The 'Platinum Coin Plan' and the Debt Ceiling
Why minting new coins as a way to pay the bills would be extremely problematic, even in the short term.
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.
- The first potential snag is the involvement of the Fed. Will the Fed actually accept these coins on deposit? In theory, it probably has to, though I suspect Ben is working hard to find a more traditional solution than this. It really does further erode any evidence that the Fed is independent of the government, and will certainly give more ammunition to those who decry that the Fed is owned by the banks and run by the president.
- Assuming the Fed wants to go along with it, will there be some attempt to create an injunction against issuing it, or some other test of the legal backdrop? It seems strange enough that it wouldn't surprise me to see legal action against the minting, so I wouldn't want to use this as the primary solution. We are a society that loves to sue, and Washington has more than its fair share of lawyers. I would be worried that this policy gets challenged, and possibly ruled against initially, or overturned.
- This seems ok if it is for a few weeks, or even months, as some measure to force Congress to resolve the issue in a pseudo-adult manner. The problem is that Congress isn't able to resolve this. This step of minting coins to pay for our promises takes all the pressure off and both sides dig in. The Democrats like it because they can spend and not have to pay for it (in a real world sense) and the Republicans like it because they can try and attack Obama for taking too much power from the people and abusing the system. Minting coins as a de facto way of funding ourselves means we will hit the $1 trillion mark at some point (in a year?) and then the inflationary risk will grow. The willingness of politicians to effectively buy votes increases since there is no "cost." The term "slippery slope" exists for a reason: once some things start, you run the risk of it getting worse. What doesn't necessarily cause problems on Day One can cause massive problems by Day 300.
- Do we want to be the "reserve currency" of the world? Many would like our currency to get devalued so that we can grow our way out of problems. That strikes me as short sighted, since I cannot think of any examples of countries crashing and failing with a strong currency, and yet, I can see lots of countries that failed with weak currencies. But why let actual real world practical applications interfere with some simple math equations that economists like so much? However, if you want to be the "reserve currency" and you get benefits from that, then this is yet another step in the wrong direction. Being the reserve currency depends as much on trust as on any other factor, and taking this step of minting coins to pay debt and avoiding the political process will just further encourage other countries to move away from the dollar and dollar-based assets (which would suit my call of long Europe/Asia, short the US, very well).
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