Would The $1 Trillion Platinum Coin Be Inflationary?

The recent chatter this week involves the usage off the $1 Trillion platinum coin.  The purpose of this brief post is not to say whether this is stupid or brilliant, but rather to look at the mechanics involved and see whether it would in fact be inflationary.

My understanding is that the $1T coin would allow the US to spend that amount as the coin is deposited at the US Treasury.  Unlike typical deficit spending, debt would NOT be sold the finance this transaction.  Usually, spending occurs and US Treasuries are sold to fund this spending.  So, $’s spent into the economy, while $’s are sucked out when people pay for the UST purchases.  In this case, $’s would be spent into the economy, WITHOUT a corresponding debt sale which would suck $’s out.

Some commentators have suggested that the Fed could sell UST’s that they own to mop up the liquidity.  BUT, this still results in an increase of assets in the system.  Even if you sell UST’s, you are taking reserves out of the system and replacing them with UST’s – no change in net assets.  When you spend without a corresponding debt sale, that IS an increase in net assets – regardless of whether or not you sell UST’s or Agency MBS.  So in short, I do believe that this type of thing is inflationary in nature.  Obviously I don’t know exactly how much it would take to “create” real incremental inflation, but the mechanics show this to be the case IMO.

By David Schawel, CFA of Economicmusings