By Alvaro Vargas Llosa • Wednesday January 9, 2013 2:18 PM PDT •
Paul Krugman has made a tongue-in-cheek proposal that has set tongues wagging—having the U.S. Treasury Department mint a $1 trillion platinum coin in order to circumvent the federal debt ceiling. Actually, Krugman was not the first to propose this solution he himself calls “silly” but he has given it wider exposure.
In these weird monetary and fiscal times, no proposal is so crazy that it will be dismissed as such by everybody who is generally perceived as sane. Eventually, it may become respectable. There is already an initiative in Congress to prevent the government from printing the platinum coin (something which an obscure norm would allow it to do), while a petition to the White House in favor of the solution has gained some traction. If it gets 25,000 signatures, the White House will have to respond...
The tongue-in-cheek debate has so far centered more on whether it would be legal for the Treasury Department to use the coin, i.e. to draw checks on it once it deposited it with the Federal Reserve, than on what would actually happen. The main argument against the legality of this move is that only Congress could authorize the expenditure. But, given all we know about fiscal spending, can we really trust that Congress will not authorize the government to spend more money? We know for a fact that in 2000 fiscal spending amounted to 18 percent of GDP and that today it amounts to 24 percent. We have just witnessed a tortuous negotiation aimed at averting a “fiscal cliff” that produced a tax hike, not spending cuts. The perception is widespread that entitlements are the only problem. Actually, discretionary spending went up by 70 percent in the last twelve years. How can anyone who keeps their head above their shoulders be so sure that the Treasury would not be authorized, sooner or later, to spend the coin?
Of course, the coin would add to the already colossal monetary base (the Fed´s total assets are already nearing the $3 trillion mark.) The government would use the money presumably to buy back debt. Even if it bought debt from the Fed rather than from the market the money would end up in the market, as it were, because the Fed would use the proceeds to keep buying government bonds. We know this because continuing with asset purchases is official Fed policy! Although I guess initially the coin would be a liability in the Fed´s balance sheet as would any deposit, it would gradually become also an asset either because the money paid into the market by the Treasury would end up as bank reserves at the central bank or because the money would be paid directly to the Fed in order to buy back debt. The effect, either way, would be inflation.
I am, of course, sidestepping the funny issue of how the coin would be turned into many parts, but in an era in which the Fed does virtually anything it wants to do and in which money is an electronic rather than a physical thing I am pretty sure they would find ways to break it up fairly quickly. I am also disregarding the obvious disconnect between the denomination of the coin and the real value of the metal—$1 trillion translates into several thousand tons of platinum, not just a coin. But in the era of fiat money, when was that an issue?
Perhaps there is an upside to discussing this silly gimmick as if it were a real option. Many intelligent solutions to the monetary problem sound to mainstream opinion leaders and politicians too nutty to even consider right now. But the more crazy inflationary ideas (that include monetary fraud) come into respectable circulation, the greater the chances that apparently crazy anti-inflationary ideas, including the abolition of the Fed and the return of the gold standard, can be productively discussed. So long live the Krugmans of this world!