Forestall the "Debt Crisis": Mint a 5 Trillion Dollar Coin | Hacker News Reader

Forestall the "Debt Crisis": Mint a 5 Trillion Dollar Coin

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48 pointssunsu52 comments

http://www.bloomberg.com/markets/rates-bonds/government-bond... says that the current yield on 1-year US treasuries is 0.20%. If I understand correctly, that means that if you plow US$100 000 into 1-year US treasuries in the open market, you get treasuries redeemable (at the Treasury) a year from now for US$100 200. (Thanks for the correction to the number, aquark and perlgeek.)

In other words, the bond market says that the big banks are betting heavily against any kind of hyperinflationary move like this.

I think you are missing a 0 ... it would be $100 200.

Still at that rate you'd figure the transaction costs of moving the money around would swamp most of the return

The return is surely already negative if you take into account inflation.

If the 'supercoin' is only held by the government, and only used to free up enough of its debt to itself to continue on the same fiscal path as a debt-ceiling-change would allow, then it won't be any more hyperinflationary than a debt-ceiling-change.

Now, if instead they gave the $5 trillion coin to Goldman Sachs... :)

US$100 200 actually.

Krugman is even talking about this on the NY Times blog.

http://krugman.blogs.nytimes.com/2011/07/29/lawyers-coins-an...

I love how all of that stuff is legal, and yet inaction could lead to a totally illegal violation of the 14th amendment. Irony at it's most expensive.

I feel like this entire house of cards that is the international financial system is going to completely collapse in my lifetime. I'm not extremely familiar with the details, but the more I learn, the more fragile and arbitrary the whole thing seems.

I recently read a fiction book, "The Panic of '89" by Paul Erdman, which discusses a hypothetical terrorist plot to create an international run on US-priced financial instruments and institutions. Interesting hypotheticals abound.

It also mentions the Gramm-Rudman act, which I had not heard of prior to reading the book. It was an 'Emergency Deficit Reduction Act' from 1985.

http://en.wikipedia.org/wiki/Gramm%E2%80%93Rudman%E2%80%93Ho...

The really interesting thing is it's probably the most stable house of cards ever built; generally speaking, it is in nobody's best interests for the international finance system to collapse.

Interestingly enough, there are conspiracy theories that say JFK did something similar to try to subvert the FED's total authority to "print money" by doing something similar to what is suggested in the article. The order gave the Treasury the power to issue silver certificates against any silver bullion, silver, or standard silver dollars in the Treasury.

See executive order 11110: http://en.wikipedia.org/wiki/Executive_Order_11110

Jack Balkin has been engaging in a sort of parlor game of making up other alternatives as well. The main issue is that issuing debt is just one way of acquiring/manufacturing cash; you can do it lots of other ways. A straightforward way is minting coins. But you can even do it ways that the private-sector can also do, like by selling options on government assets, or inventing and selling derivative securities.

For example, he has an only-half-tongue-in-cheek article about how to use some of the magic from the recent financial crisis to gain a bunch of cash on hand. Banks can in effect mint money by writing and selling derivative securities. Well, if the Treasury issues credit-default-swaps on its own debt, it collects a premium up front (the value of the CDS), and if it never defaults, it never has to make a payout. Even better, it could write a gigantic CDS for the entire debt, and deposit it with the Federal Reserve, which would credit the account for the value of the instrument, like they do with any member bank that deposits a financial instrument. Of course, that financial instrument was just recently manufactured from thin air before it was deposited, but that's true of any CDS.

http://balkin.blogspot.com/2011/07/end-debt-crisis-now-with-...

The treasury selling CDS on its own debt makes no sense, because the credit-worthiness of your insurer is completely correlated to the underlying credit. So people would pay zero for the credit protection.

Quite why people away from the financial markets assume that those that are are going to fall for something so obvious is a mystery to me. And if you think that the housing crisis is a counterexample, I should point out that people over-leveraging themselves to invest in property at ever-increasing prices was common wisdom back in 2005.

Hmm true, but I believe the Fed would be the buyer in this case, not the open market. The government would be selling its own instruments to a quasi-governmental entity, like BoA writing a CDS and selling it to a BoA subsidiary.

If they actually do this I think any faith I have left in the US's monetary system will be gone. This is just too absurd.

Same here. Can I have my paycheck in Swiss Francs?

Essentially, yes.

In the world of ~low friction (fast, low cost) financial transactions and liquid markets, you should be able to separate out the three roles of money: medium of exchange, store of value, and unit of account.

Basically no one keeps substantial amounts of wealth in USD directly as a store of value; you have a bunch of more related or less related assets in an account (money market, treasury securities being more related; equity in foreign businesses with little exposure to the USA being less related).

Medium of exchange usually is fairly instant; you can liquidate money market automatically to pay your debit card/credit card/checking/wire transactions. This could easily be anything mutually agreed by both parties in a transaction, but is almost always USD, unless it's conducted entirely within a foreign currency zone. A Japanese company paying a Chinese company is likely to use USD for the exchange, even.

Unit of account is the tricky one. With the right UI skin over your bank account, you should be able to display your wealth in arbitrary units ("houses", Audi A4s, kilos of cocaine, etc.) based on current exchange rates. You could also have a browser hack which replaces USD prices in pages with EUR or Cocaine-kg prices.

Nice that you bring that up. Why can't it work like that? Sure the burrito lunch truck guy would look at me kind of funny if I tried to pay him that way, but that is what we have exchange rates for. Why isn't it a thing that I work out with my employer what currency I want to be paid in?

I don't buy all the mumbo jumbo about different economies rising and falling in different geographic regions and whatnot either. If that were the real reason then we should have seperate currencies for the west, middle, and east areas of the US. Hell, each city should have their own currency in that case, why should Detroit's shittyness drag down the economies of cities thousands of miles away?

Geography is a terribly abstract concept in this world where communication is for all intents and purposes instant and I can get packages to anyone regardless of location in less than 24 hours. Companies paying people with US currency just because that particular building happens to be located in the US is just absurd if you think about it.

If your employer receives revenue in US dollars, and you pay your expenses in US dollars, committing to pay in Swiss francs adds volatility from both their perspective and yours.

This is the essential bar to adoption of any new currency.

My employer happens to receive revenue in numerous currencies. I do think that it should be up to the employer which currencies they want to offer payment in, but I really think that it should be something that is legal (is it not? I don't know) and to a certain degree expected.

I'm pretty sure that it's legal for me to pay you in pesos, franks, shekels or whatever else you and i find mutually agreeable. Note, though, that this does not get me out of paying payroll taxes in dollars or you out of paying your income taxes in dollars; I've still gotta figure your payroll taxes based on the value of whatever I'm giving you in dollars, and then pay that to the government in dollars.

This does make doing so rather a lot more complex; I mean, do you pay taxes based on the value of the foreign coin in dollars when you are paid? at the end of the year? etc, etc. It'd get complicated pretty fast, so it's usually easiest for a business to operate in a main currency, and if the employee wants franks or what have you, the employee can go buy them after they get paid in whatever the standard currency is.

It can. Employment is a negotiation like any other. If you're irreplaceable you can demand to be paid in Swiss Francs, blue M&Ms, or organic saffron if you so desire. However, if you're not that unique of a snowflake your employer will see no reason to jump through hoops and incur the extra costs of meeting your demands.

Currency itself is an abstract concept. There are many reasons currencies are associated with nations (instead of just cities or other smaller economic regions). The most important reason is that currencies are under the control of some sort of central bank (the FED in the US the ECB in the eurozone). Because the fed controls the supply of money and the fed is a national institutions it makes sense that the fed would be attempting to do what it thinks is best for the nation (and therefore the people living in that nation). One of the major reasons currencies fluctuate between different nations is due to changes in the money supply (which is obviously related to economic production and the intervention of the fed). So having currencies associated with sovereign states makes a lot of sense.

The concept of nations is a relic though. We're not under threat of roaming Hun tribes or whatnot. The exclusive modern purpose of a nation seems to be to have a currency, and the purpose of the nationally administered currency seems to be to maintain the nation... Seems terribly circular to me.

If we admit that geographically defined nations are silly then I don't see any reason why we can't just let people, businesses, or perhaps even entire cities, choose which currency they wish to subscribe to.

"The exclusive modern purpose of a nation seems to be to have a currency"

That is incorrect. The purpose of a nation is manifold, nations provide a lot more than just a currency for example: rule of law, public services (roads, fire service), judicial system, safety regulations, an open and efficient marketplace. Currency is a means to some of these ends not a purpose in and of itself. Now like everything else in life not all of these tasks are always well executed and thats why governments do things like change laws and policies and provide for mechanisms such as the courts and a free press. I believe you are taking a very narrow view of what a nation is and what it (strives) to provide.

In almost all of these cases a State or local government is providing those things or could easily provide those things.

Very very few things make sense to govern at a scale the size of the continental US.

Ok, I'd love to hear this. What things make sense to govern at a quater-dozen timezone scale?

They do when it matters. Many countries at various times have used the dollar as a non official but widespread currency, eg much of south america, and Russia.

You could simply invest your US income in the currency exchange market (FX or Forex).

Or buy a currency-linked ETF ('FXF' for instance).

It doesn't sound too much different than QE1 & QE2 -- where the Federal Reserve created a trillion dollars out of thin air and used it to buy US debt and mortgage securities.

I'm not a lawyer, but don't the courts usually sort out conflicting laws? It seems that's the case -- congress demanded the executive branch spend money -- and congress has now decided the executive branch can't spend money. Why doesn't Obama take it to the courts?

It's quite possible the courts would punt on this one due to separation-of-powers concerns. If Congress passes a law requiring the president to execute some laws, but also refuses to fund him sufficiently to do so, resolving the problem arguably is the responsibility of the executive branch.

The SC isn't known for being expeditious. Obama likes to believe congress will work together to solve these things, and it works most of the time. But now we're less than a week from needing a solution with no signs of progress.

Wouldn't this cause massive inflation almost instantly? We could have the next Zimbabwean Dollar (http://en.wikipedia.org/wiki/Zimbabwean_dollar). Isn't this extra just 'printing money' the type of thing that you learn in Econ 101 is about the worst possible thing for an economy? Sounds like the medicine will be worse than the disease?

Not necessarily, though $5 trillion all at once would probably not be a good idea. The money supply is a bit tricky in these days when most transactions (especially large ones) don't actually use cash. Issuing new debt in a sense already is like printing money, because bonds can be used as cash-like instruments in many situations. That's particularly true of U.S. Treasuries, because they're safe and liquid enough that they can be used as quasi-cash, especially for large transactions, e.g. settling part of a debt by transferring title to Treasuries. It's a bit of an open question to what extent just printing $500b would be different from issuing $500b in new bonds, and heavily interacts with the background situation (e.g. prevailing interest rates, demand for Treasuries, liquidity situation).

There are a decent number of economists who think that the U.S. a year or two ago should've fought deflation by just printing $500b or $1 trillion or something, rather than pursuing the quantitative easing (QE) scheme, which uses financial trickery to get some of the same effect without officially printing money. The just-print-money option may have actually worked better, been more transparent, and had the added bonus of reducing our national debt.

It can only cause inflation when the money actually hits the economy. The effect would be no different than raising the debt ceiling. Some special book keeping (which is what this whole mess is) will do nothing by itself.

the coin doesn't hit the economy but it enables further borrowing which does.

surprised at all the 'no this is actually quote ok' arguments. you can't print value out of thin air. you only print volume which taxes the holders of existing USD.

I didn't say it wouldn't be inflationary.

We've already printed and spent quite a bit of money, and while it has produced increases in commodity prices it has not produced hyperinflation. Replacing debt-backed money with debt-free money, while leaving the amount of money more or less the same, would also not cause hyperinflation.

The GDP of the US is 2,800 Zimbabwes. A couple trillion is a big number, but it's not going to be a huge problem for the US.

What if Fidel Castro steals it?

Give what back?

So, is America now a complete laughing stock abroad? I really wonder what non-USian folks think about all this political posturing and willingness to play chicken with the financial reputation of the US.

I’m more worried than laughing. I would laugh if what’s happening were inconsequential to me.

I'm actually quite sad. This seems so unnecessarily self-destructive. It feels like watching a girl cut her forearms with a broken beerglass.

Laughing stock abroad? Hell, they're a laughing stock in the US right now.

It's a major ongoing story in the newspapers here in Belgium (front page, all of p.3 today in mine). Don't worry, we and other countries in Europe that I am familiar with have our own face-palming political situations, though of course our countries are smaller. If anything it makes me feel we're all in the same boat together.

Most people don't, do the newspapers do mention it every couple of days.

Granted I am in Scandinavia so they are likely to be more biased but right now they are far, far more concerned with the terrorists reaction when he heard the number of people he murdered, who was buried first, etc, etc, etc.

I don't think anyone is doing that. There is precisely no risk of sovereign default, even if we don't raise the debt ceiling for a couple years.

The consequences of a downgrade are TERRIBLE : So much of modern finance relies on Treasuries being AAA to act as some kind of bed-rock.

Just like your idea of 'precisely no risk' of default, what would happen if the programming constant ZERO was only guaranteed to be close to 0? And not really a constant?

I said that there was no risk of sovereign default. Our tax revenue exceeds the cost of our debt service by a factor of more than 10. Do you anticipate that our blended interest rate will increase by a factor of 10 in the near future?

We would certainly run a great risk of downgrade (but not of default) if we raise the debt ceiling without making any significant effort to lower our deficit going forward. This seems to be the plan of our politicians, however.

Its just another blip in the entertaining dysfunction of your politics.

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