Thursday, July 28, 2011

CNN Video Report on The Coin Option

Video that reports on The Coin Option from CNN:

Plenty of commentary from a Yale Law Professor, and former Treasury Dept. Official from the Bush 41 Administration.  Who both as is typical from what we've seen on this issue, prematurely dismiss this approach via opinion disguised as objective analysis.

Link here to a definitive analysis on this definitive solution.

Salutes to beowulf & Joe Firestone, et. al. for pushing this into the mainstream.  H/T Anon on the video link.


Anonymous said...

Unless it's explained why this IS NOT inflationary the public will reject the idea.

But if you manage to explain it successfully the whole charade of current economic policy may start to fall apart.

beowulf said...

"Unless it's explained why this IS NOT inflationary the public will reject the idea."

The proof is in the pudding, no one can stop them from doing it so what's to reject?. If Tsy does and it turns out not inflationary, the real danger is people start asking, why exactly is it that Tsy borrows money?

Matt Franko said...

I agree that would probably be the biggest argument against it. Not a legal argument but monetarist stuff... would have to address it.

Was reading some of the thread at Sumners, he is probably a good example of just how ingrained the quantity theory is... tough to convince some people.

A while back I posted this link to a FRED graph. I dont know if this EXRESBAL graph plots what Sumner considers "money" but this type of graph, if you show it to people, perhaps could help convince them of how benign "money supply" is to inflation.

It went up by about 12,000 percent and prices collapsed.


Tom Hickey said...

Sumner and Rowe are good examples of why all economists should be required to trade tsys on leverage as part of their professional requirements. These guys are clueless about how markets work. After they got wiped out a couple of times, they might actually try to figure out what is happening. Now they pontificate from their ivory towers, never looking out the window.

wh10 said...

Tom, can you explicate on that, very clearly? Fullwiler has mentioned this, it being a non-zero sum game, and I sort of get it but not 100% conceptually. Convince me it's effectively the same as if people could redeem their treasuries at the Treasury whenever they wanted.

Dan Kervick said...

Well, this is all academically interesting. But in my humble opinion, there is zero chance of the coin gambit actually happening. Obama wants to go down as the centrist Democrat who forced his party to swallow big entitlement cuts. He doesn't want to go down as the guy who got around borrowing limits by manufacturing money.

Tom Hickey said...

wh10, tsys are so liquid and they can be borrowed against, too, that they the money things that are effectively equivalent to currency (reserves or cash). A person is not inhibited, or even slowed down, in spending by holding tsys. In other words, holding tsys has little impact on desire to consume or invest, i.e., spend.

Sumner and Rowe's problem is that they seem to think that switching from a tsy to reserves (deposit) implies spending, like taking out a bank loan implies spending the resulting deposit. It doesn't probably most often those funds are simply saved in another vehicle, e.g., one with a better risk-weighed return. People and institutions are switching portfolio composition all the time, depending on changing conditions.

What Sumner and Rowe, and all monetarists seem to miss is that there is now causal mechanism connecting reserves with spending, so they think that holding tsys sterilizes reserves from spending. The fact of the matter is that tsys are traded in large volume by people who either want a risk-free parking place that pays interest or else have some other use for the funds, mostly likely to park in some other place that promises a better risk-weighted return. Financial investment is essentially arbitraging across a spectrum of assets and asset classes wrt risk-wighted return. They keeps market roughly in balance, based on perception of relative risk and reward.

Most academics just totally miss what is actually happening in these markets.

wh10 said...

Tom- thanks.

I got that idea, but can I challenge you to explain to me some example or limit where the leveraged trading isn't "sufficient" to allow spending to happen as if the treasuries didn't exist? I will concede your position is more than reasonably justified, but I really want to understand this to the bare bones.

Are there any empirical studies that can "prove" what people do with treasuries, so we can add that evidence to the armamentarium?

Matt Franko said...


Here is the Feds z.1 report, table L.209 exhibits who has the USTs and trends in ownership.


The ROW simply cannot be stopped in their zealous desire to hoard these, the current premiere western financial asset. This is irrational. What these countries are "doing" with them (shadow USD banking?) is I think a good idea to try to flesh this out....

Here is a table on foreign ownership:


UK: NEVER a down month

Japan: If ever they would use these USD "savings", you would think it would be after the quake/tsunami (btw much bloviating in this regard after the quake in March). Perhaps buy some cement, structural steel, medical stuff, etc... But what do we see; tiny $1B blip down in April (ports closed), then as if ON CUE, right back to $6B accumulation in May.

And of course there is no fiscal response from our govt to any of this irrationality by foreigners that results in demand leakage here...

Irrationality by Al Queda, we've got a big hammer for that one for sure ok, but this zealous irrationality by these others who seek to hoard USD NFAs: we do nothing and the results of this foreign irrationality are just as damaging to the US. Perhaps more as it is systemic.

This irrational foreign demand for USD NFA has to be looked at also...


Tom Hickey said...

There are three big holders of US tsys. The foreign sector which holds US tsys for two reasons, first as foreign reserves, and secondly, as the KAS offset of the net exports to the US. If they don't save in dollars then they have to reduce their net exporting to the US.

The second factor is banks and financial institutions, which use them to store excess reserves at interest and also for Fed collateral, as well as collateral for other borrowing.

The third is the savers, especially pension funds that have to extremely large portfolio to manage.

Of course, the Fed also carries tsys on its books for it own operations.

Other than the Fed, the use of tsys is as a rsik-free parking place. Most portfolios hedge based on changing circumstance, adjusting for perceived risk. Tsys, precious metals and strong currencies are always represented as a changing portfolio percentage in large portfolios.

The primary dealers act as buffers, holding more tsys when demand is lower, and less when demand is higher.