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President Barack Obama gestures as he speaks about the fiscal cliff, Monday, Dec. 31, 2012, in the South Court Auditorium at the White House in Washington. (CHARLES DHARAPAK/AP)
President Barack Obama gestures as he speaks about the fiscal cliff, Monday, Dec. 31, 2012, in the South Court Auditorium at the White House in Washington. (CHARLES DHARAPAK/AP)

$1-trillion coin idea goofy, but economics of it are sound Add to ...

The proposal to print a $1-trillion platinum coin to avoid the U.S. debt ceiling is a goofy solution to a goofy problem, but the economics of it are sound. Still, don’t expect to see one any time soon.

Minting a coin in such an impossibly large denomination is goofy on its face. The debt ceiling, however, is equally so.

A spending and taxation plan has already been passed in the U.S., and it will necessarily cause a deficit large enough to increase the debt beyond the ceiling.

There is no reason whatsoever that the debt level should be treated separately from budgetary decisions, as the debt is the inherent result of those budgetary decisions. In essence, the United States is having the same budgetary debates twice, with the added uncertainty of knowing whether the government will default on their debts.

If all this was not enough we can add a side-order of brinkmanship to the U.S. debt ceiling debate. It is a poor way to manage the world’s largest economy.

A $1-trillion coin is an elegant idea. In the U.S. system currency creation is left to the Federal Reserve, not the U.S. government. An exemption exists, however, for the Treasury Department to mint and issue platinum bullion coins. The rule was created to allow the Treasury to issue commemorative coins, though there appears to be no legal reason why it could not be used to create exceptionally high denomination coins.

Once the coin is created, it would be deposited at the Federal Reserve and that deposit would be used to pay off debts, thus avoiding the debt ceiling.

The move, by itself, would substantially increase the U.S. money supply and almost certainly be inflationary. The Federal Reserve would likely offset such a move by selling a large number of their bond holdings for cash, thereby creating an offsetting reduction in the money supply. If there is no net increase in the money supply, there should be no direct economic consequences.

Despite this, I cannot see the Obama administration seriously considering such a move.

It would be poorly understood by the general public, who would see it as a gimmick and an abdication of responsibility.

While there should be no direct economic consequences, there may be indirect ones, as the plan could cause foreign investors to lose confidence in the U.S. economy, causing a reduction in investment.

While the economics are sound, the idea is best left as a theoretical exercise.

Follow on Twitter: @mikepmoffatt

 

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