Demonstrating yet again that there is nothing as powerful as an idea whose time is coming, we are now swept by a wave of posts celebrating the Trillion Dollar coin as a solution to our debt ceiling woes. There's (pocket) change we can believe in!
We are having a debt-ceiling crisis because Congress has given the president contradictory commands; it has ordered the president to spend money, and it has forbidden him to borrow enough money to obey its orders.
Are there other ways for the president to raise money besides borrowing?
Sovereign governments such as the United States can print new money. However, there's a statutory limit to the amount of paper currency that can be in circulation at any one time.
Ironically, there's no similar limit on the amount of coinage. A little-known statute gives the secretary of the Treasury the authority to issue platinum coins in any denomination. So some commentators have suggested that the Treasury create two $1 trillion coins, deposit them in its account in the Federal Reserve and write checks on the proceeds.
I suggest that[ Treasury Secretary Geithner] immediately mint 50 ten-pound liberty-head coins, each of them denominated at $100 billion, and temporarily store them in the Treasury Secretary's office. Then the Treasury Secretary can take them up one at a time to the Federal Reserve Bank of New York in a special armored train as required.
Think how much money the federal government could make from the movie rights alone...
10 craziest things about the debt-ceiling crisis
...10.) We can ‘mint” our way out of this mess. This is an idea that’s bouncing around some of the blogs. The basic idea is right: The Treasury doesn’t actually need to borrow any money at all to pay our bills. Why not? Because we live in a world of fiat currencies, in which the Treasury can unilaterally create money out of thin air. Read Joe Firestone’s explanation.
Instead of borrowing the money, we could use seigniorage to create it.
So, the idea to get around the debt ceiling is for the Treasury to mint a one-ounce, $1 trillion palladium coin and deposit it in the Treasury’s bank, the Fed. (Under the law, the monetary value of any coin has no relation to its metallic value.) The Fed would credit $1 trillion to the Treasury, which could use it to pay our creditors.
It’s a brilliant and creative idea in theory, but in practice it would be almost as devastating to the full faith and credit of the United States as a default would be.
If this gimmick were used only once in an emergency, that’d be one thing. But once the government got the idea that this sort of alchemy is an option, it would use it all the time. Inflation — perhaps hyperinflation — would result from overuse of the alchemy/seigniorage option. Don’t go there.
Wel, hmm. First of all, we are only using the idea once, this time. It will be someone else who uses it a second time.
Secondly, as an astute commenter noted at Brad Delong's post, if the size were manageable the Fed could simply sell some if its own Treasury holding to offset the seignorage impact. The net result would be as if the Fed had sold bonds to finance the Treasury (which is naughty), but the immediate impact need not be inflationary, depending on the size of the coinage. I happen to think that the notion of a $50 billion coin to carry Treasury through a week or two of Congressional wrangling might just fly.
I was saying last night (before the crowd hooted me down) that if the Treasury Secretary is staring at a dwindling cash balace and has to choose between not paying Medicaid, not paying the military, not paying the Veterans Administration, not paying the Coast Guard, not paying the Border Patrol, not paying food inspectors, not paying the NIH, or issuing a $50 Billion coin, well, none of the choices are appealing, but the special coin might not be the most unappealing.
As a bonus wrinkle, it would be worth knowing just how quickly this ploy would be reported - the Mint reports annually, but I presume Treasury and Fed balances are reported on a more timely basis. That said, if Geithner could slip a few high value coins into the mix in early August and only report it in early September on some Treasury report covering August activity, well, the debt deal would probably have been wrapped up by then.
FWIW, net seignorage profit in 2010 was a mere $388 million as reported by the Mint, so we are talking about a notable change in practice here.
DO REMEMBER: The idea that the US might simply spin the printing presses to satisfy foreign bondholders is hardly news, as this Eerily Prescient post from a year ago illustrates. Striking coins updates the metaphor.
LEFT UNADDRESSED: How might the coins be presented to the Fed? Should Tim Geithner dress up as a stage magician and pull the magic coin from an unsuspecting taxpayer's ear? Or maybe the coins can be delivered by Rodeo Clowns. Tough call, given the seriousness of the enterprise.