Explained | US plans $1 trillion platinum coin to tackle debt crisis
The story so far: The bipartisan fight between US Democrats and Republicans over the US public debt ceiling launched an interesting idea. Some members of the Democratic camp have suggested that a $1 trillion platinum coin could be issued to circumvent the debt ceiling if Republicans refuse to raise it. US senators reached a compromise on Thursday that will allow the US government to meet its spending obligations through December. However, the bipartisan fight over the debt ceiling seems far from over.
What is the debt limit?
The US Congress limits the total amount of debt the US government can borrow to fund its spending. The debt ceiling has been gradually raised over the decades, from around $4 trillion in the early 1990s to $28.4 trillion in August 2021. US governments typically run a budget deficit, that is that is, their expenses exceed their income, which forces them to borrow. The debt ceiling is supposed to act as a brake on public borrowing by forcing the government to live within its means.
Feuds over the US debt ceiling are common because Republicans and Democrats tend to block raising the ceiling when the other party is in power. This causes problems for the incumbent government, which has to scramble to get the money and possibly even default on existing debt if it fails. Republicans are currently opposing President Joe Biden’s plan to spend $3.5 trillion on various social programs. They argue that raising the debt ceiling to fund the plan would make the situation worse and lead to higher inflation.
What is the $1 trillion platinum coin proposition?
The $1 trillion platinum coin is a symbolic coin with a face value of $1 trillion that can be issued by the US Treasury and deposited with the US Federal Reserve, the US central bank. This will help the US government get the money it needs from the Fed to fund its spending programs without increasing its overall liabilities. Here’s how it works. Usually, when the US government wants to borrow money, it issues treasury bills to investors. These bonds are then purchased by the Fed in the secondary market, where they are actively traded. The Fed therefore indirectly finances the government. But issuing these bonds also increases the overall public debt figure. This, in turn, could cause the debt ceiling to be exceeded unless the Treasury simultaneously redeems bonds of equal value by reimbursing investors. With the $1 trillion platinum coin, however, the US government won’t have to worry about breaching the debt ceiling. Receiving dollars from the Fed in exchange for the coin will not increase government debt.
The platinum coin proposal exploits a loophole in the law that allows the US Treasury to issue platinum coins of any denomination, regardless of the actual platinum content of those coins, so much so that some have suggested to mint a 1 quadrillion dollar coin. The US Treasury can thus mint a platinum coin of the value it wishes and demand an equivalent sum in dollars from the central bank. Gold and silver coins, on the other hand, can only be issued in certain denominations and, more importantly, must contain a certain weight of gold. This severely limits the amount of dollars the Treasury can demand from the Fed. Nobel laureate Paul Krugman and financial journalist Joe Weisenthal have been at the forefront of the push for the platinum coin proposal. US Treasury Secretary Janet Yellen, however, dismissed the idea, calling it a “trick”.
Will it lead to inflation?
Inflation has been a major cause for concern in the United States since the Fed began pumping trillions into the economy last year to deal with the economic crisis due to the Covid-19 lockdown. Many believe that the $1 trillion platinum coin proposal will further increase the total money supply in the economy and cause prices to rise. To be more specific, they argue that the Fed will create new dollars in exchange for the platinum coin deposited by the Treasury and this will add significantly to the overall money supply. Without a sufficient increase in the overall supply of goods and services in the economy, it can cause prices to rise if people choose to spend rather than hoard the new money provided by the Fed.
Proponents of the platinum coin proposal, however, say the Fed, when crediting the Treasury with $1 trillion in fresh dollars, will simultaneously sell $1 trillion worth of US government bonds. from its open market holdings. This will suck $1 trillion worth of money into the economy and prevent inflation. Other critics, however, point out that circumventing the debt ceiling through such tricks will come at the expense of fiscal discipline. US fiscal conservatives, in particular, have been wary of the influence of modern monetary theory (MMT) in the debt ceiling debate. MMT enthusiasts think there is no reason to worry about government debt because it can be easily paid off using new dollars created by the Fed. But it will blur the line between government and central bank and may lead to more reckless spending by short-sighted politicians, critics of MMT believe.