Steve Randy Waldman as usual gets practical about Treasury issuing platinum coins. JKH in comments there does typically likewise.
Suppose the Department of the Treasury says:
“We have a statutory obligation to pay all amounts that have been authorized by Congress — both expenditure and debt obligations. Since the borrowing limit has been reached and Congress won’t let us sell bonds to make the payments they’ve authorized, we are now issuing physical currency, in the form of platinum coins, to meet those obligations. We are required to do this by statute.”
Let’s say the coins are worth $1 million each.
Treasury would have to issue about $100 billion in coins per month, which is about what it currently issues in bonds. The coins would be effectively the same as zero-interest, perpetual bonds.
It doesn’t matter conceptually whether Treasury deposits that currency at their bank (the Fed) then pay bills normally using checks and wire transfers, or issues the coins to payees. Payees will deposit them at their banks, banks will deposit them in their accounts at the Fed, and the result is the same. The Fed has a bunch of platinum coins in its vault, and the government has met its obligations.
Ditto if Treasury sells the coins to primary dealers/banks/sovereign-wealth funds:
1. A transfer of Fed reserves/deposits from dealers/bankers to Treasury. Treasury has money to spend.
2. Dealers/bankers deposit their coins at the Fed.
3. The Fed issues reserves to dealers/bankers in return.
But: Suppose the Fed starts feeling inflation looming. So it sells bonds and receives bank deposits (reserves) in return, to sop up excess money/reserves. This is called “sterilizing” the platinum money creation. (We’ll ignore for the moment the fact that the sold bonds may/will just get repoed in the private market in return for cash.)
But the Fed’s only got about $3 trillion in bonds to sell. What happens when it runs out? Can it still control inflation?
(At that point, monetary policy is effectively managed by congress’s taxing and spending decisions. Budget deficit = easing. Budget surplus = tightening. That is not a promising prospect.)
The Fed could start selling its platinum coins, draining reserves/”money” out of the system. (Assuming those coins aren’t used for exchange, but are held in vaults just like other “reserves”/stores of value.)
But why would dealers buy them?
The answer seems to be negative interest on reserves (IOR). If the Fed charged .25% (or whatever) to hold banks’ money for them (negative quarter point of interest), banks/dealers/sovereign-wealth funds would have an incentive to trade those reserves for platinum coins (at 0% interest) to hold in their vaults.
Would (negative) IOR be a sufficiently effective monetary instrument for the Fed to manage monetary policy? Other implications?
Cross-posted at Angry Bear.
Comments
6 responses to “Platinum Currency: What’s The Fed’s End Game?”
yikes, Steve!
I run for the hills when anybody mentions negative interest on reserves!
🙂
My proposed exit plan for platinum is here:
http://monetaryrealism.com/treasury-and-the-federal-reserve-platinumqe-integration/
BTW, I really liked that post by Greg Ip, although I disagree with a few of the points – but the icing on the cake was that he gave one of the most succinct descriptions of ISLM that I’ve seen – one of the problems with the whole debate about ISLM relevance IMO is getting a solid verbal description of what its supposed to mean – as a basis for debate – and Ip does an usually good job there
@JKH:
Ah, I’ve been wondering who G.I. was…
Why so bad on neg IOR? My usual wide-eyed question…
@Asymptosis
I guess the starting point is that I haven’t seen a proposal that deals persuasively with the issue of the potential for massive arbitrage through the demand for banknotes
That issue has to be buttoned down
And then there’s the aspect that negative IOR requires a negative fed funds target rate
And then there needs to be an assessment of how smoothly the negative fed funds rate can ripple out into a direct or indirect effect on all interest rates in the economy – e.g. the entire liability side of commercial banking right through to the cost of equity capital
Just haven’t seen anything serious along these lines
@JKH: “I guess the starting point is that I haven’t seen a proposal that deals persuasively with the issue of the potential for massive arbitrage through the demand for banknotes”
I guess I don’t understand why we care: piles of physical cash (or platinum coins) sitting in bank vaults, or piles of reserves sitting in the fed computers. Why does either spur demand for real goods and services more than the other?
@Asymptosis But yes, I understand that the whole game theory would shift and we’re not at all clear where it would land.
@Asymptosis
We care because the strategy of negative interest rates won’t work. There will be hyperbolic demand for a risk free instrument that pays 0 per cent instead of a negative rate. Banks will be able to hedge their interest rate exposure by swapping reserves for currency. And they’ll be able to pass that hedging benefit on to their deposit customers. The intended negative rate transmission mechanism won’t work – because of arbitrage. There needs to be a coherent proposal to stop that arbitrage in order even to begin considering negative rates, and I haven’t seen one.