Saturday, January 12, 2013

Why the Platinum Coin Must Never Be Minted

Tim Duy's post on why the Very Serious People inside the Beltway couldn't countenance the Big Coin option is deeply insightful:
As the debate continued, it became increasingly evident that the platinum coin threatened the conventional wisdom in very deep and profound ways.   It was a threat that could not be endured by Washington.

This realization hit me this morning, working on my last piece.  Begin with the effectiveness of monetary policy at the zero bound.  Or, more accurately, the lack of effectiveness as the Federal Reserve is swapping one zero-interest asset for another.  Rarely do we take this to its logical conclusion for fiscal policy:  If there is no difference between cash and Treasury bonds, why should we issue bonds at all?  Why not simply issue cash?  In other words, at the zero bound, what is the argument against monetizing deficit spending?
Indeed, the lack of any difference explains how Japan can sustain massive fiscal deficits year after year.  At the zero bound, cash and government debt are the same thing.  We would assume that as long as inflation was not a concern (which it wouldn't be at the zero bound), the fiscal authority could issue as much cash as it wants, so why couldn't it issue as many bonds as it wants?  After all, at the zero bound the two are equivalent.  Hence Japan continues to defy predictions of doom despite ongoing debt issuance. 
Carrying the argument further, the illusion of a difference between cash and debt at the zero bound is counterproductive because it prevents the full application of fiscal policy.  Fears about the magnitude of the government debt prevent sufficient fiscal policy, but such fears are not rational if debt and cash are perfect substitutes. If cash and debt are the same, the fiscal authority should prefer to issue cash if debt concerns create a false barrier to fiscal policy.
Bottom Line: The platinum coin idea was ultimately doomed to failure because neither the Federal Reserve nor the Treasury could allow for even the remote possibility it might be successful. Its success would not just alter the political dynamic by removing the the debt ceiling as a threat. The success of a platinum coin would fundamentally alter the conventional wisdom about the proper separation of fiscal and monetary policy and the need to control the debt immediately.
(via Mark Thoma)

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