The Trillion Dollar Coin

From: http://www.creditwritedowns.com/2011/07/trillion-dollar-coin.html

"The coin seignorage idea has really caught on – not just in the blogosphere, but in the mainstream media as well. You have Brad DeLong, Matt Yglesias, Tyler Cowen and a lot of others talking up ‘The Coin’. In the mainstream media, the Economist, CNN, The New Republic and many others.

Just so you know what I am talking about, the idea is an end-run around the debt ceiling and it works like this:

The Treasury mints a $1 trillion coin, or whatever amount is desired.
The Treasury deposits the coin into the Treasury’s account at the Fed.
The Treasury buys back bonds
The retirement of bonds is an asset swap, no different from QE2
The increase in reserve balances is not inflationary, as Credit Easing 1.0, QE 1.0, and QE 2.0 already have shown.
These operations by the Treasury create no new net financial assets for the non-government sector
The debt ceiling crisis is averted

Here’s what Ryan Avent of the Economist says about The Coin:

As the date on which Treasury runs flat out of money grows nearer, various harebrained ideas to workaround the statutory limit on borrowing and keep paying the bills have been getting more attention. This one, one of my favourites, seems like it just might work

Those MMTers are not so crazy after all."
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My comments: I want to analyze this.  Instead of minting a coin, how about just issuing a special-purpose $1 trillion bond that pays 0.05% interest.  Then the Fed would create $1 trillion in new electronic FRNs and buy the bond.  Then the treasury would use the money to retire higher-interest bonds that the Fed owns.

Isn't this the same effect?  What is the purpose other than to lower the interest paid.  And since the Fed already returns interest received to the Treasury, this wouldn't have any effect at all.

Whoever is promoting this hasn't thought it through.

Alternatively, the Treasury could just use the cash to finance the deficit.  Printing money out of thin air and just spending it.  Of course this would lead almost directly to hyperinflation.