One of Shakespeare’s most famous lines is from Henry VI. The pretenders to the throne are plotting and a character named Dick the Butcher says, “The first thing we do, let’s kill all the lawyers”. The line has been interpreted many ways within the context of the play, but most people remember it at face value. In order to get anything done, you must first get rid of the hairsplitters, gainsayers and schemers that have always defined the legal profession. It is a lovely thought.
Like all humor, it is funny because it contains a kernel of truth. Lawyers, given enough time, can fashion an argument for or against anything. You see this in the recurring debate about the trillion dollar coin. This is the claim that the executive can get around Congressional spending and borrowing limits by minting a trillion dollar coin. The mint would strike a coin whose value would result in one trillion in seigniorage . This is the difference between the value of the coin and its cost.
The wiki page on this topic is both amusing and informative. Normal people would naturally assume that the government cannot invent out of thin air a trillion dollar coin, but the lawyers have found a way. At least they have found a legal justification for conjuring such a coin. The mechanics of how this would work are a bit sketchy, but lawyers never let practical reality get in the way of a good idea. We will be hearing lots from them during the coming debt ceiling debate.
The basic argument here is that the mint has the legal right to sell bullion coins, circulating coins and numismatic items. That means they can take gold and make a gold coin and sell it. They can also make collectors items and sell those. They can also buy and sell circulating coins at a profit. Since the mint is charged with striking circulating coins for the Treasury, they also make a profit from this. These sales pay for mint operations and profits go to the Treasury.
The claim here is the mint could create a trillion dollar coin that has the cost of the materials and the labor to make it. Since these are tiny, relative to the face value of the coin, the seigniorage would be roughly one trillion dollars. This would then be handed over to the Treasury to spend on government. Congress is cut out of the process, as they do not control the mint. That also means the Treasury could bypass the debt limit as they would have a trillion dollars.
If this sounds insane, you are in luck. It is insane. When the mint strikes a novelty item for collectors, they actually sell it to collectors. They price the item based on estimated demand and the cost of production. Like any business they are seeking to make a profit from these sales. The reason buyers are willing to pay more for a novelty item than the value of its base metal is they think it will fetch more on the secondary market because of its limited production run.
Another way to think of it is the trading card makers. They will create a special limited edition run of cards. They use the same paper and the same images as other cards, but these cards are limited in number. Maybe they have a special imprint or these days a holographic stamp on them. Collectors will pay a premium for these cards on the assumption that they will be worth more in the future. Of course, card collectors also buy for their own collections.
Who will pay a trillion dollars for a coin? The answer is no one. Markets can only work if there are buyers and sellers. Who would be the trillion dollar buyer? The only plausible buyer is the Federal Reserve. To do this they can liquidate assets from their balance sheet in the open market, then use the proceeds to buy the coin. There are two problems with this idea. One is the banks would be taking a trillion dollars out of the economy and flooding the market with various assets.
The other problem is the central bank could not plausibly list this new coin as an asset as the coin has a market value of zero. Again, a thing is worth what someone will pay for it and in the case of a coin with one possible customer, the value of the coin must by definition drop to zero when the customer acquires it. In effect, the Fed will have handed the mint a trillion dollars for nothing and the mint would then turn that trillion over to the Treasury as a profit.
There is an old joke that goes something like this. A rich man is traveling in Europe and finds himself in a small town. He needs a place to stay, so he goes to the one inn and asks for a room for the night. He slaps down a thousand euros and tells the innkeeper that he wants the best room he has to offer. The innkeeper takes the money and tells the man that he can take any room he likes. The man goes upstairs to look at the rooms and the innkeeper leaves to see the grocer.
You see, the innkeeper owed the grocer a thousand euros so he wanted to pay him off before the grocer cut him off. The grocer is happy to be paid. He takes the money and immediately heads off to his landlord to whom he owes back rent. He pays off the landlord with the one thousand euros. The landlord, who has a taste for prostitutes, takes the money and pays off the madam. The madam then heads off to the innkeeper to pay him for the use of his rooms.
Meanwhile, the traveler comes back down and tells the innkeeper that he does not find any of the rooms satisfactory and demands his money back. The innkeeper is happy to refund him the one thousand euros, as he just got them from the madam. The traveler leaves, but everyone in the town has been made whole. The innkeeper paid his debt to the grocer, the grocer paid his landlord and the landlord paid the madam, who then paid off the innkeeper.
The joke is the economy works just fine as long as the money keeps flowing and there is always some new money from outside to prime the pumps. As soon as we run short of outsiders with the extra cash, the system locks up. This is what the trillion dollar coin idea amounts to in the end. The Fed artificially increases the balances of member banks so they can buy assets from the Fed. Those banks then become the man looking for a room in that old gag.
The coming debt limit drama and the inevitable howling from the crazies about the need to get around this problem with crackpot ideas like the trillion dollar coin mask a much deeper problem. Washington famously said, “The last official act of any government is to loot the treasury.” That is what these debt limit fights are about when you examine them without the lawyers present. It is just a debate about how best to continue looting the treasury before it all comes crashing down.
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