Delray Beach Florida, Florida, USA
October 12
CEO/Editor in Chief
Jack of all trades. Master of some.


Sagemerlin's Links

JANUARY 7, 2013 11:28AM

Bad Ideas: The $1 Trillion Platinum Coin

Rate: 4 Flag

Disclaimer:  I used to manage a precious metals trading firm, so I know something about the metal trade, but I am out of that business for a year now and my information might be somewhat suspect.

That said, recent suggestions that the President could side-step Republican resistance to raising the debt ceiling by paying down our debt at the Federal Reserve by minting a one trillion dollar platinum coin are totally ridiculous. 

First of all, a $1 trillion platinum coin would weigh 39,000 pounds at current platinum prices.  Very difficult to transport anywhere. 

Secondly, the United States doesn't have any platinum reserves.  We have gold reserves and silver reserves, but no platinum reserves.  We would have to buy the platinum on the open market to issue a platinum coin.

Third, specie currencies such as hard bullion  are priced according to the market value of the metal that the coin was struck on, not the face value 0f the coin.

Ergo, suggestions that we could offset the deficit by declaring the value of a one or two ounce platinum coin are wholly fallacious.  That dog just don't hunt.

Suggestions that the Federal Reserve, a private corporation, would accept a coin worth around $1600 in lieu of $1 trillion worth of accumulated debt are simply fantastic and have no place in a serious discussion about the National Debt.

No currency is priced by the country that issues the currency.  The value of a currency is established by international rates of exchange, and by nominal inflation rates.  As we increase the money supply we decrease the value of the dollar, which results in an inflationary spiral. 

Your tags:


Enter the amount, and click "Tip" to submit!
Recipient's email address:
Personal message (optional):

Your email address:


Type your comment below:
Thank you.

The whole concept is ridiculous and artificial, but as Paul Krugman so succinctly stated, "so is the Federal debt ceiling".

As for it being viable, well:

* The government could print 1 trillion 1 dollar coins...

* Nothing says a coin needs to be pure or worth actual value. A quarter is actually worth less than a quarter and a penny const more than a cent to produce.

* The Fed Reserve WOULD accept a coin. All it represents is a different class of governmental debt. The Fed has no restrictions on type.

* It will have no impact on the money supply or inflation. That is because the "coins" would be used only to pay prior debt and could be made redeemable once borrowing authority / the debt ceiling is raised.

As Krugman said, it is a gimmick... and a good one at that because it bypasses the Rethugs ability to block everything and prevents the Dinocraps from tying more pork to it.
If you haven't done one already, I'd be interested in a post on your experience in the precious metals business. I don't know anything about it, so it would be interesting to learn something new.
Amy, you're wrong about this. The Fed is under no obligation to accept any specific form of payment or deposit at face value. In fact, the Treasury doesn't put funds on deposit with the fed. Paper money is transferred to the Fed for distribution throughout the banking system. The government merely prints the money for the Fed. It's the Fed that actually underwrites the money. That's why they are called Federal Reserve Notes. So, when the government sends money to the Fed, they are sending Federal Reserve Notes BACK to the Fed. The $1 trillion Platinum Coin, despite the fact that is a metal coin, isn't backed by the Fed and therefore has no value. Proof of this is simply obtained. Go to any coin dealer and see what they will pay for a one ounce platinum coin. It will be around $1500 at current prices, and that's all you will get. By the same token, if you bring a $100 gold piece to a coin dealer, you will get around $1600 for that item. (Gold, right now, is running higher than platinum.)
$50 dollar gold coin is one troy ounce
The $50 American Eagle sells for $1727 today. If you attempted to deposit the coin, it would not be accepted because gold coins are not considered legal tender. If a bank accepted it, it would be accepted at its value of $50 and you would be out $1675. However, if you were to present a $1 trillion platinum coin, the bank would not accept it because the bank doesn't sequester deposits. This means that all cash deposits are literally deposited in the same vault where one bill becomes interchangeable with any other bill of the same denomination. The $1 Trillion platinum coin, however, could not be placed on deposit because that would put the bank in the position of having to disburse $1 trillion in cash if you attempted to withdraw the value of the coin.

Imagine, for a moment, that you are in Los Angeles, and the coin is on deposit in New York. If y0u wanted to withdraw your $1 trillion from a branch in Los Angeles, the bank would have to cover that withdrawal from its own funds....but it wouldn't be able to recoup those funds because there is no one other than the federal government with a vested interest in redeeming that coin for anything more than it's true metal value, which is around $1627 on Friday's pricing.

No private institution such as the Federal Reserve will accept a deposit based on this premise.
The Federal Reserve is not privately owned. In fact, nobody owns it. It is independent to the degree it sets monetary policy within the confines of congressional mandates. Whatever profit above operating expenses is returned to the US treasury. The member banks within the 12 regional systems buy stock as a condition of membership, but the stock only has value to the 6% legal dividend. It cannot be sold, transferred, pledged as collateral and is not like "stock" as we know it in the markets.

The Fed buys paper currency at manufacturing value, but coins at face value. The US Treasury does, in fact, have an account with the Fed, as it has had for all the years we've had a central bank. Ask Alexander Hamilton, if he's talking calls.

The Fed is in no position to refuse the Trillion Dollar Coin, nor is there any obligation to strike coins out of sufficient metal to meet a metal price point. The difference between the cost of minting a coin and its face value is "seigniorage," and is one method by which the government generates funds. This is also a truth that spans a long time frame.

As there is no gold, silver or platinum standard, there is no use in the once-traditional definition of payment in specie in any form of metal other than coin, which, as we know, has the value of specific denomination unrelated to metal prices. As the definition of specie payment is payment in coin, now detached from metal prices, the Platinum Coin is...payment in specie. As dollars can be exchanged for coins, the dollar also represents specie payment. We do not settle international accounts with gold, but with dollars.

That said, the odds of the Great Platinum Coin being minted and deposited in the US Treasury account with the Federal Reserve are minimal, but the issue is an interesting conversation-starter. Politically, it's a Mongolian Fustercluck waiting-to-not-happen.
The US Court of Appeals disagrees with you Paul:

In Lewis v. United States,[3] the United States Court of Appeals for the Ninth Circuit stated that: "The Reserve Banks are not federal instrumentalities for purposes of the FTCA [the Federal Tort Claims Act], but are independent, privately owned and locally controlled corporations."
As far as the ownership of the Federal Reserve Banks is concerned, they are shareholder owned institutions. Each Branch of the Federal Reserve is owned by the commercial banks that are located in that bank's region. They are required by law to buy, own and keep share of stock in their Federal Reserve Regional Bank. Only banking institutions can buy shares of stock in the Feds. (And to be clear, each of the 12 Federal Reserve Banks is an independent entity, and the leadership of the banks is elected by the shareholders of the corporation...ie the commercial banks in that region.)

The law has been expanded to encompass all banks in the regions, and the net profits from the operation of the branches.

The Federal Reserve Board web site has this to say about the election of directors:

Under the Federal Reserve Act, each of the twelve Reserve Banks is separately incorporated with its own board of directors. In each Reserve District, commercial banks that are members of the Federal Reserve System own the stock of their District's Reserve Bank and elect the majority of the Reserve Bank's board of directors; the remainder of the directors are appointed by the Federal Reserve Board.

In the Federal Reserve Act, Congress provided that all nationally chartered banks were required to become members of the Federal Reserve System. The Act required these banks to purchase specified non-transferable stock in their regional Federal reserve banks, and to set aside a stipulated amount of non-interest bearing reserves with their respective reserve banks.
People keep saying that the Federal Reserve is obligated to take coinage at its face value. Can anyone point to the specific legislative authority for that position?
A response much in your usual theme of suppositions-presented-as-fact and ignoring of nuance. As the Fed is not funded by Congress and is not directed, by government, in its day-to-day activities, for LEGAL purposes, and specifically to the Federal Tort Claims Act--it takes on the nature of a private corporation.

Now if a car owned by the Federal Reserve hits you (as in that case), you'll know you cannot make a claim under the Federal Tort Claims Act. If you one day choose to write a blog post about getting ran over by a Fed Reserve car, you'll know you have no legal standing--nor does the Fed-- to advance a claim based on the FTCA. However, I noticed this is about Platinum Coins, not torts.

Because the Fed takes on the legal nature of "privately owned" where the FTCA is concerned doesn't mean it is, anymore than a corporation, within legal confines, becomes a "Person" as opposed to a "Juristic Person" just because for SOME purposes corporations can act the same as persons and are treated as such.

The Federal Reserve isn't independent of government, it is independent WITHIN government. It is organized exactly like a corporation, as observed above, in that member banks own stock. It is a quasi-government entity which, as you now know, is one reason it can't be sued under the FTCA.

The ruling you cite does not say the Fed is privately owned. That is good because it isn't. What it says is "The Court of Appeals, Poole, Circuit Judge, held that federal reserve banks are not federal instrumentalities FOR PURPOSES OF THE ACT, but are independent, privately owned and locally controlled corporations."
(My emphasis)

It doesn't say, as you wrongly assume, that the Fed is privately owned. You can also get the correct information from the Federal Reserve website, as well as from other objective sources. That you didn't bother to test your assumptions against the facts, though, isn't at all surprising. I see the same errors-presented-as-firm-knowledge in your Our Salon gobbledegook about the 2nd Amendment.

Ever hear of: "Look before you leap?"
As to you question of whether the Federal Reserve has to accept the coin, if it had the option to not do so, it would also have the option of refusing increases in the debt ceiling and thus accepting, or not, the money that goes along with it. Can you explain the difference that would make the distinction between the 2 methods of funding, as far as the Fed is concerned?

The Fed can set interest rates based on a perception of too much currency and other factors, but it doesn't dictate spending, nor by what means the Treasury can value coins. The Treasury simply deposits the coin and draws against it's value. When a time comes that the debt ceiling is raised, it can buy the coin back, replacing it with equally specious specie.
Paul, go fuck yourself. If you want to debate opinions about facts, but you are so full of yourself that you believe your opinions are facts and everyone else's facts are simply wrong opinions. I am always willing to discuss the facts, but I am not going to tolerate your bad behavior any longer. You ever hear the saying, "if you can't keep a civil tongue in your head, keep your fucking mouth shut."

I could refute every point you made, but since you know everything about everything, and your opinions are the only valid ones, why don't you go off somewhere and masturbate to your heart's content....but don't do it here.
You were wrong, you are wrong. Your response can't hide that you're wrong. You're wrong on the facts. You're wrong on the opinions you issue "as if" they're based on facts. You are possibly one of the biggest phonies on the web, so secure in your unstudied assumptions you perform "as if" those pulled-out-of-wazoo babblings are informed presentations.

It's pretty funny, to me, actually.

Pity the person who believes anything you say, given your very poor track record. You're not a Great Thinker, or even an adequate one.

You can't refute anything, so your "I would but I hear Mom calling" retreat has no weight. If you could, you would.

Try avoiding making claims you can't substantiate, and don't be so foolishly full of yourself you think you don't have to. I substantiated all of my claims, and did so too well for your dream-state wishes of adequate response.

Sometimes I just get motivated to expose posers. Somebody should defend the facts, and, as a charitable act, introduce you to them.
That was a nice point, and maybe you should go back into precious metals, if people on Left and Right aren't careful, and make the perfect the enemy of the good.
The debt ceiling per se is a potential "policy rule," although a very risky one right now, since it has not been stated as such, and there is no consensus on what that should be anyway, unlike with what was tried with the Euro.
That policy rule didn't really fully survive a major shock either. In the end, policy rules are hard to enforce, because if you agreed on what it was that it would take to end up in the fiscal state implied by the policy rule, then you wouldn't need the rule in the first place. That's because of course people want the government to do different things, or not do them too, per the spending, regulating and taxing arguments that are a big part of modern government, everywhere, in which of course debates over efficiency versus what some perceive as fairness/equity are at the heart of that. I could put quotes around efficiency if one had what amounts to a different set of tastes, as that's a lot of it, and there's no accounting for taste, if maybe debate or explanation... if that's often wishful thinking.
It's not unlike the balanced budget as a policy rule not magically solving things. A monetary policy rule in theory has different properties as to less politics, except that with enough pressure, they seem to deviate too, unlike with a gold standard, save again when it is inconvenient in the short run. The Fed was running a Taylor rule, until things got tough inn 07. What is the policy rule of Q infinite? Not very clear, as some are starting to wonder about a zero instantaneous interest rate, although there are ways of getting out of their balance sheet issue that generate that over time without shocking markets too. But I digress, and sorry for long comment, if its nice to see people again, since it seemed like everyone was gone for a minute, even if no one here shares many of my views.
As to how one could use the debt ceiling as a policy rule, as with the Euro, that would induce a penalty function as to automatic cuts as one approached it, like 60 per cent of debt to GDP, but that's not what people are doing here, which makes it a risky tactic, although, having a long term deal to stabilize debt as some level would make sense, like say 75 per cent of GDP, certainly less than 100 per cent, by 2020, because at that point, Boomer Retirement really kicks in, and we need to be able to borrow to smooth expenditures over time.
Thanks for setting the record straight.