El-Erian on the coin

By Felix Salmon
January 11, 2013
blog to his newspaper column, and now Mohamed El-Erian has weighed in, too, at Fortune.

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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.

11 comments

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Sadly, like so many other people, Felix doesn’t quite get it right. The problem isn’t “Congressional dysfunction”. It is Republican obstructionism and it is important for journalists and OpEd writers to be clear on that. The only people who are talking about bringing the country to default, technical default, or whatever else are Republicans.

Posted by GregHao | Report as abusive

I agree. It’s perfectly fatuous to claim that the root cause of the current fiasco is “Congressional dysfunction.” The root cause, as Felix knows perfectly well, is that the Republican Party, having
failed to enact its policies through conventional means — you know, win elections, pass legislation in Congress, get legislation signed by President — thinks it is ok to threaten to blow up the economy unless it gets what it wants.

Any analysis of the situation that does not begin with this premise is bound to be flawed.

Posted by f.fursty | Report as abusive

“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.”

If Congressional Republicans had done that, we wouldn’t be talking about #mintthecoin. Anyone stupid enough to think that’s an achievable goal hasn’t been paying attention.

Anyone foolish enough to negotiate with people who won’t who doesn’t have a BATNA should be shot and sent to the Russian Front, without wasting money on the pine box. (Note: this is not advocating the assassination of the American President, or his staff.)

Posted by klhoughton | Report as abusive

The “cure” Felix is seeking is simple. Republicans must be beaten in elections so thoroughly that their party ceases to be viable as currently constituted, allowing the shell to be re-captured by sane people, or a new party to rise in its place. I’d be perfectly happy to see the Libertarians rise in their place, or the Dems complete their transition to becoming the center-right party of business interests while the Greens and other elements on the left matured into a new center-left party advocating European-style social democracy and the interests of labor.

Posted by Auros | Report as abusive

Some people like Ezra Klein have become fraidy cats about the coin, filled with forebodings they can’t actually spell out about how it “could go wrong.” Fear of novelty, in my view. I would suggest that Obama order the coin minted NOW and deposited in the Treasury (or wherever). Then IF, and only IF, the GOP tries to use the debt limit as blackmail would he use it. He would have it ready to use, and if he did, it would be clear that he was driven to it. That would assure people that it was done as a last resort when good sense could not persuade the GOP to give up their nonsense. And leave the coin there for future use if the nonsense started up again.

Posted by Chris08 | Report as abusive

Sounds like your ridiculous concern trolling worked Felix. Good job on sabotaging the American economy.

Posted by Zdneal | Report as abusive

Auros:

No, it’s even simpler, the current Republicans should understand what the debt ceiling is.

See? Simple!

Impossible, but simple. Thanks for providing another useless solution.

Felix, you are less than useless on this. You are actively and objectively evil. Maybe not intetionally, but it cannot be said strongly enough that your prescription is awful and useless. You really should think about all the people that will suffer because you didn’t want your sensibilities offended.

Posted by Zdneal | Report as abusive

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