A trillion-dollar platinum coin sounds like a plot line from “The Simpsons,” but serious people are saying it might be the solution to a looming U.S. debt crisis.
Nobody in official Washington has endorsed the idea, but plenty of economists and bloggers are talking about it. While it sounds far-fetched, it wouldn’t be nearly as crazy as letting the nation default on its debts, which is the implicit threat that Republicans are making in the debt ceiling debate.
The coin gambit relies on an obscure law, intended to meet demand from collectors, that allows the Treasury to mint platinum coins in any denomination.
If Congress refuses to raise the debt ceiling, the Treasury can’t issue any more bonds, but it could stamp “$1 trillion” on a hunk of metal, deposit it at the Federal Reserve and begin spending the proceeds.
Yes, it would be an extreme measure, but no more extreme than abruptly shutting down a third of the government (because tax revenue currently covers just two-thirds of spending) or handing out IOUs to soldiers and Social Security recipients.
The Treasury says it’s already close to the debt limit, and it can buy about two months through “extraordinary measures” like delaying contributions to government pensions. That gives Congress until the end of February to raise the debt ceiling or face the consequences.
If the debate goes down to the wire, financial markets will become nervous. The last debt ceiling crisis, in the summer of 2011, sent stock prices down by 16 percent in a month and prompted Standard & Poor’s to downgrade the government’s credit rating.
Moody’s, the other major credit rating agency, is threatening a similar downgrade this time around.
Scott Colbert, head of fixed income investing at Commerce Trust in Clayton, says investors’ nerves are likely to be tested once again.
“I think it’s bad for the stock market, all the volatility and uncertainty,” he said.
Oddly enough, Colbert says, a debt ceiling standoff would drive more investors to buy Treasury notes, the very security whose creditworthiness is being called into question. That’s because investors crave safety and liquidity in times of crisis, and they still assume Uncle Sam will find a way to pay his bills.
At the moment, Congress isn’t doing much to reinforce that faith, but Colbert thinks markets eventually will pay less attention to manufactured crises like the “fiscal cliff” and the debt ceiling.
“I don’t doubt there will be a third and fourth step we have to get through” after the debt ceiling debate, he said. “The markets will react less and less to each step as they realize the sun still comes up tomorrow.”
Colbert assumes that Congress will reach another last-minute agreement, the way it passed a tax bill on New Year’s Day to avoid the fiscal cliff. If it doesn’t, that’s when wild possibilities like the platinum coin could happen.
The trillion-dollar coin wouldn’t make the deficit any bigger. It wouldn’t cause inflation because the Federal Reserve could sell securities to keep its balance sheet the same size.
“To me it’s a sensible thing,” says Paul Kasriel, a retired bank economist in Chicago. “It is far out, but so in my opinion is the whole debate over the debt ceiling.”
Congress has, after all, already decided how much to spend and how much to collect in taxes. To say we can’t borrow to make up the difference is to deny the fundamental laws of arithmetic.