The Trillion Dollar Coin

Now that the Fiscal Cliff has been 'successfully' overcome, the next thing on the docket is the impending Debt Ceiling disaster.  Government loves crises because people demand action without thinking things through.  This is why Rahm Emanuel said you 'should never let a crisis go to waste.'  The President had all the cards in the Fiscal Cliff since doing nothing would raise everyone's taxes; he was bound to get the taxes he wanted.  The Debt Ceiling gives the Republicans a better position.  First, taxes are supposedly off the table now that they have only just been raised.  Therefore, time to talk about the spending cuts that were not addressed in the Fiscal Cliff deal.

The president not only doesn't want to cut spending, he wants to increase it.  The Republicans can refuse to raise the debt ceiling and that instantly chokes off further borrowing.  The government would immediately have to moderate spending to equal current tax receipts.  The president, the Democrats, and much of the media claim that this is default.  That sounds ominous and may sway the uninformed.  Default would mean failure to send out Social Security checks and pay the interest on our $16 trillion debt but failure to keep the EPA open is not default.  Nor is closing National Parks or various non-essential government agencies.  We will have plenty of money to avoid default even if the debt ceiling isn't raised.  Now, I fully expect the Republicans to cave and raise the debt ceiling in exchange for more never-to-be-implemented cuts.

That aside, let's consider the argument that it would be a default.  That brings us to a little considered section of the 14th Amendment:

Section 4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.

Obviously, this is a Civil War amendment that allowed the federal government to not reimburse slave owners under the takings clause of the 5th Amendment.  Nonetheless, it declares the US debt to be immune from default, thus offering a potential loophole to bypass Congress.  The Treasury would mint a $1trillion coin out of platinum (Congress has passed laws regarding the minting of coins in other metals as well as paper money) which would immediately be deposited at the Federal Reserve.  Voila!  The debt is paid down by a trillion dollars and spending can continue apace.

 

To my astonishment, I have found economists on both sides of the political spectrum who are either wholly in favor or not particularly opposed.  In effect, it is raising the debt ceiling by other means with similar, if not identical, economic effects.  Both say that it is not inflationary and may have a point.  All the printing (QE1, QE2, and QE4ever) have not resulted in runaway inflation.   Still, I am aghast at the idea.

 

Once the government mints the trillion dollar coin, there will be more such coins with increasing frequency.  Only the Federal Government can be so fiscally irresponsible and have PhDs defend it.  No other institution can mint a coin for a nominal fee and get a trillion dollars in spending from it.  Could we press 16 and pay off the debt?  Somehow I don't think China would accept a handful of platinum in payment.