Tuesday, January 8, 2013

Platinum coin and gold standard [updated]

The trillion-dollar coin is getting a lot of circulation as an idea. I think it's a stupid idea, and am somewhat surprised to find people mounting seemingly serious defenses of it. Here's Josh Barro: "Why Platinum Coin Opponents Are All Wrong." I agree with Barro that the Republican strategy of refusing to raise the debt ceiling is dangerous, irresponsible folly, but I disagree that the trillion-coin somehow makes the situation better; on the contrary, its effects would be additive, not substituting for the fears stoked by the debt ceiling debate but rather confirming that U.S. fiscal policy is in complete meltdown.

It is funny that some people are asking where the U.S. government would get all that platinum, when in fact all it would take is enough to mint a coin and inscribe $1,000,000,000,000 on it. Of course, as Barro notes, this notional coin is not a "platinum standard," but I think it does highlight a difficulty that any commodity standard does face: the equation of x amount of a commodity to y amount of dollars ultimately rests on a monetary issuer's assertion that it will uphold that value--exchanging between cash and metal on demand and not, say, deciding tomorrow that the new rate is x = 2y, or x = 2 trillion y.

As such, metal-backed money is not fundamentally different from fiat money. There's no easy way for policymakers to tie their own hands, in monetary policy or in fiscal policy (see, e.g., "debt ceiling"). At least, though, an unanticipated benefit if the U.S. government does mint a trillion-dollar coin would be to underscore the absurdity of seeking "sound money" based on a supposedly solid link to any metal.

UPDATE 1/9 2:43PM: A piece at Business Insider takes the opposite view--arguing that resistance to the platinum coin idea shows that people are stuck in a gold-standard mentality. According to the writer, there actually are no problems involved in the government vastly expanding the money supply, just print away or mint a coin with an arbitrary amount or whatever. I think that might work on a different planet, one where there's no worry that, say, foreign bond investors will ever stop buying a government's debt.

Also, Megan McArdle has a well-justified rant about not just the platinum coin but the deeper dysfunction it represents. Excerpt:
Try this exercise: name some of President Obama’s campaign pledges.  Unless you were actually covering the elecetion, I bet you can only name one: the pledge to raise taxes on people who made more than $250,000.  No new programs to solve some problem, no high-concept bargain to unite the nation . . . no, the one thing that Democrats wanted to do was raise taxes for 2% of taxpayers, and only 2% of taxpayers.  Not to pay for anything in particular, but just because the rich had too much. And why was this—rather than some actual policy program—the centerpiece of his agenda?  Because his base liked it, and because opposing it made the ultra-rich Mitt Romney look like a selfish heel.  
Me: The debate I wanted to see.


Ray Haupt said...

A platinum coin? How preposterous.

As I understand this proposal it is to produce a single coin made of platinum to be valued at one trillion dollars that will magically cause America's financial future to brighten. Never mind that platinum is currently valued at about 5% less than gold for a similar amount. Of, course if that coin weighs in somewhere in the neighborhood of 600 million ounces it might make some sense.

As for Republicans opposing a new debt limit I ask why should they not? It will be needed, of course, but can not opposition and debate be used to illuminate the fact that the Federal Government is operating without a budget and overspending is rampant? Republicans are not the only ones who must compromise to solve our economic woes.

Kenneth Silber said...

Ray, I am with you as to the platinum coin. As for opposing an increase in the debt limit, it seems to me more likely to spark an economic crisis than to reduce overspending. In any case, I think the basic problem is a combo of overspending and not enough tax revenue; that's what I see in this chart: Unfortunately, neither party is much inclined to agree with me on that just yet.