What are the chances for a trillion-dollar coin?

9. January 2013 by Herman Brodie


It is amusing to see the US, a country that has railed for so many years against minting a one-dollar coin, petition its government to issue one worth one trillion dollars. The monster mintage is simply a ruse to avoid having to negotiate a higher debt ceiling. The idea of creating a platinum coin (the only kind the Treasury is permitted to mint) is not new; it was tossed around last year too. Back then though, it never went beyond an audience of investment professionals. This time, however, it has graced the international press, has been endorsed by Nobel-Prize economist, Paul Krugman, and has built up such a head of steam that one US senator is actively trying to criminalise it.

The coin is not intended to go into circulation, so the US government is not going to be able to pay off its debts with outsized seigniorage profits. But the Treasury would be able to borrow against the face value of the coin once deposited at the Fed, rendering the debt ceiling irrelevant for a while at least. So, had the idea been implemented one year ago, the US debt situation would probably not better or worse than it is today. Indeed, Treasury Secretary Geithner proposed defanging the debt ceiling rule last year in order to avoid a crisis that could involve the US defaulting on its debt. That idea did not get very far because many people, although they see the ceiling as archaic, consider it to be a prudent reality check. It is a bit like credit card limit; it forces one to stop for a moment and take stock. Given these factors, what are the chances for the platinum coin idea?

The trillion-dollar coin has some advantages over the Geithner plan. Firstly, it is permissible under the current law. Changing the law to achieve an objective invariably involves more anxiety than reaching the same goal under existing laws. This is because of our regret aversion; when things go wrong we rue more the things we changed than those we didn’t. Secondly, the coin plan has received a lot of media attention. Even the quirkiest ideas start to sound ‘normal’ after we have heard them often enough. However, the biggest obstacle to plan is still there, namely the public’s desire to have a reality check in place.  Even though the sobering moment one encounters when one maxes out one’s credit card only lasts as long as it takes to fish out another card, one cannot help but draw a false sense of reassurance from the knowledge it is there.

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vposted on 9. January 2013 at 9:20 am

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