Explained | US $ 1 trillion platinum coin plan to address debt crisis
The story so far: The bipartisan dispute between US Democrats and Republicans over the US national debt ceiling has spawned an interesting idea. Some in the Democratic camp have suggested that a $ 1 trillion platinum coin could be issued to bypass the debt ceiling if Republicans refuse to raise it. US Senators reached a compromise on Thursday that will allow the US government to meet its spending commitments by December. However, the bipartisan dispute over the debt ceiling is far from looking.
What is the debt limit?
The US Congress limits the total debt that the US government can borrow to fund its expenditures. The debt ceiling has been gradually raised over the decades from around $ 4 trillion in the early 1990s to $ 28.4 trillion in August 2021. US governments generally run a budget deficit, which means that their spending exceeds their income, forcing them to borrow. The debt ceiling is designed to control the state’s borrowing by forcing the state to live within its means.
Disputes over the US debt ceiling are commonplace as both Republicans and Democrats tend to prevent the ceiling from being raised when the other party is in power. This creates problems for the incumbent government, which is struggling for money and may even default on existing debts if it fails. Republicans are currently opposed to President Joe Biden’s plan to spend $ 3.5 trillion on various welfare programs. They argue that raising the debt ceiling to fund the plan would worsen the situation and lead to higher inflation.
What is the proposal for a $ 1 trillion platinum coin?
The $ 1 trillion platinum coin is a $ 1 trillion face value token coin that can be issued by the U.S. Treasury Department and deposited with the Federal Reserve. It will help the US government get the Fed the money it needs to fund its spending programs without increasing its overall debt. This is how it works. When the US government wants to borrow money, it usually issues government bonds to investors. These bonds are then bought by the Fed on the secondary market and actively traded there. In this way, the Fed indirectly finances the government. The issuance of these bonds also increases the total debt of the state. This, in turn, could result in the debt ceiling being exceeded unless the Treasury Department redeems bonds of the same value at the same time by repaying investors. However, with the $ 1 trillion platinum coin, the U.S. government doesn’t have to worry about exceeding the debt ceiling. Receiving dollars from the Fed in exchange for the coin will not add to the government’s liabilities.
The platinum coin proposal takes advantage of a loophole in the law that allows the U.S. Treasury Department to issue platinum coins of any denomination regardless of the actual platinum content of those coins, so some have suggested minting a trillion dollar coin. The US Treasury Department can mint a platinum coin of any denomination and demand a corresponding dollar amount from the central bank. Gold and silver coins, on the other hand, can only be issued in certain denominations and, above all, must contain a certain weight of gold. This severely limits the amount of dollars the Treasury Department can charge the Fed. Nobel Prize winner Paul Krugman and financial journalist Joe Weisenthal were at the forefront of the movement to support the proposal for a platinum coin. However, US Treasury Secretary Janet Yellen ruled out the idea and called it a “gimmick”.
Will that lead to inflation?
Inflation has been a major cause of concern in the US since the Fed began pumping trillions of dollars into the economy last year to deal with the economic slump caused by the Covid-19 lockdown. Many believe that the proposal for a $ 1 trillion platinum coin will continue to add to the total amount of money in the economy and lead to a spike in prices. More specifically, they argue that in return for the platinum coin deposited by the Treasury Department, the Fed will create new dollars and that this will add significantly to the total amount of money. Without a sufficient increase in the total supply of goods and services in the economy, this can lead to higher prices if people choose to spend rather than hoard the fresh money provided by the Fed.
However, proponents of the platinum coin proposal say that when the Fed credits the US Treasury Department with $ 1 trillion in fresh dollars, it will also sell $ 1 trillion in US Treasuries from its holdings in the open market will. This will suck $ 1 trillion worth of money from the economy and prevent inflation. However, other critics point out that circumventing the debt ceiling through such tricks is at the expense of budget discipline. American fiscal conservatives in particular were skeptical of the influence of modern monetary theory (MMT) on the debt ceiling debate. MMT enthusiasts believe there is no need to worry about the national debt as it can be easily paid off with the fresh dollars created by the Fed. However, doing so will blur the line between government and central bank and may lead to more reckless spending by myopic politicians, critics of MMT believe.