Hyperinflation is a key worry for economists. It would be like producing money out of thin air if the $1 trillion coin were to be minted. When all that new money pops up, the value of the other currencies in circulation plummets. Consumers, who are already grappling with price inflation, may suffer as a result of this.
Is it a smart idea to create a trillion-dollar coin?
The $1 trillion coin concept is, without a doubt, a gimmick. It is, however, totally legal. The man who is credited with coming up with the concept claims it’s a way to avoid an equally ludicrous concept: the US debt ceiling.
“On the one hand, I find it amusing,” Atlanta attorney Carlos Mucha remarked. “On the other hand, it’s a shame that this gimmick is all that stands between us and the government’s economic disaster.”
What purpose does a trillion-dollar coin serve?
- The trillion-dollar coin is a hypothetical accounting approach for lowering the government debt that was first presented to avoid congressional gridlock on debt ceiling increases.
- The Treasury would have to create a $1 trillion platinum coin and store it in a vault.
- The concept, which is based on a legal loophole, was hotly debated between 2011 and 2013, but it was never put into practice.
Is the $1 trillion coin real?
The Treasury can print platinum coins of any value without the approval of Congress, thanks to legislation passed in 2001. The coin’s worth might be anything under that statute, but it would have to be platinum, not gold, silver, nickel, bronze, or copper, which are all controlled by Congress.
So, in principle, President Joe Biden could instruct Treasury Secretary Janet Yellen to have a $1 trillion coin produced and placed in the Treasury, providing the government with an additional trillion dollars to satisfy debts and avoid default.
Will the United States experience hyperinflation?
Inflation has returned. Despite the fact that rates are likely to fall in 2022, Martin Paick and Juraj Falath note that there is a lot of uncertainty, and the Fed needs to act now to prevent having to reverse course later.
Despite the fact that some price rises were anticipated, US inflation rates have routinely exceeded economists’ estimates. Seven of the last ten CPI inflation numbers shocked economists to the upside, but none to the downside. New COVID mutations that are more transmissible, slower vaccine rollouts (creating supply bottlenecks in emerging nations), decreased vaccine efficacy, supply chain disruptions, climatic hazards, and rising property and energy prices are all potential risks.
Inflationary pressures that persist are unfavorable for debtors. A little degree of inflation above target could help countries restructure their debt and wipe out some of the record government debt burden. If inflation spirals out of control and central banks are forced to slam on the brakes by hiking interest rates sharply, those record debt levels would hurt even more. Furthermore, stifling economic activity too severely risks triggering a new recession.
Inflation soared because of COVID
To determine if we should be concerned about inflation, we must first examine the current sources of inflationary pressures. The only source of inflation that should prompt a contractionary macroeconomic policy response (either monetary by raising interest rates or fiscal by reducing budget deficits) is inflation caused by the labor market. There is a risk of “overheating” when workers have enough bargaining strength to win a pay raise that exceeds the economy’s long-term potential. Only in this case, where wage growth exceeds productivity growth, should macroeconomic policy be intervened. Other supply-side causes of inflation, such as commodity prices, are very volatile and largely determined by global markets. These inflationary pressures are unlikely to be permanent because they are not the product of overheating.
Energy costs and variables related with the reopening of the US economy were the key drivers of inflation at the start of 2021. Both of these things are usually just transient. However, since the second quarter of 2021, CPI inflation has been increasingly driven by increases in the pricing of core items that are unrelated to the reopening (Figure 1, green columns). This could point to the fact that inflation is becoming more persistent.
Figure 1 shows the impact of reopening and other factors on CPI inflation in the United States (month-on-month in per cent)
Source: Bloomberg, based on my own calculations. Food away from home, used automobiles and trucks, car and truck rental, housing away from home, motor vehicle insurance, and airline cost are all included in the CPI’s reopening component. The rest of the COICOP categories are included in the non-reopening component.
The globe is currently experiencing the worst energy crisis in decades. Gas and power rates have reached all-time highs. This can be considered as part of a compensation for the extreme price drops in 2020, which drove several factories to shut down. The removal of limits increased commodity demand, resulting in higher energy costs. Emission allowances have become more expensive, resulting in a type of green tax. The need for natural gas and oil is increasing as winter approaches. Because supplies are limited, the severity of the crisis will be determined by how cold it becomes.
What we call to as reopening factors have been the second major contributor to headline inflation. Demand has rebounded in contact-sensitive sectors such as vehicle sales, transportation, recreation and culture, holidays, and restaurants as social alienation has reduced. As a result of the battle to supply this pent-up demand and process stockpiled orders, prices began to rise. Reopening triggered inflationary pressures on both the supply and demand sides. Production bottlenecks were caused by a paucity of crucial components in the automobile sector, as well as expensive energy. When demand for cars was low, some chipmakers redirected deliveries to mobile operators. The scarcity of chips available to carmakers pushed vehicle costs up as it started to recover.
Labour markets are much tighter than employment data suggests
We need to look at labor market developments to assess the inflation picture. In general, the unemployment rate decreases as the economy recovers. Workers get more bargaining power as labor demand rises, allowing them to negotiate higher compensation. Their achievement will have an impact on inflation, as higher labor expenses may be passed on to consumers in the form of higher product prices. This can result in a downward price-wage spiral.
More persons chose to remain in retirement, either to health issues or a re-evaluation of life goals.
The labor market in the United States is much tighter than it appears, despite the fact that there are 4.7 million fewer employed employees than before the pandemic. With unemployment at 4.2 percent, there is still a long way to go before reaching the pre-pandemic low of 3.5 percent. The majority of the tightness stems from a drop in participation. Some people were able to retire early or take a temporary hiatus from work because to generous fiscal handouts such as childcare benefits or direct checks to American families. However, a large portion of the reduction in participation was attributable to fewer previously retired people returning to work. More of those people choose to remain in retirement, owing to health issues or a re-evaluation of their life goals. Jobs are plentiful, with 10.4 million opportunities in September. When combined with the historically high percentage of Americans quitting their employment voluntarily, this indicates high job market confidence and, as a result, tight labor markets. Wage inflation is likely to persist as businesses compete for workers who have a choice of occupations.
In the long run, the highest rate of wage increase that can be sustained is equal to the central bank’s inflation target (2% in the US) plus possible productivity growth. Given that this rate in the United States is projected to be about 1.5 percent, nominal wages can rise by about 3.5 percent year over year without worrying about inflation exceeding the objective. In October, average hourly earnings in the United States increased by 4.9 percent year over year, indicating that workers are increasingly able to demand better pay. This is different from the past, when wages did not begin to rise until the recovery was nearing its end. Even more strangely, low-wage workers have benefited the most from the recovery. While this is wonderful news, it could also mean slightly higher inflation in the long run because low-wage employees spend disproportionately on essential commodities.
Markets still on team transitory with more upside risks
Prices are influenced by what consumers and businesses expect, as well as the current situation of the economy. People will demand greater wages in the negotiation process if they predict more inflation. Firms may then try to pass the cost on to customers in the form of higher prices. This is less of an issue for them during times of high demand.
Inflation is expected to rise in the short future, according to financial markets. Long-term expectations in the United States are beginning to de-anchor, with 5y5y forward swaps topping 2.5 percent (Figure 2). The de-anchoring of expectations could have serious effects if they remain high or rise much higher.
Median inflation estimates can be of limited help when the severity of the problem and the desired policy response are dependent on inflation drivers and tail risks. A closer examination of expectations reveals that there is still a modest (but not insignificant) probability that average inflation will exceed 4% during the next five years (Figure 3, red area). The markets, on the other hand, continue to assume that inflation of 2.5-4 percent on average over the next five years is the most likely scenario (Figure 3, dark yellow area). This could lead the Fed to slam on the brakes in the future in order to keep inflation under control. The flattening of the yield curve further supports the idea that the Fed committed a policy blunder by adopting such a lax policy. Although markets anticipate some interest rate hikes in the near future, a rate reversal signals that the transition to neutral rates will be bumpy.
Figure 3: Future inflation probabilities determined from inflation alternatives (average expected inflation for the next 5 years)
The Fed is on the brink of a policy mistake
The inflation rise is consistent with most economic theories, given the unique character of the crisis and the fact that inflationary pressures are mostly originating from the supply side. The key question currently facing central banks is whether increased inflation will become permanent. If employees continue to earn larger wages, this could happen. The de-anchoring of inflation expectations from the central bank aim is another reason why inflation could become entrenched. According to popular belief, if inflation is driven by temporary circumstances, it cannot endure for a long time. These two mechanisms, on the other hand, call this premise into question. Neither may be easily remedied, and each may necessitate a policy shift by central banks. Right now, the greatest danger is not hyperinflation, but long-term high inflation.
Huge quantities of fiscal stimulus, particularly in the form of generous unemployment benefits and checks to low- and middle-income families, have sown the seeds of inflation. Savings have been boosted even more by historic returns in resurgent stock markets, which have benefited Americans in particular. In the near future, this, together with pent-up demand, is anticipated to exert upward pressure on pricing.
Should we thus dismiss Joe Biden’s Build Back Better plan as adding more fuel to the inflation fire? Certainly not. For the first time, a significant portion of the bill is aimed at increasing labor market participation by providing childcare for working families. One of the major concerns about current inflation might be resolved by making it simpler for people to return to work, thereby alleviating labor shortages.
The true danger of escalating inflation outweighs the fact that the US is still not at full employment.
The central bank’s alternatives are restricted. To speed up deliveries, the Fed can’t produce missing semiconductors, mine more oil, or build faster ships. It’s possible that reducing pent-up demand is the way to proceed. However, because the US is still far from full employment, the Fed’s self-imposed benchmark for reducing stimulus, the dual mission complicates things. Furthermore, following the most recent strategy review, full employment should be inclusive as well. This criterion will not be met anytime soon, as Hispanic and Black minorities have been disproportionately affected by the COVID recession.
The real risk of inflation becoming entrenched, in our opinion, outweighs the fact that the United States is still far from full employment. This is a once-in-a-lifetime chance for fiscal and monetary policy to come together. While the monetary side may stop pumping cash into the system, so dampening demand, the fiscal side could much more effectively encourage workforce participation, assisting the Fed in meeting its full employment aim.
In the end, the credibility of the Fed will be critical. Open dialogue and self-reflection are the first steps. The Fed should be candid about why it miscalculated inflation persistence and adjust its assessment of future risks. The recent decision to accelerate the withdrawal of stimulus is a significant step toward recovering credibility and trust in the Fed’s ability to control inflation. The Fed has removed the word “transitory” from its vocabulary, admitting inflation as the number one enemy and signaling speedier rate hikes as an early sign of self-reflection. However, it should do more now in order to avoid having to slam on the brakes later.
Who invented the trillion-dollar bill?
Janet Yellen, the US Treasury Secretary, finally said it on Tuesday: she has no plans to issue a $1 trillion platinum coin to pay for the US government’s expenses.
If you’re unfamiliar with the platinum coin concept, the hashtag #MintTheCoin, or the small army of Coinistas who have become a vocal element of economics and financial circles since the early 2010s, you might be wondering what the hell you’re talking about.
The short answer is that the United States will breach the debt ceiling the legal limit on how much outstanding debt the federal government may hold later this month. Senate Republicans have agreed to extend the deadline until December, but this only sets up a new fight in a few months. Some people have proposed some pretty crazy measures to avoid the worldwide economic disaster that could occur if the US exceeds the debt limit.
The Treasury Secretary has the authority to issue platinum coins of any denomination and for any reason, thanks to a 1997 law meant to assist the Mint profit from coin collectors. During the 2011 and 2013 debt ceiling disputes, analysts uncovered this statute and concluded that it could provide a method to circumvent the legal limit Congress imposes on the federal government’s borrowing.
Instead of releasing fresh debt and risking breaching the debt ceiling, the Treasury Secretary may simply print platinum coins to fund the government. Even former US Mint Director Philip Diehl agreed in 2013, and significant voices like financial journalist Joe Weisenthal and New York Times columnist Paul Krugman have supported the idea throughout the years.
These folks, on the other hand, did not come across this law by chance. Beowulf, a blog commentator and “reply person” better known as Atlanta-area attorney Carlos Mucha, brought it to their attention. Mucha came up with the concept in a brief remark on investor Warren Mosler’s blog on May 24, 2010, at 8:29 p.m.:
Surprisingly, Congress has already given Tsyall the seignorage power authority required to manufacture a $1 trillion coin (even numismatic coins are legal tender at face value and must be acknowledged by the Federal Reserve) the catch is that it has to be made of platinum (ditto the balls of any President who tried this). So Tsy would only make $999.998 billion off a 1 oz. coin:o)
A trillion-dollar notion germinated from this small post, one that has come to impact fiscal policy talks at the highest levels in the United States.
I went out to Carlos Mucha on Twitter, where we had a brief conversation about how he began the #MintTheCoin frenzy, how it caught the attention of officials, and how to get out of the present debt limit problem via direct message. The following is a transcript of our DM chat, which has been modified for length and clarity.
Dylan Matthews
Tell me the story behind the trillion-dollar coin concept. How did it move from you commenting in a blog comment thread to being a topic of conversation among the president’s advisers?
Carlos Mucha
In 2010, an idea arose on Warren Mosler’s website’s forum. Warren is the originator of Modern Monetary Theory, which is currently gaining popularity among progressives. Anyway, the crowd was debating how to avoid a default if Congress did not raise the debt ceiling, and I came upon subsection (k) of the Coinage Act that dealt with platinum coins.
I wrote a little about it on my blog at the time, and it got picked up by other bloggers and then journalists, and it just grew from there.
In her book Shock Doctrine, Naomi Klein describes how conservatives in the United States and around the world use crises such as natural disasters and other unforeseen calamities to push through policies that would never pass in Congress. What happened was that during Obama’s presidency, his Republican opponents learned that by refusing to raise the debt ceiling, they could create a crisis and then utilize the shock doctrine to enact their preferred policies (spending cuts and, if they can get away with it, tax cuts too).
Here’s the deal: Republicans understand that, for the most part, Dick Cheney was correct: deficits are unimportant; Reagan taught us that. It’s possible that Don Rumsfeld, Reagan’s greatest friend in the DC power circle, taught Cheney that rather than Reagan.
Republicans understand that concerns about the deficit and debt are exaggerated, but Democrats do not. As a result, we see Carter, Clinton, and Obama balance the budget, allowing Reagan, Bush, and Trump to come in and cut taxes. The trillion-dollar coin (and the large spending proposals of Bernie Sanders and AOC) appeal with the Democratic base because progressives have caught on to the game. That, at least, is what I believe is going on.
What drew you to Warren Mosler and his forum in the first place? What made you want to post there in particular?
I’m not sure how I ended up on Warren’s site, but he’s a genuine nice guy who is always willing to communicate with his readers on his message board.
It helped that he was friends with two economists I already liked: William Vickrey (who introduced Warren to the other post-Keynesian economists, Bill Mitchell and Randy Wray, who helped develop MMT) and Jamie Galbraith (who wrote the foreword to one of Warren’s books and later quietly promoted the trillion-dollar coin idea to other economists). I believe Jamie is to blame for Paul Krugman approving it.
It was only a short distance from there to folks like Rep. Jerry Nadler (D-NY) endorsing it and the White House having to issue a formal statement. It’s now a widely held belief. What was it like to see the concept take off so quickly? Bewildering? Embarrassing? Is it completely positive?
Positive in every way. It’s been good to be able to, well, monetize the idea. I’ve had clients seek me out and hire me as a result of it. The nicest part was receiving an email from Phil Diehl, a former Mint director who wrote the platinum coin legislation passed by Congress in 1997. I felt like Rodney Dangerfield in Back to School when he remarked, “Yes, this will actually work.” He needs a Kurt Vonnegut paper written, so he hires Kurt Vonnegut to do it.
It’s hilarious; it started off as a simple intellectual exercise like a website where people debate who the greatest third basemen of all time are or whatever and then it just blew out.
Have you received any questions regarding the coin from politicians or Treasury/Fed officials?
Sure, every now and then, someone from the White House, Congress, or the Federal Reserve will contact me and ask for my opinion on a particular issue. I would have replied it was because of the trillion-dollar coin story if you had asked me yesterday, but after receiving this text yesterday…
Who does the United States owe money to?
Over $22 trillion of the national debt is held by the general populace. 3 A substantial amount of the public debt is held by foreign governments, while the balance is held by banks and investors in the United States, the Federal Reserve, state and local governments, mutual funds, pension funds, insurance companies, and holders of savings bonds.
What is the number of billions in a trillion?
Large numbers are numbers greater than one million, which are commonly expressed using an exponent such as 109 or terminology such as billion or thousand millions, which vary from system to system. The American system of numeration for denominations greater than one million dollars was designed after the French system, which was altered in 1948 to correspond to the German and British systems. Each number above 1,000 millions (the American billion) under the American system is 1,000 times the previous one (one trillion = 1,000 billions; one quadrillion = 1,000 trillions). With the exception of milliard, which is often used for 1,000 millions, each of the denominations in the British system is 1,000,000 times the previous one (one trillion = 1,000,000 billions). In recent years, British usage has mirrored the growing popularity of the American system.
Is the platinum coin likely to generate inflation?
None of this would generate inflation, according to Bloomberg’s Joe Weisenthal, because it’s just a “accounting trick” rather than an injection of cash into the economy. Have we ever done something like this before? Every time the US faces a debt ceiling crisis, the concept of a $1 trillion platinum coin appears.