Is the Trillion-Dollar Platinum Coin Clever or Insane?

Policy wonks are debating whether a trillion-dollar platinum coin would be a clever or insane way for President Obama to play hardball with Republicans in the upcoming debt limit battle. Here’s what you should know about this crazy-sounding idea:

1.     A legal loophole gives the Treasury Secretary apparently unlimited authority to mint platinum coins.

Treasury is forbidden from printing money to cover government deficits. Treasury must issue debt, while the Federal Reserve independently controls our nation’s monetary printing press.

That is exactly as it should be. But there is an arcane exception for platinum coins. To serve coin collectors, Treasury can issue platinum coins of any denomination. That creates an intriguing loophole: Treasury could bypass the collector market and mint a trillion-dollar platinum coin. By depositing it at the Federal Reserve, Treasury could keep paying bills after we’ve fully exhausted our borrowing limit.

2.     Most observers think this is a terrible idea, but the legal arguments against it are weak at best.

A who’s who of commentators has already objected to the coin on legal, economic, political, and image grounds (see, for example, John Carney, Matt Cooper, Tyler Cowen, Kevin Drum, Jim Hamilton, Heidi Moore, and Felix Salmon). I’m no lawyer, but the legal arguments seem wholly unconvincing. The language of the statute is clear, and in any case, the executive branch gets away with expansive actions in extreme times. During the financial crisis, for example, Treasury aggressively interpreted its authorities in order to bail out GM and Chrysler and to backstop money market funds. If default became a real possibility, the same expansiveness could easily justify a platinum coin.

3.     The economic arguments against the coin are stronger but manageable.

There’s a good reason that Treasury is forbidden from printing money to pay our debts: inflation. Many economies have been ruined when profligate governments turned to printing money. But minting the platinum coin needn’t mean monetizing our debt. The Federal Reserve has ample ability to offset any inflationary impact by selling some of the trillions in Treasury securities it already owns. As long as the Fed does its job, inflation would not be a risk.

4.     The best arguments against the platinum coin involve image and politics.

Minting a trillion-dollar coin sounds like the plot of a Simpsons episode or an Austin Powers sequel. It lacks dignity. And despite modern cynicism, that means something.

It would also be premature. President Obama and the Republican and Democratic members of Congress have roughly two months to strike a debt limit deal. There is no reason to short-circuit that process, as painful as it may be, with preemptive currency minting as the now-famous #MintTheCoin petition to the White House suggests.

5.     Nonetheless the platinum coin strategy might be better than the alternatives if we reach the brink of default.

Analysts have considered a range of other options for avoiding default, including prioritizing payments, asserting the debt limit is unconstitutional, and temporarily selling the gold in Fort Knox. All raise severe practical, legal, and image problems.

In this ugly group, the platinum coin looks relatively shiny. In particular, it would be much less provocative than President Obama asserting the debt limit is unconstitutional. That nuclear option would create a political crisis, while a platinum coin could be a constructive bargaining chip. As Josh Barro notes, President Obama could offer to close the platinum coin loophole as part of a deal to raise or eliminate the debt ceiling.

6.     If necessary, Treasury should mint smaller platinum coins, not a trillion-dollar one.

A trillion-dollar coin is eye-catching and ridiculous. That’s why it’s filled the punditry void left by the fiscal cliff. But a single coin makes no policy sense. No federal transactions occur in trillion-dollar increments.

Among the largest transactions are Treasury bond auctions, which today raise about $25 billion at a time. If necessary, Treasury could issue individual $25 billion coins, each in lieu of a needed bond auction. Still ridiculous, to be sure, but less so as it would calibrate coin issuance to immediate financing needs.

Steve Randy Waldman suggests as even more granular approach: issuing coins denominated in millions not billions. Such “small” denominations would be even less ridiculous and could potentially be used in transactions with private firms, not just Fed deposits.

Of course, the best path would be a bipartisan agreement to increase the debt limit, address spending cuts, and strengthen our fiscal future, all settled before the precipice. If we reach the brink, however, minting million- or billion-dollar platinum coins would be better than default.

10 thoughts on “Is the Trillion-Dollar Platinum Coin Clever or Insane?”

  1. I agree with your idea of depositing smaller denominations into fed , but wouldn’t putting the coins into private circulation inflate supply of money, and weaken support for the idea?

  2. In case no one has noticed. The US govt already mints a 1oz platinum coin with a $100 dollar face value. But you won’t buy it for that, because the market demands $1500/oz of platinum. You can put 1tr USD on the coin but that won’t make it worth 1tr. If you force the fed to create 1tr USD by making them buy the coin. Then you have just pumped 1tr extra into the feds books. This is no different than adding 9 zeros to $1usd bill and making the fed buy it. Why not just put $20tr on the coin and the entire us debt would be paid with a surplus.

    That’s what the govt. Is going to do eventually.
    It’s as silly as it sounds.

  3. Re: Analysts have considered a range of other options for avoiding default, including prioritizing payments…

    If the Treasury has the legal authority to so prioritize (and apparently that is unclear), and if “default” means failing to pay debt service when due, it seems quite clear to me (admittedly, as just a layperson, not any sort of expert) that the federal government could fully pay debt service when due if such payments are a/the top priority. I’m assuming the proportions in these figures (monthly estimates for 2011) are close enough to demonstrate this dynamic for this year http://www.economist.com/blogs/freeexchange/2011/01/americas_debt

    Is there any reason the above point may not be valid?

    If it is indeed valid, then by what definition of “default” would we be in any danger of defaulting (assuming the Treasury can prioritize)?

    And if the answer is that the “default” would occur as a result of failure to pay government employees for work they haven’t yet done, private sector suppliers to whom we don’t already owe money, and/or beneficiaries of government entitlements (e.g., Social Security beneficiaries) for benefits due in the future based on current eligibility and benefit formulas, etc., then isn’t the real point that continuing to make these commitments at the budgeted/projected levels of expenditure will result in failure to pay money that will become owed, not that failure to raise the debt limit per se would cause such failure, given that we could choose not to make such commitments (and even to change policies via legislation if needed to reduce future commitments that are on auto-pilot)?

  4. How to use the Trillion Dollar Coin Idea of the US Treasury

    In reviewing the story below and the Trillion Dollar Coin idea this came to mind about the Debt Ceiling issue and I think you may like this idea , Please read on …..
    Shouldn’t this be part of the Debt Ceiling Negotiations ? Why not take a look at this through the spectrum of Healthcare savings accounts as a way to build up the cost saving structure that includes the activity of people searching for healthcare coverage be a part of these states loophole benefit of creating competitive deductions to those states and people who buy healthcare coverage and or seek treatment in those states , say in comparison to how the deduction was offered in terms of use by how “ Mr. Schumer once proposed giving hunters tax deductions for contributions of killed deer to the needy” ? This same theory of the Honorable Senator Schumer could be the way people paying into their health saving account or state Pool or whichever states pool has the most competitive health saving structure, ie: through tax structures and competitive healthcare advantages , the payment by the Individual could be what Guarantees the Minted The Trillion Dollar Platinum Coin that is designed to stabilize the Debt Ceiling , setting up the New Affordable healthcare Financial Structure in a Competitive manner ?
    If the States could Be made to compete for the Citizens Payment that is usually just a direct state benefit as is described below in the Fiscal Times article , and that payment instead is a Guaranteed revenue of the healthcare for the states and the states then have to Offer and provide healthcare insurance and treatment competitively to then access these tax benefits this would turn the healthcare industry into a better quality cost benefit for the nation , industry and individual I bet !
    Why Not use The Trillion Dollar Platinum Coin as a Healthcare Guarantee Reserve ?

    This would change the competitive structure of the healthcare industry , something needed to stabilize costs I think .

    Deductions that Reward the Worst Managed States
    Read more at ;

    http://www.thefiscaltimes.com/Columns/2013/01/09/Deductions-that-Reward-the-Worst-Managed-States.aspx#page1

    Thanks for your time and have a great day .

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