Fixing the debt ceiling with a trillion dollar platinum coin
Make a silly demand, get a silly concession.
It's always interesting seeing an idea whose time has come, and today's seems to be the "platinum coin option" for the US.
America will, in two months, hit the debt ceiling. Again. The federal government will be denied, by law, the money it has been ordered to spend, by law. The three options facing it, in conventional wisdom, are a total government shut-down, a default on its loans, or the raising of the ceiling.
Since the first two are, frankly, unthinkable, the last is the only thing the administration can do. The Republicans know this, and are prepared to leverage their image as an unhinged party which would metaphorically kill the hostages to gain policy concessions.
But there is actually a fourth option. It's leveraging a quirk in the laws of the nation, but it is, by any reading of those laws, entirely legal. United States law says:
31 USC § 5112 (k) The Secretary [of the Treasury] may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.
That is: at any time, the Treasury Secretary – Tim Geithner – can mint platinum coins in any denomination.
The other important aspect is how government spending is actually accounted for. The Treasury has a "bank account" at the Federal Reserve. When it pays someone, it's the Fed which hands the money over. When it needs money to put in that bank, it sells bonds at auction.
The debt ceiling is, in that simple version of the story, basically a ban on the Treasury selling any more bonds. As a result, it's bank account will run dry, and all hell will break loose.
But if Geithner mints a trillion dollar platinum coin, he can just waltz over to the Fed, deposit that, and the government's ability to spend is restored.
The plan sounds too good to be true, but it's really not. Joe Weisenthal has a bumper post debunking the biggest myths about it, but the trick to understanding it is to think of it as a legal, not monetary, trick. In terms of the real economy – outside of strange intragovernmental transfers designed to get around bizarre anachronistic limits – nothing has changed. The state is still taking money in through borrowing and taxing, and still putting money out through spending. It's just some of the borrowing is transferred from the Treasury, which does it under the authority it has to raise the national debt, to the Federal Reserve, which does it under the authority it has to borrow against assets it holds. Like, for instance, a trillion dollar coin.
This plan has been knocking around for years, now. It was first suggested during the last showdown, in 2011, by Pragmatic Capitalist's Cullen Roche. Weisenthal jumped on board, and then slowly so did others.
But in the last couple of days, there has been a White House petition calling for the President to do it, discussions in Congress, Paul Krugman mulling over the idea and a Huffington Post front page on it.
But the best argument has been Josh Barro's in Bloomberg. Barrow takes the legal quirks of the situation, and applies them to a political analysis. After all, although the President has the power to do it, doesn't mean it wouldn't be extremely politically damaging to actually go ahead with it. Barro's solution:
Hitting the debt ceiling isn't an option. It's no way to run the country, and Republicans know that. So, a debt-ceiling increase shouldn't count as a "concession," and it's nutty for Obama to have to give substantive policy ground to get one.
Monetizing deficits through direct presidential control of the currency, in lieu of borrowing, is also no way to run a country. It's silly, and it's perfectly legal. Agreeing not to do so is therefore the ideal "concession" for Obama to offer in return for Republicans agreeing to end the threat of a debt-default crisis.
Make a silly demand, get a silly concession. Perfect!