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The 'Platinum Coin Plan' and the Debt Ceiling

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

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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:
  • There is a law on the books that allows the Treasury Department to mint platinum coins – specifically platinum, which is why it is a platinum coin and not gold, silver, or copper; it is a function of the law/loophole/language that coin minters want to use.
  • The Treasury Department pays our bills, and typically relies on borrowing to do so. But in this case, it would mint coins, deposit them with the New York Fed, and have its account credited, which would then be used to pay bills.
  • The $1 trillion coin is just hype. The reality is that the Treasury Department could create whatever denomination coin it wanted (say, $1 billion) and use these coins as needed to create some ones and zeros at the Fed and then pay bills with that "money."
  • Once the debt ceiling is passed (and in the end, it always seems to get passed), then the Treasury Department could borrow money, take back the coins, and potentially melt them down – or auction them off on eBay.
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.
  • 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).
Editor's Note: For more from Peter Tchir, check out TF Market Advisors.

Twitter: @TFMkts
No positions in stocks mentioned.

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