Joe Wiesenthal of Business Insider combines some interesting points with a bit of misdirection in discussing the ramifications of the Trillion Dollar Platinum Coin.
First, the good idea:
But contrary to all these people who say that this is a childish, non-adult proposal put forth by impish trolls, it's actually quite the opposite. It may be the most important fiscal policy debate you'll ever seen in your lifetime, because it gets right to the nature of what is money.
This question is central to any discussion about a country's monetary and fiscal policy, and yet it's almost never discussed, and virtually nobody understands it.
People's understanding of money may be murkier by the end of the Wiesenthal contribution. His explanation of money is accurate but misleading. He is correct that the Federal government can create money without limitation; he slides past the point that normally this would take the cooperation of both the Legislative and Executive branches:
Almost everyone talking about fiscal policy imagines money to be a commodity of sorts that we can "run out" of if we don't spend it carefully. In this sense, although we've long gotten rid of the gold standard, we're still shackled with a gold standard mentality, where we think of money as a scarce natural resource that we need to husband carefully, lest one day the bond vigilantes show up at our door, causing us to go broke.
Creating money is exactly what government does. What's absurd for a private business is not absurd for the government.
That the state creates the money we use is actually known to just about everyone, but people have a hard time making the key leap, which is that once the state is in the business of creating money, then the old gold standard notions of monetary scarcity don't apply in the same way.
And he tackles the concept of 'seignorage", quoting Philip Diehl, the former head of the US Mint:
What is seigniorage? Seigniorage is the difference between the face value of a coin and its cost of production. Say a quarter costs 11 cents to produce; banks pay 25 cents for the coin and the government books 14 cents in seigniorage. When (more often, if) the coin is returned to the Mint damaged or worn out, the seigniorage is reversed on the books and the coin melted. In this way seigniorage is like an interest-free loan for the life of the coin, and if the coin is never returned to the Mint, it is an interest-free loan in perpetuity.
In order to have a "serious" debate about fiscal policy, as so many pundits claim to want, we must first understand what money is, and how governments get it.
The answer is that they have always created it, and any notion of the government "running out" are illogical.
Remember, money is a fiction. Real wealth is capital assets, our infrastructure, our cars, our houses, and most importantly the potential human ingenuity and cooperation. Money is just something that the government creates to facilitate the trade in all of those things.
To which I say, yes, but! In principal, Treasury could solve their funding problem by issuing more bonds, but of course, the debt ceiling (a creation of our own government) prevents that. Similarly, seignorage involving either coins or paper currency (does anyone think a $100 bill costs $100 to produce) could solve our problem. But wait! We can't use paper currency, gold coins or silver coins because our government has legislated a constraint onto itself.
(a) The Secretary of the Treasury may issue United States currency notes. The notes—
That closes the paper trail out of this mess. What about gold and silver? Well, the reason the Platinum option works (as discussed yesterday) is that Congress gave very specific authority for gold and silver coins, then tossed in a "Oh, yeah, and platinum, too" clause without repeating every relevant constraint. The key bits for silver and gold are these (my emphasis):
(f) Silver Coins.—
(1) Sale price.—The Secretary shall sell the coins minted under subsection (e) to the public at a price equal to the market value of the bullion at the time of sale, plus the cost of minting, marketing, and distributing such coins (including labor, materials, dies, use of machinery, and promotional and overhead expenses).
and for gold coins:
(2)(A) The Secretary shall sell the coins minted under this subsection to the public at a price equal to the market value of the bullion at the time of sale, plus the cost of minting, marketing, and distributing such coins (including labor, materials, dies, use of machinery, and promotional and overhead expenses).
Setting the sale price at roughly the bullion value means the Treasury can't legally stamp "$1 Trillion" on a ten ounce gold coin (at current gold prices, but hyperinflation may be around the corner!).
And what went wrong on platinum? In a hasty supplementation of Treasuries authority to sell platinum coins to collectors, this language was added (my emphasis again):
(k) 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.
I argue that Treasury lawyers reviewing the legality of the proposed sale and Federal Reserve lawyers reviewing the leagality of the proposed purchase will stall on the limits of "the Secretary's discretion". Congressional intent is obvious, since the Secretary's discretion to create seignorage has been limited with paper, gold and silver. And obviously, Congress limits the Treasury ability to issue debt by way of the debt ceiling. Presumably these constraints are partly meant to reassure America and the world that we won't debase our currency, but of course, they also protect Congress' power of the purse from an creative Executive.
At the governmental level Mr. Wiesenthal is correct - there is no legal limit to the seignorage opportunities available to the US government. But within the Executive Branch, limits exist. Obviously, the key unresolved questions are whether Federal Reserve lawyers would ever embrace the Fed's role in buying the Trillion Dollar Platinum coin, and whether a judge would ultimately uphold such a sale.
As a political matter I can't imagine Obama going this way, but even if Treasury makes the coin I don't think they can force the Fed to buy it absent a court ruling. And neither the Fed nor the Judiciary will want to step into a clear Legislative-Executive tussle. So getting this done in a timely manner looks impossible.
MORE: Coiner Paul Krugman has the right spirit:
There seem to be two kinds of objections. One is that it would be undignified. Here’s how to think about that: we have a situation in which a terrorist may be about to walk into a crowded room and threaten to blow up a bomb he’s holding. It turns out, however, that the Secret Service has figured out a way to disarm this maniac — a way that for some reason will require that the Secretary of the Treasury briefly wear a clown suit. (My fictional plotting skills have let me down, but there has to be some way to work this in). And the response of the nervous Nellies is, “My god, we can’t dress the secretary up as a clown!” Even when it will make him a hero who saves the day?
Turbo-Tax Tim in a clown suit is not hard to imagine. And some pundits have noted that Obama giving a national address while wearing a clown suit (and blaming Bush) will probably be a win for the Republicans. Hero or clown? Tough call.