The trillion dollar trick

Of all the crackpot ideas that have been dreamed up, fiat currency — paper money which is valued only because governments say so — has to be one of the daftest.

The creation of a trillion-dollar platinum coin is, however, a strong contender for the title.

What follows is a tangled but incredibly important tale, one which tells you all you really need to know as to why gold — and perhaps cryptocurrencies or indeed any asset that is outside government control — are so important.

At its heart is the almost $29 trillion dollar (£21 trillion) US national debt, which is now nudging a legally fixed debt “ceiling”. The deeply divided US political class is engaged in an unseemly wrangle over this ceiling. Legally, the US is barred from running up any more debt without Congressional approval, hence the political headache.

It’s often mistakenly claimed (including by Janet Yellen in a column she published in the Wall Street Journal on 19 September ) that the US has never defaulted on its debt. But in 1934 the US defaulted on its 4th Liberty Bond, repaying the bond holders not in the gold it had pledged but in devalued paper dollars.

We have been here before, quite recently; in 2011 and 2013, Congress agreed to raise the debt ceiling at the 12th hour. That’s why many are rolling their eyes in boredom this time around.

But it might be different this time. American politicians are intent on exploring what The Economist calls “the true depths of partisan nihilism”. Out of this noxious brew might emerge the biggest sleight-of-hand ever perpetrated by a government, a trillion-dollar trick which pulls away fiat money’s cloak of respectability. A game of chicken is being played out in the US Congress and — not to over-dramatise — the financial stability of the world could be at stake. It’s a bit like the boy who cried ‘wolf!’ Eventually, when least expected, a wolf actually turns up.

Source: Visual Capitalist

The mind-boggling US debt

Why should this even be a topic for debate? Out of the group of wealthy countries in the Organisation for Economic Co-operation and Development (OECD) only Denmark and Poland have a hard legal limit on debt.

Other OECD countries like Japan, Canada, the UK, France, and Germany get along just fine without debt ceilings. They just pass laws setting up their tax and spending policies, and issue debt to make up the difference.

The US debt ceiling dates from 1917, when it was set at what now seems the absurdly small amount of $11.5 billion (£8.5 billion). Since 1945 the Congress and the President have raised that ceiling almost 100 times. Occasionally legislators, when they can’t agree as to what the new limit should be, suspend the debt limit — they’ve done that 7 times since February 2013. The most recent suspension began in August 2019 and ended August 2021. The debt limit is currently some $28.5 trillion (£21 trillion). The US Congress needs to agree to raise this limit — or default will happen. In the current Congress, the Democratic Party wants to raise the ceiling but the Republicans are saying they will block that.

This impasse is worrying some of the adults in the room. “Failing to raise the debt ceiling would be disastrous. It would result in severe negative consequences that experts are not capable of predicting in advance”, says the (non-partisan) Committee for a Responsible Federal Budget”, A default, or even the perceived threat of one, “could have serious negative economic implications. An actual default would roil global financial markets and create chaos, since both domestic and international markets depend on the relative economic and political stability of US debt instruments and the US economy”.

Right now, the US government is only able to pay its bills through what it calls “extraordinary measures”, a wonderful euphemism which means shifting funds around among different government departments. Janet Yellen, the US Treasury Secretary, wrote to Nancy Pelosi, the Speaker of the House of Representatives, in July, about the debt ceiling. She said that defaulting on the debt “would cause irreparable harm to the US economy and the livelihoods of all Americans”. She added that no-one can really tell how long the “extraordinary measures” might last. The Congressional Budget Office (CBO) says the government might run out of cash this month or next. Yellen has recently said the money will start to run out on 18 October.

A very big coin

But — hey presto! The Treasury has a ‘get out of jail free’ card to hand. It has the legally enshrined right to mint platinum coins of any size and denomination. It could easily print one with a face value of $1tn, deposit it at the Federal Reserve, and thus immediately add $1tn to the Treasury’s bank account, giving it breathing room to avoid the debt ceiling fight.

It is perhaps appropriate that the land which gave us Mickey Mouse should have the kind of legal loophole which could turn this trillion-dollar trick. There is a Twitter hashtag — #mintthecoin — which has been around since at least 2013. One such coin probably wouldn’t be enough though, given the speed at which the US is racking up debt. Here’s a proposal — why not mint a platinum coin with a face value of $30 trillion? If you are going big, then go really big.

According to one academic paper on the super-coin: “one could easily imagine the Treasury Secretary deciding to mint and deposit a $1 trillion platinum coin at the Fed on a rainy Friday afternoon after the markets had already closed, with no prior announcement, and then conducting a public education and PR blitz over the weekend until the issue had been discussed to exhaustion by Monday morning… The President and Treasury Secretary [would be able] to declare victory in terms of averting the debt ceiling crisis before anyone even had a chance to complain about the particular methods employed to achieve that victory… from a constitutional perspective it is a scalpel compared to the sledgehammer of the President and Treasury Secretary explicitly breaching the debt ceiling. Indeed, Treasury Secretaries have historically employed similar creative accounting manoeuvres precisely in order to avoid breaching the debt ceiling… [it] can be seen as merely the latest iteration in a long tradition of fiscal financing gimmicks”.

Does this matter?

Is this trillion-dollar trick being taken seriously in the US? Surprisingly, yes.

The list of the great and the good backing the trillion-dollar coin trick ranges from Nobel Prize laureate Paul Krugman through Congress Democratic Party members Rashida Tlaib and Jerry Nadler to the former director of the US Mint, Philip Diehl.

According to Diehl: “The Mint strikes the coin, ships it to the Fed, books $1 trillion, and transfers $1 trillion to the treasury’s general fund where it is available to finance government operations just like with proceeds of bond sales or additional tax revenues. The same applies for a quarter dollar.

Once the debt limit is raised, the Fed ships the coin back to the Mint, the accounting treatment is reversed, and the coin is melted. The coin would never be “issued” or circulated and bonds would not be needed to back the coin”.

There are some options other than the trillion-dollar trick. President Biden could invoke the 14th Amendment, which states in part “the validity of the public debt of the United States, authorised by law… shall not be questioned” and simply declare the debt ceiling unconstitutional. Or a new class of bond could be created to fund the government while it cannot issue Treasury bonds. Janet Yellen has said she backs the abolition of the debt ceiling, which seems a rational position.

It is unthinkable that the Democrats and Republicans will not cobble together some deal to push the debt ceiling down the road, even though the net effect of that will simply be the deferral of the US Dollar’s time of reckoning. It would be logical to abandon the debt ceiling rather than face this regular recurring nightmare of a Washington snarl-up and weeks of wasted time. But that would also mean the fiscal profligacy of this mighty nation would be freed to run completely wild.

Whatever happens, if the debt ceiling is raised, abandoned, or a trillion-dollar trick is perpetrated, the US debt is on track to reach more than $32 trillion (£23 trillion) by this date in four years’ time. By which time the US will be headed for a fresh presidential election and, no doubt, another debt ceiling crunch.