Would the US minting of a trillion-dollar coin torpedo the Fed’s QE policy?


Euromoney Skew, Sid Verma
Published on:

Stay alert to the US fiscal tragi-comedy and the monetary fallout or not, notes Commerzbank.

In what might be a dispiriting lesson for bankers – that financial journalists can influence public policy discourse after all – pressure, led by US bloggers, is mounting on the US Treasury to stay liquid by minting a platinum coin with a face value of $1 trillion to ward off the debt-ceiling Armageddon.

With a maximum two months left before the debt-ceiling is breached, without legislative redress, the “mint the coin” movement has grown as a means of side-stepping the crisis. The rationale is that the US Treasury can capitalize on Article 1 section 8 of the US constitution that gives Congress the right to "coin money" without explicitly capping the face value, and thereby avoid a technical default in the event US fiscal policymaking remains in a sorry state.

Here is Commerzbank opining on the economic consequences:  

“What would be the economic consequences of resorting to this coin trick? The Treasury secretary cannot simply take a trillion dollar coin and “go shopping”. Rather, he would deposit the coin at the Federal Reserve. The Fed would then credit the amount in question to the  government’s account (the “Treasury General Account”). The accounting effects of the trillion
dollar coin can be illustrated with simplified balance sheets.

Once the funds were credited, the government could pay its bills with transfers from its account at the Fed. The Treasury account would then be debited and the Fed would credit the money to the payee’s bank. More precisely: it would transfer the money to the account held by the bank in question at the Fed. The bank reserves (the sum of all credit balances which commercial banks hold at the Fed) would therefore increase.

Is minting a coin the same as printing money?

Is this the same as financing government deficits by printing money? It depends. The Fed currently has Treasury securities worth $1.66 trillion in its portfolio. The Fed could sell Treasuries for the same amount as the Secretary pays bills through the Treasury Account. This way, the Fed would drain the newly created money from the banking system.

From an outside perspective, that is to say, from the point of view of the private sector, it makes no difference in economic terms whether the secretary or the central bank sells bonds to the public. Financing the deficit by issuing $1,000 billion of treasuries would increase the volume of treasuries held by the public (excluding the Fed) by $1,000 billion. Selling bonds for a corresponding amount out of the Fed’s holding would likewise increase the amount of debt paper in the hands of the public by $1,000 billion.

In this case, the trillion dollar coin would not lead to an increase in the bank reserves and hence the money supply. In other words: minting the coin would not be equivalent to printing money to finance the public sector. On the other hand, such “sterilization” would take the Fed out of the policy of quantitative easing.

It would no longer be buying bonds at the rate of $85 billion per month:

With an expected net public-sector deficit of $7 billion to $100 billion, it would no longer have to buy any
bonds at all. In this way the trillion dollar coin would actually make US monetary policy less expansionary.

But what if the Fed, out of continuing concern for the economy, decides not to sell any bonds or continues QE3 at the same rate as before?

If the liquidity trap proponents are right, this would not necessarily lead to an inflationary disaster: under liquidity-trap conditions, central bank money and short-dated government bonds are completely interchangeable (they are “substitutes”). So it amounts to the same thing, whether the Treasury issues (short-dated) bonds or the Fed “prints” money – or rather bank reserves.

At least in the current environment, according to the supporters of the coin plan, resorting to the printing press would not have unduly serious side-effects. After all, the quantitative easing carried out globally in the last few years (which one could interpret as government financing via the printing press) has not led to higher inflation. Moreover, the coin solution would only be temporary, as Congress will then cave in and raise the debt ceiling."

Legal or not; minted or not, the very discussion obviously throws into sharp relief the crisis in US fiscal policymaking amid political brinkmanship.