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Sunday, January 6, 2013

On the Platinum Coin Trick and the Fed Minutes

 Platinum Coin Trick

Are we in a Dudley Do-Right cartoon or what?  The nation is poised to go down in flames over the debt limit ceiling.  But wait!  Brain challenged Dudley Do-Right arrives and Snidely Whiplash is foiled! We have a solution.  Untie Nell!  We've got the Platinum Coin trick.

In the version we are living through, it turns out that apparently the U.S. Treasury has the authority to mint collector coins.  And therein lies the solution to the much-feared upcoming UFC battle between President Obama and the Republicans - just mint a $1 trillion coin, deposit it at the Fed, and voilĂ -- money to spend and the ceiling is averted!  To ensure that inflation is not a problem, Treasury can issue $1 trillion in bonds and then buy them back later.

Help me out here.  I find the timing of Andrew Fastow's release from prison conciding with this buy-back plan mighty suspicious.  It looks very similar to Enron's buy-back schemes.

Furthermore, this whole concoction seems to me to be what the Treasury and Fed does on a regular basis.  The Treasury finances the Federal deficit by selling Treasury bills, notes, and bonds.  (As an aside, it seems like yesterday that former Chairman Greenspan was in a snit over the possibility that the national debt would be eliminated and that, in the absence of Treasuries, the Fed wouldn't be able to carry out policy!)  The Fed then buys those Treasury issues, thereby expanding the money supply and monetizing the debt and expanding its balance sheet.

With the Platinum Coin Trick, the Fed, in effect, is just buying something different.  The bottom line is that, with the Treasury issuing bonds, the debt ceiling is violated.

The scary thing is that we have a lot of Dudley Do-Rights trying to resolve this mess.

Fed Minutes

The Fed minutes released this week from the December FOMC meeting got more than their usual attention, especially on CNBC, because they reported that the Committee was actually debating the impact on their balance sheet of ongoing Treasury and MBS purchases.  Excuse me, but isn't that their job.  Shouldn't they continually be asking whether they should keep the purchases going and how the program will be wound down.

I see it as a major plus that these issues are being debated.  There were many questions that should have been examined leading up to 2008 that weren't--that could have considerably lessened the pain of that period and lowered the Great Recession's cost to the nation.

Here are excerpts from the minutes that bothered Wall Street commentators:

Participants noted that the Committee would need to continue to assess whether large purchases were having adverse effects on market functioning and financial stability. They expressed a range of views on the appropriate pace of purchases, both now and as the outlook evolved. It was agreed that both the efficacy and the costs would need to be carefully monitored and taken into account in determining the size, pace, and composition of asset purchases. 

In considering the outlook for the labor market and the broader economy, a few members expressed the view that ongoing asset purchases would likely be warranted until about the end of 2013, while a few others emphasized the need for considerable policy accommodation but did not state a specific time frame or total for purchases.

Several others thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet. One member viewed any additional purchases as unwarranted.  (My emphasis)
The last statement implies that the Fed might pull the punch bowl away before the party ends.  There was a time where that was seen as the Fed's job. 

3 comments:

  1. The country seems to be on a suicide mission to spend itself out of existence like Rome and the other great empires of dust bin of history.

    We don't have a debt limit problem, we have a major spending problem. Our politicians act like a bunch of meth addicts who need their next spending fix, and there is no leadership in either party.

    I see nothing but a bunch of Dudley Do-Wrongs out there looking for the next gimmick to kick the can down the road. What a bunch of chickens!

    Higher interest rates might be the only thing that can slow down the spending orgy. Not to mention the general revolt that will happen when people finally realize just how much their taxes are going to be hiked.

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  2. Platinum is a pretty extraordinary mode of investing, yet isn't as famous as gold.


    US Gold Bureau

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