Can a trillion dollar currency solve the debt ceiling crisis?

Washington – in Debt reduction confrontation Between Republicans and Democrats, he raised questions about creative solutions to avert the crisis, including those that at first glance might seem unthinkable: Could minting a trillion-dollar platinum coin solve the whole problem?

What was once a fringe idea is now being offered to top economic policymakers as a serious remedy.

Asked Wednesday about the idea that there might be another option if Congress fails to raise the borrowing cap, Jerome H. Powell, the chairman of the Federal Reserve, was not there.

“There is only one way forward here,” Powell said, “and that is for Congress to raise the debt ceiling so that the United States government can pay all of its obligations when they fall due.” “Any deviations from this path would be too risky.”

Treasury Secretary Janet L. Yellen was unable to avert a debt-limit crisis brewing again in the United States when she was touring Africa last week and fielding inquiries about the currency, which she called a “gimmick.”

Instead, Ms. Yellen sent two stern letters to Speaker of the House Kevin McCarthy stating, “exceptional measuresShe was taking action to ensure that the United States continued to pay its bills and urged Congress to “act quickly” to protect the nation’s full faith and credit by raising the debt limit.

President Biden told Mr. McCarthy on Wednesday that while there was room for debate about addressing the deficit, Congress would have to pass a debt-limit increase without strings attached to avoid a fiscal disaster. Mr. Biden and Mr. McCarthy met in the White House for more than an hour in a debate that bore high stakes, as the federal government is set to exhaust its ability to pay its bills on time as early as June.

But the coin-op idea still has its fair share of supporters, and they’re not giving up.

As a political deadlock over the borrowing ceiling hardenedthe notion that the Treasury secretary could defuse the debt-reduction drama with her minting powers has resurfaced, including on Twitter, where the hashtag #MintTheCoin is once again trending.

However, the feasibility of avoiding the US debt crisis by minting a valuable piece of currency is not at all clear. Here’s a look at the coin’s origins, how it can be used and the possible consequences.

An unusual procedure

If Congress cannot reach an agreement by early June to increase the debt limit, which is set at $31.4 trillion in late 2021, Ms. Yellen’s ability to use government accounting tools to delay default may soon run out, and neither will the United States be able to. . To pay all their bills on time.

This can cause a A deep recession and possibly a financial crisis, shutting down large sectors of the economy and preventing Social Security and Medicare beneficiaries from receiving their money. Although Ms. Yellen has the ability to move money around government accounts to delay defaults, eventually government coffers will run out without the ability to collect more tax revenue or borrow more money.

This is where the currency comes into play. Supporters of the idea believe Ms. Yellen could use her power to direct the US Mint to produce a $1 trillion platinum coin – or other large denomination – and deposit it with the Federal Reserve, the government’s banker, which manages the Treasury’s “public account”.

Supporters of the coin say this would allow the federal government to draw on funds as needed and keep paying its bills until a deal is struck or until a trillion dollars are spent and another coin must be minted.

Born out of a legislative loophole

The concept of a trillion dollar coin first appeared in 2010 before the first major debt ceiling battle under Obama. Reflection on the comments of a popular economics and finance blog about the feasibility of minting such a coin to create money out of thin air and avoid default sparked a discussion about creative ways to avoid economic disaster.

The logic is that language in a 1997 law passed by Congress to help the US Mint make more money from bullion sales gave the Secretary of the Treasury broad discretion to mint platinum coins of any denomination. Supporters of the idea say this power gives the minister a way to continue meeting the state’s financial obligations even if the government’s ability to continue borrowing is frozen.

The idea has captured the imagination of academics and analysts alike, leading to calls on social media for the coinage and endorsement columns from the likes of Joe Weisenthal, now a Bloomberg writer and podcast host, and Paul Krugman, a New York Times columnist, who announced in 2013 that if all else fails, “Darn coinage.”

These days, the idea widely appeals to proponents of modern monetary theory, an economic philosophy that argues that deficits should not be a constraint on government spending. He has also found support among some legal scholars such as Rohan Gray of Willamette University School of Law, who regularly spars with currency critics on Twitter and argues that the idea is less crazy than letting the US default.

“At least the disastrous cliff option has been taken off the table,” Gray said of the coin.

Avoiding the crisis or igniting it?

It is far from clear that such a maneuver would calm global markets or preserve the credit rating of America, which suffered a downgrade after the 2011 debt-limit standoff.

Mr. Gray suggested that such a unilateral move would likely be challenged in the Supreme Court, and acknowledged that bond markets could get nervous about deficit spending without issuing new bonds. (In which case, he suggests, the Fed might want to sell more of the bonds in its portfolio.)

For some, the idea that the coin is a safety valve makes the debt frontier confrontation even more dangerous.

Low, who served as Treasury secretary from 2013 to 2017 during the Obama administration, told the New York Times during the 2021 debt limit impasse: “It is harmful to create the sense that there is something when there is none.” Open up the possibility of an accident.”

Mr. Liu said that while he was Treasury secretary, administration lawyers discussed alternatives to getting around the debt limit during confrontations with Congress, but concluded that none of those options were viable. He warned that if Congress did not eventually raise or suspend the debt limit, it would lead to cascading problems and financial turmoil.

Can currency finally prevail?

The most prominent skeptic is the current Treasury Secretary. Ms. Yellen has repeatedly argued that the idea of ​​minting a trillion dollar coin does not warrant serious consideration. Asked about this in 2021, she also warned that such a move would encroach on the Fed’s independence.

In an interview with The Wall Street JournalMs. Yellen suggested that the Fed might not even accept the currency.

“In no way can it be taken for granted that the Fed would do that, and I think especially with something that is a gimmick,” she said. “The Federal Reserve is not required to accept it. There is no requirement on the part of the Fed.”

However, those who believe the coin should be taken seriously were comforted by the fact that Ms. Yellen did not question the legality of the maneuver.

Diehl, director of the US Mint from 1994 to 2000, said Ms. Yellen’s responses were predictable because coinage was not the preferred method for dealing with the debt limit. However, he said she would be wise if she was open-minded.

said Diehl, who was also chief of staff for the Treasury Department during the Clinton administration.

Mr. Diehl helped write the legislation in the 1990s that eventually gave the minister mint power. He believes it is a viable solution but said he hopes it will never be tested.

“I hope reason prevails,” he said.