The gov't is saying they can get around the Federal Reserve and get around the debt limit by minting a $1,000,000,000 dollar coin. The fact is they could. However it would be a bad idea and likely a disaster.
Basically what they would be doing is abandoning the pretense that we have an independent central bank (the Fed) that limits the amount of money we can create and would open the door for unlimited money creation directly by the US treasury.
How does this platinum coin work as opposed to what we do now? Let's first look at what the US gov't currently does in its operations with the Fed on the US gov't debt.
The US gov't can't print money directly with what we currently do. What it can do is it can offer bonds - which is a form of borrowing money - and the Federal Reserve can choose to monetize that debt. As an aside, the Federal Reserve technically doesn't have to buy the US gov't bonds - in the best interest of the country, they really shouldn't. If the Fed was a truly independent central bank then they would refuse to monetize the debt of the US gov't, but unfortunately, they are monetizing all the debts.
What happens in today's world is the gov't issues debt, and as the Federal Reserve chooses to buy that debt, then the Federal Reserve is the entity that creates the money. The Federal Reserve creates Federal Reserve notes, which are liabilities of the Fed, although they are not liable to pay anything. The Federal Reserve then credits the government's bank account, and this is done indirectly through Morgan Stanley, or Goldman Sachs, etc. The bottom line is the government's debts are turned into money, which is where you get monetizing debt.
In THEORY, at least, the Fed can contract the money supply. It can withdraw the liquidity because the Fed owns the US gov't bonds which, whenever the Fed wants it can sell the bonds into the market and take away the money that it created. In other words it can reverse the flows and sop up all the liquidity, as in the case of high inflation. Again this is in theory - in practice today, the Fed cannot and likely will not do this. If the Fed actually tried to unload its hoard of treasuries and mortgage-backed securities, it would kill the market. The bond market would collapse and so would the housing market, and interest rates would skyrocket. The Fed will never admit to this, but it is reality. But at least with the Fed, there is the pretense - people out there believe that the Fed can expand and contract the money supply at will.
Now with the proposed $1,000,000,000 coin. The government would deposit this coin over at the Fed and write checks against it. The Fed no longer has an asset that it can sell. What the US gov't would be doing is taking this coin to Federal Reserve and cashing it. The US gov't would say hey Federal Reserve, give me $1,000,000,000 in Federal Reserve Notes in exchange for this coin, so Congress doesn't owe the Federal Reserve anything. The Fed with this coin can no longer drain liquidity in the way they can do now. In other words the coin has no liquidity! This means a $1,000,000,000 or what the coin is worth would not be used in open-market operations. This means an extra $1,000,000,000 would instantly be added to the money supply and can NEVER be withdrawn. This is a very bad idea. The US gov't would debase our dollar even further and make the things all Americans buy instantly more expensive.
Basically what they would be doing is abandoning the pretense that we have an independent central bank (the Fed) that limits the amount of money we can create and would open the door for unlimited money creation directly by the US treasury.
How does this platinum coin work as opposed to what we do now? Let's first look at what the US gov't currently does in its operations with the Fed on the US gov't debt.
The US gov't can't print money directly with what we currently do. What it can do is it can offer bonds - which is a form of borrowing money - and the Federal Reserve can choose to monetize that debt. As an aside, the Federal Reserve technically doesn't have to buy the US gov't bonds - in the best interest of the country, they really shouldn't. If the Fed was a truly independent central bank then they would refuse to monetize the debt of the US gov't, but unfortunately, they are monetizing all the debts.
What happens in today's world is the gov't issues debt, and as the Federal Reserve chooses to buy that debt, then the Federal Reserve is the entity that creates the money. The Federal Reserve creates Federal Reserve notes, which are liabilities of the Fed, although they are not liable to pay anything. The Federal Reserve then credits the government's bank account, and this is done indirectly through Morgan Stanley, or Goldman Sachs, etc. The bottom line is the government's debts are turned into money, which is where you get monetizing debt.
In THEORY, at least, the Fed can contract the money supply. It can withdraw the liquidity because the Fed owns the US gov't bonds which, whenever the Fed wants it can sell the bonds into the market and take away the money that it created. In other words it can reverse the flows and sop up all the liquidity, as in the case of high inflation. Again this is in theory - in practice today, the Fed cannot and likely will not do this. If the Fed actually tried to unload its hoard of treasuries and mortgage-backed securities, it would kill the market. The bond market would collapse and so would the housing market, and interest rates would skyrocket. The Fed will never admit to this, but it is reality. But at least with the Fed, there is the pretense - people out there believe that the Fed can expand and contract the money supply at will.
Now with the proposed $1,000,000,000 coin. The government would deposit this coin over at the Fed and write checks against it. The Fed no longer has an asset that it can sell. What the US gov't would be doing is taking this coin to Federal Reserve and cashing it. The US gov't would say hey Federal Reserve, give me $1,000,000,000 in Federal Reserve Notes in exchange for this coin, so Congress doesn't owe the Federal Reserve anything. The Fed with this coin can no longer drain liquidity in the way they can do now. In other words the coin has no liquidity! This means a $1,000,000,000 or what the coin is worth would not be used in open-market operations. This means an extra $1,000,000,000 would instantly be added to the money supply and can NEVER be withdrawn. This is a very bad idea. The US gov't would debase our dollar even further and make the things all Americans buy instantly more expensive.
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