Of course the trillion dollar coin is silly, but what’s even sillier is U.S. defaulting on its national debate...
Trillion dollar coin is a concept that emerged during the U.S. debt-ceiling crisis in 2011, as a proposed way to bypass any necessity for the U.S. Congress to raise the country’s borrowing limit, through the minting of very high value platinum coins. The concept gained more attention by late 2012 during the debates over the U.S. fiscal cliff negotiations and renewed debt-ceiling discussions. After reaching the headlines during the week of January 7, 2013, use of the trillion dollar coin concept was ultimately rejected by the Federal Reserve and Treasury.
According to Gene Owens; the national debt currently stands at $16.4 trillion and some folks were talking seriously about adding a $1 trillion platinum coin into the national piggy bank via a legal loophole. One of the proponents is Paul Krugman, who has soothingly assuring us that a little debt isn’t all that bad… The trillion-dollar coin concept is a byproduct of the battle between those who want to continue paying the nation’s bills by floating debt and those who want the country to cut its losses by refusing to borrow more cash.
Here’s how it would work: The federal government functions under a self-imposed borrowing limit. When it hits the debt ceiling, it faces two options: Increase the debt ceiling or stop paying the bills… Enter the trillion-dollar coin. As Krugman noted, there’s a law on the books allowing the Treasury to mint platinum coins in any denomination it chooses.
The law was intended to allow the minting of commemorative coins, which could then be stashed away among your souvenirs, or sold at market value. But, as Krugman noted, that’s not what the letter of the law says. Conceivably, Treasury could mint a coin in any denomination and slip it into circulation through that loophole. And, Krugman writes, by minting a trillion dollar coin, then depositing it at the Fed, the Treasury could acquire enough cash to sidestep the debt ceiling – while doing no economic harm at all.
So here’s the idea: Take a little bit of platinum, strike it into coin, and engrave the words; ‘United States of America, In God We Trust, E Pluribus Unum, One Trillion Dollars’. Then the U.S. Treasurer could take it to the nearest Federal Reserve Bank, fill out a deposit slip for $1 trillion in cash, and immediately start writing checks on it…
In the article Meet the Genius Behind the Trillion-Dollar Coin by Ryan Tate writes: It was a December 2009 Wall Street Journal article that ultimately inspired the Georgia lawyer known online as ‘Beowulf’ to invent the trillion-dollar coin. Beowulf, a leading contributor to the blog; Monetary Realism explained his thinking this way: If you go through the Federal Reserve, you’re borrowing money. If you go through the Mint, you’re making money. Some of Beowulf’s buddies on Mosler’s blog, whose prodding had helped him come up with the trillion dollar coin idea, in the first place, then fanned out to promote the idea.
According to Beowulf; it really started as a game and there’s really no reason for a trillion dollar coin, it’s kind of sad that it’s gone this far… it was really a group thing… Interestingly, the coin has been embraced by liberals as a useful political hack and rejected by conservatives as absurd and dangerous… The coin hack even surprised and impressed former U.S. Mint director Philip Diehl, who co-authored the law that enabled the platinum loophole in the first place.
‘When I first heard about the idea to mint a trillion dollar coin, I was very surprised’, says Diehl. ‘But because I know that law backwards and forwards, I knew immediately that the guy who came up with the idea was right. It’s an ingenious use of the law to avoid a ridiculous and irresponsible situation, in which the country would be driven to default.’
In the article Everything You Need to Know About the Crazy Plan to Save the Economy by Matthew O’Brien writes:
- What’s this nonsense about a trillion dollar coin? It’s no joke. At least no more than voluntarily defaulting on our obligations by refusing to lift the debt ceiling would be. It’s an absurd solution to an absurd problem, but a solution nonetheless…
- Why does it need to be a coin? And why platinum? We don’t make the loopholes. We just find them. Congress passed a law in 1997, later amended in 2000, that gives the Secretary of the Treasury the authority to mint platinum coins, and only platinum coins, in whatever denomination and quantity he or she wants. That could be $100, or $1,000, or … $1 trillion.
- Why did Congress authorize these coins? The idea was Treasury would only use this authority for collectible coins, while making a little money for the government in the process. But the law is vague. It only says the Treasury can mint platinum coins in any denomination it wants. So, to infinity and beyond!
- Doesn’t this violate the spirit of the law? Maybe. But remember, part of the point of creating these commemorative coins was to increase government revenue. The trillion-dollar coin is seigniorage just like commemorative coins are seigniorage… Seigniorage is the difference between the cost of creating currency, and the value you assign to that currency — in other words, the ‘profit’ governments get from minting money. Even if you don’t find this terribly convincing, it doesn’t really matter. The plain text of the law, not its intent, is what matters. And that means the trillion-dollar coin is almost certainly legal.
- Would it survive a court challenge? It’s far from clear anybody would have the legal standing to challenge the trillion dollar coin in court. That would at least require a joint resolution of Congress, which isn’t happening, or an investor who can show that not defaulting on our obligations caused them injury.
- So this might be legal: If you’re still not convinced, just asks Representative Greg Walden, a Republican from Oregon, who’s so convinced it’s legal that he introduced a bill to close the platinum coin loophole.
- Would we need to come up with $1 trillion worth of platinum to mint the $1 trillion platinum coin? Repeat after me: seigniorage, seigniorage… The entire point of the trillion-dollar coin is it gives us money to pay our bills if the debt ceiling isn’t raised. But it won’t give us any money if we spend an equal amount creating it. Basically, we want to take the smallest amount of platinum we can find and scribble $1 trillion on it. If you think this sounds nutty, ask yourself whether your $100 bill is made from $100 worth of cotton.
- Why not just create a single $16 trillion coin — scratch that, make it $100 trillion! Now that’s just crazy talk. Let me be clear: Nobody wants to use platinum coins to eliminate the debt. As Paul Krugman points out, there’s a limit to how much seigniorage a government can extract before hyperinflation sets in, and that’s certainly far less than $1 trillion, let alone $16 trillion. The trillion-dollar coin is just a technical fix to the technical problem of the debt ceiling.
- Do I need to buy some gold bars to prep for the coming hyperinflation? As Joe Weisenthal of Business Insider points out, the biggest fallacy about the trillion-dollar coin is that it will be massively inflationary. It won’t be. If the government quickly spent $1 trillion, that might be inflationary. It would pay for old spending — Now, inflation might go up in the long-term if the Fed doesn’t intervene. That’s because the composition of spending will have changed — more currency, less borrowing — even though the amount has not…
- Do I have this right: Treasury mints money and pays for stuff with it, and the Fed sells bonds to offset this new money? This sounds kind like— Monetary policy! It’s just a convoluted way of doing sterilized ‘quantitative easing’ (QE). Let’s translate this into English: To simplify a bit, the Treasury would; 1) mint the trillion dollar coin, 2) use it to pay for already approved obligations, and 3) the Fed would suck out as much money as the Treasury mints…
- Letting the executive usurp control of monetary policy from the Fed seems like a very bad idea– is it a frightful precedent? Yes and no. The consequences could be terrible if trillion-dollar coins become a regular part of policymaking, but monetary-policy-by-executive isn’t exactly unprecedented. FDR grabbed the reins of monetary policy when he took the U.S. off the gold standard in 1933 and announced he wanted prices to return to their pre-Depression level… But the danger, as Ryan Avent of The Economist points out, is if this extraordinary measure became ordinary, or if markets merely feared it might…
- But wouldn’t this be a political train wreck? Indeed. Cardiff Garcia of FT Alphaville makes the rather persuasive case that Democrats shouldn’t use the trillion dollar coin as a negotiating tactic to increase their leverage in the debt ceiling talks– making a debt ceiling breach more likely. But it does make sense as a form of insurance against the economic carnage a protracted debt ceiling breach would entail.
- You don’t seriously think this is a good idea, do you? If it’s a choice between defaulting on obligations, and minting a trillion-dollar coin, I say mint the coin.
It’s legal and it’s possible… According to Leigh Ann Caldwell; regardless of what they think about it, economists on the left and the right point out that it’s completely legal. ‘I think it’s deeply wacky but it’s possible’, said economist Jared Bernstein.
According to Douglas Holtz-Eakin; I agree that it’s possible, but I think it’s an incredibly stupid idea. The coin itself does not have to literally be worth $1 trillion: Its common sense: just because there’s a $99 difference in the value of a $1 and a $100 bill, the materials that are used to make them are worth the same. Translation: The trillion dollar coin does not need to be made of $1 trillion worth of platinum.
The coin would have no economic impact; it would not cause inflation: The reason this idea is so out of left field is because the Federal Reserve is the entity responsible for printing money, and every dollar the Fed prints must be backed by Treasury bonds and counted toward the U.S. debt.
But the Treasury’s printing of a trillion dollar coin would not have any connection to the debt. Because it would sit in a vault and not be part of the money supply and not backed by bonds, it would not skew the economic system and, therefore, can’t cause inflation.
But because this coin is sitting in a vault and the Treasury Department determines that it’s worth $1 trillion, but really it is. The trillion dollar coin is purely political – just like the debt ceiling: Because the trillion dollar coin has no impact on the economy, conservatives decry it as political laziness. They say it causes a perception problem that the U.S. is unable to deal with its financial problems. According to Holtz-Eakin; you’re messing with international confidence and that confidence is fragile.
According to David John; this is the typical Washington sophistry… but what is the debt ceiling? Just like the trillion dollar coin, it’s completely created out of thin air. Congress can raise and lower it at will. It’s not steeped in economic basis, but in political gamesmanship. The debt ceiling was created by Congress more than 100 years ago to put some checks on the executive branch.
According to Bernstein; trillion dollar coin is not ideal but it’s better than the potential negative economic impact if the debt ceiling isn’t raised. It shouldn’t have to come to that but it’s a better solution than default… However, regardless of whether you think it’s a good idea or not, the trillion dollar coin would undoubtedly further poison the political well of a federal government whose well is already downright toxic…