Jan 4 2013




Everyone has an idea on how to balance our budget, avoid increasing the debt ceiling and get us back on track. BusinessInsider.com is writing about an idea that originally was promoted by a blog and has since been advocated by a number of serious people. Here is the BusinessInsider.com article.

The premise of the idea is this: Although the Treasury can't just create money out of thin air to pay its bills, there is a technicality in the law that says the Treasury has special discretion to create platinum coins, and the thinking is that Tim Geithner could make the coin and walk it over to the Federal Reserve and deposit it in the Fed's account.

The first blog to really promote the idea was Cullen Roche's Pragmatic Capitalist. We jumped on it soon thereafter, as did others. Of course, once the debt ceiling was solved, people forgot about it.

But there's a new debt ceiling looming, and this time, LOTS more people are talking about it.

We noted our surprise back in early December that an actual 3rd party research firm brought up the idea.

Now it's going even more viral.

Paul Krugman discussed it yesterday.

In an interview with Capitol New York, Representative Jerry Nadler came out in favor of the solution (Nadler has an above-average understanding of economics in our experience).

Josh Barro at Bloomberg is now endorsing it, and that's spread a huge conversation about it among DC journalists and policy folks on twitter.

Barro explains why it's the perfect "solution" to the debt ceiling fiasco:

Hitting the debt ceiling isn't an option. It's no way to run the country, and Republicans know that. So, a debt-ceiling increase shouldn't count as a "concession," and it's nutty for Obama to have to give substantive policy ground to get one.

Monetizing deficits through direct presidential control of the currency, in lieu of borrowing, is also no way to run a country. It's silly, and it's perfectly legal. Agreeing not to do so is therefore the ideal "concession" for Obama to offer in return for Republicans agreeing to end the threat of a debt-default crisis.

This is basically the right way to think about it. Yes it's silly to think of funding yourself with a coin, but it's even sillier to think that defaulting might be a good idea, so you might as well do it.

One economics point must be addressed: Lots of people, when they hear the idea, say one of two things:

-This would cause massive inflation!

-Well if we did this, why not a $100 trillion dollar coin?

Neither of these are legitimate rejoinders.

This would not result in massive inflation, because we wouldn't have a gigantic injection of new money into "the system." That is only achievable through massive spending beyond which the economy can handle. But this loophole would in no way let the government spend beyond which Congress has allocated through the budget.

And the point about the $100 trillion coin misses the point as well. The current economic constraint is not what we can raise or spend, but rather a dumb law (the debt ceiling) that we would like to get around legally. A $1 trillion coin accomplishes this goal just as easily as a $100 trillion coin does. Remember, the constraint isn't money, the constraint is law.

So yes, this is very thrilling, and we hope Obama puts an end to this nonsense tomorrow by unveiling the coin.