Jan 10, 2013

How the Platinum Coin Option Helps the President's Negotiating Position

I agree with Joe Weisenthal, the debate over the platinum coin has been the most interesting discussion in ages. Not only has it split the usual coalitions—with Josh Barro allied with Atrios against Kevin Drum, for example—it's exposed in a stark way just how primitive the economic views of much of the national media are. On this segment, for example, neither of the hosts have a clear idea of what the coin proposal even is, let alone what it would do.

But Felix Salmon has a point—the coin proponents haven't been clear on the operational use of the idea. I agree that it would be a bad idea to wave the coin around and taunt the Republicans with it, they'd only be emboldened. So what should the president's strategy be? Here's my outline:

1) He should absolutely refuse to even entertain the possibility of negotiations over raising the debt ceiling. Normalizing the idea of holding the economy hostage to extract unrelated policy concessions is a terrible development, and habit needs to be broken.

2) If we indeed hit the debt ceiling, he should use Steve Randy Waldman's procedure for implementing the coin option:
The Treasury Secretary would announce that he is obliged by law to make certain payments, but that the debt ceiling prevents him from borrowing to meet those obligations. Although current institutional practice makes the Federal Reserve the nation’s primary issuer of currency, Congress in its foresight gave this power to the US Treasury as well. Following a review of the matter, the Secretary would tell us, Treasury lawyers have determined that once the capacity to make expenditures by conventional means has been exhausted, issuing currency will be the only way Treasury can reconcile its legal obligation simultaneously to make payments and respect the debt ceiling. Therefore, Treasury will reluctantly issue currency in large denominations (as it has in the past) in order to pay its bills. In practice, that would mean million-, not trillion-, dollar coins, which would be produced on an “as-needed” basis to meet the government’s expenses until borrowing authority has been restored. On the same day, the Federal Reserve would announce that it is aware of the exigencies facing the Treasury, and that, in order to fulfill its legal mandate to promote stable prices, it will “sterilize” any issue of currency by the Treasury, selling assets from its own balance sheet one-for-one. The Chairman of the Federal Reserve would hold a press conference and reassure the public that he foresees no difficulty whatsoever in preventing inflation, that the Federal Reserve has the capacity to “hoover up” nearly three trillion dollars of currency and reserves at will.
The president would do a live broadcast the day we hit the ceiling, explaining calmly that he is in a legal bind. Congress has passed a budget forcing the government to spend certain sums of money, but they have not given him the authority to borrow the money they themselves are forcing him to spend. He'd explain how on consultation with his lawyers he's determined the platinum option is legal, and he'd cite chapter and verse. He'd explain that there is no danger of inflation and that things will be returned to normal the moment Congress raises the debt limit. He could propose that he give up his power to print in return for abolishing the debt ceiling. Most of all, he'd be the classic cool, reserved Obama, reassuring everyone that this is only a little hiccup, a simple technical workaround a goofy obstacle, that won't affect anything important.

To be clear, I don't think it will get this far. My best guess (and that's all it is) is that the House GOP will probably just give up on this one.

But if the president can't acknowledge the validity of the coin option, what is the point of working through the logistics and generally talking about it so much? The real danger of the coin option is the ignorance of the national media. As we've been finding out, many members of the press have primitive, pre-Enlightenment beliefs about money. They think the government is like a household, and don't consider the implications of fiat currency. Running the government on platinum seigniorage, even temporarily, would sound deeply strange, and you can bet Republicans would be howling bloody murder. The coverage would be key. If only we had panicked reports from the likes of Judson Berger blaming the president entirely for the situation, gabbling incoherently about hyperinflation and default, then we'd likely see a big backlash and possibly impeachment.

Therefore, hashing out the debate now is critical, to give the president the confidence he needs that the platinum option is a viable one and he won't be crucified for exercising it, so he can absolutely refuse to negotiate over the debt ceiling. I'd say Team Coin has done quite well in this task so far.

PS: A different debt ceiling runaround is coming up today: an option to issue scrip instead of money, which I consider about equally valid to the coin option. Everything in this post would hold true for that option as well, with only a few minor changes in the details of implementation.

[Cross-posted from Ten Miles Square.]

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