Election Politics and the Trillion Dollar Coin

Sometimes people object to the idea of the President ordering minting a $1 Trillion proof platinum coin on political grounds, even though they believe it's: legal to mint such a coin, won't be inflationary, and will allow the President to avoid the debt ceiling crisis. Robert Rice offered [1] the following as part of a longer comment on a post [2] of Beowulf's:

“Given a large portion of the country regards any form of money creation as inherently inflationary, coining the billion, trillion, or infinity coin will be fought tooth and nail in the name of preserving the value of the dollar. While this position is of course grossly mistaken, do you really think the Obama administration is going to want an argument a few weeks before the election on whether money creation is inherently inflationary?”

I think that's right. I don't think the Administration is going to want a big fuss over the inflation bogeyman a few weeks before the election. However, It won’t happen before the election because the President still has almost $800 B in headroom [3] before the debt ceiling is reached (See Daily Treasury Statement, June 20, 2012). [4] It will happen after the election. My hunch is November, though there’ll enough money to last until the new Congress starts in January, if Obama wants to continue deficit spending at the $109 B per month rate he has been running this fiscal year.

In any event, during the lame duck, and the succeeding months after he mints a jumbo coin, the President could have that debate about money creation being inflationary. He could take plenty of time to educate people about his initiative. But I think he'd be a fool to try that after minting only a $1 Trillion coin, because that coin won't solve the problem of persuading people that there are no solvency or inflation problems to worry about. It's just a half-measure, and it won't pay off the debt that many people are so freaked out about.

Let’s say, however, that he creates a $60 T coin and uses it to repay other Government agencies and buy the Treasury debt from the Fed on November 15. That will reduce the debt by 6.4 T bringing it down to $9.3 T or so. Since none of that money will be spent into the private economy, beyond normal entitlement spending, there won’t be any inflationary impact.

The Treasury has been rolling over [4] close to $4 T in debt instruments every month; meaning that most of that is probably short-term debt. So, by the end of the year our debt subject to the limit will be down to $5 T or so, and we will find out by the first quarter of next year whether paying down the debt using seigniorage is inflationary or not.

If it isn’t, as Modern Monetary Theory (MMT) predicts, then the fight over “printing money” will be over, won by MMT and reality. We’ll probably be down to about $3 T remaining longer term debt to be paid off as it comes due, and both the debt terrorists and the inflationistas will have to fall silent. Obama will have won the political fight and he will still have more than $45 T left to cover remaining debt subject to the limit, and future spending for 20 years, at least.

In short, I think the political argument against huge value Proof Platinum Coin Seigniorage (PPCS) [5] will fall to the ground, since people will love the idea of no more national debt, especially those who, not knowing about MMT, believe that our national debt is fiscally unsustainable and fiscally irresponsible.