One TRILLION dollars
The US could mint a trillion dollar coin to pay off its national debt. Why?
Discussion on Twitter and the media is ablaze with one ludicrous concept: the trillion dollar platinum coin. The idea is that, to avoid breaching the debt ceiling, the US would mint that coin and use it to pay off debts. What is the debt ceiling, how does the coin work, and what else should we know?
What is the debt ceiling?
The US, like most normal governments, finances its deficit via debt. The deficit, the difference between revenue (taxes and other sources, like natural resource royalties) and expenditures (i.e. spending or debt payments) is set by Congress via the budget. The difference between the money the government takes in and the money it spends has to come from somewhere, so it borrows money from banks, companies, and even regular people, both Americans and foreign.
But Congress also has set a cap on how much money the government can owe in total, known as the debt ceiling. The debt ceiling was created in 1917, and it was routinely raised as a meaningless gesture until the Obama era. During the Obama administration, in 2011, Republicans decided to play hardball and threatened to not raise the debt ceiling unless Obama and the Democrats agreed to give them whatever they wanted. They eventually agreed on spending cuts and tax hikes, and the same thing happened again in 2013.
Why did the Democrats go through with it? After all, the Republicans demanded very bad policies in exchange for a procedural vote. If the debt ceiling isn’t raised, then the Treasury would have to spend the money on hand to pay its bills, and when that runs out at some time in October, it would stop being able to spend money at all. This would mean, in practice, a cessation of all payments: Social Security, welfare, the military, salaries, etc.
One of those items would be the national debt: if the debt ceiling is breached, once the United States has to pay interest in its national debt, it would be unable to, triggering a default. The US defaulting on its national debt would be really bad - Latin American countries defaulted pretty often during the 20th century, and it usually raised real interest rates and reduced credit - leading to lower economic growth. Plus, US Treasury bonds are considered the safest assets on the planet, and used for many day-to-day financial transactions, so the US welshing on them would trigger a global financial crisis. Considering that the last global financial crisis lead to a decade-long recession, this would be really bad indeed.
Why a trillion dollar coin? And why a platinum coin?
Okay, so not raising the debt ceiling is really bad. And let’s say that getting rid of it is actually impossible, because of the politics of it. But why a coin in particular?
The idea comes from the Obama administration, once again. According to a podcast interview, the government was desperate to find a way to avert a default if the Republicans couldn’t compromise - and the main way they found around it was to create a coin worth a trillion dollars, and made specifically out of platinum.
Why both of those? Well, US Code Title 31 Subtitle IV Chapter 51 Subchapter II § 5112 rules how coins work - and most of it is devoted to which coins and dollar bills exist and how they should look like. But section (k) of that law reads:
(k) The Secretary [of the Treasury] may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.
The most important part here is the word “denominations”. It means that the Secretary of the Treasury is allowed to mint whatever coins they want, with whatever designs and inscriptions they feel like, for whatever value they like - as long as they’re made from platinum (or gold). The US does mint novelty coins made out of precious metals - for example this Declaration of Independence 100 dollar coin made from platinum. The coin is worth about $1,500 dollars, but the face value is just one hundred.
While Obama imagined the platinum coin as “a giant Stone Age coin rolling around”, like the famous fei stones of Yap island, the metal on it doesn’t need to actually be worth one trillion dollars, or any amount in particular. For example, until 1982 a penny contained 2 cents worth of metal, and there are pennies worth over a hundred thousand dollars - and as much as $1.7 million, in the case of the 1943 Lincoln Bronze Penny. And, once again, the US sells various novelty coins already.
But how would this work? The government would then give the one trillion dollar platinum coin to the Federal Reserve, buy back some of the government debt they own, and borrow a trillion more. It could actually mint a coin of whatever arbitrary magnitude it had, then use it to buy back bonds other government agencies own, and then issue new bonds. It could also just get the money from the Fed and then the Fed would reduce the money supply through regular operations. Or just pay for the government spending directly by giving the coin to the Fed, no change in policies.
Imagine you owe a friend ten dollars. You go out to lunch, and he asks for the ten dollars back, because he forgot his wallet. You don’t have ten dollars - but you do have a ten dollar coupon to the restaurant you’re eating in. So why not cancel the debt that way? Well, the trillion dollar platinum coin works like that.
Why not pay for everything with novelty coins?
In 2020, Democrat congresswoman Rashida Tlaib of Michigan proposed a $2,000 dollar monthly stimulus financed through 6 and half one trillion dollar platinum coins (or just one 6.5 trillion coin, really). This is in line with how proponents of Modern Monetary Theory (MMT) claim fiscal policy works.
Basically, to MMT proponents, the government first spends money (which it prints, or in MMT terms, creates) and then raises taxes to destroy some of that money so it doesn’t cause inflation. Their view is that taxes aren’t necessary to fund the government’s expenses, just to keep the money supply from growing too much (and also to incentivize people to use government money instead of like, gold or bitcoin).
The MMT view is either insane nonsense or just mainstream center left macroeconomics with a few things twisted around: the government is the one that keeps the economy stable (at full employment and with no inflation), and the Central Bank just does whatever and sits around. Normally, if unemployment is high the Fed lowers rates, and if inflation is high it raises them. MMT proposes that rates be permanently set at zero and that instead the govenrnment uses taxes to reduce inflation. MMT people hate this latter characterization because their theory of inflation (besides from being a muddled mess) isn’t centered on aggregate demand, and instead on things like speculation on commodities or business profit margins.
But are they right about the government being able to pay for whatever just by printing money (raising taxes is a non-starter now, and raising the kinds of taxes that keep spending down is even less of a starter)? Also, no. Larry Summers (who, if you’re familiar with my Twitter, you’ll know I’m not a fan) writes:
It is not true that governments can simply create new money to pay all liabilities coming due and avoid default. As the experience of any number of emerging markets demonstrates, past a certain point, this approach leads to hyperinflation. (…) As with any tax, there is a limit to the amount of revenue that can be raised via such an inflation tax. If this limit is exceeded, hyperinflation will result.
I take issue with his description of hyperinflation, but he’s right: funding the government through monetary emission is inflationary. For the past 20 years, Argentina has had an extremely contractionary monetary policy in traditional terms - the expansion consistently happened by funding the government. And there’s not much difference in doing this through giant metal coins or through bonds called “intransferible bills” that can’t be used for anything else.
Conclusion
So there it is: the trillion dollar coin. Using it to fund the government constantly would put the US on the path to spending itself into out of control inflation; not using it would result in a second Great Depression. Not great options!
Obviously any reasonable country would just get rid of the ridiculous debt ceiling restrictions. Blaming the debt ceiling for the national debt is like blaming your scale for you gaining weight - the problem is clearly on the other end, to put it somehow. The obvious compromise here is that the Republicans and the Democrats agree to both take the stupid coin off the table, and to eliminate the debt ceiling altogether. The debt ceiling could also be eliminated de facto by just raising it a lot (say, to 69 sextillion dollars), but that accomplishes the same.
The main non-inflationary issue here is one of negotiation. The Republican party can demand whatever it wants in exchange for not crashing the global economy; the only counteroffer is to do something really silly and costless. That makes debt ceiling hijinks more likely in the future, because it both removes the incentives to bargain by taking away all the costs from failing. So by using the coin one time, you may be incentivizing everyone to use it more times, which is precisely what nobody wants.
Unless you believe in MMT, then you think that printing money to pay for the government’s bills is a bad idea. And funding the government by just printing money isn’t a thing normal countries do: it’s a thing mostly done by incredibly dysfunctional governments, ones that can’t stop spending and/or can’t raise revenue. So the government would be telling everyone around the world that its options are a default or the thing Venezuela and Zimbabwe do to pay the bills - neither of which makes “global economic hegemon” an appealing title for the US to keep. This breakdown of trust would also probably weaken the Federal Reserve too, and cause both short and long term raises in interest rates - which is precisely what the coin wanted to avoid!
A solution where debt brinksmanship is avoided is better than a solution where it’s triggered and the response is a stupid item that sounds straight out of a corny Nick Cage movie. But we don’t live in a perfect world with nice things, so maybe American legislative paralysis and Republican insanity (both are the same, really) lets Biden and Yellen do that one fun party trick.
Sources
The debt ceiling
The Economist, “What is America’s debt ceiling?”, 2021
Sarah Ewall-Wice, “What happens if Congress doesn't raise the debt ceiling?”, 2021, CBS
Boonman (2016), “The Economic Impact of Sovereign Debt Defaults in Latin America 1870-2012”
The coin
Bob Bryan, “OBAMA: This was the scariest night of my presidency”, Business Insider, 2017
The Economist, “America going platinum”, 2013
Paul Krugman, “Be Ready To Mint That Coin”, The New York Times, 2013
The drawbacks
Dian Rabouin, “The plan to fight coronavirus with trillion-dollar platinum coins”, Axios, 2020
Dylan Matthews, “Modern Monetary Theory, explained”, Vox, 2019
Cardiff Garcia, “The coin as negotiating strategy”, Financial Times, 2013
Hi, Maia!
Your analysis isn't quite correct about the economics of the giant platinum coin. It won't lead to any sort of inflation (by itself). The reason has nothing to do with MMT or anything like that.
Short version: the government deposits the trillion-dollar coin at the Fed. The Fed then immediately sterilizes the inflow by selling off a trillion dollars worth of Treasury bonds. You might wind up with an interest rates hike (maybe depending) but not inflation.
Think of the platinum coin as the equivalent of a big foreign exchange inflow in a country with a fixed exchange rate.
A bit more detail, with accounting:
https://noelmaurer.typepad.com/aab/2021/10/the-trillion-dollar-coin.html