by Michael Roberts
One reader asked me to comment on the talk about the US Treasury
and Federal Reserve minting a platinum coin with a face value of
$1trillion to provide funds for the government to spend if the
Republican-controlled Congress blocks an increase in the public debt
ceiling and brings US public services to a halt. Is this possible and
what implications does it have for the economy?
Well, in a way the issue is now dead. Over the weekend, the US
Treasury department issued a statement to say that the loophole in
federal law that would allow the government to mint this coin would not
be applied for the purpose of avoiding an increase in the debt limit.
So it ain’t going to happen. The Federal Reserve was not going to
credit the government’s accounts with $1 trillion if the Treasury
department had minted the coin. So minting money (as opposed to
printing it) as a way of funding government borrowing has been ruled
And that is what it was. The platinum coin was just another way for
the government to borrow money through the Fed creating it in the
government’s accounts. The government was being blocked from issuing
any more ‘debt’ i.e. bonds or T-bills, but it could mint a coin and thus
bypass the so-called ceiling on debt set by Congress each year.
Keynesians like Paul Krugman were all gung-ho about minting the coin
so that the bluff of the Republican veto on government borrowing and
spending could be called. “Minting the coin would be undignified, but so what?” said Krugman. “it would be economically harmless and help head off government by blackmail”.
Economically harmless? Well, yes. If the Fed created a credit line
of $1trillion for the government in return for a platinum coin as an
asset that would not necessarily be inflationary. First, the Fed could
sell off other assets like the huge amount of government bonds it
already holds to fund the new government borrowing. In that way it
would ‘soak’ up the extra cash going into the economy from new
government spending. If it did not do this, then there would be extra
money in the economy. But then that would happen anyway when the debt
ceiling was raised, as it will have to be if the Federal government is
to function beyond next month. So there is nothing new there.
But there were two objections to the coin minting plan that were
raised. The first was that it made a laughing stock of the US
government in the eyes of potential purchasers of US government debt,
especially foreigners who already hold 40% of it. How does it secure
confidence that America’s officials are managing their public finances
properly when Congress goes into paralysis and President Obama then
announces that he has minted a $1trn coin to cover things?
Indeed, for the first time, the Federal Reserve would be creating
money explicitly to fund the government’s deficit and not just to expand
the money supply in attempt to boost the economy, as with QE measures.
This would be monetising the debt by doing the bidding of the
government and not remaining ‘independent’ as mainstream economists
prefer the Fed to be. The consensus among pro-capitalist economists is
that by minting the coin, the Fed would be jeopardising its role as the
lender of last resort for all the capitalist economy in return for
helping one particular government out of its hole. A bad precedent
indeed. No wonder, Bernanke said, no way Barack.
The second objection was that ‘down the road’, unless this extra
funding is paid for through more taxes or less government spending, the
extra borrowing (that would happen anyway if the debt ceiling is raised)
would eventually drive up inflation. Keynesians like Krugman said that
is ridiculous in the current environment with 8% unemployment rate,
inflation well below 2% and interest rates ‘zero bound’. That’s surely
true – right now. The real issue is not inflation as such – but the
fight between those who reckon that rising government spending will
boost economic growth and those who reckon that it will only squeeze the
private sector and lower profitability. On that issue, neither the
Keynesians nor the Austerians can mint a coin.
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