Friday, July 29, 2011

The Coolest Way to Solve the Debt Ceiling Crisis - Mint $1 Trillion Platnium Coins

With the Republican leadership slowly imploding (I may have more to say on this topic this afternoon, depending on now the events of the day play out), it may be more important than ever to come up with a solution to the debt ceiling crisis that doesn't involve Congress. One option is "the constitutional option," though that would probably end up with Obama being impeached, and Obama has probably waited too long to sue Congress, as I advocated.

But, never underestimate the power of obscure American laws! I somehow missed this yesterday - by way of TNR, we have from CNN the coolest way to solve the debt ceiling crisis:
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.

Matt Yglesias gives us the law on the matter:

It’s right here in 31 USC § 5112 “Denominations, specifications, and design of coins.” It’s super-prescriptive about all kinds of things until you get to section (k):
(k) The Secretary 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

Yes, it's just that crazy, cool, and simple. But why stop at 2? Why not mint 100 of the suckers and effectively give the Treasury enough borrowing authority to make the debt ceiling irrelevant for decades, if not forever?

I suspect at least some people would seriously freak out ("ZOMG INFLATION!!111!!1!"), and at least a few people would dream of swiping the coins, even though you wouldn't be able to do anything with them. Nevertheless, this is a simple, elegant, apparently completely legal solution that would take about an hour, needs no approval from Congress, and wouldn't end up with Obama getting impeached.

I like Jonathan Chait's moniker and hereby dub this the Montgomery Burns Solution:



Note: Based on a little quick feedback, I just want to clarify - I do NOT think this is the best solution to the crisis. However, if Congress refuses to act, I think a more ... "creative" solution, such as this one or "the constitutional option" would probably cause less harm than a U.S. default. The best solution to this "crisis" would be for Congress simply to raise the debt ceiling, cleanly - it would take them about 5 minutes.

6 comments:

  1. Wouldn't they have to buy the platinum first? So no inflation risk; but no debt reduction, either?

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    1. Anonymous: I'm not sure I understand the premise of your question. The government wouldn't be buying $2 trillion worth of platinum; it would essentially be printing $2 trillion dollars through a legal loophole so it could continue paying its bills. If Congress refused to raise the debt ceiling ever again, continuing to do this would eventually cause inflation and decrease the value of the dollar, since the U.S. would now be monetizing U.S. government debt (http://en.wikipedia.org/wiki/Monetization) rather than borrowing dollars from investors.

      It would amount to Obama calling the Republicans' bluff - "Oh, you'll wreck the U.S. economy by refusing to raise the debt ceiling if I don't do what you want? Well, if you do that, I'll just monetize the U.S. debt to keep paying the U.S.'s bills, thanks to this legal loophole."

      Let me be clear - all of this is BAD and shouldn't be happening, because it's horribly dangerous and irresponsible for the Republicans to be playing chicken over the debt ceiling and holding the U.S. economy hostage. But, the effects of a sudden U.S. default would probably be much worse than a gradual monetization of the U.S. debt - I would definitely choose the latter over the former.

      But as my first choice, I'd choose neither.

      -The Angry Bureaucrat

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  2. Sorry if I'm missing something, but how do you mint platinum coins without platinum? The statute quoted does not, by itself, appear to authorize the creation of imaginary platinum coins . . .

    If you're just talking about the Fed's and banks' ability to make imaginary money in general, I'm not clear how the provision re- platinum coins adds anything.

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    1. Oh, you would need platinum, but only an ounce each or so, for each of the coins - so, a few thousand dollars worth of platinum. Since the statute allows the Treasury to mint platinum coins in ANY denomination, they could mint two $1 trillion platinum coins, deposit them at the Federal Reserve, and start writing checks. You don't have the same kind of freedom to print or mint other forms (paper, gold, silver, etc.) of currency; it's a loophole that applies to only platinum coins.

      -The Angry Bureaucrat

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    2. Ok, that helps; but I thought "Quantitative Easing," also commonly referred to as "printing money," was pretty much the same thing – i.e., they're not literally printing more paper money, but they are creating more "money" on the books; this is why it entails a risk of inflation.

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    3. Whether quantitative easing / printing money causes a meaningful increase in inflation depends very specifically on how the quantitative easing / money printing is implemented. If the government prints money and then spends that money on goods and services in order to use productive resources (e.g. people and factories) that are currently standing idle (this approach is often derided as "government stimulus"), the risk of inflation is rather low, since the government is just engaging productive resources that would otherwise stand idle and produce nothing.

      If the government prints money and then loans that money to private banks in the hopes that they will lend out that money to people and businesses to use productively (which is most of what's happening now in the USA, since Congress refuses to pass any more "government stimulus," and the Federal Reserve can't spend money - it can only loan money to banks), there is a much higher risk of inflation because, although some of the extra money will be lent to people and businesses, the banks will also use some of the money to buy speculative investments like gold, oil, etc., driving up the price of those goods and thereby increasing inflation.

      As with many things in finance, when it comes to whether printing money will cause meaningful inflation, the devil is in the details.

      -The Angry Bureaucrat

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