Mint the Coin

With the Debt Ceiling coming up soon, it
Is time (although some may impugn it)
For coining a halt
To a US default
With a really big monet'ry unit.

A one-trillion coin, it is said,
Could be minted and shipped to the Fed,
In order to pay
What the US of A
Might be forced to renege on instead.

This sizeable denomination
Would be kept out of mass circulation,
The better to sidestep
That such an untried step
Precipitates hyperinflation.

When Republicans finally come round
From running bond issuance aground,
It's back to the Mint
For the Coin, where its stint
Will be wound up with melting it down.

So let's mint The Coin out of platinum!
Though objections there be, we may flatten 'em.
There are ways besides cash
'Round the Debt Ceiling clash,
But there's nothing as clever as that in 'em.

It's an idea so crazy, it just might work: the US Treasury could circumvent the looming debt ceiling showdown by minting a very large denomination platinum coin of, say, $1 trillion. The coin could be deposited in Treasury's account at the New York Fed, where the new funds could be used to pay any of the Federal government's many obligations. First proposed in a comment on an economic blog in 2010, the Coin is within the legal powers of Treasury, which "may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time." Never mind the fact that this law was intended to facilitate minting bullion coins for numismatists - it's on the books. Of course it's absurd to speak of minting a $1 trillion coin to keep the government out of default, but the debt ceiling itself is absurd, as is the threat to throw the nation into default for political purposes. So, it's a case of fighting crazy with crazier.

The "Mint The Coin" movement has been gaining steam thanks to the (only slightly tongue-in-cheek) advocacy of such leading economic writers as Bloomberg's Josh Barro and Business Insider's Joe Weisenthal. For those who fret that the issuance of a $1 trillion coin would ignite inflation of Zimbabwean proportions, a former head of the US Mint (who wrote the 1996 platinum coin law) has weighed in with a cogent explanation of why that would not happen. It all comes down to a choice: would we rather the US Treasury default, or do something absurd?

Message from the Fed

"To counter employment fragility,
We promote cheaper funding ability,
But investors who yearn
For a decent return
Must accept more default probability."

The Fed Open Market Committee announced the details of its latest stimulus program on Wednesday, and it's a doozy: under the 3rd round of quantitative easing, the Fed will purchase up to $40 billion a month of mortgage bonds and Treasuries, in addition to its $45 billion of monthly machinations under the Operation Twist program. This massive QE3 intervention is intended to lower long-term interest rates, as the Fed long ago did for short-term rates. Chairman Bernanke and colleagues hope to drive the 10-year T-note, currently yielding 1.75%, back to its July low of 1.38%.

For bond investors, all this rate compression inflames an already acute yield pressure. Those who want to earn an attractive yield must either shift into riskier bonds, or reduce their fixed income allocation in favor of stocks or other more volatile asset classes. As one CIO expressed it to the Wall Street Journal, retail investors "are practically walking around in a daze; they don't know what to do. There is no safe yield out there, so they are redefining what is safe, which is a dangerous thing to do."

Greece: Select Company

Said Standard & Poor's: "It's preferred
You remember your bond is your word;
When changing the payments
You've promised to claimants,
'Selective default' is incurred."

Greece joined a select company indeed when it became the first euro-zone country to be given a default rating. Standard & Poor's cut the country's long-term rating from CC to "selective default," as it had promised to do if Athens amended the terms of its bonds to add collective action clauses. The Greek CAC effectively forces bondholders to accept a bond swap offering. The measure, which was approved by the Greek parliament last week, could potentially forces bondholders to take losses, but up to now the country has not missed any interest payments; hence, the "selective" qualifier. If a majority of bondholders accept the amended bonds, the rating agency has indicated that it will set Greece's rating at CCC.

Euro Yes, Drachma No

There'll be many a Euro bank run done
If the euro's allowed to come un-done,
But Greece in the ranks
Will be best for the banks
In Frankfurt and Paris and Lon-don.

With all the Greek unrest, European can-kicking and German resistance, many ask: why keep Greece in the euro zone? After all, they're effectively bankrupt and everyone knows that they will default sooner or later. However, those who have thought the situation through say that, while an orderly Greek default within the euro will bring pain, a chaotic default in a "new drachma" would bring disaster, both for the Greeks and their European creditors. As a Bloomberg editorial put it:

"The possibilities range from runs on European banks to violent rioting in the streets of Athens -- or even civil war... a prepackaged, well-managed bankruptcy, not unlike the ones arranged by the Obama administration for General Motors Co. and Chrysler Group LLC in 2009, would be better than letting the chips fall where they may."

Capitol Thrill-Seeker

A fellow who loved a good thrill
Made a bet on the debt ceiling bill,
Going 7 to 3
On a "yes" from the G.-
O.P. Caucus on Capitol Hill.

As the debt ceiling crisis heads toward the Default Date of August 2 with no resolution in sight, many are aware that this impasse has been manufactured by the Republican House majority to force spending cuts on the President and Congressional Democrats.  However, some extreme GOP representatives appear to want to force concessions on their Speaker as well.  The Wall Street Journal reports that Senators Rand Paul (R-KY) and Jim DeMint (R-SC) wrote to House colleagues that Speaker John Boehner's plan to cut $1.2 trillion in expenses doesn't go far enough.  The GOP may yet vote "yea" on a budget compromise, but don't bet your life on it.

What Happens if We Default?

On a US default, we deduct,
If the GOP reps can obstruct,
Our economy's fatally,
Foolishly, finally,
Fittingly, fecklessly f***ed.

Simon Johnson writes in Project Syndicate that some Tea Party Republicans hope that a US default will radically reduce government's role in the economy,

But the consequences of any default would, ironically, actually increase the size of government relative to the US economy – the very outcome that Republican intransigents claim to be trying to avoid.
The reason is simple: a government default would destroy the credit system as we know it.

The entire dollar-based credit system is founded on the assumption that US government debt is riskless; the entire economy is founded on credit; without the one, the other will contract fitfully, fiscally and ferociously.

Hat tip to Tess Vigeland of Marketplace Money.