As you know, the never-ending 2012 election was much ado about nothing. Republicans and Democrats are still slugging it out about the so-called "fiscal cliff," and later next year there will be a showdown about raising the debt ceiling. There's no need to worry about any of this because easy solutions are available which will make these apparent troubles go away. One approach I particularly like is the "two-coin solution" described by Brad Plumer in Could two platinum coins solve the debt-ceiling crisis?
The U.S. government is, after all, facing a real problem. The Treasury Department will hit its $16.4 trillion borrowing limit by next February at the latest. Unless Congress reaches an agreement to raise that borrowing limit, the government will no longer be able to borrow enough money to pay all its bills.
Last year, Republicans in Congress resisted lifting the debt ceiling until the last minute — and then only in exchange for spending cuts. Panic ensued. So what happens if there’s another showdown this year?
Enter the platinum coins. Thanks to an odd loophole in current law, the U.S. Treasury is technically allowed to mint as many coins made of platinum as it wants and can assign them whatever value it pleases.
Under this scenario, the U.S. Mint would produce (say) a pair of trillion-dollar platinum coins. The president orders the coins to be deposited at the Federal Reserve. The Fed then moves this money into Treasury’s accounts. And just like that, Treasury suddenly has an extra $2 trillion to pay off its obligations for the next two years — without needing to issue new debt. The ceiling is no longer an issue.
“I like it,” says Joseph Gagnon of the Peterson Institute for International Economics. “There’s nothing that’s obviously economically problematic about it.”
I like it too! If only all problems were this easily solved! If you're a fussbudget and thus require a more precise explanation of how this would work, UCSD economist James Hamilton has the answers.
To explain the idea, let me begin with some basics on how the banking system functions. If some day you were to bring that jar of coins sitting on your dresser to deposit them in your bank account, the bank would credit your account with the amount of the deposit, and you could then use those funds to write checks.
Similarly, your bank may have an account with the Federal Reserve. If your bank brought some currency or coins in to deposit them with the Fed, the Fed would credit their account by that amount. These deposits with the Fed are known as reserves. A bank can use its reserves to pay for anything it wanted, for example, by instructing the Fed to transfer those reserves to some other bank in payment for an asset that the bank purchased.
The U.S. Treasury also has an account with the Fed. When you write a check to the IRS, your bank's account with the Fed is debited and the Treasury's account is credited. The Treasury can use those funds to buy anything it wants, by instructing the Fed to transfer those reserves back to some bank to whose customer the Treasury wishes to make a payment...
What would the Treasury do with a trillion dollar coin, you ask? Why, deposit it in their account with the Fed, of course. The Fed would then credit the Treasury's account with 1 trillion dollars. The Treasury could in turn then order the Fed to transfer those reserves to the accounts of any banks to whom the Treasury owes money. The result is that the Treasury's bills are all paid with money that would be newly created by the Fed.
I do not believe in half-way measures. For example, take the situation I reported on in We Don't Make This Stuff Up! You know, where the Fed prints enough money to buy up about 90% of the monthly Treasury bond issuance and will do so for the indefinite future. That's what I call a half-way measure!
And why stop at only 2 one-trillion-dollar platinum coins? Clearly we need 17 of them right now. And what of the future? It's platinum coins as far as the eye can see. Go big or go home!
Consider the foreign holders of U.S. public debt as of September, 2012. These numbers are in billions of dollars. The list starts off like this—
China, Mainland 1155.5 Japan 1130.7 Oil Exporters 267.0 Brazil 250.5 Carib Bnkng Ctrs 240.4 Taiwan 200.4 Switzerland 195.8 Russia 162.8 Luxembourg 148.1 Hong Kong 135.7 Belgium 133.7
We in the United States do not want our creditor countries to think that Americans are freeloaders with Big Guns and Nuclear Weapons who want something for nothing. We want these nations to understand that Americans always pay their debts, that we are accountable and responsible guardians of the world's reserve currency.
So I propose that we send China and Japan one (1) trillion-dollar platinum coin each, and call it even. Surely neither of these great nations will quibble about another $100 billion and pocket change, right?
And let us send another coin (1) to the combined group Oil Exporters + Brazil + Carribean Banking Centers + Taiwan. There doesn't seem to be any good method for dividing up one (1) platinum coin to pay off these nations (or groups of nations/banks) in the proper amounts individually, but these are minor details. Let them figure it out!
And we here in the United States would like to shout out a big THANK YOU! to these creditor nations and central banks for being so generous with us in our time of need. But that's all in the past now that we've got the platinum coin solution.
So if you have been worrying about Social Security or Medicare/Medicaid or Defense spending going forward, there is no longer any reason to do so.
And in these troubled times, that is certainly a relief.
Bonus Video — Gangnum Style