Tuesday, January 15, 2013

Sense and Nonsense (Bruce Bartlett Edition)

Bruce Bartlett, who held senior policy positions in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul, is out with a column that is a  combination of sense and nonsense.

He begins with a point that I have been making since the trillion dollar platinum coin idea became popular:
Washington had been buzzing about the idea of minting a $1 trillion platinum coin in the event that Republicans block an increase in the debt limit (as they did in 2011), until the Treasury and the Federal Reserve rejected the idea.
But whether or not creating a $1 trillion coin to avoid defaulting on the debt was reasonable, in accounting terms it would have been no big deal — simply a larger scale of what the Treasury and the Fed do every day.
The above is correct, the Fed and Treasury would be doing pretty much the same dance, in platinum clothing rather than paper clothing . But Bartlett then goes on to say:
While some people worried aloud that the creation of $1 trillion of cash would be dangerously inflationary, this is nonsense. The coin would not affect monetary policy. The Treasury and Fed constantly coordinate their actions so that tax receipts don’t reduce the money supply and Treasury payments don’t lead to an increase.
Bartlett is technically correct here. The issuance of the coin and the Treasury depositing such coin at the Fed would not in itself cause monetary inflation, but monetary inflation could occur. As part of the operation involving the Treasury depositing such a coin at the Fed, the Fed would issue, to the Treasury, Federal Reserves notes or a credit at the Fed against the coin. If this issuance of Fed credit is not sterilized (by the Fed simultaneously selling off Treasury securities equal in dollar amount to the credit issued by the Fed to the Treasury), the money supply would, indeed, climb. But, again, the Fed could technically sterilize any credit issued to the Treasury.

This is Bartlett's point when he writes:
If Treasury payments threatened to raise the money supply more than the Fed would like, it would simply sell bonds from its portfolio to absorb the excess liquidity. Possessing close to $3 trillion of Treasury securities, the Fed could easily offset all the cash created by the platinum coin.
There are a number of problems here. First, Bartlett is incorrect when stating the Fed owns $3 trillion in Treasury securities. The Fed owns $1.6 trillion in Treasury securities. Another trillion dollars is held by the Fed in mortgage backed securities, not Treasury paper. This is a significant difference and a major factual error being made here by Bartlett.

Mortgage backed securities would be much more difficult for the Fed to liquidate, relative to Treasury securities. And so, while Bartlett gives the impression that a sterilization is just a technical operation, for sure, it becomes much more difficult at some point, given the liquidity problems with the MBS paper. That is, even if we grant that the liquidation of Treasury securities is an easy operation, the limits to such operations would be $1.6 trillion, not $3 trillion. In other words, the Fed could only, over time, sterilize 1 1/2 trillion dollar coins deposited by the Treasury, not 3 coins.

However, there is an even further problem, in that it is by no means certain a Fed sterilization could be easily pulled off without enormous upward pressure on interest rates (even if the Fed just used the Treasury securities it had on hand.). While the Fed could technically sterilize a trillion dollar platinum coin, it would unlikley do so entirely because of the upward pressure on interest rates. Thus, Bartlett's seeming sloughing off of the monetary inflationary consequences is misleading. The coin, in other words, would free up as much as a trillion dollars in new government spending, which would have to be sucked out of the bond markets (unlikely, though technically possible)  or paid for with newly created Fed money (much more likely).

Bartlett then gets even more misleading:
Nor would the creation of a $1 trillion coin have led to higher spending. The Treasury could still spend only what has been authorized by Congress.
The coin would lead to more spending, since although Congress already has authorized more spending, the Treasury can't spend what it doesn't have, so the spending does stop without the debt ceiling raised or the coin issued. If the coin was issued, it would allow the spending to go on that would otherwise have stopped, i.e., spending is higher.

Bartlett than supplies us with some interesting data about how GDP is calculated (my highlight):
[...] although it is part of the federal government, the Fed is treated as a private bank for the purposes of calculating the gross domestic product. The data can be found in Table 6.16D of the national income and product accounts. They show that in 2011, the Fed generated a profit of $75.9 billion – 18.6 percent of all the profits generated by the financial sector of the United States economy and 5.6 percent of the total profits of all domestic industries.
In other words, 18.6% of profits shown in GDP data for the financial sector is really only hocus pocus magic resulting from Federal Reserve money printing activities.


  1. I will leave to others the discussion about the merits of the coin concept.
    Here is my child-like question: don't you need metal to mint a coin?

    Where would said platinum be coming from? My understanding is that the US (Fed GOV) has no strategic platinum reserve or other holdings.

    What's the plan, write a rubber check for the metal?

  2. "don't you need metal to mint a coin?"

    No. And a metal "coin" would be embarrassing to the religious principle that money is a pure invention of our God the state that is issued by the state through its priests.

    So, in keeping with state religious principles, the "coin" will be minted as a polished turd and denominated at $2+ trillion.

  3. Once more. If they can mint coins or print money, why do we need to pay taxes? Can't they just fund the gov't with free money?

  4. Good article.

    Aren't most or all of the profits of the financial sector "hocus pocus magic" because nearly all financial institutions are tied to the Federal Reserve system and heavily regulated? Sort of like profits of Soviet tractor factories back in the day. Under such conditions, the reported profits may not serve as an objective measure of how well the industry is satisfying market demand. Instead the "profits" may be arbitrary numbers generated primarily for political purposes.