The Trillion-Dollar Coin Is Back

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James Pethokoukis points out that an analyst in Guggenheim Securities' Washington Research Group has resurrected the idea of using a trillion-dollar coin the avoid the debt ceiling.

Here's what Chris Krueger of Guggenheim wrote in a note (which also details three other alternative policy options for dealing the debt ceiling):

This is even more theoretical than the Constitutional Option, though some argue that it is a stronger legal option. There are limits on how much paper money the U.S. can circulate and rules that govern coinage on gold, silver, and copper. BUT, the Treasury has broad discretion on coins made from platinum. 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 now can pay all their bills and a default is removed from the equation. 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 Constitutional Option and create two tranches of treasuries. Both this option and the Constitutional Option are VERY low probability options.

As Joe Weisenthal points out, this idea originated last July with a commenter called "Beowulf" at Cullen Roche's Pragmatic Capitalism blog. Beowulf pointed out that although there are statutory limits that prevent the Treasury from printing paper currency to fund its operations, there's a quirk in the law that allows the Treasury to print platinum coins of any denomination.

You can find it in subsection (k) of 31 USC 5112, which governs "Denominations, specifications, and design of coins."

(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.

A few weeks later, the idea got a big boost when Yale Law School's Jack Balkin endorsed it in a piece for CNN. Pretty soon everyone was talking about it.

When I first encountered the idea I jokingly speculated that a trillion coin would have to be enormous. Of course, that's nonsensical because a coin's size is completely unrelated to its value. A dime, after all, is smaller than a nickel. Yet, for some reason, whenever I write about this concept, I still conjure up a mental image of a really big coin.

More seriously, last year I was also worried that the creation of a trillion coin would be "highly inflationary." (Others also worried about inflation.) This concern now seems to me to be seriously misplaced. There would really not be any additional inflationary pressures caused by a trillion coin

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.