Debt Ceiling: Government Considers Minting a $1 Trillion Platinum Coin

January 8, 2013


Okay so this isn’t as strange as it sounds, or is it?  Basically after about March 1st the US Government will not be allowed to issue new debt unless congress approves of moving the debt ceiling higher.  Many think this is just congress hamstringing spending they’ve already approved, the problem is that not all spending is done via debt.  This means that while revenue will come in at some percent, it will not cover all the costs and the Treasury would have to pick and choose what to fund for a while.

Or…..The Treasury could take an alternate route.  It sounds wild, but it comes form a loophole in the special coins law passed to allow the US Mint to make commemorative Platinum coins of any denomination that are worth whatever their stated value is.  Hypothetically they could make a $1 Trillion coin, maybe, if it withstood a constitutional challenge in the courts.

What then would happen?  Well the Treasury wouldn’t have to issue new debt as they would have just minted their own money (Printing money in the truest sense of the term).  But there would be few takers for such a large value coin (exactly 1 taker actually, the Fed) and any smaller coins would be expensive to mint as Platinum isn’t exactly cheap.  This coin would be deposited in the Treasuries account at the Fed and then the account would be credited $1 Trillion to be used to spend until a new debt ceiling was agreed upon.  Sounds awful in practice as it’s printing money, but it’s very much the same thing that was done during quantative easing programs pushed by the Fed.  Which brings up another issue.  It doesn’t have to be a $1 Trillion coin, the treasury could mint $100 Billion coins as they needed.  So there is at least some mechanism to deal with hitting the ceiling that doesn’t involve the government shutting down completely as everyone will fear once the mainstream news gets their hands on this story.  Nothing like scaring the public to drive ratings up!

So then what ramifications would there be?  This would be effectively a 0% bond issued by the Treasury and sold to the Fed.  But this is precisely the same as the Fed buying Treasuries right now (just that it wouldn’t be on the open market and they’re not resalable).  Since returns on treasuries via interest rates paid by the Treasury are counted as profit and profits of the Fed are returned to the Treasury account….they already dabble in 0% interest bonds.  Effectively our central bank buys treasuries to control interest rates and then resells them.  This would be QE4, and presumably a much larger endeavor although QE1 and 2 were no small feats.  So what we could see is a bit of inflation, which gets us to the point of using coins that would be $100 Billion rather than $1 Trillion…..removing a $1 Trillion coin from the Fed would be a long and tough process and we’d have to sell massive amounts of treasuries to cover the difference.  Not surprising using smaller value coins would be easier and they would have a smaller effect on the treasury market (a goal of the Fed).  However, like QE, this could lead to potential inflation scenarios as our economy comes roaring back if not done correctly.  Something not horrible (say 10% inflation) but certainly above the 2% target that would be desirable giving the weak hiring situation currently.

So, while this isn’t some idle conclusion it’s certainly a workable and useful solution to shutting down the government (oh the horror!!).  Shutting down the government for a day or two isn’t bad, and maybe we need to reduce the size of it as we move along.  But just stopping abruptly for long periods has larger consequences than public employees.  So it’s not idle.  Nothing is for this scenario, but I think this is something the government should consider moving forward if we cannot reach a deal to raise the debt ceiling that all sides agree upon.