Here is a solution to our national debt problem that is being floated seriously with various economists and Congressmen buying into it: Mint a trillion dollar coin out of platinum (other metals have statutory limits on how much they can be worth) and put it in the bank. We blogged about this idea during last year’s crisis, but it has come back, perhaps in a more sophisticated form.
Economist Joe Wiesenthal, in explaining the scheme, argues that the coin would not necessarily spark hyperinflation and other dangers of creating money from thin air as long as it is not plopped into the economy, but simply deposited into the Federal Reserve as a technical solution to the technical problem of the national debt limit, allowing the government to simply continue paying its bills as it has been. (But if the government pays bills without either having money or incurring debt, won’t that still inject unbacked money into the economy with all of the consequent hyperinflation?) Anyway, let’s let Wiesenthal have his say:
In the section of the law which specifically relates to the Treasury’s ability to create money coins and bills section K says this: “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.
However the economics would work, my interest in the trillion dollar coin is literary. There is a great comedy here somewhere. The treasury worker taking the coin from the mint to the Federal Reserve has it in his pocket. When he takes out the keys to the car, it falls out and rolls into the gutter. A kid picks it up and puts it in a school vending machine. The guy that restocks the machine thinks it’s a Susan B. Anthony dollar. He uses it to buy cigarettes at a convenience store. The owner recognizes what it is. He flies to Switzerland and deposits it in a secret account. . . .(You can take it from here.)