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Could a $1 Trillion Platinum Coin Save the U.S. Economy?

Tuesday, September 28, 2021 03:11 PM | Neal Farmer
Could a $1 Trillion Platinum Coin Save the U.S. Economy?

The U.S., could find itself with a big problem in the next few weeks. According to Treasury Secretary Janet Yellen, the Treasury will run out of money on Oct. 18.

One proposed solution to this crisis is to mint a platinum coin worth $1 trillion.

How Can the U.S. Run Out of Money?

In the United States, tax rates and spending are set by Congress. When the amount of spending is less than the amount of taxes brought in, the government borrows money, by selling bonds, to have enough cash to spend.

This is all relatively normal and how most governments work.

The U.S. though has a limit on how much money it can borrow that is set by law, separate from the budgeting process.

This means that from time to time, the country finds itself in a place where legally it has to spend more money than it has, but also isn't allowed to borrow money.

This "debt ceiling" as it is known, potentially creates a situation where the United States would be unable to meet it's obligations. This includes things like salaries of government workers, veterans benefits and Social Security checks, but more importantly interest on government bonds.

When an issuer is unable to pay the interest on bonds, this is known as a default. Defaults have a number of implications.

First, interest starts accruing at a penalty rate of 6% per year, making the eventual catch-up payments significantly larger than the normal interest payments would be.

Second, borrowers may be less likely to lend money to an issuer that has a history of defaults. This means borrowing costs would likely be higher in the future.

U.S. Treasury bills, bonds and notes aren't just any bonds though, they play a large role in the global financial system. If the banks and money market funds are the plumbing of the world financial system, Treasuries make up most of the water.

While it's impossible to know exactly what would happen in the event of a default, the potential fallout is bad enough that most experts believe it is best avoided at all costs.

How Did We Get Here?

The last big showdown, in 2011, coincided with a top-to-bottom drop in the S&P 500 of nearly 20%. Since then, there have been some relatively minor skirmishes around the debt ceiling, but nothing resembling the 2011 showdown, nor our current situation.

The debt ceiling was suspended three separate times during the Trump Administration, all three with bipartisan votes. In those cases, rather than voting to make the limit a higher number, the bill said the debt ceiling didn't matter until a given date, at which point it would be reinstated at whatever the then-current debt was.  The last of those suspensions ended earlier this year and the Treasury has been paying obligations from reserve funds and using other "extraordinary measures" to keep things funded since then.

Republicans in the Senate have been blocking bills that would increase the debt limit, voting against a measure as recently as yesterday. Mitch McConnell, the leader of the GOP caucus, has repeatedly said his party will not vote for a bill to raise the debt ceiling, effectively blocking such a bill from passing under the Senate's normal rules, which require 60 votes to end debate and allow an actual vote on legislation.

#MintTheCoin

The idea of a platinum coin was first popularized during the 2011 crisis, but was mostly an idea people promoted on social media and got little traction among elected officials.

Under the Coinage Act the Treasury has the authority to mint and issue platinum coins in any denomination the Secretary of the Treasury wishes. Coin proponents say such a coin could then be deposited in the Treasury's account at the Federal Reserve and used to buy back and retire Treasuries, which would lower the amount of outstanding debt and free up room under the cap.

The idea of using a platinum coin to fund the government was proposed more recently as a way to fund Covid relief, however the ABCAct didn't go anywhere in Congress.

Does it Have to Be $1 Trillion?

No, the coin can be any denomination the Treasury Secretary chooses, $1 trillion is just a very big number that would provide lots of borrowing capacity.

How Big of a Coin Are We Talking About?

Size is irrelevant. Dimes are smaller than Nickels, but are worth more. The dollar-value of the coin is set by the Treasury Secretary, not by the size of the coin, or the amount of platinum it contains.

Is This Legal?

Incredibly, it is completely legal for the Mint to do this. There is no legal restriction on the total quantity of coins the Mint can issue on behalf of the Treasury. The Mint can issue coins in amounts that the Secretary deems necessary to meet the needs of the U.S according to the Coinage Act.

Would This Make Congress Seem Silly?

Every penny of the current debt, as well as billions of additional spending has already been approved by Congress. Is having a separate law that blocks the Treasury from doing what Congress told it to do in the budget silly?

How Likely is This?

Probably not very likely. Leaders in Washington would prefer to deal with the debt ceiling in the traditional way, but as the deadline gets closer, it's hard to know what kind of extraordinary measures the Biden administration could take to stave off a default.

 

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