Can a trillion dollar coin solve the debt ceiling crisis?
WASHINGTON — The distance between the debt limit between Republicans and Democrats has raised questions about creative solutions to avert a crisis, including one that might seem unthinkable at first blush: Could minting a $1 trillion platinum coin make the entire problem go away?
What was once a fringe idea is now being presented to top economic politicians as a serious remedy.
Asked Wednesday about the idea that there might be another option if Congress failed to raise the debt ceiling, Jerome H. Powell, the chairman of the Federal Reserve, said that was not the case.
“There is only one way forward here, and that is for Congress to raise the debt ceiling so that the United States government can pay all of its obligations when they come due,” Mr. Powell. “Any deviation from that path would be very risky.”
Treasury Secretary Janet L. Yellen was unable to avoid the debt-limit crisis brewing back in the United States as she criss-crossed Africa last week, raising questions about the coin, which she dismissed as a “gimmick.”
Instead, Ms. Yellen two stern letters to Speaker Kevin McCarthy that outlined “extraordinary measures” she took to ensure the United States can keep paying its bills and urged Congress to “act quickly” to protect the nation’s full faith and credit by lifting the debt limit.
President Biden told Mr. McCarthy on Wednesday that while there was room for discussion on fixing the deficit, Congress would have to pass a debt ceiling hike without conditions to avoid a fiscal disaster. Mr. Biden and Mr. McCarthy met at the White House for more than an hour in a high-stakes discussion in which the federal government would exhaust its ability to pay its bills on time as early as June.
But the idea of a coin still has its fair share of supporters, and they’re not giving up.
Like political gridlock over the borrowing cap is hardenedthe notion that the finance minister could neutralize the debt limit drama with his currency minting powers has resurfaced, among other things on Twitter, where the hashtag #MintTheCoin is buzzing again.
Still, the feasibility of averting America’s debt crisis by minting a valuable piece of currency is far from clear. Here’s a look at the coin’s origins, how it can be used and the potential implications.
A most extraordinary measure
If Congress can’t agree in early June to raise the debt ceiling, which was capped at $31.4 trillion by the end of 2021, Ms. Yellen’s ability to use government accounting tools to delay a default could soon be depleted and the United States would be unable to pay all its bills on time.
This can cause a deep recession and potentially a financial crisis, shutting down large parts of the economy and preventing Social Security and Medicare recipients from receiving their money. Although Ms. Yellen has the power to move money around government accounts to delay a default, the government’s coffers will eventually run dry with no way to raise more tax revenue or borrow more money.
This is where the coin comes into play. Supporters of the idea believe Ms Yellen could use her authority to direct the US Mint to produce a $1 trillion platinum coin – or some other large denomination – and deposit it with the Federal Reserve, the government’s banker, which administers the Treasury’s “general account.”
Understanding the US Debt Ceiling
What is the debt ceiling? The debt ceiling, also called debt limit, is a cap on the total amount the federal government is allowed to borrow through U.S. Treasury bonds, such as bills and savings bonds, to meet its financial obligations. Because the US runs a budget deficit, it has to borrow huge sums to pay its bills.
Supporters of the coin say this would allow the federal government to draw on the funds as needed and continue to pay its bills until a deal was reached or until $1 trillion was spent and another coin must be minted.
Born out of a legislative loophole
The trillion-dollar coin concept first emerged in 2010 before the first major Obama-era debt ceiling fight. A musing in the comments of a popular economics and finance blog about the viability of minting such a coin to create money out of thin air and avoid default spurred a debate about creative ways to avoid a financial disaster.
The logic is that the language of a 1997 law Congress passed to help the U.S. Mint make more money from bullion sales gave the Treasury secretary broad discretion to mint platinum coins of any denomination. That power, supporters of the idea say, gives the secretary a way to continue meeting the nation’s financial obligations even as the government’s ability to continue borrowing has been frozen.
The idea caught the imagination of academics and pundits alike, leading to calls for social media to mint the coin and endorse columns from the likes of Joe Weisenthal, now a Bloomberg writer and podcast host, and Paul Krugman, the New York Times columnist, who declared in 2013 that if all else failed, “slap the damn coin.”
These days, the idea has broad appeal to adherents of modern monetary theory, an economic philosophy that argues that deficits should not be a constraint on government spending. It has also found support among some legal scholars like Rohan Gray of Willamette University College of Law, who regularly spars with coin critics on Twitter, arguing that the idea is less crazy than allowing the US to default.
“At least the possibility of a catastrophic cliff has been taken off the table,” said Mr. Gray about the coin.
Crisis averted or inflamed?
It is far from clear that such a move would calm global markets or preserve the US credit rating, which was downgraded after the 2011 debt limit standoff.
Mr. Gray suggested that such a unilateral move would most likely be challenged at the Supreme Court and acknowledged that bond markets could become nervous about deficit spending without issuing new bonds. (In that case, he suggests, the Fed might want to sell more of the bonds it has in its portfolio.)
For some, the notion that the coin is a safety valve makes the debt limit even more dangerous.
“It’s harmful to create the sense that something is there when there isn’t,” Jacob J. Lew, who served as Treasury secretary from 2013 to 2017 under the Obama administration, told The New York Times during the debt ceiling impasse in 2021. “Leaving opens the possibility of an accident.”
Mr. Lew said that when he was Treasury secretary, administration lawyers discussed alternatives to bypassing the debt limit during conflicts with Congress, but they concluded that none of those options were viable. If Congress doesn’t eventually raise or suspend the debt limit, he warned, it will lead to cascading problems and economic upheaval.
Could the coin finally prevail?
The most prominent skeptic is the current finance minister. Mrs. Yellen has repeatedly argued that the idea of minting a trillion-dollar coin does not warrant serious consideration. Asked about it in 2021, she also warned that such a move would interfere with the Federal Reserve’s independence.
In an interview with The Wall Street JournalMrs. Yellen suggested the Fed might not even accept the coin.
“It’s really not by any means taken for granted that the Fed would do that, and I think especially with something that’s a gimmick,” she said. “The Fed is under no obligation to accept it. There is no requirement on the part of the Fed.”
Still, those who believe the coin should be taken seriously were encouraged that Ms. Yellen did not question the legality of the maneuver.
Philip N. Diehl, who was director of the US Mint from 1994 to 2000, said Ms. Yellen’s answers were predictable because the mint was not the preferred way of dealing with the debt limit. However, he said she would do well to keep an open mind.
“As Treasury secretary, I wanted to have a solution in my back pocket that I would be able to pull out to avoid default,” said Mr. Diehl, who was also Treasury chief of staff during the Clinton administration.
Sir. Diehl helped write the legislation in the 1990s that ultimately gave the secretary the power to mint the coin. He believes it’s a viable solution, but said he hoped it would never be tried.
“I hope common sense prevails,” he said.