POLITICAL ECONOMY

Can trillion-dollar platinum coins solve the U.S. debt ceiling problem?

As the U.S. government struggles through another fiscal crisis, pundits are resurrecting a theory that the minting of a handful of trillion dollar platinum coins could resolve U.S. debt woes.

RENO (MINEWEB) - 

As wrangling continues between President Barack Obama and House Republicans about exactly how to avoid the fiscal cliff, the U.S. Treasury Department will hit its $16.4 trillion debt ceiling In February.

Analyst Chris Krueger at Guggenheim Securities’ Washington Research Group recently suggested that to avoid a default sometime in February, the Proof Platinum Coin Seigniorage (PPCS) might be considered.

PPCS involves minting proof platinum coins with arbitrarily high face values, depositing them at the Fed, receiving electronic credits equal to the face value of the coins from the Fed, and then having Treasury sweep the profits in the Treasury General Account, where they could be used to redeem debt held by the Fed, debt held by Trust Funds and government agencies, and debt held by the non-government sector including domestic investors and foreign government and investments.

In an article published on the www.ourfuture.org website, author Joseph M. Firestone, writes, “It is important to emphasize that the capability to use PPCS, and to pay off the national debt, lies with the Executive Branch.”

Yale Law School Professor Jack Balkin, who raised the concept in a 2011 CNN News report, arguing “jumbo coin” strategies would work “because modern central banks don’t have to print bills or float debt to create new money; they just add money to their customers’ checking accounts.”

“The theory goes that the U.S. Mint would create a handful of trillion dollar (or more) platinum coins. The President would then order the coins deposited at the Fed, who would then put the coin(s) in the Treasury who can now pay all their bills and a default is removed from the equation,” according to Krueger.

However, Krueger acknowledged,” The effects on the currency market and inflation are unclear, to say the least. You would also likely trigger a wave of lawsuits similar to the Constitution Option and create two tranches of treasuries.”

“Both this option and the Constitutional Option are VERY low probability options,” Krueger stressed. The Constitutional Option would allow President Obama to invoke the 14^th Amendment of the U.S. Constitution and unilaterally raise the debt ceiling.

James Pethokoukis at the American Enterprise Institute also suggests that PPCS would have a negative impact on inflation.

“I like it,” Joseph Gagnon of the Peterson Institute for International Economics, recently told the Washington Post. “There’s nothing that’s obviously economically problematic about it.”

Washington Post reporter Brad Plumer recently noted, “This strategy is hardly risk free. Opponents could plausibly argue that the original law was intended to set rules around commemorative coins, not to finance the operations of the government.”

“And, of course, the political blowback would be fierce,” Plumer warned.

John Carney, senior editor at NetNet, recently advised, “The key point here is that the government would not be throwing an extra trillion dollars into the economy. It would, rather, be spending exactly how much it planned to spend anyway. It would not be issuing bonds to cover some of that spending but bond issuance by the Treasury does not do very much (probably nothing at all) to combat inflation anyway. The amount of government issued financial assets remains the same, even though the composition of dollars and Treasury bonds changes.

“There could a long-term inflationary problem, I suppose, if the government fell in love with the idea and used platinum coins to finance ever larger deficits. But that seems unlikely. And, in any case, the Fed could step in and use its monetary policy tools to counteract the spendthrift coiners,” Carney concluded.