The 'Platinum Coin Plan' and the Debt Ceiling

By Peter Tchir  JAN 07, 2013 12:35 PM

Why minting new coins as a way to pay the bills would be extremely problematic, even in the short term.

 


There is a lot of talk about the trillion dollar coin. That has actually clouded what is an already clouded issue. My understanding is that this is how it would work: Congress’s Mouth Writes Checks Its Body Can’t Cash

This all starts because we have a somewhat stupid system. We have a debt ceiling. That is meant to limit how much we borrow. I can see why we have that; in theory, it should stop the government from racking up massive debts. But in the current system, the government can obligate the country to make payments with full knowledge that we are likely not to be able to pay for them in the future without breaking the debt ceiling. That just seems stupid.

In a proper world, anything that would cause us to breach the debt ceiling in the future shouldn’t be allowed, or we should get rid of the debt ceiling (I prefer the former to the latter) -- but right now, we are stuck in a strange situation.

The government has made promises and created obligations, legally, that we owe, but because of the debt ceiling, we can’t pay for. That has been an on-again, off-again situation for a long time. But as we become ever more bipartisan and enjoy the brinkmanship, the problem is growing. Since restraining spending isn’t an option (at least not one that politicians will accept easily), we have this bizarre situation.

So the argument is that rather than letting Congress mess up the country by failing to raise the debt ceiling, the Treasury should mint coins, and use that money (via depositing at the Fed) to pay our bills while Congress debates the situation and finally approves something.

So ignoring the $1 trillion hype, it is possible to see why this “plan” could work, and why it wouldn’t necessarily be hyper inflationary. The Issues

There are a lot of potential issues with this. Some issues are in regards to it actually being able to work, and some are in regards to the longer-term risk.
Editor's Note: For more from Peter Tchir, check out TF Market Advisors.

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