I am sure most of you are already aware of the details regarding the platinum $1tr coin alternative to austerity due to the debt-ceiling not being raised. I will use this post only to provide a short technical description of the coin accounting:

Step first, the US Mint mints the coin and Treasury deposits it at the Fed. The Fed credits the Treasury TGA account with the face value (actually the seigniorate profit) and keeps the coin as an asset.

The Treasury is only allowed to spend what has already been appropriated by Congress. As a result, no actual change happens to its spending schedule. Treasury debits its TGA account and credits private sector deposit accounts while in the process the Fed credits bank reserve accounts with the same amount. Any taxes do the opposite and in the end, the private money supply is increased by the amount of deficit spending performed as well as the bank reserves of the financial sector.

Compared to debt-financed deficit spending, the private sector still holds the same increased deposit balances but the financial sector ends up with larger bank reserves as an asset instead of Treasury bonds and the monetary base is larger.

Up to this point, spending through coin seigniorage sounds exactly like QE. Since bank reserves earn Interest On Reserves (IOR) the Fed is left with two choices:

  • It can allow bank reserves to increase since IOR will make sure that no change happens to the Federal Funds rate. In case it is targeting a specific amount of bank reserve balances it might have to lower its ongoing QE operations.
  • It can remove the excess reserves created by the Treasury spending by performing reverse repos with primary dealers. The monetary base will be lowered while the Fed cost will be the same since reverse repo rates arbitrage with IOR.

I am not aware of the legal details but the Fed should also probably be able to auction short-term debt certificates in exchange for excess reserves. As long as these certificates are negotiable, they would be equivalent to T-Bills and function as ‘government’ debt. In fact I believe that in the current context of high demand for short-term safe assets (evident in the large balances of non-interest bearing deposit accounts which have unlimited FDIC guarantee), creating a mechanism to transform bank reserves to short-term negotiable securities (either through Fed debt certificates or Treasury T-Bill auctions) is something that should be done regardless of the platinum coin usage and would avoid depressed short-term money market rates.

The $1tr coin should be considered a short-term alternative until Congress allows the debt ceiling to be increased (or removed completely). In reality, Treasury would most probably mint a much smaller face value only to be able to maintain government operations while Congress is negotiating. As soon as a deal is reached, the Treasury will sell securities for an amount equal to the deficit spending already done. Banks will use the excess reserves to buy them and the Treasury’s balance at the Fed will return to the amount it held just after the Fed credited the coin face value. At that point Treasure can just cancel the coin and have its account balance lowered to previous levels while the Fed will shrink its balance sheet by that amount with no other consequence.

Advertisements