US debt ceiling crisis -- trying to understand

what's the current position? i just caught up with it through wikipedia. i don't understand one thing though:

jack balkin suggests that one way out could be "by issuing two platinum coins in denominations of one trillion dollars each, depositing them into its account in the Federal Reserve, and writing checks on the proceeds."

but is that a solution? isn't that like printing more dollars? the US govt. also does that from time to time. i don't understand -- the govt. is printing money and taking debt. why is there a ceiling on only one? also, are the two interchangeable? i would imagine not (thus it should not be a solution offered). i'd think printing money is more damaging to the domestic economy that borrowing -- no?

Huzefa Kapasi wrote:what's the current position? i just caught up with it through wikipedia. i don't understand one thing though:

jack balkin suggests that one way out could be "by issuing two platinum coins in denominations of one trillion dollars each, depositing them into its account in the Federal Reserve, and writing checks on the proceeds."

but is that a solution? isn't that like printing more dollars?

Yes and no. It is not like printing dollars because just doing that does not increase the money supply. It does not increase money supply because the coins would be deposited into its account with the Federal Reserve.

There are at least four distinct jobs involved here: (a) setting monetary policy (controlling money supply and interest rates) which is the job of the Federal Reserve's Open Market Committee (aka FOMC), (b) administering monetary policy (selling and buying US Treasury securities in order to set rates, and managing currency) which is the job of the twelve Federal Reserve Banks, (c) setting fiscal policy (how much money the government spends) which is the job of the US Congress with approval by the President, and (d) administering fiscal policy (actually raising the cash that Congress has decided to spend, by collecting revenue as directed by Congress and borrowing money by issuing Treasury securities for the rest of the spending) which is the job of the Department of the Treasury.

These four jobs are today clearly separated, as I described above. But that is the result of 200 years of evolution. Back when the constitution was written, there was no Federal Reserve, and there were no macroeconomists. So the Treasury has the ability to print coins (which would impact money supply). In practice, the Treasury stopped doing that a long time ago, to ensure the clear separation I described above.

Huzefa Kapasi wrote:the US govt. also does that from time to time.

If you consider the Federal Reserve as part of the government, yes. But the Treasury does not print money. (Just like Ministry of Finance does not print currency in India, but RBI does. One wrinkle in India is the one rupee note which technically the MoF produces, although it is actually done by RBI on behalf of MoF. In India the lines of separation are not as distinct anyway; MoF makes statements about future interest rate actions of RBI -- something which would result in a huge hue and cry if it happened here, because of the independence of the Federal Reserve.)

Huzefa Kapasi wrote:i don't understand -- the govt. is printing money and taking debt. why is there a ceiling on only one?

That's just an accident of history. Back in 1917, fiscal conservatives were concerned about the growing debt. So they put a ceiling on debt. Because the Federal Reserve is separate and independent, there was no need for Congress to tell the Fed how much money to print. (It would actually be a bad idea for Congress to set a ceiling on money supply.)

Just to add to my earlier comment on the 200 years of evolution... in earlier times, the Treasury was also issuing currency notes called United States Notes. The current notes OTOH are issued by the Federal Reserve system and its 12 regional banks; that is why official US currency now says "Federal Reserve Note."

PS: Your question and my earlier post made me refer back to lecture notes that I took in school almost seven years ago. Cool.

thanks charvaka. now i understand it a bit better.