not going to be a huge problem for the US.

sunsu3• 15 years ago

Interestingly enough, there are conspiracy theories that say JFK did something similar to try to subvert the FED's total authority to "print money" by doing something similar to what is suggested in the article. The order gave the Treasury the power to issue silver certificates against any silver bullion, silver, or standard silver dollars in the Treasury.

See executive order 11110: http://en.wikipedia.org/wiki/Executive_Order_11110

callmeed• 15 years ago

What if Fidel Castro steals it?

aj700• 15 years ago

Give what back?

_delirium4• 15 years ago

Jack Balkin has been engaging in a sort of parlor game of making up other alternatives as well. The main issue is that issuing debt is just one way of acquiring/manufacturing cash; you can do it lots of other ways. A straightforward way is minting coins. But you can even do it ways that the private-sector can also do, like by selling options on government assets, or inventing and selling derivative securities.

For example, he has an only-half-tongue-in-cheek article about how to use some of the magic from the recent financial crisis to gain a bunch of cash on hand. Banks can in effect mint money by writing and selling derivative securities. Well, if the Treasury issues credit-default-swaps on its own debt, it collects a premium up front (the value of the CDS), and if it never defaults, it never has to make a payout. Even better, it could write a gigantic CDS for the entire debt, and deposit it with the Federal Reserve, which would credit the account for the value of the instrument, like they do with any member bank that deposits a financial instrument. Of course, that financial instrument was just recently manufactured from thin air before it was deposited, but that's true of any CDS.

http://balkin.blogspot.com/2011/07/end-debt-crisis-now-with-...

mdda3• 15 years ago

The treasury selling CDS on its own debt makes no sense, because the credit-worthiness of your insurer is completely correlated to the underlying credit. So people would pay zero for the credit protection.

Quite why people away from the financial markets assume that those that are are going to fall for something so obvious is a mystery to me. And if you think that the housing crisis is a counterexample, I should point out that people over-leveraging themselves to invest in property at ever-increasing prices was common wisdom back in 2005.

_delirium4• 15 years ago

Hmm true, but I believe the Fed would be the buyer in this case, not the open market. The government would be selling its own instruments to a quasi-governmental entity, like BoA writing a CDS and selling it to a BoA subsidiary.

Forestall the "Debt Crisis": Mint a 5 Trillion Dollar Coin

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