Wednesday, January 09, 2013

Would $1 Trillion Platinum Coin Be Inflationary?

Now that "the platinum coin option" for circumventing the debt ceiling that I discussed in the previous post has been become increasingly popular among leading liberal pundits, the economic consequences of such a move should be considered. More specifically, what is the effects on inflation.

At first glance it would appear that this must be very inflationary. After all, such a move would constitute direct money printing (or minting more accurately) to finance deficit spending. However it should be noted that because the coin would be left in the Federal Reserve, it wouldn't really be part of money supply, and would therefore not mean a direct expansion of money supply.

It would however become a part of the monetary base, and an increase in the monetary base will ultimately cause money supply to increase, something that of course would be inflationary. However, if the Fed decides to counteract this by selling bonds from their current $3 trillion holdings of bonds, the monetary base would be unaffected meaning that this wouldn't have any inflationary implications.

However, if the Fed did that then we would in fact have a government agency selling bonds to finance the deficit, same as if the debt ceiling had been increased, except that it's the Fed selling the bonds instead of the Treasury department, illustrating how the debt ceiling is effectively repealed, using the Fed and that platinum coin as a loophole.