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With the debt ceiling debacle looming, there's a move afoot to urge the Treasury to skirt the painful spectacle with a sleight of hand, by using its power to mint money to create a single, $1 trillion platinum coin.
It turns out the magic trick would be a lot harder to pull off than its proponents would have you believe.
The idea was originally floated in July 2011, the last time lawmakers deadlocked over what had been, until then, a routine vote on the government’s borrowing authority. Now that political battle lines are being drawn as the Treasury once again needs to raise its credit limit, the idea is gaining momentum again.
In the past week, a petition on the White House website has gained more than 6,000 signatures in support of the idea. Blog posts are popping up for and against.
An Oregon congressmen has vowed to introduce a bill banning the magic coin. No less than Nobel Prize-winning economist Paul Krugman has endorsed the idea.
“By minting a $1 trillion coin, then depositing it at the Fed, the Treasury could acquire enough cash to sidestep the debt ceiling — while doing no economic harm at all,” Krugman explained.
In theory, the idea has a lot going for it.
Magic coiners say their goal is to eliminate a repeat of the July 2011, near-self-induced default by the U.S. Treasury. That last debt ceiling go-around crashed the stock market, cost the U.S. its Triple-A credit rating and produced the still ticking “fiscal cliff" budget time bomb that has justifiably sapped business and consumer confidence for months.
The government once again is bumping up against its credit limit, which it's expected to hit sometime next month. The exact date is hard to nail down because, just like a household having trouble paying the bills, the Treasury can juggle a bit to stretch its dwindling tax dollars. It's also hard to predict the flow of fresh receipts as taxpayers begin filing their 2012 returns.
Contrary to its critics' fears, the magic platinum coin would not fuel runaway government spending. If the idea worked, the Treasury would only be allowed to write checks against the coin for expenses already authorized by Congress. No more.
Nor would the minting of the magic coin spark runaway inflation. The coin wouldn't be introduced into circulation, so it wouldn't devalue the bills and coins already flowing through the economy. (Even if it were allowed to circulate, it’s hard to imagine it changing hands very often.)
So far, so good. Actually creating the coin, though, wouldn't be as simple as its proponents would have you believe.
For starters, there isn't enough platinum in the world – either above or below ground – to create a $1 trillion coin.
There’s roughly 3.2 million ounces of platinum in the world, according to estimates by the European Union. At the current market price of about $1,500, that comes to roughly $500 billion, or enough for about half a magic coin. (This is also, by the way, why the world will never return to the gold standard. There’s not enough gold to back the paper wealth created since the U.S. closed its gold window for good in 1971.)
Even if you could scrounge up enough platinum, you’d be looking at a really big coin. At $1,500 an ounce, you’d need a little more than 40 million pounds of platinum – which works out to about more than 1,000 cubic yards of the precious metal. If proportioned like a quarter, the magic platinum coin would be (roughly) five and a half feet high and about 76 feet in diameter. Not something you could use at the laundromat.
But the “magic” of this trick, say its backers, is that the coin can be any size you like. It doesn't even have to be worth $1 trillion. Thanks to an obscure clause in the U.S. Code, specifically Title 31, Subtitle IV,› Chapter 51, Subchapter II, paragraph 5112(k), Treasury Secretary Timothy Geithner can direct the U.S. Mint to create a platinum coin in any denomination he so chooses. At anytime he likes, no questions asked.
That means the magic coin could be as small as a dime – which works out to about an ounce of platinum, worth $1,500. But even if the government declared the coin worth $1 trillion, it still wouldn't get very far trying to pay its bills with it, according to Drew Matus, an economist at UBS.
“If the government made a wooden nickel and carved $1 trillion on it and hands it to you, are you going to take it?” he said.
This is where the Treasury pulls off its most ingenious sleight of hand, according to the platinum coin crowd. Secretary Geithner simply sends the coin over to the Federal Reserve and swaps it for cash – just like the paper securities the Fed routinely buys from the Treasury. Presto! Uncle Sam now has another $1 trillion in cash to pay the bills.
To be sure, the Fed has pulled some unusual stunts since the financial collapse of 2008, including mopping up billions of dollars worth of toxic mortgage bonds to clear them out of the system. To do so, Chairman Ben Bernanke and his colleagues had to reach deep into the 90-year-old Federal Reserve Act to a previously unused clause that gives the central bank broad powers “under exigent circumstances.” (A Treasury default would probably meet that definition.)
But the rule (Section 13, paragraph 3) says only that the Fed can lend out “notes, drafts, and bills of exchange.” Nothing in there about taking platinum as collateral. When asked to clarify whether the central bank would accept the magic platinum coin, Fed officials said they were unable to comment on hypothetical cases.
If the Fed won’t take the coin, debt ceiling magicians have one more trick up their sleeve. Under the Fourteenth Amendment, they argue, the president has the power to declare the entire borrowing limit process unconstitutional.
That idea also came up during the last debt ceiling debacle but was dismissed as too extreme. Some 18 months later, the idea isn't so radical to some congressional leaders, include House Minority leader Nancy Pelosi, D-Calif.
“I were president, I'd use the 14th Amendment, which says that the debt of the United States will always be paid,” she told CBS "Face The Nation" on Sunday.
Under this plan, the Treasury would simply continue churning out paper debt, sell it to investors and use the cash to pay its bills. But it’s not at all clear those investors would go along with the idea, said Matus.
“As an investor, I don’t want to own a piece of debt that might be ruled illegal three months in the future,” he said.