Posted by Neil Irwin
This is apparently platinum coin week among the economic punditocracy. It is not a moment that should inspire great pride in America, but here we are. Here are some key things to understand about a debate that started as a strange, amusing sideshow and is increasingly front and center in the economic policy debate. I’ll lay out this econo-pundit’s conclusion upfront: I hate the platinum coin idea. But if there is no resolution of the debt ceiling through the legislative process, I hate some of the alternatives more.
The issue, for those who need a refresher: To avoid running into the debt ceiling in the next couple of months, the Treasury secretary could exploit a legal loophole, create a platinum coin, assign it a value of $1 trillion or some other very high number, and deposit it at the Fed, thus enabling the government to carry out its previously promised tax and spending policies without broaching the legal cap on debt issuance.
This idea is positively idiotic, though it has gained a more and more respectable set of fans. (They now include Bill Gross, the nation’s biggest bond investor, a Bush administration economist named Donald Marron, and the Nobel laureate and New York Times columnist Paul Krugman). Some of the critics are misunderstanding what it would do and wouldn’t do. The fact that it is idiotic is kind of the point.
To back up a minute, it is important to understand what the debt ceiling does, and why it is problematic. Congress passes laws to spend money: This many dollars for fighter aircraft, Social Security benefits paid according to such and such formula, and so on. It passes laws to enact a tax code. And the difference between that spending and the money raised in taxes the government funds by issuing debt. But Congress also has a third constraint: An overall ceiling on how much debt the Treasury can issue. In the past, Congress has raised that ceiling to whatever it needed to be to match the previously approved taxes and spending as a matter of course.
Now, House Republicans are viewing the debt ceiling differently. They are treating the debt ceiling–and the need to raise it–as a lever through which to try to win battles over spending that they lost in previous negotiations. They want to not pass an increase to the debt ceiling unless they get some major concessions from Democrats on cutting spending—concessions that Democratic senators and the White House say are non-starters.
When the Treasury runs out of tricks it can deploy to avoid the debt ceiling next month, the president is in a bind: Congress has ordered him to spend more money than it has ordered him to tax. It has ordered him not to issue Treasury debt in excess of the $16.4 trillion cap. And 200 years of history, the 14th amendment, and good sense argue against the U.S. government simply not making good on its debts.
All of which is why people have turned to the platinum coin option as a way out of those constraints, should Congress not pass an increase to the debt ceiling. It relies on legislation designed to govern the issuance of commemorative coins, which allows the Treasury secretary to mint platinum coins in any denomination. $1 trillion, or $100 billion, or whatever giant number you may choose is, it might be noted, any denomination.
A couple of the widespread objections don’t hold water. So long as the Federal Reserve does its job, the platinum coin would not be inflationary. In the current ultra-low interest rate environment, the Treasury depositing a $1 trillion coin at the Fed would not affect the supply of money in the broader economy any differently from it issuing $1 trillion in Treasury bills. Nothing about the platinum coin would prevent the Fed from hiking interest rates when it sees an inflationary threat on the horizon.
That’s not to say a platinum coin gambit would be much fun for the Fed. Chairman Ben Bernanke and New York Fed president Bill Dudley would face a moment of truth, and scores of Fed lawyers would be working overtime, as the central bank had to decide whether to treat the $1 trillion coin as a legal deposit. The Fed in general hates to end up in the middle of political disputes, and this would be a highly uncomfortable spot.
The best reason to oppose the platinum coin idea is this: It is not the way we do business here in the United States. It is the kind of insane, seemingly extra-constitutional gambit one expects of banana republics, not the wealthiest and most powerful nation to ever stride the earth. It is demeaning to all of us.
The U.S. government has spent generations establishing the market for Treasury bonds as the deepest, most reliable, most credible in the world. It is hard to overstate how seriously the people at the Treasury Department and New York Fed (which acts as effectively the banker for the U.S. government) take their jobs. Everything they do is oriented toward clarity and caution; they want investors around the globe looking for a place to park their savings to know that the U.S. government isn’t trying to exploit them, only to offer a reliable, credible, and efficient market.
For example, the Treasury announces its schedule for auctions of new bond issues far, far in advance, and sticks to those schedules; on one level, the government may be able to get a better deal if it behaved opportunistically, like a private investor, and did surprise auctions to sell off bonds when prices were uncommonly high. But the judgment is that the U.S. government is better off in the long-run if the Treasury bond market is predictable and global investors don’t feel like the Treasury is trying to game the system.
The platinum coin idea is nothing if not gaming the system. In that sense, it seems to throw out two centuries worth of credibility that the U.S. government has managed. The interesting question is whether that would show up, either immediately or over time, in the form of higher borrowing costs. I suspect it would, even if not immediately, but this is the realm of guesswork.
But ultimately, the platinum coin is an idiotic solution to an idiotic problem. Congress has given the Treasury a series of mutually exclusive instructions. If Congress can’t pass a debt ceiling increase, the choices that Obama and the Treasury face will all be bad ones. Is suspending Social Security checks or payments to military contractors a more appropriate step than exploiting the platinum coin loophole? Both would have real consequences as well, either for seniors trying to scratch by or for government contractors trying to make payroll (not to mention more credit rating downgrades for the United States).
The platinum coin gambit could be terrible for the U.S. government’s long-term standing as a premier destination for global capital. This is a moment for Republicans to take responsibility for governing and to accept the fact that their leverage is limited with control of only one house of Congress. But if the alternative truly is default, a crazy coin option may indeed be less bad than the alternatives.