Wednesday, February 1, 2023

Why I prefer perpetual/premium bonds to the platinum coin

1877 $50 Thirty-year Registered 4% Consol [link]. (A consol is a perpetual bond.)

If I had to choose one of the tricks for getting around the debt ceiling, I'd go with premium bonds/perpetual bonds over the platinum coin.

I've known about the platinum coin idea for over a decade (Here's an old blog post I wrote on it back in 2013.) But I only recently found out about the premium bond idea courtesy of Ivan the K on Twitter. (Little did I know there's a long intellectual pedigree for this idea on the blogosphere.) Related is the idea of issuing perpetual bonds, or consols, to get around the ceiling (which seems to have first been discussed at the now defunct Monetary Realism blog, by Beowulf, the person who figured out the platinum coin loophole?).

The premium/perpetual bond trick, in short, is to get around the debt ceiling by issuing new bonds either at a premium to face value (premium bonds) or with no face value at all (perpetuals). Both types of bonds get around the debt ceiling because apparently only the face value of a bond counts to the ceiling.

I prefer issuing premium and/or perpetual bonds to the platinum coin because the former options don't encumber the Fed's balance sheet. The latter does. Evading the debt ceiling with any of the proposed tricks is already a dicey proposal. Choosing as your method a trick that also handicaps the Fed only multiplies the drawbacks of the whole thing.

Encumbering the Fed's balance sheet would reduce the Fed's independence, and independence is a good thing. The Fed's job is to set a target for the national monetary unit, the dollar, which along with the mile or the pound is one of the most important components of the U.S.'s system of weights & measures. To do it's job of calibrating the dollar unit, the Fed should be protected from the day-to-day ambitions of politicians, at least more so than other government institutions.

If you recall, the platinum coin requires the President to ask the U.S. Mint to manufacture a $1 trillion coin made of platinum and then deposit it at the Fed. The Fed then instantiates $1 trillion in deposits which the government can proceed to spend.

The platinum coin trick does neuter the debt ceiling. However, in the process the Fed has issued $1 trillion more dollars than it would have otherwise. This extra issuance is in turn secured by an illiquid non-interest earning asset on its balance sheet; the platinum coin. The Fed is hobbled. For a central bank to be independent, it helps to have a consistent stream of revenue to pay for expenses. That's where interest-earning assets are key. Liquid assets are also vital, because they can be sold in a snap to market participants if necessary for monetary policy purposes. Either way, a 0%-yielding trillion dollar platinum coin doesn't make the cut.

Compare this to the alternative of issuing premium bonds or perpetuals directly to the market.

In this scenario, the Fed's balance sheet hasn't changed at all. The Fed hasn't issued an extra trillion dollars into existence. And it still holds the same portfolio of highly-liquid interest-earning assets as before. Yet the debt ceiling has been evaded.

In sum, with premium and/or perpetual bonds, you get all of the debt ceiling evasion punch with none of the decline in central bank independence. It seems to me to be clearly the better of the two options. (Unless you're not a fan of Fed independence. If you aren't, the platinum coin conveniently shoots two birds with one stone: not only does it get around the debt ceiling, but it also short-circuits the independence of the central bank.)


  1. It is surprising treasury yields rebounded as much as they did. I agree with your article.