Incredibly, the idea of the US government minting a trillion-dollar platinum coin to evade the debt ceiling seems to be gaining traction. This despite that it amounts to a mega-monetization of the US debt. As economist Josh Hendrickson points out at his must-read blog, The Everyday Economist: “To put it bluntly, large-scale debt monetization is bad. This is traditionally how hyperinflations start.”
But coin proponents, such as Paul Krugman, don’t seem much concerned since President Obama obviously would make it clear that the supercoin would not circulate, would not lead to a long-term change in the money supply, and would be a temporary situation. Henderickson responds:
An announcement from the president that the increase in the money supply isn’t permanent does not guarantee that the minting of the coin is seen as such. In order to believe that the money supply would not increase, we would not only have to believe that the Treasury would commit to borrowing money in the future once the debt ceiling was lifted, but also that the Treasury would borrow enough money to finance the previously financed cash payments necessary to enable them to withdraw the $1 trillion coin.
In other words, we would have to believe that the Treasury could perfectly commit itself to actions it would prefer not to take. Or we would have to assume that the Federal Reserve would conduct large scale asset sales to prevent increases in the money supply.
Put differently, in the midst of conducting large scale asset purchases, the Fed must commit to large scale asset sales to prevent the money supply from growing by more than they wish as a result of the minting of the coin.
The policy would not only tie the hands of monetary policymakers, but forcing the Federal Reserve to conduct such policy is a threat to its independence. And if inflation expectations became unanchored, this could exasperate the effects of the increased money supply and the coin could be particularly harmful.
Advocates think that it gives the president an upper hand in debt ceiling negotiations. However, all it does is increase the stakes of the chicken game. The platinum coin is a bad idea.