Photo: St. Louis Fed
Have you heard about the trillion dollar platinum coin proposal to avert a debt ceiling crisis next month?Pundits from the political, economic, and investment spheres continue to weigh in on the plan.
Mohamed El-Erian, CEO of PIMCO – the world’s biggest bond fund – said in a CNN op-ed today that the trillion dollar coin proposal just might work.
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…It could also encourage Congress to deal once and for all with the oddity of having to consider both annual budgets and disconnected debt limits. In fact, there is a reason why this dual approach is not prevalent outside our borders. It is both redundant and harmful.
However, El-Erian acknowledges one caveat that other critics of the trillion dollar coin proposal from the investment community often raise.
Should the coin be viewed more of and end in itself than a means to an end, it could be a problem:
Markets would worry about whether the approach would add considerable fuel to the fires of Congressional discontent, dysfunction and polarization. Political risk would increase, serving to price out an even greater array of job- and growth-enhancing investments by the private sector.
Meanwhile, the rest of the world could well view this policy approach as potentially inflationary, and also indicative of a superpower that has lost its way. All of which would be detrimental to equities, bonds and the value of the US dollar.