El-Erian on the coin
It’s not exactly a slow news week, but the platinum coin meme is gaining momentum daily all the same: today it jumped from Paul Krugman’s blog to his newspaper column, and now Mohamed El-Erian has weighed in, too, at Fortune. As the overseer of well over $1 trillion in fixed-income assets at Pimco, El-Erian’s views on this are important, and, in Fortune at least, he seems not to hate the idea: “much would depend,” he writes, “on whether the coin option is viewed as an end in itself or a means to an end”.
El-Erian worries about a large possible downside if the coin is seen as an end in itself, but at the same time, every single proponent of the platinum-coin idea is crystal-clear that they see it as a means to an end. So what does El-Erian think of that case?
I suspect that market reaction would be generally calm if the option were used as a way to diffuse what could otherwise be a repeat of the debt ceiling debacle in the summer of 2011 — when political brinkmanship and bickering harmed growth, risk assets and the country’s credit rating.
Indeed, some argue that, by broadcasting very loudly the dysfunction of Congress and essentially embarrassing its members, such an unusual (and for many — and here you can pick your preferred wording — unthinkable, unprecedented, absurd, creative, etc.) approach could provide the catalyst needed to shock our politicians into more constructive behavior, thereby reducing headwinds to growth and job creation.
This seems pretty positive on its face, especially the bit about the market reaction being “generally calm”. But there are hedges here, especially with the “some argue that” clause, so I asked El-Erian directly whether he himself would advocate the use of the coin. He replied:
Given the extent and depth of today’s political polarization and dysfunction on Capitol Hill, I do not believe that the proposal would end up serving as a means to a greater benefit – that of shocking Congress into taking its economic governance responsibilities seriously. As such, the risks would be too high and the benefits too elusive.
In other words, don’t put El-Erian in the #mintthecoin camp with Krugman. El-Erian’s point is an important one: we all agree that the only reason we’re even talking about this is the degree of political polarization and dysfunction on Capitol Hill. But minting the coin wouldn’t make that better: rather, it would exacerbate it further.
Or, to put it another way: the root cause of the debt-ceiling fiasco is Congressional dysfunction, and minting the coin would, by aggravating Congress, only serve to make that root cause worse rather than better. You’d be treating the symptoms while worsening the disease.
El-Erian makes another point in his column: he says that Treasury “has been strategically silent” on the coin option. At this point, the noise surrounding the coin is so great that it probably behooves Treasury to break its silence. By staying quiet about the coin, Treasury might think that it’s somehow preserving the option of using it. But at this point, the noise surrounding the coin is becoming unhelpful in and of itself. If Treasury isn’t going to use the coin, then Jack Lew should probably take the opportunity of mollifying House Republicans and saying so explicitly. If he fails to do so, that’s going to send the message that he’s keeping the option open. And I’m not at all sure that’s a message he really wants to send.