Last year, Republicans in Congress resisted lifting the debt ceiling until the last minute — and then only in exchange for spending cuts. Panic ensued. So what happens if there’s another showdown this year?
Enter the platinum coins. Thanks to an odd loophole in current law, the U.S. Treasury is technically allowed to mint as many coins made of platinum as it wants and can assign them whatever value it pleases.
Under this scenario, the U.S. Mint would make a pair of trillion-dollar platinum coins. The president orders the coins to be deposited at the Federal Reserve. The Fed moves this money into Treasury’s accounts. And just like that, Treasury suddenly has an extra $2 trillion to pay off its obligations for the next two years — without needing to issue new debt. The ceiling is no longer an issue.
“I like it,” says Joseph Gagnon of the Peterson Institute for International Economics. “There’s nothing that’s obviously economically problematic about it.”'Nothing'? Well, we suppose if the Zimbabwe Gambit is nothing....
The gimmick would be to 'monetize' the debt by devaluing it in real terms. The current figure for M1 is less than $2-1/2 trillion, so this idea would come close to doubling that (if it all leaked into M1, rather than, say M2, which, since the idea is to use the money for the Treasury to pay its debts, it almost certainly would).
What the markets reaction would be is anybody's guess, but we doubt that the potential for inflation wouldn't be noticed by the usual lenders. Which makes one wonder what the Peterson Institute allows its economists to smoke during working hours;
In theory, this is much like having the central bank print money. But, says Gagnon, the U.S. government would simply be using the money to keep spending at existing levels, so it wouldn’t create any extra inflation.Which seems to be elementary confusion about fiscal and monetary policy. If the government spends $2 trillion dollars that currently doesn't exist, that is a very different thing from borrowing the same amount from funds that do now exist.
In the latter case there is no new spending in aggregate, as the government spending crowds out private spending in the same amount. In the first case, that's not true; there is an overall increase of $2 trillion added to the gigantic auction that is the American economy.
Which, like (we're told) injecting heroin into your veins, might feel good at first, but....