The magic deficit coin

For some reason, there is suddenly a lot of buzz around the notion of “fixing” the deficit through the creation of a magical platinum coin, as an alternative to raising the debt ceiling.  Granted, many of the people discussing this idea regard it as more of a theoretical exercise, or perhaps even a satire of monetary policy.  It can be viewed an extension of the old debate over just how “real” the national debt is.

The most concise explanation of the “magic coin” theory comes from James Pethokoukis of the American Enterprise Institute, who said it was “a new one on me” when writing about it early in December, although I vaguely recall hearing a similar idea kicked around in 2011, or maybe even longer ago:

There are limits on how much paper money the U.S. can circulate and rules that govern coinage on gold, silver, and copper.  BUT, the Treasury has broad discretion on coins made from platinum.  The theory goes that the U.S. Mint would create a handful of trillion dollar (or more) platinum coins.  The President would then order the coins deposited at the Fed, who would then put the coin (s) in the Treasury who now can pay all their bills and a default is removed from the equation.  The effects on the currency market and inflation are unclear, to say the least.  You would also likely trigger a wave of lawsuits similar to the Constitutional Option and create two tranches of treasuries.  Both this option and the Constitutional Option are VERY low probability options.

The “Constitutional Option” Pethokoukis refers to would involve President Obama invoking the Fourteenth Amendment to raise the debt ceiling by fiat, on the grounds that it states “the validity of the public debt shall not be questioned.”  Pethokoukis envisoned this move triggering a wave of lawsuits that would have the effect of devaluaing the new “Obama debt,” because its legitimacy would be in doubt.

Having heard the 14th Amendment option discussed before, I’ve always thought it missed the point that restraining the government’s ability to incur new debt wouldn’t automatically invalidate the existing debt, because it would still be possible to pay the mounting costs of financing that debt; it would become painful, requiring swift and significant cuts in non-mandatory government spending.  Which is what we should be doing, and that’s why I continue to believe the right strategy is allowing a modest debt increase to cover existing spending commitments, through the end of 2013, and then freezing the debt ceiling in place forever.  I think that would also disable whatever remained of the President’s theoretical ability to break the debt ceiling by invoking the Fourteenth Amendment.

Today Pethokoukis collected a tart rejoinder to the magic coin strategy from Jaret Simberg of the Washington Research Group, in which Simberg predicted serious inflation, economic chaos, panic at the banks, loans imploding, and the world laughing at us “because it seems like something out of a Simpsons episode.”  With Joe Biden in the Homer Simpson role, presumably.

Personally, if we’re going to turn to television fantasies for the solution to our debt problem, I prefer the White-Pinkman Magnet Solution, from Breaking Bad:


Just imagine Barack Obama and his Treasury Secretary of the hour driving up outside the Fed with an unmarked van full of electromagnets, and… BOOM!  National debt erased!

Or if you want to address our economic problems with coin tricks, how about this one: just pass a law decreeing that quarters are worth one dollar apiece.  It would have to be done quickly, to avoid a lot of quarter-hoarding, and the Treasury would have to sit on the supply of new quarters for a while, until the demand stabilized.  But just imagine how much “stimulus” that would pump into the economy!  And it would be in all the right hands, because the Evil Rich don’t generally keep a lot of loose change in their mansions.  The quarters are all in the hands of small businesses and the Sainted Middle Class.  Middle class people would suddenly find their spending power dramatically increased.  Piggy banks would become winning lottery tickets!  They’d rush out to buy stuff, producing an Obamanomic surge – you know, the kind of economic growth that all of Obama’s other schemes to promote growth by showering money on lower-income consumers have conspicuously failed to produce.  Of course, there would be some unfortunate tension in the vending machine market, but those machines are mostly electronic and their wares tend to cost a dollar or more anyway, so they could work it out.  And haven’t some folks been kicking the idea of switching to collar coins around anyway?

Using monetary tricks to goose the economy or “fix” the national debt would be a short-term sugar rush that does nothing to resolve the underlying issues.  Those who want to pretend the national debt is a purely monetary fiction have to contend with two immediate, very real effects.  There’s the cost of debt financing, which is mandatory spending, and came in at roughly $360 billion for fiscal year 2012.  That’s a lot of money that could be spent elsewhere, or returned to the American people.  And it’s a somewhat unpredictable expense, as it bounces around with shifting interest rates.  Those rates are historically low at the moment; if they rise, billions more in taxpayer money will be consumed.

Somehow “erasing” the debt would alleviate those interest payments… but of course, it would also raise the ire of those from whom the government borrows money, both foreign and domestic.  That would greatly increase the cost of financing future debt.

The other pertinent problem caused by the debt, which most certainly does affect all Americans, is the accumulation of commitment.  When the government spends vast amounts of money it doesn’t have, it is making false and unrealistic promises to the people who grow dependent upon that spending.  This, in turn, becomes an obligation shackled to future generations.  Without big-time deficit spending, the government would have to make only realistic promises: we will give you $X in benefits now, but someone else must give up $X in benefits to pay for them, or the taxes of current voters must be raised by $X.  Debt-crazed government is a form of taxation without representation, in which people are forced to pay for commitments they never had a chance to vote against.  You heard a great deal of such talk during the fiscal cliff showdown, and you’ll hear more of it during the upcoming debt ceiling discussion.  You’ll be told you have to submit to higher taxes, and other restrictions on your liberty, because the bills incurred by yesterday’s politicians must be paid… even though they told yesterday’s voters they could conjure their government-subsidized lollipops out of thin air.

So, no, the national debt is not just an abstract fiction that can be disregarded, and it is hurting us in real immediate ways as it grows.  You can’t alleviate the pressure with cute little Constitutional dodges or coin tricks.  In the end, even if seriously contemplated, such measures would only add to the avalanche of financial doom coming our way in a few years.  The longer we put off getting serious about dealing with it, the worse it will be.