Friday, December 7, 2012

beowulf — Will Congress (accidentally) double down on The Coin?


Trusty beowulf comes up with yet another gem.

Monetary Realism
Will Congress (accidentally) double down on The Coin?
beowulf

17 comments:

Dan Kervick said...

Yes, but wouldn't the receipts from the sale just reduce the deficit by the amount of the minting cost of the coin, not its face value? How much are we talking about here?

It seems to me the intent is that since the Treasury has to buy the machinery raw materials to make the coins, which adds to the deficit, then when the Fed buys the coins from the Treasury it should reimburse the Treasury for the manufacturing cost, thus reducing the deficit only by the amount it was increased. The Fed thus bears the full manufacturing cost of the coin, but it doesn't sound like this is a method for getting a net reduction of the deficit.

beowulf said...

Dan, you're thinking paper currency. Tsy makes more from minting a quarter (10 cents costs, 15 cents seigniorage) than it does from printing a $100 bill.

"Each year, the Federal Reserve Board projects the need for new currency, which it acquires from the Department of the Treasury's Bureau of Engraving and Printing at the cost of production [5.2 to 9.2 cents per note]....
The United States Mint determines annual coin production... Reserve Banks purchase coin at face value from the Mint."
http://www.federalreserve.gov/faqs/currency_12771.htm

Dan Kervick said...

Ah, OK. Thanks.

JK said...

Can someone put 'the point' of this in easier to understand language?

paul said...

"Can someone put 'the point' of this in easier to understand language?" - JK

A coin could be minted that mathematically cancels out the "debt" part of the National Debt , which is nothing more than an accounting abstraction, as is the money creation system in it's entirety.

The coin is a visual "cue" that the "debt" has been paid off. This is possible because the nominal value of a platinum coin can be designated any value whatsoever untethered from the value of the metal it is made from, as enshrined in current law.

The coin would be a physical representation of that abstraction. It represents a number on a balance sheet, which is all that money or debt is on the government side of the ledger.

Basically it exploits a loophole in the law that prohibits the Fed from loaning money directly to the Treasury (although there are other loopholes we've been exploiting for decades).

As always, the "law" is the law except when TPTB don't want it to be, and I suppose politics becomes the constraint.

It also demonstrates how absurd the idea is that the government can "run out of money" or "go bankrupt".

Oops. That didn't come out as simple as I had hoped.

Roger Erickson said...

"None of us are safe while Congress is in session, I guess."

Well said, Beowulf.

I'm desperate to learn what paradigms and strategies are driving the Congresspeople enacting these policy moves. Do you know anything about the bill sponsors, the process that got it through committee, and the lobbies behind both?

The US electorate should not be flying blind.

Not only floor votes, but every word of Committee deliberations should be recorded and be accessible on CSPAN, and totally OpenSourced.

Roger Erickson said...

You have to wonder what Geithner and Bernanke are thinking. Surely they're aware of this pending bill.

Tom Hickey said...

I'm desperate to learn what paradigms and strategies are driving the Congresspeople enacting these policy moves. Do you know anything about the bill sponsors, the process that got it through committee, and the lobbies behind both?

From what I can gather, most of the substance is handled by staff. Congress critters are too busy with fundraising for the next election to get involved. Most of them aren't smart enough to, either.

Roger Erickson said...

“Term deposits will facilitate the implementation of monetary policy by providing a new tool by which the Federal Reserve can manage the aggregate quantity of reserve balances held by depository institutions. Funds placed in term deposits are removed from the accounts of participating institutions for the life of the term deposit and thereby drain reserve balances from the banking system.”
http://www.federalreserve.gov/monetarypolicy/tdf.htm

Beowulf: "am I wrong or did the Fed more or less hijack bonding power for itself with its new Term Deposit Facility program? If so, I say, good job!"

Beowulf is right. Most of what passes as monetary policy are convoluted ways to squate double-entry accounting with real growth of the nation & it's currency supply. Past hacks weren't enough.

"The Treasury tax and loan account system was designed as a mechanism for minimizing the dislocations on bank reserves and the money market arising out of the sizable and irregular transfers between the Government and the public."
Treasury tax and loan accounts and Federal Reserve open market operations
http://www.newyorkfed.org/research/quarterly_review/1978v3/v3n2article7.pdf

TTL Note Accounts and the Money Supply Process
http://research.stlouisfed.org/publications/review/79/10/Accounts_Oct1979.pdf

There is a better way. Just explain to the electorate how currency-supply growth actually occurs - hen take the simplest available option (not just the most expediant step that allows questions to be avoided). We can't keep hiding things from a growing population forever. That only increases the growing confusion.

Tom Hickey said...

All to maintain the illusion of a gold standard surrogate without the gold.

Clonal said...

Tom,

See Mike Sankowski's comment and my reply here

JK said...

Paul,

Thanks for responding, but you explained 'the point' of the platinum coin (in general). I understand that. I meant that I'm confused about what Beowulf is saying in this new piece.

Tom Hickey said...

@ Clonal

Interesting. Maybe something's up. I suspect that the president, no legal slouch himself, is well aware not only the law but also the politics. He is probably using this as a negotiating tactic in private meetings with Boehner, telling Boehner that the GOP doesn't have him over the barrel they think they do with the debt ceiling.

Tom Hickey said...

Also interesting to note there that Congress created both the debt ceiling and the way around throug TPC. Two factions sparring?

Clonal said...

@Tom Hickey
Quote:Two factions sparring?

More likely Kabuki Theater for the faithful.

beowulf said...

"Oops. That didn't come out as simple as I had hoped."

You did fine, You summarized that much more succinctly than I could.

JK, my point of the new piece is that Members of Congress, including a dozen Republicans have sponsored a dollar coin Act that would add seigniorage to the budget (so depositing $1 or $1 trillion in coinage with the Fed would reduce the deficit by like amount). Its just another battle in the age old warbetween the copper mining lobby in the Southwest (and, of all places, Iowa) and Crane & Co (the monopoly supplier of currency paper) in New England.

This bill (sponsored by McCain of Arizona and Harkin of Iowa) is nothing more than a bit of political gamesmanship. By putting seigniorage on-budget they can demonstrate-- in these deficit-conscious times--- that dollar coinage is a better value for the taxpayer than paper dollars.

I'm certain that no one in House or Senate had any intent of providing the Secretary of the Treasury with the power to erase any deficit with the stroke of a pen. My post was about the effect of this law (if passed), not its intent.

JK said...

Beo,

Ok, I think I follow you…

It would reduce the deficit by the same amount BECAUSE the Treasury wouldn't need to "borrow" (issue Tresuries) to have sufficient funds in its account?

If this is the case, my sense is that nothing would really change... so long as the FFR was being kept above zero. i.e. instead of "borrowing" first, the "borrowing" (issuing Treasuries) would have to occur after-the-fact, in order to maintain an above-zero FFR. So, the deficit wouldn't then be reduced?

What am I missing?