The trillion dollar coin

The trillion-dollar coin ideas seems completely irresponsible on its face. Here you have a law that lets the U.S. Treasury mint commemorative platinum coins with whatever face value that it wants. So let’s have the Treasury mint a coin with “One Trillion Dollars” stamped on it and use that to finance the federal government if Congress refuses to raise the debt limit.

Uh … okay? That seems inflationary and rather banana-republic like. Crazy, actually.

But weirdly, it’s not crazy. There are two ways that the government can use the trillion-dollar coin to get around the debt limit without affecting inflation at all. One involves the active cooperation of the Federal Reserve; the other does not.

Here’s how it works. Start with the fact that the Federal Reserve (the “Fed”) has a balance sheet. Cash in circulation and bank deposits held at the Federal Reserve are liabilities of the Fed. Why is cash a liability? Well, at some point in the past the Fed printed it up and used it to purchase assets or reduce other liability accounts. So in accounting terms, it’s a liability.

More intuitively, cash is to the Fed what writing an IOU is to me. If I write an IOU and give it to you, it’s a liability. The IOU isn’t enforceable, though. (Well, unless you’re my brother and I’m 12 years old, in which case, yeah, it is.) So it’s a liability I don’t have to pay off unless I choose to. And if I do, say, sell an asset of mine to somebody in return for that IOU, I just throw the IOU in trash. A IOU to someone that I wrote isn’t an asset to me; what, I owe resources to myself?

So let’s start with the Fed’s balance sheet from September 30, 2021:

STEP ZERO:

ASSETS		LIABILITIES
U.S. Treasury securities	5,431,056	2,197,401	Currency in circulation
Federal agency debt securities	2,347	1,702,347	Repo agreements
Mortgage-backed securities	2,494,684	4,524,350	Deposits from banks
Mark-to-market adjustment	338,797	27,447	Treasury accounts
Loans	105,509	45,866	Other liabilities and capital
Foreign exchange	26,421
Other assets	35,704
Gold	11,041
Coins and treasury currency	50,853
TOTAL	8,496,412	8,496,412

On the liability side, we have the federal government’s deposit account. The federal government basically uses the Fed as its bank. (It would be so damn much easier to teach this to undergraduates if the United States would just call its central bank “The Central Bank of the United States” instead of the “Federal Reserve.”) Look at the two bold-faced categories. The Fed’s biggest asset is debt issued by the federal government: $5.4 trillion worth. It also holds reserves of coins and what is called “treasury currency”: i.e., old-fashioned dollar bills issued by the U.S. Treasury instead of the  Federal Reserve. The Fed is legally obligated to accept these when the U.S. government deposits them in its accounts at the Fed.

In other words, if the Treasury minted up a trillion-dollar coin, it could then go down to the Federal Reserve and deposit said coin into it’s deposit account. The balance sheet of the Federal Reserve would then look like this:

STEP ONE: Deposit the trillion-dollar coin

ASSETS		LIABILITIES
U.S. Treasury securities	5,431,056	2,197,401	Currency in circulation
Federal agency debt securities	2,347	1,702,347	Repo agreements
Mortgage-backed securities	2,494,684	4,524,350	Deposits from banks
Mark-to-market adjustment	338,797	1,027,447	Treasury accounts
Loans	105,509	45,864	Other liabilities and capital
Foreign exchange	26,421
Other assets	35,704
Gold	11,041
Coins and treasury currency	1,050,853
TOTAL	9,496,412	9,496,410

STEP TWO: Spend the money in the Treasury’s account

The federal government now has a trillion dollars deposited at the Fed, and the Fed has a trillion-dollar coin sitting in a vault somewhere. The federal government, of course, now wants to spend the money sitting in its deposit account. So it will! Presumably its spending will wind up in the checking accounts of recipients (although some will likely end up as cash in circulation) so for simplicity’s sake I’ve moved the liabilities from the Treasury’s account at the Fed to the deposit accounts that banks keep at the Federal Reserve.

ASSETS		LIABILITIES
U.S. Treasury securities	5,431,056	2,197,401	Currency in circulation
Federal agency debt securities	2,347	1,702,347	Repo agreements
Mortgage-backed securities	2,494,684	5,524,350	Deposits from banks
Mark-to-market adjustment	338,797	27,447	Treasury accounts
Loans	105,509	45,864	Other liabilities and capital
Foreign exchange	26,421
Other assets	35,704
Gold	11,041
Coins and treasury currency	1,050,853
TOTAL	9,496,412	9,496,410

Isn’t that inflationary?

Well, by itself, no. And not just because (as we’ve discovered over the past 13 years) printing money isn’t always inflationary.

STEP THREE: Fed open-market operations counteract increases in the monetary base

The move will not be inflationary because the Federal Reserve can simply sell its holdings of Treasury securities. People will buy those holdings for cash. I’ve assumed here that they will buy those holdings using deposit accounts at various banks, which will ultimately lead those banks to hold fewer deposits at the Fed, but it could show up as a reduction in any of the Fed’s liabilities.

And voila! We are back more-or-less where we started. 

ASSETS		LIABILITIES
U.S. Treasury securities	4,431,056	2,197,401	Currency in circulation
Federal agency debt securities	2,347	1,702,347	Repo agreements
Mortgage-backed securities	2,494,684	4,524,350	Deposits from banks
Mark-to-market adjustment	338,797	27,447	Treasury accounts
Loans	105,509	45,864	Other liabilities and capital
Foreign exchange	26,421
Other Federal Reserve assets	35,704
Gold	11,041
Coins and treasury currency	1,050,853
TOTAL	8,496,412	8,496,410

But now all the Argentines reading this are screaming. We’ve discovered is a way to subvert the independence of the Federal Reserve and force it to finance federal spending by printing money! Isn’t that a problem?

STEP FOUR: Replace the coin with new debt

Well, I can understand that we might not want to set a precedent here. Congress can get it’s act together after-the-fact, abolish the debt ceiling, ban the minting of new trillion-dollar coins, and issue one trillion in federal debt to make up for the coin-based spending. It can then order the Treasury to hand over the newly issued trillion-dollars in debt to the Fed in return for the coin, which can then be melted down (or, preferably, demonetized and put in the American History Museum at the Smithsonian).

ASSETS		LIABILITIES
U.S. Treasury securities	5,431,056	2,197,401	Currency in circulation
Federal agency debt securities	2,347	1,702,347	Repo agreements
Mortgage-backed securities	2,494,684	4,524,350	Deposits from banks
Mark-to-market adjustment	338,797	27,447	Treasury accounts
Loans	105,509	45,864	Other liabilities and capital
Foreign exchange	26,421
Other Federal Reserve assets	35,704
Gold	11,041
Coins and treasury currency	50,853
TOTAL	8,496,412	8,496,410

There is an alternate path that solves the inflation worries, although it sets an even spookier precedent. If the Federal Reserve agrees, we could just jump straight to Step 3, except instead of selling Treasury securities on the open market the Fed sells $1,000,000,000,000 worth of federal debt back to the U.S. government in exchange for the trillion-dollar coin. Poof, $1 trillion in debt is wiped out and the U.S. government finds itself back below the debt limit, with no worries about money creation.

What are the counterarguments? Well, it would set a lousy precedent, but as we explained above, Congress can easily close the loophole if it wanted to.

Minting a trillion-dollar coin does represent yet another transfer of authority from the legislature to the executive, but the United States has had a dysfunctional legislature (at least on some things) for quite a long time—and playing chicken with the debt ceiling represents a particularly dangerous kind of legislative dysfunction. 

(Senatus delenda est. Senatus delendus est.)

The real worry is that Congress won’t do anything and we will wind up paying off more and more of the federal debt with trillion-dollar coins. That seems unlikely to me, but I think everything about the present-day U.S. Congress — particularly the Senate’s advanced state of decay — would have seemed unlikely to me back in 1990.

I suspect that it won’t come to this. I fear, however, that it will come to what I consider a more dangerous route: the Biden administration simply declares that the debt ceiling violates the sentence in the 14th Amendment that reads, “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”

The legal argument is that Congress authorized the issuance of debt when it passed the budget, so the debt ceiling therefore questions the validity of the debt. I am not a lawyer, but I don’t find that convincing. The last thing the country needs is more executive aggrandizement.

Unless the alternative is chaos.

Dammit.

Comments

[Will Baird]

A pity this blog has become quiescent. Whether the situation in Ukraine or the nationalization of the lithium industry in Mexico (and potentially (probably?) the Chinese owned mine), these are topics your own take would be interesting to hear.