WASHINGTON, DC, January 10, 2013 — The trillion-dollar platinum coin is a silly idea. Everyone thinks so. So why are people starting to take it seriously?
If Congress doesn’t raise the debt ceiling in two months, President Obama will be faced with an array of unpleasant options:
1. He might invoke Section 4 of the 14th Amendment. “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.” That is, Obama might majestically walk out of the room and declare the debt ceiling unconstitutional, and his intention to pay American debt whether Congress gives him the authority or not.
This is the so-called “nuclear option.” It would produce spectacular political fireworks and demands for Obama’s impeachment. The political crisis would end Obama’s ability to work at all with Congress for the rest of his term, and he won’t do it.
2. He could sell the gold in Fort Knox. While legally within Obama’s authority, this would create an ugly image problem for the United States. The sale might be temporary, but it would look unpleasantly like a national trip to a pawn store. Obama won’t do it.
3. He could pick and choose which bills to pay from tax revenues. The United States doesn’t have to default on its debt just because it can’t borrow money; it still has income. We might have to start shutting down non-vital government services and scaling back vital ones, but the government receives over $2 trillion in tax income every year. That’s more than enough to pay our debts.
Obama might do this for a short while. He might start by putting federal projects and employees in Republican districts at the bottom of his priorities, or he might start shutting down the military. Either way, Republicans would feel immediate pressure to do something to restore the funding.
4. He could default on U.S. debt. That option would be catastrophic. It’s also unconstitutional.
5. He could order the minting of high-denomination platinum coins.
An idiotic or silly idea can be made to look good in comparison to even worse ones. As Nobel Prize winning economist Paul Krugman writes, President Obama will be faced with [at least] two choices if Republicans threaten not to raise the debt ceiling, “one that’s silly but benign, the other that’s equally silly but both vile and disastrous.”
So is this silly idea legal?
Yes. A 1997 law, 31 USC § 5112 - Denominations, specifications, and design of coins, specifically permits the Treasury to “mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the secretary, in the secretary’s discretion, may prescribe from time to time.”
The law puts no limits on the Treasury’s ability to mint platinum coins in any denomination. Furthermore, the coin need not contain metal equal in value to the face value of the coin. The law doesn’t allow the Treasury to print money to pay for the national debt, but it does allow the above exception for platinum coins.
So how would the platinum coin allow the President to avoid the debt ceiling? The Treasury would mint the coin, it would be deposited at the Fed, and the government would thus have enough cash to avoid the debt ceiling. When Congress eventually raised the debt ceiling, the government could borrow the money to buy the coin back and melt it back into bullion. It would be as if the coin never existed.
Is this silly, legal idea an idea worth pursuing? That depends. How seriously do you want the world to take the U.S. government? You might argue that our fiscal reputation is already in tatters, but that misses the truism that no matter how bad things are, they can always be worse. There’s something ridiculous about the platinum coin solution, so astoundingly ridiculous that the ridiculousness would stick to all involved.
Krugman asserts that this solution would do no economic harm at all. He’s wrong. The math may work out to show no net effect, the phase diagrams may all settle back at equilibrium, but ultimately money and an economy are about image and trust.
A paper dollar has value because everyone accepts that it has value, not because there’s gold in Ft. Knox to back it up. We accept money for payment of goods and services because we think others will accept it in turn. Make a country’s currency manipulations ridiculous, and the taint will never go away. We may not be able to quote a dollar value and say, “here’s the cost,” but it’s there, like a bad reputation.
Donald Marron, a former acting director of the Congressional Budget Office, has suggested pulling this stunt with smaller-denomination coins, perhaps $25 billion. He argues that the appearance would be ridiculous, but not as eye-catchingly ridiculous as the trillion-dollar coin. And if the government takes to minting million-dollar coins to pay defense contractors and others who do business with it? At what point is the currency revealed as a joke?
In two months Congress and the President should be able to come up with spending cuts that will permit resolution of the debt ceiling without turning the process into a crisis. If they can’t, we’ll get a silly, idiotic outcome, and it will be destructive.
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