The Trillion Dollar Platinum Coin Trick


Before discussing how it works in the current environment, let’s take a look at the history. It was in the days of the Clinton administration when the Republicans had taken control of Congress. The United States controlled much of the world monetary market. But a small segment of the monetary market, platinum coins, was not within the control of the United States. Congressional Republicans, determined to corner the platinum coin market worldwide, came up with a plan for the Treasury Department to begin minting platinum coins.

The Clinton Democrats at the Treasury Department opposed the idea, but Congressional Republicans pushed it through anyway. Having been duly required to follow the instructions of Congress, the Democratic Treasury Department proceeded to mint platinum coins and did, in fact, corner the world platinum coin market.

So anxious were the Congressional Republicans to corner the platinum coin market that the authorizing legislation did something unusual. The custom in such legislation is that the authorizing legislation specifies the denominations of coins to be struck. Given the desire to corner the world market, Congressional Republicans in this instance authorized that platinum coins might be struck “in any denomination.”

Fast forward to 2012 and the impending debt ceiling limit negotiations, and enter Jerry Nadler (D-NY). Being aware of the platinum coin legislation, Nadler suggested, as a negotiating tactic, that the Obama administration strike a $1 trillion platinum coin and be prepared to deposit it with the Federal Reserve in the US Treasury’s account. The suggestion was designed as a counter to potential Republican attempts to use the debt ceiling limit as a means of threatening default, potentially impugning of the full faith and credit of the United States in an attempt to force spending cuts to programs such as Social Security, Medicare and Medicaid.

As outlandish as the trillion dollar coin idea may sound, it may be legal, and it may avoid the necessity for raising the debt ceiling. The idea has been endorsed by Josh Barrow of Bloomberg View. Joseph Wiesenthal of Business Insider has begun a twitter campaign to adopt the idea and it is now on the petition list that the White House makes available online. In addition, Philip Diehl who was head of the United States Mint from 1994 to 2000 has said that he regards the trillion dollar platinum coin trick as “a viable alternative.” Diehl went on to say that he regards this option has being on firmer legal ground than the 14th amendment option that some, including Nancy Pelosi, have called for.

Here’s how the Daily Beast describes the scenario working:

“Tim Geithner shows up at the neo-Florentine fortress that houses the Federal Reserve Bank of New York and asks to make a deposit on behalf of the U.S. Treasury. But instead of handing over a check—or the Treasury wiring one over—he unveils a single coin to be deposited. It is worth … $1 trillion. And with that, the debt-ceiling standoff would be resolved. Instead of issuing debt in the form of Treasury bonds to fund the gap between taxes and spending, the trillion-dollar coin would cover the deficit, and Congress wouldn’t have to worry about raising the debt ceiling, at least for a while.”

Joe Gagnon, former economist at the Federal Reserve, says he loves the idea and that he would use it if Congressional Republicans resisted raising the debt ceiling. In an odd twist, the Federal Reserve has the power to print money, but the Treasury Department, a department of the Obama administration, has authority to strike platinum coins.

Two additional articles on the subject are at Daily Beast and Capital New York .

Author: ELIJAH SWEETE

Contributor, aka tidbits

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12 Comments

  1. It may solve one problem but create a bigger one for the Admin. The PR from such a move couldn’t be good.

  2. EEllis,

    I agree that it would be a PR nightmare without an awful lot of explanation. Even then it might be a PR problem. But, a large number of very serious people are much more worried about what some extremists in the Congressional Repubican caucus may cook up than they are about a little PR egg on the administration’s face. Here’s one analysis I’ve heard discussed seriously.

    Some extremists in the Congressional Republican caucus seem to believe it would be a cute political trick to force the U. S. into default. Without going into detail on the world economic impact [which I am not qualified to begin to comment on], one result would almost certainly be a downgrade of the government’s credit. If that downgrade were to result in a 1% increase in the interest rate the U. S. had to pay on its debt, the cost over ten years would be an extra one trillion dollars.

    In other words, in the name of extorting spending cuts to reduce the deficit, some extremists in Congress propose a “solution” that would add a trillion dollars to the deficit. In the face of this, some very serious people, including former directors of the U. S. Mint are looking for solutions.

    From my perspective, they’re both a little on the mad hatter side of what governance should look like. But, when you’re faced with folks who want to burn down the government without regard to the best interests of the country or her citizens, serious people can get very creative. My view.

    Wouldn’t it be nice if all sides could just act like adults and try governing the country for a change?

  3. What in God’s name am I reading here? This is the most ridiculous notion I have ever heard of. This government has jumped the shark big time and needs to be brought down & rebuilt. Gads!!

  4. Sorry, Barky, but Elijah is right. When confronted with intractable lunacy then almost anything goes to counter it.

  5. If such an action were required to invade Iran, Reps would do it.

    The possibility does add to the debate, but I would hope that things would not go so far.
    Printing a trillion dollar coin would do serious damage to our reputation. Maybe even worse than a credit rating downgrade.

  6. I think the Federal Reserve would fight such a move with everything it had. All Federal Reserve Notes (money) earns interest for them, and having any significant amount of “free” money out there would both reduce their income, and their power (already weak) to fight inflation.

    The markets would also rightly see it as a partial default, and demand higher interest on future bonds, including any corporate and municipal bonds. It might be a short-term gain, but it would cost everyone more in the long run.

  7. Not necessarily, ProfElwood. Frankly, given the size of our economy and the fact that this “money” would not flow into the general supply it would almost certainly have no inflationary effect.

  8. I’d be tempted to become a counterfeiter. :)

  9. SL maybe that’s the solution. Convince the Reps that the Platinum Coin is being initiated to cover the cost of invading Iran. If they get antsy about seeing any actual troops being dispatched, explain that platinum is in short supply because of EPA regulations, but we’ll get there – just be patient.

    They can go home and brag to their constituents about how they are going to beat those muslim commies right down into the sand and it won’t cost a thing because the FED is going to cover the cost.

  10. Jim, inflation isn’t always an immediate effect, as I’m sure you already know. So when inflation hits, and it has to eventually, there’ll be no way to trace down how much of it came from the maneuver or not.

    It also doesn’t matter. People know that if it can be done once, it’ll be done again, and investors aren’t as theoretical as politicians. They’ll recognize the implications immediately.

  11. If that downgrade were to result in a 1% increase in the interest rate the U. S. had to pay on its debt, the cost over ten years would be an extra one trillion dollars.

    That seems a mighty big if for at least a few reasons.

    1. The last downgrade did not result in an increase in the US interest rate. It’s pretty clear that the sovereign debt market doesn’t much care what S&P, Fitch, and Moody’s think.

    2. Even if it did, a 1 step downgrade from AAA to AA doesn’t seem to have much affect. There is little difference between AAA and AA rates paid. This is likely largely because there aren’t that many sovereign issuers and large buyers can do their own research.

    3. Even assuming the impact were a 1% change, the math works out such that less debt is created by a higher rate than by higher spending (assuming a $/$ increase in the ceiling versus 10-year reduction in spending).

    In my view, this is the Washington crew absolutely refusing to make cuts in spending. Yes a debt default is nuts but our current level of government spending is also nuts. And our spending trend really is unsustainable unless we want middle class taxes a lot higher than they are today. Thus far, nobody in DC wants to bite that particular bullet; and any chance of them doing so is a lot lower today than it was a month ago.

    So the trillion dollar coin trick is nothing more than that, a trick, a trick designed to perpetuate the myth that we don’t have to pay for what we spend. I also agree with Prof. Market actors will see through that trick pretty darn quickly. A downgrade would certain with a trillion dollar coin trick, perhaps a relatively large one. Again it may not matter…what will matter in the end is when all the printing and debt catches up with the government.

  12. and lets not forget that everyone in the plant went running for US debt after our rating was nicked for a bit. We are viewed as the most secure place to invest, particularly during chaotic times. The issue is and will always be…will that change? We can print 10 one trillion dollar coins if we wish, but how does that change how the world views our economic and military stability.

    A long time ago, I wrote that we could rack up as much debt as we wish, because we have the biggest stick on the planet and we work ourselves to death. As bad as our economy could get, the USA is going no where.

    The caveat is….what could happen to change that attitude? What would we have to do to shatter that feeling of stability? and are we doing that right now?

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