The problem: The Biden administration doesn’t have enough money to pay its bills, and they’ll run out of money sometime in June.
The solution (at least according to some economists and the Twitter hashtag #MintTheCoin): Mint a $1 trillion platinum coin, which can then be deposited with the US Federal Reserve to keep the money flowing.
It’s not a new idea, having been floated in every debt crisis since 2011 as an accounting fix that sidesteps the need for recalcitrant politicians to agree on a debt ceiling hike.
But Treasury Secretary Janet Yellen shot it down over the weekend.
So could it actually work and end the tussle over how to service the nation’s $31 trillion debt?
Economists have floated the idea of a $1 trillion coin to solve the country’s debt crisis and stave off a financial meltdown later this year if Congress doesn’t agree to raise the cap
Treasury Secretary Janet Yellen addressed the debt ceiling dispute during a tour promoting American investment in Africa. She said the idea was nothing more than a “gimmick.”
As always, the truth seems to be a little yes and a little no, depending on who you ask.
The problem is certainly one that needs to be resolved quickly. A US government default would deal a severe blow to the economy, leading to job losses and higher interest rates that would cause years of economic pain.
As Republicans in Congress signal a hard line on raising the debt limit, the coin offers a more imaginative — or wacky, depending on your stance — solution.
The idea is that under a 1990s law, the president has the power to direct the mint to produce commemorative coins of any denomination in platinum. What’s stopping him from asking for a $1 trillion coin instead of the usual $5 or $10?
The Treasury is limited by law on how much paper money and gold, silver, or copper coins can be circulated at one time. However, platinum money is not subject to the same restrictions.
So far, so good.
Economists begin to diverge on the next step: depositing the coin with the Federal Reserve, essentially the federal government’s banker.
Michigan Rep. Rashida Tlaib has issued a trillion dollar coin in the past
Economics Nobel laureate Paul Krugman is among the proponents of the idea, and he used a Twitter thread to confront skeptics about its feasibility
Here Yellen drew the line.
“It’s really by no means a given that the Fed would do it, and I think especially about something that’s a gimmick,” she told the Wall Street Journal while aboard an Air Force plane en route to Lusaka, Zambia.
“The Fed is under no obligation to accept it, there is no obligation on the part of the Fed. It’s up to them what to do.’
Many other experts agree. Good idea, but what if the Fed just says no thanks?
However, it could say yes and allow the federal government to add $1 trillion to its coffers ready to be spent.
This is where the other reservations come in.
Wouldn’t that mean economic chaos? Everyone knows that trying to print money to get out of the crisis by adding a trillion dollars to the economy without a corresponding increase in output will trigger runaway inflation.
“Economists have known since David Hume that helicopter money losses — which are permanent additions to the balance sheet — are highly inflationary,” wrote Jon Hartley and Jackson Mejia of the Foundation for Research on Equal Opportunity in the National Review, before citing a measure of cash in circulation.
“A $1 trillion helicopter drop, equivalent to about 5 percent of the M2 money supply, would be one of the largest in American history.”
Proponents of the coin, like Nobel Prize-winning economist and New York Times columnist Paul Krugman, say it doesn’t have to be that way. There are ways to restrict the money supply to control inflation.
The federal debt ceiling was raised by $2.5 trillion in December 2021 to $31.381 trillion, which is expected to be reached on Thursday, January 18.
The Mint is already producing a platinum Ealge coin (left) and printing a trillion version of it would only require a denomination change (right)
“It is true that if the Treasury went to a coin account, the Fed would have to release funds, but this would not have to increase the monetary base; it could be offset by selling Fed-held securities,” he wrote on Twitter.
“Indeed, the government, loosely defined as Treasury + Fed, would borrow exactly the same as before — except that the Fed, not the Treasury, would sell securities to the private sector. Zero inflation impact.’
Another possibility is that the Fed would deposit the coin with the Treasury Department, proponents of the idea say, thereby erasing $1 trillion of the debt.
But all of this creates another problem, which is the mixing of monetary and fiscal policies.
The former is related to decisions about money in the economy made by the Federal Reserve.
While the latter concerns how the government spends its money, that is a political process in Congress and the White House.
When the president uses monetary policy to create the coin and solve a budget problem, Yellen says “compromises the independence of the Fed and exposes it to short-term political pressures.”
So could the $1 trillion coin solve the current impasse? Yes, maybe. But doing so would open a whole different can of worms.