Yglesias out with another idea today:
New debt ceiling workaround just dropped — an idea for folks who find the platinum coin too silly. https://t.co/COhytbTHgv
— Matthew Yglesias (@mattyglesias) January 11, 2023
I guess: With policy rate at 5%; they sell a 1 year 10 face value with a coupon of 95 then people would pay 100 and get redeemed for 10... they would make the 5%... iow they would pay 100, get coupon for 95 then get back 10 at redemption in 1 year... pay 100 and get back 105 within a year...
USD savers would have their USD savings in the Treasury General Account at the Fed instead of in Treasury Securities accounts at the Fed… TGA account would probably maintain a VERY high balance…
It's interesting that Matt missed the other effect.
ReplyDeleteIf the yields on Fannie and Freddie rise then that causes a rise in the Monetarist Mortgage Tax, which means the Fed would have to *lower* base rates in an attempt to steer credit amounts to whatever they believe is current demand.
Less "faith" and a higher risk premium higher up the yield curve means lower interest rates, not higher.
It's a better idea that the coin - which doesn't work because of a misunderstanding of why a five dollar coin is worth five dollars rather than the few cents of metal in it.
ReplyDeleteThere's nothing that says the Fed has to give Treasury the face value of a coin. It can do what any bank does and discount it to the value of the metal - because there isn't sufficient in the TGA to cover the face value.
https://new-wayland.com/blog/the-coins-deposit-problem/
Neil I don’t believe the GSE bonds issued are part of debt ceiling so those bonds could be issued close to 100…
ReplyDeleteNeil I think there is a loophole in us law that requires the Fed to accept the coin at full face value if it is a PROOF coin..
ReplyDeleteThis is the legal loophole that Carlos (lawyer) proposed to exploit… has to be ‘platinum proof’ coin or wtf…
I used to be concerned that it (coin) would crash the economy again like 2008 and 2020 by forcing reserves onto bank balance sheets as govt spent out of TGA and depository’s reserves mooned… but now they’ve stood up the RRP account where depositories can divert the USD savings that depositories don’t have the regulatory capital to possess…
Would create an irritating flow towards depositories but would not be catastrophic as in the past in September 2008 and March 2020…
"Neil I think there is a loophole in us law that requires the Fed to accept the coin at full face value if it is a PROOF coin"
ReplyDeleteI've asked for that, and they can provide nothing in law that would prevent the Fed discounting the coin to metal value and refusing to issue more than scrap amounts of Fed liabilities for it.
Ultimately a coin is only worth what it says on the face because a bank can return it to the Treasury and get a transfer from the TGS to the face amount. If the bank can't get that, then it won't issue credit for it in its own liabilities. That applies to the Fed as well.
If you read their stuff carefully, you'll notice they skip why coins are worth anything at all to banks.
That contrasts with here in the UK where HM Treasury has the legal right to order the bank to make a payment. It doesn't rely on the discount mechanism, and the balance arises as 'book debt' automatically.
“ There's nothing that says the Fed has to give Treasury the face value of a coin.””
ReplyDeleteI think they have to if it is a “platinum proof coin”…. loophole in the law…
Maybe the lobbyists for the platinum miners put it in the law…
ReplyDeleteThe law was not intended to be used this way but that is how loopholes happen…
ReplyDeleteAlso since the RRP would moon that would probably put the Fed into a permanent loss position as they pay the RRP rate out of future revenues…. “negative asset”… Now they can point to future revenues from their USTs …but if Tsy stops issuing debt securities then the Fed would lose their access to those revenues…
ReplyDelete"I think they have to if it is a “platinum proof coin”…. loophole in the law"
ReplyDeleteIt's not in the law Matt. Those supporting the coin couldn't quote anything preventing discount.
If the Fed wants to give 5c per $100 of face value it can do, and there is nothing Treasury can do about it.
All the law says is that Treasury can create coins of any face value.
ReplyDeleteThere's nothing in any law requiring coins or notes to be accepted by the banks at Face value. In other words Treasury dollars and Fed dollars are only pegged because of the implicit promise by Treasury to pay the face value in Fed dollars from the TGA.
However with a debt ceiling and a $10tn coin, that promise fails.
Neil, Congress has given the the Treasury to mint the coin of any face value, however if the FED discounted it then it would be in conflict with the Treasury in a manner that Congress has provided the Treasury with the authority. Therefore the Sec of the Treasury can override the FED and make them accept the face value of the coin.
ReplyDelete1913 Federal Reserve Act, section 10, subsection 6. Reservation of powers of Secretary of Treasury
"Nothing in this Act contained shall be construed as taking away any powers heretofore vested by law in the Secretary of the Treasury which relate to the supervision, management, and control of the Treasury Department and bureaus under such department, and wherever any power vested by this Act in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary."