The Trillion Dollar Coin is a duration trade

By L. Randall Wray

The Platinum coin has been all over the blogosphere as well as the media. Some have been arguing it will cause hyperinflation. How can issuing a coin to be held at the Fed to allow the Treasury to spend up to budgeted amount lead to hyperinflation? It has no first round effect that is different from selling a bond into private banks and then having the Fed buy the bond to replenish bank reserves (the current operating procedure); the second round effect–if there is any–is deflationary because it can remove interest income. Some “challenged” politicians are advocating that we remove the Treasury’s ability to coin platinum.

Here’s an interesting email from someone who works in, and understands, financial markets; note it is consistent with what MMT has to say about the trillion dollar coin:

JJ LANDO   Subject: The Trillion Dollar Coin

  1. It’s technically a viable solution to the debt ceiling. Proof that when you look at the mechanics of our Monetary System you discover that the Fed ALWAYS ‘monetizes’ the deficit. QE is just a duration trade. It shortens net issuance and thereby suppresses yields. If you think there is some inflationary impact via higher asset prices – maybe. It would have to overcome the lost coupon interest the rest of the world receives. Regardless, the hyperinflation nonsense being blogged and spewed about QE being a monetization trade is false. It might be good marketing for TIPS and Gold funds, and ppl using these arguments might have attracted insane amounts of investment, but that doesn’t make it right. High Inflation would arrive when there’s too much spending – including GOVERNMENT SPENDING BY CONGRESS NOT THE FED – chasing too little stuff. Not bec of QE. QE IS JUST A DURATION TRADE NOT A MONETIZATION TRADE. When the Fed stops QE, even if deficit spikes, notice the UST still funds. How? It’s called a Repo. Fed does that too. It’s QE but with less duration and no one talks about it.
  2. I happen to think this thing will go to the wire, be messy, and there is legitimate chance it gets settled by the Supreme Court. And all due to an odd timing issue where the Debt Ceiling requires being addressed before the Sequester or the budget. Some speculating it could be even sooner, which would be insane if we don’t even have a Treasury Secretary at the time.
This post first appeared at my EconoMonitor blog “Great Leap Forward

Randall Wray


L. Randall Wray is a professor of economics and research director of the Center for Full Employment and Price Stability at the University of Missouri–Kansas City. His current research focuses on providing a critique of orthodox monetary policy, and the development of an alternative approach. He also publishes extensively in the areas of full employment policy and the monetary theory of production. Wray received a B.A. from the University of the Pacific and an M.A. and a Ph.D. from Washington University, where he was a student of Hyman Minsky.