Thursday, January 10, 2013

ET, phone home

From Twitter trolling to dueling blog posts in the Economist, it's been a short, strange trip for the mythical, mystical, "trillion dollar platinum coin".

The young digital progressives are in lockstep on the issue. It's legal, what the Republicans are doing with the debt ceiling is much worse than the coin shenanigans, it will cause less problems than a default.

 Josh Barro, one of the coins most persistent and seemingly serious defenders, has a piece where he attempts a debunking of the concerns of the anti-coin crowd. I am most interested in one particular slice of his piece:

 "But that will be inflationary!" This is a more serious objection, and it gets at what the platinum coin strategy really is -- financing the federal government's operations by printing money instead of borrowing it. The trillion- dollar coin will never circulate, but it will be used to back cash payments coming from the Treasury that would have otherwise been financed by bond purchases. If the government financed itself this way in general, that would absolutely be inflationary. But the president can hold inflation expectations steady by making absolutely clear that the policy will not lead to a net change in the money supply over the long term. Obama should pledge that once Congress authorizes additional borrowing, he will direct the Treasury to issue bonds to cover the government's coin-backed spending and then to melt the coin.... If the president is clear about his lack of any long-term intention to interfere with the money supply, I don't expect the platinum coin to cause a spike in prices."

I think the coin is excellent political theatre. It's got the right up in arms, positively sputtering with indignation, which can only be a good thing.

However, I think the expectations issue is quite a bit more problematic than what Josh outlines. In economics modeling, expectations aren't anchored by jawboning or empty promises. Without a specific commitment mechanism, mere promises will be non-credible (this of course is the time-consistency issue made famous by another Barro).

Specifically, I worry that when a US president takes up the power to directly print money in a political dispute, his assurances that it's only temporary, will be reversed as soon as his opponents capitulate, and will never happen again, might not be extremely credible. One could make a case that this action would indeed increase expectations of inflation down the road and increase the volatility of inflation as well.

And beyond inflation concerns, it is worth considering what the coin would to do the expectations of future government behavior held by investors, credit raters, trading partners and other relevant actors.

So while I absolutely love the trolling value of the coin, and kind of love the overall idea of the coin, I think is is a much more risky economic proposition than its proponents will recognize.


Gerardo said...

Yes, as long as he makes it *absolutely* clear that it won't lead to a net change in money supply. If he just makes it clear, I don't think that would be sufficient. But *absolutely* clear, now, that should work out just fine.

Norman said...

I thought Scott Sumner made a good point that Republicans would actually *love* to see a solution to the debt ceiling where they never have to capitulate and can blame Obama for any negative effects. "It was that blasted coin!!" I don't think Obama will do it precisely because it would be politically costly to him without costing the other party anything.

And if Obama's word isn't enough to keep inflation down, but the Fed's preference is for low inflation, we would expect the Fed to raise rates to kill the inflation, wouldn't we? Which means Obama would pay political full-price for the coin, delay the debt ceiling problem for a while without making it go away, and gain approximately zero in stimulus value to the economy. Sounds like a great plan!

Anonymous said...

I assume the coin would have the phrase "Edictum De Pretiis Rerum Venalium" printed on it.

Anonymous said...

I agree with Gerardo. The question might be, how would Obama make it *absolutely* he would be responsible and dispose of the trillion dollar coin once he could once again borrow? He just needs to place it in the care of Monty Burns. What could go wrong??

Anonymous said...

How would the coin be destroyed if the debt ceiling weren't raised? They would be assuming that an increase is inevitable. That's like borrowing money from the social security trust fund assuming people are going to start spitting out enough babies to fund future liabilities. How is that working out?

Unknown said...

"it is worth considering what the coin would to do the expectations of future government behavior held by investors, credit raters, trading partners and other relevant actors."

Is it possible the genie is already out of the bottle?