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Turning An Absurd Situation Into a Teachable Moment, Platinum Coin Edition…

January 10th, 2013 · 8 Comments
Macroeconomics · Policy

Twitter tells me that I’m behind on this platinum coin thing:

Personally, I would like to know whether the economists seemed appalled by the idea of the platinum coin or the idea of blogging. Anyway, in case you’re been in a cave for the last couple of weeks, there is apparently legislation on the books that, on a technicality, would allow President Obama to fulfill the government’s debt obligations without needing to get congressional approval to raise the debt ceiling. The debt ceiling arguments are pretty absurd in the first place, since a vote to raise the debt ceiling is just a vote to actually pay out the money that you voted to spend at an earlier point in time. (It’s like voting to pay an AmEx bill or something.) So the bypass should be a nice, reasonable thing, right? Well the joke’s on you (and the government, apparently), since the proposed bypass involves the minting of a trillion-dollar platinum coin. (If you don’t believe me, you can read an excellent summary here, or you can read it straight from the likes of Paul Krugman here. And I’m pretty sure that this time, unlike with his theory of interstellar trade, he is in fact serious.)

At first, much of the debate was around whether this trillion-dollar coin thing was a good idea from either a political or economic perspective, but soon the logistical debate over this coin got way more interesting. It started off with a conversation I had with a friend that went like this:

Friend: So, dumb question. How can the gov’t produce a coin and just say it’s worth $1 trillion?
Me: Well, how can the gov’t produce a piece of paper and say it’s worth a dollar?


I was a bit taken aback by the fact that my friend seemed to have momentarily forgotten how money works. After all, I thought that we had cleared up this issue around the time that we were told that zinc prices were such that is costs well over a penny to make a penny. Unfortunately, my friend is not alone:

Zerohedge:

Or perhaps you would prefer the economic (and historical) wisdom of the National Republican Congressional Committee:

(HT to Steve Benen) Yeah, sooo…*facepalm* is really the only reaction I have to all of this. First, I’m pretty sure that the Titanic is already sunk, so technically any amount of platinum would sink it. Second, did we go back to a system of commodity money and everyone forgot to tell me? If not, here’s a handy reminder:

Commodity money is money that would have value even if it were not being used as money. (This is usually referred to as having intrinsic value.) Many people cite gold as an example of commodity money, since they assert that gold has intrinsic value aside from its monetary properties. While this is true to some degree- gold does in fact have a number of uses, it’s worth noting that the most often-cited uses of gold are for making money and jewelry rather than for making non-ornamental items.

Commodity-backed money is a slight variation on commodity money. While commodity money uses the commodity itself as currency directly, commodity-backed money is money that can be exchanged on demand for a specific commodity. The gold standard is a good example of the use of commodity-backed money- under the gold standard, people were not literally carrying around gold as cash and trading gold directly for goods and services, but the system worked such that currency holders could trade in their currency for a specified amount of gold.

Fiat money is money that has no intrinsic value but that has value as money because a government decreed that it has value for that purpose. While somewhat unintuitive, a monetary system using fiat money is certainly feasible and is, in fact, used by most countries today. Fiat money is possible because the three functions of money- a medium of exchange, a unit of account, an a store of value- are fulfilled as long as all people in a society acknowledge that the fiat money is a valid form of currency.

I guess my answer to my friend should have been “it’s worth a trillion dollars because the government will exchange it for a trillion of those dollar-looking thingies.” Technically the fiat currency creation being tossed around can only be legally implemented with a platinum coin, which is why platinum is the metal of the moment.

And hence my teachable moment- instructors, this is a prime opportunity to teach your kids about how money works and the concept of seigniorage. Seigniorage, simply put, is the revenue that a government generates from minting currency, and it’s equal to the value of the currency produced minus the cost to produce it. (In the world of the two giant platinum coins above, seigniorage would, by definition, always be negative.) It’s also a great opportunity to get people to think about the logistical challenges of using commodity or commodity-backed money…after all, it’s not impossible to increase the money supply (and cause inflation) when using commodity money, it just takes a lot more digging.

Update: Apparently there’s no shortage of humor (unintentional or otherwise) on this topic. Some highlights:

From @TerryDawg03:

Via Brad Plumer:

And finally MSNBC’s tweet of the day (or morning, or something), from @pourmecoffee:

Tags: Macroeconomics · Policy

8 responses so far ↓

  • 1 Trey // Jan 10, 2013 at 5:35 pm

    Seriously? Wow.

    Facepalm, indeed.

  • 2 Bo Zimmerman // Jan 10, 2013 at 6:33 pm

    Neat article Miss Beggs (though I still believe Krugman was serious about stimulus by intersteller war preparation).

    Question about seigniorage — is there a term for the Second holders of new money — like “second order seigniorage” and third order and so forth. Has anyone studied how new money enters and flows through the economy, and the effects on the structure of production if certain groups (say government employees or SSA recipients) get new money year in and year out?

  • 3 Seth // Jan 11, 2013 at 2:46 am

    stimulus idea: wrap trillion dollar coins in reeses peanut butter cups and distribute them willy wonka style.

    the titanic will be sinking with a $trillion worth of irony.

  • 4 Shrabasti // Jan 11, 2013 at 5:13 am

    But what I don’t get is, if this coin can hypothetically be of ANY facevalue, how is this even legit? So confused. :(

  • 5 curios // Jan 11, 2013 at 12:25 pm

    isn’t this all moot though given that the reserve operates independently of the political powers. I was under the impressions that the government can’t tell the Fed to increase or decrease the money supply, so no legislation would put this coin into reality since it would not be feasible to decrease the money supply by enough to allow the coin to be circulated……

  • 6 econgirl // Jan 11, 2013 at 1:12 pm

    The coin wouldn’t actually be circulated, it would remain on deposit at the Fed and most likely be melted when the debt ceiling is actually raised. As I understand it, the coin isn’t for the purpose of increasing the money supply via open market operations, it’s for making payments on existing debt.

    In related news, you can see what the former head of the U.S. Mint and one of the guys who wrote that law that allows this has written to the blogosphere:

    http://www.washingtonpost.com/blogs/wonkblog/wp/2013/01/08/former-head-of-u-s-mint-the-platinum-coin-option-would-work/

  • 7 econstudent // Jan 11, 2013 at 11:03 pm

    Hey Jodi, I wanted your opinion (since my classes haven’t started and I haven’t been able to talk to my old macro professor from last semester) on how this won’t cause inflation. Going off of Sargent’s “Persistent high inflation is always a fiscal problem”, the platinum coin seems to me to be simply using the printing press to finance our expenditures.

    This isn’t financing our expenditures with debt or taxes. This is simply increasing the money supply (and yes, this money will go into the system, given that this is being spent on gov’t functions or transfers) which increases price levels.

    I know Krugman argues that this amount of money won’t cause a lot of inflation (right now) and there isn’t a lot of price movement according to the CPI after the massive increase in money thanks to QE1-4. So I can understand his position a little bit. But, nonetheless, this is an increase in the money supply regardless (as the government really only finances itself with debt, printing money or taxation) so I don’t see how it won’t cause inflation (at least when we hit full employment).

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