The Trillion-Dollar Coin: A Dumb Idea That Won’t Go Away

Policy wonks and government people come up with some really dumb ideas. And a lot of those dumb ideas just won’t go away.

Now that we’re in the early stages of the fake debt ceiling fight, a really dumb idea has been resurrected from the dead – the trillion-dollar coin.

Last week, the federal government ran up against the debt ceiling. That means it either has to come to some kind of agreement to raise the borrowing limit or it will default.

Now, we all know how this will end. After months of political theater and hand-wringing, Congress will raise the debt limit. But that just kicks the can down the road. Because before long, the government will run up against the debt ceiling again, and we’ll have to watch another awful sequel to this awful movie.

The debt ceiling drama completely ignores the real issue —  the US government has a spending problem. The current administration is blowing through about half a trillion dollars every single month and running massive budget deficits. The solution is simple. The federal government could stop spending so much money. Or it could raise taxes. Or, why not both?

But these are politically non-viable solutions. Nobody in Washington DC is willing to seriously contemplate spending cuts. Sure, Republicans will talk about it, but that’s nothing but hot air. And nobody in Washington DC is willing to seriously contemplate raising taxes. Sure, Democrats will happily tax “the rich,” but tax increases would have to go much deeper into the poor and middle class to actually address the spending problem. So, Democrats are full of hot air too.

But there are some people out there who think they have a simple, politically viable solution — a panacea if you will. It wouldn’t require raising the debt ceiling. It wouldn’t require spending cuts. And it wouldn’t require raising taxes. (Except that it would — I’ll get to that in a minute.)

All the US Treasury needs to do is mint a $ 1 trillion dollar coin.

Viola! Problem solved!

The government could mint the coin, deposit it at the Federal Reserve, and then it could write checks against that asset.

Now, that may sound a little bit like the government is just creating money out of thin air. And that’s because it is. But hey, it’s legal, they argue. So, why not!

Here’s how it would work,  as explained by Yale law professor Jack Balkin who promoted the idea back in 2011:

Sovereign governments such as the United States can print new money. However, there’s a statutory limit to the amount of paper currency that can be in circulation at any one time.

“Ironically, there’s no similar limit on the amount of coinage. A little-known statute gives the secretary of the Treasury the authority to issue platinum coins in any denomination. So some commentators have suggested that the Treasury create two $1 trillion coins, deposit them in its account in the Federal Reserve and write checks on the proceeds…

“The ‘jumbo coin’ [strategy works] because modern central banks don’t have to print bills or float debt to create new money; they just add money to their customers’ checking accounts.”

In effect, this would be no different than quantitative easing. The Federal Reserve buys bonds with money created out of thin air. Why not let Uncle Sam write checks to spend money created out of thin air? The central bank would be good for it. After all, there would be a coin with $1 trillion dollars stamped on it sitting in a Fed vault.

The platinum coin is really just a prop to create the illusion of legality. It’s not like they would use $1 trillion dollars worth of platinum. That would weigh millions of pounds. In practice, they could just write $1 trillion on a napkin with a green crayon. Or as economist Bob Murphy explained, they could sell the Fed a paperclip.

The Federal Reserve has the power to buy whatever assets it wants at whatever price it wants. In principle, [the Treasury Secretary] could sell a paperclip to the Fed for $2 trillion. The Fed would simply write a check made out to the Treasury, drawn on the Fed itself.

When the Treasury deposited this check with its own bank — which just so happens to be the Fed — then its own “checking account” balance would go up by $2 trillion. This money wouldn’t come from anywhere in the sense that some other account would need to be debited $2 trillion. On the contrary, the system’s total reserves (and what is called the “monetary base”) would have swelled by $2 trillion. The Treasury would be free to start paying bills by writing checks on the $2 trillion in its account.

But what if the Fed wouldn’t take the coin? And what if the Supreme Court struck the scheme down on legal grounds?

Willamette University College of Law professor Rohan Grey, another big supporter of the trillion-dollar coin, doesn’t think that would be a problem. He suggested that the government could just ignore the SCOTUS and send troops over to the Eccles Building to force the Fed to take the coin.

Dumb Idea Meets Economics

You do realize this is dumb, right?

This is a monetary disaster waiting to happen. It would put inflation on hyperdrive.

We just saw what happens when the Fed prints trillions of dollars out of thin air and injects it into the economy. The price of everything goes up. We’re paying for pandemic stimulus every time we go to the grocery store.

I mentioned earlier that this scheme would raise taxes. This is how. It would jack up the inflation tax even higher. Minting a coin and pretending it is worth $1 trillion doesn’t change the dynamics. When you boil it all down, it would do nothing but increase the money supply. That is, by definition, inflation.

But we’re dealing with “smart” people here and they’ll tell you “this is different.” They’ll offer all kinds of plausible reasons it will work. They’ll talk about the dollar being the reserve currency. They show you some convincing-looking accounting tautologies. They’ll babble and spin and suddenly you’ll be thinking, “Hell yeah! A $1 trillion coin! That’s the ticket.”

No.

It’s not.

Supposedly, they can keep this from being inflationary by just dribbling the new money out as they need it. But this is the federal government we’re talking about here. Do you really think politicians will be restrained with $1 trillion in the bank? And when they blow through that, we can just mint another one of those puppies. So, they won’t dribble. It would create an even bigger cascade of spending.

This is what you get when you have an entire school of economics that disconnects money from stuff. That’s the real problem here. The government could create a $50 trillion coin. But it can’t create stuff.

We’ve been snowed into thinking money makes the economy go, but ultimately it comes down to stuff.

And the Treasury can’t create stuff out of thin air. Uncle Sam can’t mint cars and food and clothing and commodities and oil and all of the other actual stuff we need. What happens when you create more money without creating more stuff? You get rising prices. That’s where we are today. We are seeing this play out. But again, we have people who exercise zero self-reflection. They are coming up with dumb ways to solve problems they created in the first place.

Treasury Secretary Janet Yellen has nixed the idea of a trillion-dollar coin for now. But dumb ideas never die. I won’t be shocked if the sociopaths in DC eventually try it.