Following US political debate these days is like following a bad parody of a third world banana republic and even though I the deepest respect for Americans and US in general I must say it is hard not to agree with those Europeans that shake their heads these days and say “they are stupid those Americans”. Well, it is not the Americans – it is their politicians and you could say a similar thing about Europe.
The latest banana republic gimmick is the suggestion that the US Treasury should use a legal loophole to print a trillion dollar coin in the event that the US congressional majority – that’s the Republicans – would refuse to increase the so-called debt celling.
The idea in my view is completely ludicrous and it is incredible that anybody seriously would even contemplate such an idea. Anyway, is Nobel Prize winning economist Paul Krugman:
“It’s easy to make sententious remarks to the effect that we shouldn’t look for gimmicks, we should sit down like serious people and deal with our problems realistically. That may sound reasonable — if you’ve been living in a cave for the past four years.Given the realities of our political situation, and in particular the mixture of ruthlessness and craziness that now characterizes House Republicans, it’s just ridiculous — far more ridiculous than the notion of the coin.
So if the 14th amendment solution — simply declaring that the debt ceiling is unconstitutional — isn’t workable, go with the coin.”
Nobel Prize or not Krugman is wrong – as he so often is.
First, of all there is no reason to think that the US government would have to default on it’s public debt just because the debt ceiling is not increased. The monthly debt servicing costs in the US is significantly smaller than the US government’s total monthly tax revenues. It might be that the US Treasury would have to stop paying out salaries to US Congressmen and stop buying new military hardware for a while – neither would be a major lose – but the tax revenues would easily cover the debt servicing costs. That of course do not mean that I suggest that the debt ceiling should not be increased – that is US party political shenanigans that I simply don’t even want to comment on. However, it is wrong to suggest that the US government would automatically default if the debt ceiling is not increased.
Lars, wouldn’t a 1 trillion dollar coin be monetary easing? So it most be good?
What I really want to discuss is the Market Monetarist perspective on this discussion. Yes, Market Monetarists have for the past four years argued that US monetary policy has been overly tight and the reason the US recovery has been so relatively weak is the that Federal Reserve has had too tight monetary policy. That has led Market Monetarists like myself and other to call for monetary easing from the Federal Reserve.
However, at the core of Market Monetarist thinking is not the call for monetary easing and no Market Monetarist has ever said that monetary easing is the cure of all evils. Rather at the centre of Market Monetarist thinking is the call for a rule based monetary policy. An easing of monetary policy based on a trillion dollar coin is probably the most discretionary and least rule based monetary (and fiscal) idea anybody have come up with over the past four years.
Yes, Market Monetarists are certainly skeptical about central bankers ability to conduct monetary policy in a proper fashion, but that certainly do not mean that we think US politicians and bureaucrats in the US Treasury would do a better job. Far from it!
I would even go further – I don’t necessarily think that the US economy needs more quantitative easing IF the Federal Reserve started conducting monetary policy based on a transparent monetary rule like NGDP level targeting. Furthermore, if I would have to chose between an NGDP level target or a massive ramping up of quantitative easing within a discretionary framework then there is no doubt that I would choose the rule based framework. Market Monetarists are not the monetary version of discretionary Krugmanian fiscal policy.
Concluding, the trillion dollar coin idea is stupid. It is stupid because it banana republic “economic” policy based on the worst political motives without any foundation in the rule of law and a general rules based framework.
The fact is that the US government faces serious fiscal challenges. The US public debt level needs to be reduced and even if the Federal Reserve pushed back NGDP to its pre-crisis trend level I believe there would be a significant need for fiscal consolidation. There is no getting around it – debt ceiling or not, trillion dollar coin or not – fiscal policy will have to be tightened sooner or later. And if you need idea about what to cut I have some ideas about that as well (see here).
It is simple mamanomics – you can’t continue spending more money than you have. It might be that certain US policy makers would be happy if their mom raised their weekly allowances, but would they also be happy if their mom prostituted herself to do that?
PS there is no party politics in what I am saying – I have the same lack of respect for both main political parties in the US as do most Americans.
PPS Scott Sumner and Tyler Cowen also comment on the trillion dollar coin – for some reason the two gentlemen are slightly more diplomatic than I am. Josh Hendrickson, however, is as clear on the issue as I am – Josh has two posts on the trillion dollar coin. See here and here.
PPPS If you think there is a lot of James Buchanan and Friedrich Hayek in this post then I have achieved what I want to achieve. After all Friedman and Schwartz’s “Monetary History” is not the only book I read.
Update: Both Steve Horwitz and George Selgin comment on the trillion dollar coin – not surprisingly I have no reason to disagree with the two gentlemen.
Jonathan Cast
/ January 8, 2013The problem is that American politicians have been getting gradually more European over the last 10-20 years . . .
Becky Hargrove
/ January 8, 2013What I don’t like is that the practical and commonsense notion of money is what’s really being held hostage.
Jay
/ January 9, 2013“The trillion dollar coin is an utterly idiotic idea” whoever wrote the this article as titled proved to me they don’t understand like many others, and the sooner they do the better. The comment that I suspected but confirmed once read is “The fact is that the US government faces serious fiscal challenges.” The reason the U.S. does not face a fiscal challenge at all, the same as the people of the EU or any other nation on this planet…is that all these so called debts, are just that – so called.
There is no debt, and as soon as one, or rather, the many realize that – then thankfully the whole house of cards will come down and we can finally live as humans. Please do your homework and dig deeper, for yourself and fellow humans.
Benjamin Cole
/ January 9, 2013If you live in the USA, it does seem to be on its way in Estates Unidos.
Okay, no platinum coin.
But, each of the 50 states has the right to coin money, if silver or gold, a Constitutional right btw.
But there is no Constitutional delineation beyond that–in other words, California could mint a coin at $100, and put a small amount of silver in it, as in $10 worth (market prices).
Okay, why am I even talking about this?
Because the Fed is too tight, and because the Fed is way too tight for California. Such a huge economy, but only one Federal Reserve, and one central bank policy.
Think ECB.
Does one size fit all?
How about in the USA.
So CA mints up a a hundred billion, and puts them into circulation, by paying vendors and employees.
The public accepts the coins, as they know they can pay states taxes with them.
I wonder what the “free bankers” would say to this. Any state can mint money too. Why or why not?
Chris Engel
/ January 9, 2013So much of this article is spent bloviating about how bad the idea is, but of course when you examine closely, there is no substance to this opposition, it breaks down to this:
1) You say that there is no real threat of default from not raising the debt celiing because the US government can merely stiff other obligations in favor of servicing debt to avoid default. This may or may not be true given a lot of the liquidity constraints and the rather fickle nature of debt service payments. And still, the uncertainty and contractionary effect of prolonged missed payments to government employees, unemployment insurance recipients, etc. is so dangerous that it could result in loss of confidence that would destroy markets and price stability.
2) Your second “reason” before your conclusion is just that this isn’t following any rules. I agree that NGDP targetting (or price level targetting) is the future of macroeconomic management, but that has nothing to do with honoring debt and having a smooth management of obligations.
So clearly you haven’t made any real points about why it’s an “utterly idiotic idea”. I’m grateful that you’re not a sycophant pushing hyperinflation fear, so I assume you have at least some understanding of the field.
In the end the argument should boil down to whether you think money printed out of thin air to buy bonds is any different than printing money out of thin our to service spending. Given the liquidity trap setting, there is absolutely no difference and any excess liquidity can get mopped up in bond sales by the Fed.
And while there should be rules followed, there should also be an element of shock applied in extreme situations like we are in now.
Mark A. Sadowski
/ January 9, 2013Benjamin,
Article 1, Section 10 of the U.S. Constitution explicitly prohibits the States from coining money:
“…[No State shall] coin Money;…”
http://usgovinfo.about.com/od/usconstitution/a/a1s10.htm
acarraro
/ January 9, 2013I am not an expert in US law, but I really don’t understand how you could prioritize payments.
Let’s say I am on welfare and I am not getting my check. What would stop me from going to a lawyer and form a class action suit with a few thousand other people like me suing the government to make the payment? The law is in the books so I doubt a court wouldn’t grant me recourse. At that point (once the liability is recognized),I can simply get a court order stopping the government paying anybody before me. Certainly a supplier with a contract would have no trouble getting a court to agree to that. The deficit is 1$ trillion, we are talking about a lot of money not being paid here. Are all the people entitled to the money going to stay silent?
I am pretty certain that would work for a normal company and I doubt the government has the more rights in this area. I think there is no alternative to default here…
noteconomist
/ January 9, 2013Right, and even so, if default was avoidable by screwing the recipients of federal payout, the only two reasons this article gives for why “it’s an utterly idiotic idea” are 1) default is avoidable without doing this, 2) it doesn’t follow abstract “rules”
Very poor argument here by the author of the article.
JimM47
/ January 14, 2013The U.S. government has “sovereign immunity” — meaning that it cannot be sued without its consent, and under current law it only consents to a specific set of lawsuits. The vast majority of commitments the U.S. federal government has made — paying its debts, paying its employees, fulfilling its contracts, disbursing money to States, dispensing money to people — are not commitments that a court of law has the jurisdiction to enforce.
nickikt
/ January 9, 2013@Jonathan Cast
Thats simplistic thinking. The US is diffrent. Also I would point out that the countrys in europe do not have military bases around the world.
cthorm
/ January 10, 2013Lars –
The short version of my critique, which I suspect you’ll agree with, is:
If the treasury moved to mint the $1T coin it would completely unhinge the assumption of Fed control of the money supply. The Fed would have no credible ability to manage inflation (i.e. the government/Treasury could always mint more coins).
Benjamin Cole
/ January 10, 2013Mark S-
you may be right, the Constitution bans states from minting or printing their own paper money or issuing their own currency.
But it allows the states to make “gold and silver Coin a Tender in Payment of Debts.”
Okay, so the State of California gives private contractors the right to coin silver money, worth $1000 in the payment of state taxes. The coins are silver, and have about $50 of silver in them.
The contractors pay the state $900 for each coin minted, and sells the coins for $1000 to the state government, and the state pays constructors and employees with the money.
Remember, the states have the right to make silver coin a tender of payment.
A bit convoluted, but better than living under Fed asphyxiation.