Flash Point: Think! Please!

The $1 trillion dollar platinum coin (hereafter referred to as the 1T) has been burning up the media bandwidth of people who are either unable or unwilling to think deeper than their last tweet. Unfortunately, the 1T is a non-starter – or should be. We would love to see the government attempt it as it would be so entertaining. We confess we have ignored most of the discussion, but have caught a few points and comment herein.

First consider the 1T. It appears that the Mint may (as in having legal authority) and can (as in technically capable) mint such a coin. An estimate we saw suggested the platinum content would have a value of about $1500. We also note that as two divisions within the Treasury Department, the Mint can mint such a coin out of gold, silver or depleted uranium, and the Bureau of Printing and Engraving can print a $1 trillion Federal Reserve note (FRN) (we do not know if they have the legislative authority to do so but that is not the issue here).

What Would the 1T Be Worth?

Such a coin would have an intrinsic value of $1500 – its platinum melt value. The remainder of its $1 trillion value would be extrinsic. It represents ‘a promise to pay’ in the same way that all other US currency represents ‘a promise to pay’. Or in other words, it represents $1 trillion of new debt. The 1T must contain $1 trillion in asset value, debt being a legitimate asset.

If you are wondering why a 1T would have to represent debt, consider another form of currency, the $100 FRN (otherwise called a $100 bill). It has an intrinsic value that is effectively zero. As a piece of paper contaminated by ink you would likely get nothing for it from a paper recycler. It’s value is all extrinsic – it represents and is backed by $100 of other assets (all debt instruments) on the Fed’s balance sheet. The FRN – your money – is more formally considered to be debt with zero maturity.

So the 1T is either worth 1T in debt or it is worthless (the $1500 is a rounding error). And since 1T in debt would never be repaid exceptin kind, it is still worthless.

What Would You Do With It?

Having created it, the treasury would be able to do nothing with except deposit it in the Smithsonian. You can’t spend a 1T coin. No vendor could make the necessary change on the transaction. Moreover should a vendor succeed, they would have the same problem – they couldn’t spend it. In otherwise, the treasury would have created 1T in money with a velocity of zero.

The Fed would not take it on as some have suggested. The Fed acquires debt assets for, and divests the same from their balance sheet by adjusting the monetary base. They do this to change interest rates as their primary monetary tool for affecting the economy. Such transaction vary from a few million to a few billion. It is a carefully nuanced operation. A one-time change in the monetary base of 1 trillion is not an event that the Fed would ever contemplate. So the Fed would never acquire the 1T.

It’s Different This Time (Not)

Although the Treasury mints and prints all the US currency, it cannot by law spend it. It is the Fed that retains that privilege. The form of money that the Treasury can create and spend is the Treasury bill/note/bond. This is money with a non-zero maturity. It is debt – but all US currency is debt as we have belaboured in the past. We hope by now you understand that the 1T would be a form of debt. So the only difference between the 1T and existing Treasury instruments is its composition – of no significance – and its term or maturity. Although proposed with zero maturity, because it cannot be spent, and as debt it cannot be redeemed and therefore has infinite maturity. Further, if as proposed as we understand it, it magically creates 1T in debt free currency – that is it represents 1T is currency while representing no debt, it never matures as it represents nothing to mature and therefore may be said to have infinite maturity.

This leaves us with the Treasury instruments the Treasury already produces and sells (exchanges) into circulation.

So please, if you thought the 1T was a good idea, think it through, think again, and forever hold your peace.

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