It is being reported by The Washington Post (among others) that President Barack Obama could order two platinum coins to be minted, each with a designated value of one trillion dollars. That’s $1,000,000,000,000.00 each. Or 10^12 dollars each, if you prefer.
These trillion dollar coins would have one purpose … to be deposited into the Federal Reserve as a payment against the debt of The United States of America, which is currently just over sixteen trillion dollars. By law, The USA can borrow up to a certain limit ($16.4 trillion.) This is known as “The Debt Ceiling”. This is no more complex than understanding how the credit limit on a credit card works – something almost all of us can relate to.
So by depositing the 2 coins, The USA will have paid $2 trillion of it’s debt, and will have no immediate need to worry about reaching its credit limit until late 2014. (As it stands today, The USA will reach its credit limit this coming February.)
According to Yale Law Professor Jack Balkin, there are no laws prohibiting The President from ordering the production of this type of currency (there are legal limitations on the production of other forms of currency.) Economist Joseph Gangon of The Peterson Institute sees nothing economically problematic with this suggested “solution” to America’s debt ceiling problem.
I have no problem admitting my ignorance on many of the nuances and specialty-areas of economics. However, with skepticism as my footing, and with my basic understanding of economics, I see a pretty significant problem.
As far as the USA’s debt is concerned, I see no difference between printing a trillion dollar coin and printing a trillion one-dollar bills. This is called inflation. It makes every dollar in circulation less valuable (the more abundant something is, the less it is worth.)
By contrast, others argue that there is no inflationary effect on this maneuver because the coins would never make it into general circulation. It is effectively a kind of barter trade between 2 government entities (The Fed and The Treasury), albeit an entirely unequal trade. (Would you satisfy two trillion of debt someone owes you in exchange for a pair of platinum coins?) Also, if this were a legitimate way to handle debt satisfaction, why stop at $2 trillion? Why not make one coin and assign it a worth $16 trillion?
The value of a dollar is based on ‘faith” (not the most favorite of words in skeptical circles.) But this is essentially the truth. If people have faith that a one-dollar bill is good for one-dollar worth of services, then it is so. But does this kind of maneuver, printing trillion dollar coins, instill more or less faith in the value of a dollar? So it doesn’t make it into circulation – does that make it any less real that there suddenly exists an additional $2 trillion? Do other countries, some of whom we take to task for ‘currency manipulation’ (cough … China … cough) feel they are getting better value when investing in our country’s treasury bills? Could The USA not be accused of its own form of manipulation?
Carl Sagan famously asked us all what the difference might be between an invisible, incorporeal, heat-less, floating dragon in a garage versus no dragon at all. The answer is … not a bit of difference. It forces me to ask what the difference might be between inventing two trillion dollars of currency to pay a debt versus not paying the debt at all. Is there any difference?
So what is the likelihood of this happening? From a political standpoint, it would be considered a very bad (and unpopular) move for The President to make. As such, it is unlikely to occur.
But the fact that Yale professors and professional economists can not see the intrinsic inflationary issues is somewhat astounding. So I am calling economic shenanigans on this idea, at least until I am shown alternate evidence so I can adjust my understanding.
Footnote: Platinum, in of itself, has value to it. You can trade one ounce of pure platinum for about $1,600. If The USA were to actually try and come up with two trillion dollars worth of platinum, that would equate to about 78 million pounds of platinum. Unrealistic, seeing as how all of the platinum mined to date equals a cube about 25 feet per side. (One cubic foot equals about 1330 pounds.) That’s, roughly, 21 million pounds of platinum mined and collected in all of human history.