The Platinum Debt Solution

While in all probability America’s so-called “debt ceiling” will be raised next week – just as it routinely has been for the last 74 times since 1962 – the utterly dysfunctional political dynamic in Washington has turned what should be a simple matter of financial housekeeping into a completely avoidable “crisis” that now threatens to damage the credit rating of the USA and quite possibly even destabilize an already fragile global economy as a consequence.

After months of ideological wrangling over this issue, most Americans (not to mention those around the world that are dependent in one way or another on the U.S. economy) are justifiably fed up with all the Kabuki bullshit surrounding the wholly disingenuous and fraudulent “plans” that have been floated by both sides – none of which, it is important to note, will do one iota of good to address the biggest challenge currently facing the economy, which is that of intractable unemployment. If anything, the multi-trillion dollar spending cuts being proposed will simply exacerbate the problem and drive the U.S. economy even deeper into recession.

Short of signing a “clean” bill to raise the borrowing limit (as has always been done in the past) there is in fact another alternative that is almost just as elegantly simple in nature. This plan involves a little known monetary device known as “coin seignorage”; that is, the difference between the cost of bullion and the value of the coin into which the bullion is converted. A good explanation of how this jumbo coin seignorage would work in the context of circumventing the debt limit is provided by Joe Firestone writing at the blog Pragmatic Capitalism:

Congress has provided the authority, in legislation passed in 1996, for the US Mint to create platinum bullion or proof platinum coins with arbitrary fiat face value having no relationship to the value of the platinum used in these coins. The US code also provides for the Treasury to periodically “sweep” the Mint’s account at the Federal Reserve Bank for profits earned from coin seigniorage. These profits are then booked as miscellaneous receipts (revenue) to the Treasury and go into the Treasury General Account, narrowing the revenue gap between spending and tax revenues. Platinum coins with huge face values e.g. $2 Trillion, could close the revenue gap entirely, and technically end deficit spending, while still retaining the gap between tax revenues and spending.

The entire article (including the extensive comments) make for some fascinating reading, as does the seminal post on this subject at Firedog Lake way back in January.

So there, fiscal “crisis” averted. Perhaps with the issue resolved, the Obama Administration and the U.S. Congress could then focus on more important things like kick-starting the economy and tackling the problem of joblessness in America.

12 Replies to “The Platinum Debt Solution”

  1. And just as soon as they do this the greenback ceases to be the world’s accepted reserve currency. Then, and for the forever after, America would be compelled to borrow and trade – and repay – in other nations’ currencies which would be the end to America’s grand Ponzi scheme. And let’s not forget the rush to dump US treasuries that would ensue.

  2. I don’t see those as necessary logical outcomes of this approach. Certainly it’s a bit of fiscal legerdemain, but no more so than is simply changing the number on a “clean” debt ceiling bill.

  3. When nations are historically faced with the type of crisis the US currently faces, there are only two options – from an economics perspective:

    * Default on Credit Obligations/Debt;

    * Devalue the Currency.

    The USA should choose option #2, as it would allow them to more rapidly service their debt, hang China with losses, and give a boost to domestic production and exports. It will result in a hard bit of inflation for a couple of years, but like “quickly ripping the bandage off” it is the most palatable of the two in the current situation. Of course, it would probably mean that the US Currency would lose its status as the primary measurment of exchange, but that is probably inevitable anway.

  4. I don’t see that the US needs to either default or devalue USD. And using proof platinum coin seigniorage (PPCS) will not produce either effect. Here:

    I’ve outlined 4 PPCS alternatives the President might use. Certainly neither of the first two would involve any devaluation; and whether the last two do or not depends on Congressional Appropriations, and not on whether PPCS is used to pay for them. The quantity theory of money is false as a general formulation applying to most situations.



  5. Perhaps no one took the time to fully understand the first poster’s comment. I believe I may expand it in their absence.

    The entire world economy is a pyramid scheme. This should not need any great or vigourous defence; when banks are the ‘backbone’ of an economy, then prima facie a pyramid scheme is the backbone of said economy. Protestations to the contrary ignore the nature of banks.

    As anyone who runs a pyramid scheme knows, the first, last, and only thing which is important is confidence. Charles Ponzi knew this: he handed out money to crowds during his infamous scheme, and thus quelled their concerns. People, when presented with the money the suspect wasn’t there, rapidly lose the desire to posses said money.

    This ‘coin seigniorage’ plan — for it really is simply printing money by fiat, only with shiny coins of agreeable composition instead of common rag paper elevated to moneyness by priestly incantation — does not play by the game which pyramid schemes require to exist. It not only doesn’t pay lip-service to preserving confidence, it would be like Mr Ponzi calmly walking into the crowd, looking people fully in the eye, and informing them he was flat broke.

    Mr Ponzi, I expect, would not have survived much beyond that momentary flash of excessive honesty.

    The critical detail which Mr Firestone is leaving out of his understandably favourable predisposition toward his own idea is where this would leave the Federal Reserve System. As our money is dependent upon confidence in the System, a lovely coin or two would proclaim once and for all — instead of in properly sotto voce undertone — that the System is insolvent.

    The System would be left insolvent because ‘our money’ is a liability of its balance sheet. Its assets are tonnes of gold, and Treasury Bills & Bonds (backed by the taxation power of the US Federal Government), along with some odds and ends not typically discovered outside of Goldman Sachs. These hypothetical coins would be bogus assets: they would only possess the ‘value’ stamped upon them by a hopeful US Mint. The likelihood of these being accepted as valid assets are nonexistent.

    Mr Firestone’s interesting concept, if adopted, would ensure that the finances of the United States Federal Government will be treated to much the same indignities which Mr Ponzi would have suffered. The systemic risk which is inherent in banking-based economies — that is to say, pyramid schemes — would be exposed, recognised, and dealt with in appropriate fashion by understandably unsettled investors.

    There is little the US Federal Government could do to stop this meltdown, should Mr Firestone’s fancy somehow unhappily feed Congress’ caprice. There would of course be posturing, and many sombre speeches, but even nuclear weapons in this case would prove as impotent as if Mr Ponzi were to be carrying a 9mm semi-automatic in the midst of a justly indignant crowd of bilked investors.

    As an aside, I very much like the fantasy coin at the beginning of this post.

  6. There is this wackjob at work who is convinced that this signifies the “end of the world” or whatever crazy shit he’s into this week. Just like the planes that hit the World Trade Centre were “missiles” and blah blah. Thank you for shedding some light on this topic.

  7. Joe: Hey, thanks very much for taking note and commenting.

    I first heard this intriguing notion a while back (can’t remember where exactly) mentioned in passing, but it stuck with me for some reason. As wrangling over the debt ceiling dragged on and intensified, with ever more ridiculous and self-destructive spending “plans” being seriously discussed, I just couldn’t fathom why this remarkably efficient solution wasn’t even being considered or talked about as a legitimate alternative.

    I suspect the reason is because most people (media pundits and other so-called “experts” included) don’t actually understand how the modern monetary system actually works and to clearly explain it to them would be far too complex an undertaking. From their perspective, better to just ignore reality and focus instead on the idiotic “rock-em-sock-em” politics of the issue which is dead easy and fun.

  8. I agree. Today Proof Platinum Coin Seigniorage (PPCS) is going viral. Last week it was crazy. Now, Yglesia, Delong, and Krugman are all supporting it. However, people who mention it usually do so in a couple of lines. And they never go through the mechanics, so they can never explain why it would not be inflationary. Also, they tend to prefer using the 14th Amendment to PPCS. I think this is because of your “rock-em-sock-em” politics effect.

  9. TT: There’s always a contingent of nutters out there that are eager for the “end of the world” – sadly, it appears that a significant number of them were elected to Congress last fall under the Tea Party flag.

  10. Hello Andrew, one can do little to reply to those who believe so strongly in the confidence fairy either in the positive or negative direction. Argument then devolves into “well, I agree, it’s all about confidence,” or “well, such a single-factor explanation of what holds the world economy together is nonsense.” I’m afraid I’m in the latter camp. There are many factors apart from confidence that holds things together. Among them is trade, military power, productive capacity, culture, demand, and so on.

    In the situation we find ourselves in now, the minting of a coin would have no immediate effect on the international economic system. I think people would be interested to see what the US does with the credits that the Treasury ultimately gets in the TGA. Now, let’s say we go big, and those credits are $60 Trillion. Then let’s suppose that we used part of that money to pay off the Fed held debt and the intragovernmental debt, together amount to $6.2 Trillion. Why should that have any impact on world markets? All they will see is that the outstanding debt has fallen to $8.1 Trillion. Is that going to shake their confidence in USD? Somehow I doubt it.

    Now let’s say that what the Government does next is to begin to pay back maturing securities, without issuing new ones. Why would that shake confidence in the dollar? After all, everyone is getting paid. The Treasury would not disturb the market by trying to retire all the debt at once. Instead it would just pay it off as it comes due. Within 3 years most of it of it would be paid, and the US would have a debt-to-GDP ratio among the lowest in the world. Why should that shake confidence?

    Further, now let’s say that the Government continues by “deficit” spending Congressional appropriations without issuing any more debt. Are those appropriation so lavish that they would cause inflation here? Give me a break, they are hardly lavish enough to lower the unemployment rate below 9%, and the present threat is one of deflation, not inflation.

    So, what do you see in all this that is likely to shake the world’s confidence? The mere minting of the coin, which will find its way into a Fed vault, in return for $60 Trillion in credits in the TGA, very little of which will immediately go into circulation, any time soon, and most of which when it does go into circulation will only replace even more inflationary Treasury Securities? Please don’t make me laugh. There is no transmission mechanism here to arouse the confidence fairy and create a collapse of the world economy.

    Btw, here are two more recent pieces on PPCS.

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