2 Trillion over 10 years???

[Jan Van]

It is an obligation of the Federal Reserve.  That is why it called a Federal Reserve Note.  It is also shown as a liability on the balance sheet of the Federal Reserve System.

See beowulf's comment

The anomaly it addresses is that the US Govt has a debt limit yet an agency of the US Govt (the Federal Reserve) does not have a debt limit. Clearly this is a structural defect.

All the jumbo coin does is offload debt from Tsy’s books to Fed. Which doesn’t sound like much, but it would keep world financial markets from crashing simply because we are governed by morons who don’t know any better and gutless cowards who do.

[HB Reader]

It is an obligation of the Federal Reserve.  That is why it called a Federal Reserve Note.  It is also shown as a liability on the balance sheet of the Federal Reserve System.

See beowulf's comment

The anomaly it addresses is that the US Govt has a debt limit yet an agency of the US Govt (the Federal Reserve) does not have a debt limit. Clearly this is a structural defect.

All the jumbo coin does is offload debt from Tsy’s books to Fed. Which doesn’t sound like much, but it would keep world financial markets from crashing simply because we are governed by morons who don’t know any better and gutless cowards who do.

It may or may not be a structural defect.  I have reservations about the arrangement myself (as well as many others in the world).  I would prefer that we live under a gold standard.  But we don't.    

Everyone has their own opinion and fortunately here they are easy to express and don't get you in trouble.

But in my experience ignoring overwhelming legal and historical reality doesn't work very well.  

       

[Gumby]

I would prefer that we live under a gold standard.  But we don't.

I definitely see the appeal of a gold standard, but — generally speaking — what are your thoughts on the arguments against a gold standard?

Mainly...

Gold Standard: Disadvantages

• The total amount of gold that has ever been mined has been estimated at around 142,000 metric tons. This is less than the value of circulating money in the U.S. alone, where more than $8.3 trillion is in circulation or in deposit (M2). Therefore, a return to the gold standard, if also combined with a mandated end to fractional reserve banking, would result in a significant increase in the current value of gold, which may limit its use in current applications. However, this is specifically a disadvantage of return to the gold standard and not the efficacy of the gold standard itself. Some gold standard advocates consider this to be both acceptable and necessary The amount of such base currency (M0) is only about one tenth as much as the figure (M2) listed above.
• Deflation rewards savers and punishes debtors. Real debt burdens therefore rise, causing borrowers to cut spending to service their debts or to default. Lenders become wealthier, but may choose to save some of their additional wealth rather than spending it all. The overall amount of expenditure is therefore likely to fall. Deflation also prevents a central bank of its ability to stimulate spending. However in practice it has always been possible for governments to control deflation by leaving the gold standard or by artificial expenditure.
• Mainstream economists believe that economic recessions can be largely mitigated by increasing money supply during economic downturns. Following a gold standard would mean that the amount of money would be determined by the supply of gold, and hence monetary policy could no longer be used to stabilize the economy in times of economic recession. Such reason is often employed to partially blame the gold standard for the Great Depression, citing that the Federal Reserve couldn't expand credit enough to offset the deflationary forces at work in the market. Opponents of this viewpoint have argued that gold stocks were available to the Federal Reserve for credit expansion in the early 1930s, but Fed operatives failed to utilize them.
• Monetary policy would essentially be determined by the rate of gold production. Fluctuations in the amount of gold that is mined could cause inflation if there is an increase, or deflation if there is a decrease. Some hold the view that this contributed to the severity and length of the Great Depression as the gold standard forced the central banks to keep monetary policy too tight, creating deflation. Milton Friedman however argued that the main cause of the severity of the Great Depression in the United States was the Federal Reserve, and not the gold standard, as they willfully kept monetary policy tighter than was required by the gold standard.[38] Additionally, three increases by the Federal Reserve in bank reserve requirements occurred in 1936 and 1937, which doubled bank reserve requirements.
• Although the gold standard gives long-term price stability, it does in the short term bring high price volatility. In the United States from 1879 to 1913, the coefficient of variation of the annual change in price levels was 17.0, whereas from 1943 to 1990 it was only 0.88. It has been argued by, among others, Anna Schwartz that this kind of instability in short-term price levels can lead to financial instability as lenders and borrowers become uncertain about the value of debt.
• James Hamilton contended that the gold standard may be susceptible to speculative attacks when a government's financial position appears weak, although others contend that this very threat discourages governments' engaging in risky policy (see Moral Hazard). For example, some believe that the United States was forced to raise its interest rates in the middle of the Great Depression to defend the credibility of its currency after unusually easy credit policies in the 1920s. This disadvantage however is shared by all fixed exchange rate regimes and not just limited to gold money. All fixed currencies that appear weak are subject to speculative attack.
• If a country wanted to devalue its currency, it would generally produce sharper changes than the smooth declines seen in fiat currencies, depending on the method of devaluation.
• Mainstream economists believe that a low, steady rate of inflation is ideal for an economy because it incentivizes people to purchase consumable goods now rather than later. This low, steady rate of inflation is most easily achieved with a fiat currency system in which the monetary authority is free to regulate money supply.

Source: Gold Standard: Disadvantages

[stone]

HB reader "The obligations of the US Government have no credit risk, but only if the US Government ITSELF is WILLING to tax, borrow or print the money to back them.  If Congress wants to, it can force a default.  It controls the purse strings of the US Government.  Period."

I thought that Japan did default on the purely fiat Japanese Government Bonds owned by Japan's enemies during WWII. It did so as a hostile act which is not really so surprising when set against kamakazi attacks etc. That backs up what you are saying that the credit risk is that the authorities choose not to pay up.

About a gold standard system being preferable, I can imagine a non-expanding monetary system working if all the taxation was in the form of an asset tax. Without such a safeguard, my worry would be that  a handful of people would end up owning everything and managing the economy in a very ineffectual manner.

[Jan Van]

...but creating a new fiat monetary instrument like a trillion dollar coin (which would have the inherent backing of the United States Government) would violate the debt ceiling.

Why would that be? They are not issuing debt?

Yes, they are.  They are issuing a US Government dollar obligation. 

Where's the obligation, HBR?

If someone hands me a dollar, I don't see an obligation there by anyone...

It is an obligation of the Federal Reserve.  That is why it called a Federal Reserve Note.  It is also shown as a liability on the balance sheet of the Federal Reserve System.

It's a bit sad, but this kept me awake just now, so I figured I'd chase it a little bit. The above comment is about Federal Reserve Notes. But we were talking about coinage. There's a post from beowolf on this over here. One reference is to the UNITED STATES MINT 2009 Annual Report where it says on page 28:

Circulating coins are shipped to the Federal Reserve Banks (FRB) as needed to replenish inventory and fulfill commercial demand. Revenue from the sale of circulating coins is recognized at face value when coins are shipped. Earned revenue equals the gross costs incurred to make and distribute coins. Seigniorage is the difference between the face value and the gross costs of coins shipped. Seigniorage adds to the Federal Government’s cash balance, but unlike the payment of taxes or other receipts, seigniorage does not involve a transfer of financial assets from the public. Instead, it arises from the exercise of the Federal Government’s sovereign power to create money and the public’s desire to hold financial assets in the form of coins. The President’s Budget excludes seigniorage from receipts and treats it as a means of financing the national debt.

This same paragraph can be found on page 26 of the 2010 annual report. So how do I interpret that? ...seigniorage does not involve a transfer of financial assets from the public. Instead, it arises from the exercise of the Federal Government’s sovereign power to create money...

[stone]

jmourik, my understanding is that MMTers interpret the whole set up in terms of there being a "consolidated government sector" that issues "net financial assets" to the public with money creation in effect by seigniorage. They say that coins, bank reserves and bonds are all essentially equivalent because all equivalently add to non-government sector nominal wealth out of thin air. Under "normal" deficit spending circumstances the vast bulk of that "seigniorage" is in the form of bonds and the amount of coins and bank reserves remains relatively constant. Since 2008 the amount issued as bank reserves has increased dramatically but MMTers claim that that is of little consequence. MMTers claim that the complex treasury/central bank interactions are just a muddled smoke screen that has built up much as most human affairs have a tendency to degenerate into being an ever more complex muddle.

[Jan Van]

I do think MMT makes the distinction in this case between coins and bills. If I understand correctly, the Fed can print money bills (though like because the Treasury wants them to), but only the Treasury can mint coins. And the whole $1Trillion coin trick is based on that. The line I bolded above seems to tell me that them MMT-ers are on to something :-)

[stone]

jmourik, the MMT case that the Fed and the treasury should be viewed in aggregate is set out in: http://bilbo.economicoutlook.net/blog/?p=11218

I agree with HBreader that, despite MMTers saying it doesn't make sense, the Fed and Treasury could decide not to play ball just as Japan decided to default on American and UK owned JGB in WWII.

[Jan Van]

Of course. Key word being "decide"...

[HB Reader]

I do think MMT makes the distinction in this case between coins and bills. If I understand correctly, the Fed can print money bills (though like because the Treasury wants them to), but only the Treasury can mint coins. And the whole $1Trillion coin trick is based on that. The line I bolded above seems to tell me that them MMT-ers are on to something :-)

No, that is not correct.  Treasury produces both bills (Bureau of Engraving and Printing) and coins (Bureau of the Mint) for use as circulating currency.  Both bills and coins are shipped to the regional Federal Reserve Banks who each determine the mix of monetary instruments -- coins, bills, and demand deposits -- that fits the needs of the economy within their region.

The "$1Trillion coin trick" idea may make for interesting watercooler speculation, but it is more than a little nutty.  Congress has to approve new coinage designs and issuance.  The Tim Geithner (Treasury Secretary), Neal Wollin (Treasury Deputy Secretary) and other senior Departmental officials that I knew aren't going to risk jail for illegally producing a new non-circulating monetary or debt instrument like a $1 trillion coin out of the blue.  Especially if it is done with the clear and obvious intent to subvert the constitutional and well-established control Congress has always had over the US Government purse strings.   

I don't know anything about MMT (and I don't currenty have time to research it) so I don't mean to trash it, but if that is what they are calling for they had better go back to the drawing board. 

[HB Reader]

I would prefer that we live under a gold standard.  But we don't.

I definitely see the appeal of a gold standard, but — generally speaking — what are your thoughts on the arguments against a gold standard?

Mainly...

Gold Standard: Disadvantages

• The total amount of gold that has ever been mined has been estimated at around 142,000 metric tons. This is less than the value of circulating money in the U.S. alone, where more than $8.3 trillion is in circulation or in deposit (M2). Therefore, a return to the gold standard, if also combined with a mandated end to fractional reserve banking, would result in a significant increase in the current value of gold, which may limit its use in current applications. However, this is specifically a disadvantage of return to the gold standard and not the efficacy of the gold standard itself. Some gold standard advocates consider this to be both acceptable and necessary The amount of such base currency (M0) is only about one tenth as much as the figure (M2) listed above.
• Deflation rewards savers and punishes debtors. Real debt burdens therefore rise, causing borrowers to cut spending to service their debts or to default. Lenders become wealthier, but may choose to save some of their additional wealth rather than spending it all. The overall amount of expenditure is therefore likely to fall. Deflation also prevents a central bank of its ability to stimulate spending. However in practice it has always been possible for governments to control deflation by leaving the gold standard or by artificial expenditure.
• Mainstream economists believe that economic recessions can be largely mitigated by increasing money supply during economic downturns. Following a gold standard would mean that the amount of money would be determined by the supply of gold, and hence monetary policy could no longer be used to stabilize the economy in times of economic recession. Such reason is often employed to partially blame the gold standard for the Great Depression, citing that the Federal Reserve couldn't expand credit enough to offset the deflationary forces at work in the market. Opponents of this viewpoint have argued that gold stocks were available to the Federal Reserve for credit expansion in the early 1930s, but Fed operatives failed to utilize them.
• Monetary policy would essentially be determined by the rate of gold production. Fluctuations in the amount of gold that is mined could cause inflation if there is an increase, or deflation if there is a decrease. Some hold the view that this contributed to the severity and length of the Great Depression as the gold standard forced the central banks to keep monetary policy too tight, creating deflation. Milton Friedman however argued that the main cause of the severity of the Great Depression in the United States was the Federal Reserve, and not the gold standard, as they willfully kept monetary policy tighter than was required by the gold standard.[38] Additionally, three increases by the Federal Reserve in bank reserve requirements occurred in 1936 and 1937, which doubled bank reserve requirements.
• Although the gold standard gives long-term price stability, it does in the short term bring high price volatility. In the United States from 1879 to 1913, the coefficient of variation of the annual change in price levels was 17.0, whereas from 1943 to 1990 it was only 0.88. It has been argued by, among others, Anna Schwartz that this kind of instability in short-term price levels can lead to financial instability as lenders and borrowers become uncertain about the value of debt.
• James Hamilton contended that the gold standard may be susceptible to speculative attacks when a government's financial position appears weak, although others contend that this very threat discourages governments' engaging in risky policy (see Moral Hazard). For example, some believe that the United States was forced to raise its interest rates in the middle of the Great Depression to defend the credibility of its currency after unusually easy credit policies in the 1920s. This disadvantage however is shared by all fixed exchange rate regimes and not just limited to gold money. All fixed currencies that appear weak are subject to speculative attack.
• If a country wanted to devalue its currency, it would generally produce sharper changes than the smooth declines seen in fiat currencies, depending on the method of devaluation.
• Mainstream economists believe that a low, steady rate of inflation is ideal for an economy because it incentivizes people to purchase consumable goods now rather than later. This low, steady rate of inflation is most easily achieved with a fiat currency system in which the monetary authority is free to regulate money supply.

Source: Gold Standard: Disadvantages

Gumby --

Jeez, I knew I shouldn't have made that gold standard comment.  Now I have to justify it!

Just kidding.  I really don't want (or have the time) to get drawn into a long discussion about the gold standard, but I will make some general comments on those gold standard "cons" in the near future.  They are reasonable points.   

[Jan Van]

I don't know anything about MMT (and I don't currenty have time to research it) so I don't mean to trash it, but if that is what they are calling for they had better go back to the drawing board. 

They are not really calling for, but just showing the possibility. This to show the according to MMT ridiculous situation where congress could force us into default, even though we have a fiat currency and we can create money whenever we want.

Another interesting quote from the 2010 Annual Report, page 26:

Circulating coins are shipped to the Federal Reserve Banks (FRB) as needed to replenish inventory and fulfill commercial demand. Revenue from the sale of circulating coins is recognized at face value when coins are shipped. Earned revenue equals the gross costs incurred to make and distribute coins. Seigniorage is the difference between the face value and the gross costs of coins shipped. Seigniorage adds to the Federal Government’s cash balance, but unlike the payment of taxes or other receipts, seigniorage does not involve a transfer of financial assets from the public. Instead, it arises from the exercise of the Federal Government’s sovereign power to create money and the public’s desire to hold financial assets in the form of coins. The President’s Budget excludes seigniorage from receipts and treats it as a means of financing the national debt.

I like especially that last sentence, "The President’s Budget excludes seigniorage from receipts and treats it as a means of financing the national debt."

[Gumby]

Jeez, I knew I shouldn't have made that gold standard comment.  Now I have to justify it!

No, I wouldn't expect you to go through each point line-by-line. Just interested in hearing your point of view. I agree it would be nice for our money to be worth something, but sometimes I wonder if the gold standard has severe limitations as well. I'll create another discussion for this...

[doodle]

What ever happened to this??
http://en.wikipedia.org/wiki/Gramm–Rudm ... Budget_Act

It seems like we have been here before....

It is 1985, and the president has just been re-elected. The deficit has been rising through his first term, despite his annual promises to cut it. Rising also are the trade deficit and dependence on foreign capital. Congress is alarmed but undisciplined. As for the president, the deficit is his second priority. His first priority is everything else—especially avoiding tax increases, increasing security spending, and protecting entitlements.

His method of squaring the circle is to propose reductions in one narrow portion of the budget, domestic discretionary spending. Most of these cuts are too politically sensitive to pass Congress, especially when other parts of the budget and taxes are fenced off; and in truth, the president does not seem particularly interested in getting them passed. He and members of Congress all protect their agendas, and the deficit takes the hindmost.

In September of 1985, three senators—Phil Gramm, R-Texas; Warren Rudman, R-N.H.; and Ernest Hollings, D-S.C.—unexpectedly offer the ugliest, stupidest bill anyone has ever seen. It proposes to set declining annual deficit targets and impose primitive across-the-board cuts ("sequestration"), as needed, to reach the goals. Rudman calls the measure "a bad idea whose time has come."

In 1985, no one liked this Frankenstein's monster, but no one could stop it, and it had a certain monstrous logic. The real aim was not to cut spending automatically or even to meet precise targets, but to use the threat of sequestration—which would brutally and mindlessly reduce both domestic and defense spending—to force the White House and Congress into deficit-reduction negotiations. In effect, the monster took the Pentagon and domestic spending hostage. "Did I ever expect it to work exactly as written?" asked Rudman in a recent interview (he is now with the law firm Paul, Weiss, Rifkind, Wharton and Garrison in Washington and is co-chairman of the Concord Coalition, an anti-deficit group). "Of course not." But, he said, "it had a tremendous intimidation factor on a lot of people."

[Jan Van]

No, that is not correct.  Treasury produces both bills (Bureau of Engraving and Printing) and coins (Bureau of the Mint) for use as circulating currency.  Both bills and coins are shipped to the regional Federal Reserve Banks who each determine the mix of monetary instruments -- coins, bills, and demand deposits -- that fits the needs of the economy within their region.

HBReader,

My understanding is that, yes, both bureaus are part of the treasury, but there is a difference:

Each of the twelve Reserve Banks is authorized by the Federal Reserve Act to issue currency, and the Department of Treasury is authorized to issue coin. The Secretary of the Treasury approves currency designs, and the Treasury’s Bureau of Engraving and Printing prints the notes. The Federal Reserve Board places an annual printing order with the bureau.

and

Federal Reserve notes are obligations of the Reserve Banks. The Reserve Banks secure the currency they issue with legally authorized collateral, most of which is in the form of U.S. Treasury securities held by the Reserve Banks. Coin, unlike currency, is issued by the Treasury, not the Reserve Banks. The Reserve Banks order coin from the Treasury’s Bureau of the Mint and pay the Mint the full face value of coin, rather than the cost to produce it. The Reserve Banks then distribute coin to the public through depository institutions.

See Federal Reserve, Purposes and Functions, page 85.

So isn't that the big difference? The Fed secures their currency issue with collateral. The Treasury just mints coins that finances the national debt: "The President’s Budget excludes seigniorage from receipts and treats it as a means of financing the national debt."

[HB Reader]

No, that is not correct.  Treasury produces both bills (Bureau of Engraving and Printing) and coins (Bureau of the Mint) for use as circulating currency.  Both bills and coins are shipped to the regional Federal Reserve Banks who each determine the mix of monetary instruments -- coins, bills, and demand deposits -- that fits the needs of the economy within their region.

HBReader,

My understanding is that, yes, both bureaus are part of the treasury, but there is a difference:

Each of the twelve Reserve Banks is authorized by the Federal Reserve Act to issue currency, and the Department of Treasury is authorized to issue coin. The Secretary of the Treasury approves currency designs, and the Treasury’s Bureau of Engraving and Printing prints the notes. The Federal Reserve Board places an annual printing order with the bureau.

and

Federal Reserve notes are obligations of the Reserve Banks. The Reserve Banks secure the currency they issue with legally authorized collateral, most of which is in the form of U.S. Treasury securities held by the Reserve Banks. Coin, unlike currency, is issued by the Treasury, not the Reserve Banks. The Reserve Banks order coin from the Treasury’s Bureau of the Mint and pay the Mint the full face value of coin, rather than the cost to produce it. The Reserve Banks then distribute coin to the public through depository institutions.

See Federal Reserve, Purposes and Functions, page 85.

So isn't that the big difference? The Fed secures their currency issue with collateral. The Treasury just mints coins that finances the national debt: "The President’s Budget excludes seigniorage from receipts and treats it as a means of financing the national debt."

It is true that seigniorage (which can sometimes be negative) on coinage can contribute to increasing or decreasing the national debt.  But seigniorage arises from the difference of the cost of coinage production and the face value of coinage distributed by the Federal Reserve for use in commerce.  It can not arise from the production and distribution of a coin that has no commercial value. 
     

[Jan Van]

It can not arise from the production and distribution of a coin that has no commercial value.         

I guess the argument then is that this allows the secretary to issue a commercial value coin:

§ 5112. Denominations, specifications, and design of coins

(k) The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.

[HB Reader]

It can not arise from the production and distribution of a coin that has no commercial value.         

I guess the argument then is that this allows the secretary to issue a commercial value coin:

§ 5112. Denominations, specifications, and design of coins

(k) The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.

The platinum coins (just like the American Gold and Silver Eagles) have legal tender face value.  The face value of the one ounce Platinum coin is $100.   

[Jan Van]

Yeah, and then one would need way too many coins so they say the Treasury should mint a nice shiny $1T platinum coin...

[HB Reader]

Yeah, and then one would need way too many coins so they say the Treasury should mint a nice shiny $1T platinum coin...

I'm not sure who "they" are, but ...

the reality is that the Bureau of the Mint at Treasury could strike a $1Quadrillion, $1Trillion, $1Billion, $1Million, $1Thousand, $1Hundred, $1Ten, $1One, $.1 or $.01 coin (take your pick) from anything they choose (platinum, gold, silver, copper, tin, rare earth minerals, driftwood, cow pies or pressed fairy dust) but unless it is produced at a cost lower than the legal tender face value at which it can be circulated through the Federal Reserve System, or a value lower than which it can be sold directly to the public (like bullion coins), it won't produce a net surplus for the US Government. 

[Jan Van]

the reality is that the Bureau of the Mint at Treasury could strike a $1Quadrillion, $1Trillion, $1Billion, $1Million, $1Thousand, $1Hundred, $1Ten, $1One, $.1 or $.01 coin (take your pick) from anything they choose (platinum, gold, silver, copper, tin, rare earth minerals, driftwood, cow pies or pressed fairy dust) but unless it is produced at a cost lower than the legal tender face value at which it can be circulated through the Federal Reserve System, or a value lower than which it can be sold directly to the public (like bullion coins), it won't produce a net surplus for the US Government.

No, I don't think they can, if I interpret this correctly. See § 5112. Denominations, specifications, and design of coins. It mentions platinum, gold, silver, copper and zinc. It also specifically mentions

(a) The Secretary of the Treasury may mint and issue only the following coins:

(1) a dollar coin (2) a half dollar coin (3) a quarter dollar coin (4) a dime coin (5) a 5-cent coin (6) a one-cent coin (7) A fifty dollar gold coin ( 8 ) A twenty-five dollar gold coin (9) A ten dollar gold coin (10) A five dollar gold coin (11) A $50 gold coin. In (b) it describes what they should be made of ("The half dollar, quarter dollar, and dime coins are clad coins with 3 layers of metal"). Also, it says about the silver and gold coins that they have to be sold "at a price equal to the market value of the bullion at the time of sale" plus cost and such (f)(1) and (i)(2a). So those wouldn't help us even if we could mint them as $1T. Which according to (1)(a) we can not.

However, it doesn't make that exception for platinum coins...

(k) The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.

[HB Reader]

However, it doesn't make that exception for platinum coins...

(k) The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.

So the Secretary can create a platinum coin of any denomination he desires.  That doesn't change anything.

Unless the coin can be circulated in the commercial banking system (i.e., shipped to and then distributed by the Federal Reserve to a member bank) at a face value higher than it costs to produce it, or sold directly to the public for more than it costs to produce it, the USG will receive no net benefit.

There is virtually no demand in the commercial banking system for $1 dollar coins right now, so why in the world would a bank want to have a higher denomination coin?  No bank wants to hold more vault cash (banknotes and coins) than it needs for immediate commercial purposes because it doesn't make anything on it.  It certainly wouldn't pay for, request or retain a coin that it couldn't use in commerce.

The public won't buy large denomination coins or tokens from the Mint at face value or higher unless they receive something with equal or greater intrinsic metal value -- like the American gold, silver and platinum Eagles.  I doubt there is any commercial demand for a coin or token containing $1 Trillion worth of platinum (even if there were that much platinum in the world and such a coin could be produced).  And the Mint would hardly make anything on it anyway.   

[Jan Van]

So the Secretary can create a platinum coin of any denomination he desires.  That doesn't change anything.

Unless the coin can be circulated in the commercial banking system (i.e., shipped to and then distributed by the Federal Reserve to a member bank) at a face value higher than it costs to produce it, or sold directly to the public for more than it costs to produce it, the USG will receive no net benefit.

So you are saying that the Federal reserve can refuse to accept coins that have legal tender face value?

§ 5103. Legal tender

United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues. Foreign gold or silver coins are not legal tender for debts.

[stone]

HB reader, am I understanding you rightly that the US fiat system is set up such that the commercial banking system has unlimited capacity to create money without ever being at risk of systemic default but that the USG only has as much deficit spending ability as the Fed and the commercial banking system chooses to grant it? The example of the Fed setting up a line of credit to AIG in 2008 shows that the Fed has unlimited ability to create money to bail out financial institutions. BUT the USG unlike AIG etc can not legally get overdrawn with the Fed. If primary dealers and the Fed were to choose not to buy USG bonds or the debt ceiling were not raised, then the USG would just have to lump it or change the law (or use the trillion dollar platinum coin trick???). On a wider level it seems interesting that the USG chose to enact laws in such a way as to give pre-eminance to the commercial banks. Are commercial banks really such trustworthy guardians of the interests of US citizen's?

jmourik's observation of the legal loophole for making platinum coins with unlimited face value does look like a get out of jail free card for the USG if the Fed has a legal obligation to give the USG the same value of bank reserves as the face value the USG engraves on the platinum coin. Is this a widely known loophole? I saw a  comment about platinum coins on billyblog about a year ago but didn't know what it was about. I think in the UK the law is much more fluid than in the US. In the UK "emergencies" allow the state to do anything it wants such as confiscating land etc etc. In the UK we would not need such a platinum coin loophole as the state does what it wants regardless.

[Jan Van]

jmourik's observation of the legal loophole for making platinum coins with unlimited face value does look like a get out of jail free card for the USG...

Well, not my observation but the observation of MMTers like beowulf here. I'm merely playing the MMT devil's advocate, mainly as a learning tool for myself...

Are commercial banks really such trustworthy guardians of the interests of US citizen's?

According to the Ben Bernank, for sure goverment isn't:

Additionally, in some situations, a government that controls the central bank may face a strong temptation to abuse the central bank's money-printing powers to help finance its budget deficit.

Central Bank Independence, Transparency, and Accountability

(See also billy blog here).