The hottest idea to save the economy from another debt ceiling fight (and a potential default) is the Trillion Dollar Platinum Coin.In order to understand how it works, we first need a very quick lesson in how the government spends money.
This is a super-crude version of it, but here’s the gist:
The Treasury Department has a bank account at The Federal Reserve, specifically the New York branch of the Federal Reserve. When the Treasury writes a check to a company (say a defence contracted owed $100 million) that check is “cashed” at the Fed. When the Treasury needs money (which is all the time) it sells bonds in an auction. The proceeds of those bonds go into the account.
OK, now there’s this thing called the debt ceiling, which sets a maximum cap on the amount of debt that the US can carry at one time. Every time we come close to hitting it, the US has to ask Congress to raise the limit. In recent years, since the rise of the Tea Party, what used to be a mildly frustrating event has grown into a systemic economic threat.
So where does the Trillion Dollar Platinum Coin fit in?
In the section of the law which specifically relates to the Treasury’s ability to create money (coins and bills) section K says this:
(k) The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.
In other words, when it comes to platinum coins, the Secretary (who is currently Tim Geithner) has discretion on the designs, specifications, quantities, and denominations of platinum coinage.
So let’s say, Tim Geithner decided to stamp out a $1 trillion coin. What does that accomplish?
The idea is that after it was created, Geithner could walk it over to the Federal Reserve, and deposit it in the Treasury’s bank account. Then the Treasury, rather than having to issue new debt (because remember, Congress hasn’t raised the limit) can make sure its checks clear against this money.
Voila, crisis averted!
Now, that sounds all nice, but people have all kinds of objections upon hearing this idea. So we’ll address them here.
MYTH #1: This will cause massive hyperinflation.
This is an understandable fear, because the idea of creating new money out of thin air to pay our debts brings to mind situations like Weimar and Zimbabwe, and trillion dollar bills being tossed about it in the streets.
But this is not about using the coin to pay back our debts, it’s staying within the law, while avoiding the technically nonsensical debt ceiling.
Think about the mechanics, the trillion dollar coin goes to the Fed, but in terms of the real economy, government spending takes place exactly as normal. Now it is true that the Treasury might not be doing bond purchases at this time, and that this could leave more money in the system, that could heat up and cause inflation, but this is easily remedied, because the Fed has a gigantic pile of Treasuries it’s sitting on that it could sell back into the open market to “sterilize” the government spending.
The bottom line is: Because this trillion dollar coin isn’t being used as “helicopter money” (money dropped directly into the economy) you don’t get the inflationary effects you’re used to seeing when you hear about governments creating money in large denominations.
This is purely a technical fix for a bad situation.
MYTH #2: The trillion dollar coin will destroy the dollar!
This is pretty much the same as the first argument. What would destroy the dollar is if the government just started printing $1 trillion bills, declared them legal tender, and then dropped them from a helicopter onto cities. Soon, the buying power of a single dollar bill would be zilch. But alas, because the coin isn’t a direct injection into the economy, but rather a stopgap that lets the government continue to spend on various services, you don’t have that destructive effect.
MYTH #3: If this idea is so great, then minting a $16 trillion dollar coin could just solve our debt problem!
This line of reasoning ignores the point completely. People who say this (or say we should print a $100 trillion coin) are mistakenly thinking that the point of this exercise is to pay off our debts and get out of the hole.
That’s not it. Our debts are plenty manageable at current levels, and with interest rates the way the are. The point is to stay within the law, while getting around the technical problem of the debt ceiling. So there’s no point to the $16 trillion coin or the $100 trillion coin, or anything else so absurd. This is not about having money to spend. This is about avoiding a legal crisis where the government had obligations to much (such as on its debt) but didn’t have the authority to borrow and spend money.
And furthermore, if we actually did try to eliminate our debts just by creating a coin, we would create the aforementioned inflation problem (via a massive expansion of money) and it would result in buyers less inclined to buy dollar assets.
BOTTOM LINE: This won’t create hyperinflation, and it’s not the solution to all of our economic problems. It’s just a way to stay within the law, while avoiding the debt ceiling nonsense.
Is it silly? Of course it is. But what’s sillier is a rich nation having a debate on whether it will pay what it owes, which is what the debt ceiling fight is all about. So in the face of such silliness, this unfortunately may be required.
For more reading, see:
- Josh Barro: Why We Must Go Off The Platinum Coin Cliff
- Michael Sankowski: Trillion Dollar Coin Explodes: Krugman, Congress is talking about it
- JKH: How the trillion dollar coin is like regular QE
There you go!
Find out everything you need to know about the #MintTheCoin movement below: