This is a long post in New Economic Perspectives setting out patiently and exhaustively why minting trillion dollar coins is not inflationary in itself…
Monday, August 01, 2011By Scott FullwilerSolving the debt-ceiling issue via proof platinum coin seigniorage—an idea that began and was nurtured within the MMT ranks, mostly by Joe Firestone and Beowulf (see Joe’s post here and the numerous links therein)—has gone viral in the blogs and news sources as a viable option to end the debt ceiling crisis. The one thing that naysayers, and even some supporters, instinctively claim, however, is that coin seigniorage would be inflationary or even hyperinflationary. But this is not true!….Let’s begin by noting the most basic point in the proposal (see link above for more details)—a platinum coin or coins would be minted and deposited in the US Mint’s Public Enterprise Fund (PEF) at the Fed, where it would be credited for its (their) full legal tender face value by the Fed. The Treasury would then “sweep” the profits (the difference between the cost to the Mint of producing the coin (s) and face value of the coin(s)) into the Treasury general Account (TGA) at the Federal Reserve. The face value of the coin(s) can be whatever the Mint chooses to stamp on it (them); there is no requirement that the coin(s) weight be related to the face value. So, the coin(s) could be $1 trillion or more, or less if preferred. This is all perfectly legal, as, again, several blogs and news articles have explained. It’s highly unlikely that one would have to worry about the coin(s) being stolen—they would be nothing more than a collector’s item as the extraordinarily high dollar value could never actually be cashed anywhere (who’s going to give you change for $1 trillion?).
Analytical Mistakes Made by Those Claiming Coin Seigniorage Would Be Inflationary
All in all, those claiming that proof-platinum coin seigniorage would be inflationary are in fact guilty of one or more of the following:(a) misunderstanding the very basics of the proposal;
(b) misunderstanding how the monetary system actually works;
(c) misunderstanding the standard textbook explanation of the monetary system; and/or
(d) misunderstanding the options available to policy makers for dealing with concerns related to the standard textbook understanding of the monetary system.Consequently, there is simply no reason for anyone who has carefully thought through the proposal and how it would actually work to argue that coin seigniorage would be inflationary (aside from the possible temporary reactions by those in markets that might similarly have a poor understanding of both of these—which itself assumes that policy makers in conflict with their own interests do a poor job of explaining the proposal and its effects).Conclusion
We need to be on guard against inflation all the time; indeed, MMT’ers have always argued that inflation is the true constraint that the government should concern itself with, not traditional notions of “sound finance” or “bankruptcy.” Even so, we shouldn’t be paralyzed in adopting new financial arrangements for the federal government by people invoking the bogeyman hiding under the bed. That, only means that we will never cope with our financial problems and always remain in the present silly deadlocks, or worse (as in, sometimes the solutions to the deadlocks make one wonder if the deadlock was all that bad). What I’ve shown above is that there’s no reason to believe that using proof-platinum coin seigniorage will cause either significant demand-pull or cost-push inflation, regardless of the denomination, whether it be $ 1 trillion or $60 trillion, of the coin used to fill the federal purse. So, the coin seigniorage option for coping with the debt ceiling—whether now or in the future—is both a legal option, and also one that will not have any inflationary side effects.The amount of coin seigniorage employed is highly significant for several issues, including the following: whether we will have any federal debt in the future as measured by the debt ceiling or the ratings agencies; whether wealthy individuals or foreign nations will continue to receive risk-free “welfare” payments in the form of interest from the federal government; whether we will perform reserve drains via debt issuance or paying interest on reserve balances; whether arguing over the national debt and deficits will have a place in our politics anymore; whether we will ever suffer the fate of Greece. However, one issue that it is not relevant to is whether coin seigniorage itself causes inflation. It just doesn’t.(Special thanks to Joe Firestone for helpful comments and suggestions. For those interested, there is further discussion of the issues raised above here)
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