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The Quintillion-Dollar Coin

I was going to write a technical column today about how the sensitivity of bonds (and consequently, lots of other asset prices) to interest rates increases as interest rates decline, and discuss the implications for equity investors nowadays as interest rates head back up. That article will have to wait another week. Today, I want to just quickly dispense with a really silly idea that keeps making the rounds every time there is a standoff on the debt ceiling, pushed by the same guys who think Modern Monetary Theory (MMT) will work (even though we just tried it, and it didn’t).

The idea is that, thanks to a law passed back in the 1990s, the Treasury has the right to issue a platinum coin of any denomination. Ergo, it could produce a $1 Trillion coin, deposit it at the Federal Reserve (who does not have the option to not accept legal tender, Secretary Janet Yellen’s recently-voiced concerns notwithstanding), and continue to pay the government’s bills. Why? One well-traveled and entertaining simpleton started explaining the reasoning for doing this by saying “there’s this silly, anachronistic and ineffectual law on the books called the Debt Ceiling…”

If we started doing really really silly, not to mention stupid, things to get around every law that we thought was silly and anachronistic, legislators would be busy 24 hours a day, 7 days a week. (And, obviously, the law isn’t “ineffectual”; if it was then we wouldn’t need to get around it.)

I am continually amazed by how durable the really stupid ideas are. For instance, the notion that the government is lying about inflation to the tune of 6% per year is an idea that never seems to die even though you can show with basic math that it can’t possibly be the case. So, let’s dispense with this one even though I am sure I will have to keep slaying this dragon when it inevitably comes back from the dead.

A useful tool of logic that’s handy when you are trying to smoke out a dumb idea is to ask, “If that works, why don’t we do lots more of it?” Let’s not try to figure out why a $1 Trillion coin is a bad idea. Let’s try to figure out why a $1 Quintillion coin (a million trillions) is a bad idea.

After all, if we are going to mint a coin anyway, it doesn’t cost much more to stamp “Quinti” than it does to stamp “Tri”. And if the Treasury minted a Quintillion-dollar coin and deposited it at the Fed, it would be much more significant. With that balance, the Treasury could pay off all outstanding debt, fully fund Medicare and Social Security, and cancel all taxes basically forever while also dramatically increasing services! Why isn’t that a better idea? I spit on your Trillion-dollar coin.

Naturally, that would be a terrible idea and it’s now obvious why. I can think of several reasons, but I’ll leave most of them for other people to highlight in the comments. The immediate one is that by paying off all federal debt, increasing spending and decreasing taxes to zero, the money supply would increase immensely and immediately. As we saw quite recently, the result that rapidly follows is much higher inflation. Much much higher inflation. I will see your 8% and raise you 800%. Yes, to some extent that would depend on the Congress deciding to do that spending and cut those taxes – but do you doubt that would happen? And the Treasury offering to buy back all of the outstanding bonds wouldn’t need Congressional authorization. That’s trillions in money being suddenly returned to bondholders, which puts it back in circulation.

A trillion here, a trillion there, and pretty soon you’d be talking real money.

  1. Andrew Fately
    January 25, 2023 at 8:54 pm

    My only concern is that someone in the government will read this and decide it is a really good idea

  2. sarregouset
    January 27, 2023 at 9:32 am

    What do you think the effect will be of BLS’s change to using only 2021 spending weights to calculate CPI this year? https://www.bls.gov/blog/2023/weight-wait-up-increasing-the-relevance-of-consumer-price-index-weights.htm Given that “2021 is an anomalous year in many respects” (https://www.bls.gov/cpi/tables/relative-importance/weight-update-information-2022.htm) might it increase calculated inflation?

    • January 27, 2023 at 6:27 pm

      I wrote on the private Twitter feed my thoughts a few days ago. I think it’s not likely to be a very big deal; the prior biennial process dampened the pandemic effects but 2019-2020 was still a big change in weights (for this last year). For example, in 2021 CPI for used cars had a 2.75% weight; in 2022 based on the 2019-2020 sample it had a 4.143% weight. That means that when used car prices shot higher in 2021, the weight in CPI was less; when it retraced in 2022, the weight was more. Thus the effect of the retracement in core goods last year was likely exaggerated in the overall CPI. In aggregate, 2022 vs 2021 had 1.499% higher weight on core commodities and -1.943% less on services less energy services.

      2021 is likely to see the weight on core goods go back down some (I think) and core services back up some. This means the disinflation argument becomes even more dependent on shelter inflation declining.

      But we shouldn’t exaggerate how important this is. 1% change in weight, in a category inflating 2% faster than the mean is only worth 2bps on the annual CPI rate.

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