The curious concept of the ‘debt ceiling’ pushes the U.S. government into a difficult corner. On the one hand, the executive branch must spend the money that Congress appropriates. It is Congress, not the Department of the Treasury, that decides how much we will spend on Social Security benefits, Medicaid, Medicare, national defense, public payrolls, federal pensions, and nearly anything else you can name.
On the other hand, once the debt limit imposed by Congress is reached, even though the spending mandates are still there, the Treasury cannot borrow more money to meet them.
The President, then, gets caught between a rock and a hard place. He cannot unilaterally slash entitlements without Congressional approval. He cannot unilaterally discharge his Army and Navy and send them home without Congressional approval. He can’t meaningfully reduce spending at all. He’s danged if he does, and danged if he doesn’t.
To paraphrase National Lampoon’s Animal House, this situation calls for a futile gesture to be done on somebody’s part – and the government are just the guys to do it.
The gesture: President Obama can exploit a legal loophole that allows the Treasury to mint platinum coins in any denomination, direct the Mint to create a platinum coin, slap a face value on it of $1 trillion dollars… and go deposit this ruler of all coins at the Federal Reserve.
Then the Treasury can write checks against the balance.
Voila! Problem solved. The executive branch can meet its obligations to run Congressionally-mandated spending programs and continue the essential functions of government. The Treasury can observe the debt limit because they don’t have to issue bonds to paper over government spending.
A capital idea!
The idea of minting a $1 trillion coin for the sole purpose of rendering the debt ceiling moot seems to have originated with a blog commenter on the Pragmatic Capitalism blog back during the last round of debt ceiling negotiations in 2011. The Monetary Realism blog presents the idea as simply another form of quantitative easing: “Instead of buying financial assets, the Fed has bought the coin.”
So if you liked QE3, you’ll love the $1 trillion platinum coin!
“How many legs does a dog have if you call a tail a leg?” goes a riddle commonly attributed to Abraham Lincoln. “Only four! Calling a tail a ‘leg’ doesn’t make it a leg!”
The problem is this: You cannot permanently separate the supply of wealth from the net economic output of the country. Any attempts to do this may be flawed.
As of this writing, the Treasury projects that the government will hit the debt ceiling this February. Congressional Republicans, fearing primary challenges from the Tea Party wing of fiscal conservatives, are rattling their sabres threatening not to extend the debt ceiling without substantial concessions on spending from Democrats. Democrats, for their part, fresh from their Presidential victory, are not terribly inclined to compromise, anticipating that any fiscal engine seize as a result of the debt ceiling can be pinned on Republicans and help their own electoral chances in 2014 and 2016.
What Happens If They Do It?
The Obama administration has two options, if they mint the coin: Come up with $1 trillion worth of platinum from somewhere, melt it down and make the coin, or simply slap a face value of $1 trillion on a much smaller amount of platinum.
The first course of action, while not inflationary, does not seem realistic. If we had enough resources lying around to come up with $1 trillion of platinum, we wouldn’t be in the fiscal mess in the first place.
Further, with platinum’s spot price around $1,592 per ounce, a $1 trillion dollar platinum coin with that actual amount of platinum in it would weigh nearly 20 tons.
This should serve to wrap your brain around the sheer magnitude of the problem.
Course of action two – minting a smaller coin and just slapping a trillion dollar face value on it, on the other hand, would back the Federal Reserve into a corner. Why? It has to do with the mechanisms by which the Fed controls the money supply. To increase the money supply and boost economic growth the Federal Reserve buys treasury bonds for its own portfolio via its Federal Reserve Open Market operation and credits the accounts of its member banks which cash, which lend against these balances. But this course of action is ultimately inflationary. To decrease the money supply, slow down the economy and fight inflation, the Federal Reserve does the opposite: It sells off Treasuries in exchange for cash, and takes the cash out of circulation. It simply vanishes.
If the Treasury waves a magic wand to create a trillion dollars in the bank by mislabeling a quantity of platinum and expecting everyone else to buy into the fantasy, the Fed must choose whether to accept a massive devaluation of the dollar to adjust to the real value of the platinum, or radically reduce the money supply by taking dollars out of circulation to counteract the inflationary effect. They must sell bonds in an amount equal to the difference between the face value of the platinum coin and its intrinsic value to counteract the inflationary effect – removing the cash from bank reserves, where it serves to support lending activities in the private sector – and transferring it to the Treasury account.
In essence, it might need to undo the entire “stimulus.”
If it does so, the resultant collapse in the supply of money available for lending will throw the economy into reverse.
Don’t tell me the trillion dollar coin wouldn’t be inflationary – even the coin’s supporters are arguing that it’s not inflationary precisely because the Fed’s Open Market Committee can sell off bonds and take money out of circulation.
The Bottom Line
As it stands, the idea of minting a $1 trillion platinum coin is mostly popular on the left. Not because it is sound policy by any means, but because it represents an end run around Congressional Republicans. It seems unlikely to come to pass at this point, because it would re-energize the same elements that swept Republicans to power in the 2010 mid-terms – and Obama would totally own any economic disruptions that occurred afterwards, regardless of the cause.
But if we can mint one $1 trillion platinum coin without risking inflation – which is precisely what advocates claim, including Nobel prize winner Paul Krugman – then why can’t we mint $16 trillion of them and use them to pay off the national debt? Or double that, pay off the debt and give every man, woman and child in America a check for $48,000? Then again, as bad as The Coin is… the alternatives may be worse.