If Congress fails to raise the debt ceiling by Feb. 15 or so, doom sets in. At least that's the working hypothesis. The United States will no longer be able to borrow enough money to pay all of its bills. Huge chunks of government shut down. Stocks plunge. Interest rates spike. Downgrades hit. Cats and dogs start living together. Etc.
Okay, but what happens if the White House decides to mint a trillion-dollar platinum coin to evade the debt ceiling? In theory, this could work: The U.S. Treasury would have an extra $1 trillion on hand and could make all the payments it's supposed to make for the next year. But this is also undeniably a weird solution. If President Obama held up a tiny platinum coin worth $1 trillion at a press conference, would financial markets freak out?
Out of morbid curiosity, we asked a number of analysts what they thought would happen. Predictions fell into a couple of broad camps:
The platinum coin might trigger a panic! The pessimistic view is that markets might indeed freak out. The coin might be a sign that the U.S. government has become even more dysfunctional than anyone thought. "Going down this road would set up a situation where it looks like the relationship between the two parties has fundamentally broken down," says Michael Hanson, senior U.S. economist at Bank of America.
The coin itself might also scare investors. "I think the platinum coin would risk being misunderstood or misinterpreted in a way that could jeopardize inflation expectations, the value of the dollar and the country’s credit rating," says J.P. Morgan chief economist Michael Feroli.
True, many economists sound confident that a trillion-dollar platinum coin wouldn't cause inflation to surge — the Federal Reserve could mop up the extra money by selling bonds. But mere worries could prompt a sell-off of Treasuries, notes Mark Spindel of the D.C.-based Potomac River Fund. And that could hurt the broader economy — if U.S. interest rates started climbing, that could mean a corresponding spike in credit card rates and mortgage rates, at a time when the economy is still fragile.
The platinum coin might be fine. Others are somewhat more sanguine about the coin. "On the inflation front, serious investors by now have figured out printing money doesn’t equate to immediate inflation," says trader Mark Dow. He also points out that the coin could even have some upsides: "On credit risk, paradoxically, it reduces credit risk because it demonstrate the kind of thing that [Modern Monetary Theorists] have been saying for a while: A sovereign government with a printing press really can’t default unless it chooses to."
The platinum coin might be legally risky. Sure, law professors like Laurence Tribe have said that the platinum coin option is perfectly legal. After all, it's right there in the legal code — the Secretary of Treasury can mint a platinum coin of any size or denomination. But there's always the possibility that a judge might disagree. "What are the chances that some judge somewhere will issue a stay?" says Thomas Gallagher of the Scowcroft Group. "As long as there’s some uncertainty about it, that affects the markets."
It all depends on how the platinum coin is used. Mohamend El-Erian of PIMCO argues that whatever its downsides, the platinum coin beats blowing past the debt ceiling: "I suspect the markets would be generally okay if the approach were used as a way to diffuse what could otherwise be a repeat of the summer of 2011 — when, as you know well, the debt ceiling debacle harmed growth, risk assets and the country's credit rating."
But, El-Erian adds, the government couldn't rely on platinum coins forever — eventually Congress would need to lift the debt ceiling so that the government could get rid of the coin and go back to normal. "If the coin approach were to prove an end in itself, the consequences would be quite different," El-Erian notes. "Markets would worry about the fuel that the approach would add to the fires of congressional discontent, dysfunction and polarization. The rest of the world could well view the approach as potentially inflationary, and also indicative of a superpower that has lost its way."
So whether the platinum coin is a workable idea or not depends on what Congress does afterward. El-Erian thinks that "by highlighting the dysfunction of Congress and essentially embarrassing its members, the coin approach could provide the catalyst needed to shock our politicians into a more constructive behavior." By contrast, J.P. Morgan's Michael Feroli argues that the platinum coin could actually prolong the crisis — Congress will be more likely to lift the debt ceiling if it's faced with the immediate prospect of a massive government shutdown than if it's confronted with a shiny coin.
--An explanation of the platinum coin option.
--A look at what would happen if we breach the debt ceiling.