If President Obama ultimately decides to mint a platinum coin to avoid the debt limit, he should make more than one.
It would be beyond perverse for Congress to impose an economic catastrophe by refusing to raise the debt limit, (Read this if you think it would be anything but a stage of the apocalypse.) So, Paul Krugman argues, why not respond with a bizarre solution: The executive branch can use an obscure law that allows it to create money by minting a platinum coin of any denomination — even $1 trillion — and depositing it at the Federal Reserve.
The idea sounds daft, an accounting gimmick at best, and acting on it would further harm faith in the government. But it appears to be perfectly legal, and economists, commentators and members of Congress are starting to take the idea seriously. If the choice really comes down to national default or minting a platinum coin, they say, go with the coin.
Bloomberg’s Josh Barro points out that the biggest worry about such a strategy is that it would stoke inflation. If the Treasury continually funded the government with coin-backed cash, the money supply would surely expand over time, and prices with it. So, Krugman says, the Treasury would want to buy the coin back from the Fed once the debt limit is increased, presumably with whatever cash the Treasury hadn’t spent plus money raised from its usual mix of tax receipts and Treasury bill sales. Barro suggests that President Obama can manage concerns about inflation by pledging to do that and then melt the coin down. This would pressure Congress to stop playing games with the debt ceiling, or even to eliminate the statutory debt limit in exchange for revoking the president’s power to mint platinum coins at will. Obama’s pledge, then, would minimize the economic damage, though there’s no guarantee it would be minimal, particularly before the coin is melted down and Congress closes the platinum-coin loophole.
One other thing could help: Instead of minting a single, trillion-dollar coin, the Treasury could strike many coins of a smaller denomination, just enough to keep the government running for another week, say. Each could be deposited only as needed to finance federal operations until Congress deals with the debt limit. There is a risk that minting more than one platinum coin would encourage worries that the practice will become routine, but doing so would also emphasize that the platinum-coin gambit is only a stopgap measure, not a way to get a trillion dollars for free. And it could reduce the amount of time the Treasury has to rely on coin-backed spending; the spectacle of the Treasury secretary traveling to the Fed every week, platinum coin in hand, would put more pressure on Congress to end its debt-limit hijinks.
Of course, it would be better if lawmakers simply recognized that the debt limit is too dangerous to mess with — a lesson they should have learned in 2011 — and decided to focus their energies on the other potential, lower-stakes fiscal crises they have to choose from — scheduled sequestration spending cuts, for example, or hashing out a new operating budget in March. House Speaker John Boehner (R-Ohio) has hinted that Republicans might do that. Let’s hope they render the platinum-coin discussion little more than a curious policy diversion.