Economics, Pethokoukis

Would the trillion-dollar platinum coin finally make hyperinflation fears a reality?

Image Credit: Shutterstock

Image Credit: Shutterstock

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.

9 thoughts on “Would the trillion-dollar platinum coin finally make hyperinflation fears a reality?

  1. platinum coin never circulates, so its no more inflationary than government spending at current levels…

    its just a gimmick…has same effect as raising the debt ceiling..

  2. platinum coin never circulates, so its no more inflationary than government spending at current levels…

    The government buys stuff that it pays with credit drawn against that $trillion coin. If I just bought $1 trillion of goods like food, oil, tanks, etc., I suspect that the people who get paid for those goods will spend their ‘money’ on other goods or services as they typically do.

    I think that you really need to reexamine this foolishness again. The last thing Americans need is to destroy their currency and lose their reserve status.

  3. platinum coin never circulates, so its no more inflationary than government spending at current levels…

    The government buys stuff that it pays with credit drawn against that $trillion coin. If I just bought $1 trillion of goods like food, oil, tanks, etc., I suspect that the people who get paid for those goods will spend their ‘money’ on other goods or services as they typically do.

    I think that you really need to reexamine this foolishness again. The last thing Americans need is to destroy their currency and lose their reserve status.

    • again, it would be no more inflationary THAN raising the debt limit by the same amount, which will happen

      unless you think a US default will enhance our reserve status…

      personally, i dont like the gimmicky nature of this coin plan, but it does expose the ruse that government spending is somehow limited by the amount of taxes it collects or the amount of debt outstanding…

      • again, it would be no more inflationary THAN raising the debt limit by the same amount, which will happen…

        unless you think a US default will enhance our reserve status…

        How about just cutting spending? The size of government has exploded over the past two decades and it is about time the trend was reversed.

        personally, i dont like the gimmicky nature of this coin plan, but it does expose the ruse that government spending is somehow limited by the amount of taxes it collects or the amount of debt outstanding…

        Anyone with a brain can see the ruse for what it is. Anyone without one will keep voting for either of the two main parties and pretend that there is a difference. What is needed is a dose of reality that wakes up people before it is too late.

        • ‘How about just cutting spending? The size of government has exploded over the past two decades and it is about time the trend was reversed.’

          how about just raise taxes? tax rates have been decimated since the 50s. it’s about time we restore some fiscal sanity to the world.

  4. Could they mint similar coins and use them to pay interest and prinicipal on T-Bills?

    Those are issued by the treasury and then paid off by the treasury, correct?

    So, using the coin trick is a precedent. I’m sure foreign bond-holders will not worry about this possibility.

    Its one thing when the Fed buys some of the T-bills with created money…but another when the Treasury does it, no?

  5. Before we go completely off the “hyperinflationary” cliff, let’s keep in mind that the Federal Reserve does have many tools at its disposal to keep inflation in check, not the least of which is the ability to physically destroy money. If the Fed feels inflation is getting out of control, they can recall bills in circulation and actually destroy them.

    Now, I am not saying that this $1 trillion coin thing is the best option (or even a good option). I am just saying that hyperinflationary fears may be a bit premature at this point.

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