As the U.S. heads toward more political conflict over the national debt ceiling, liberal economist and New York Times columnist Paul Krugman believes he has found a simple trillion-dollar solution to stave off yet another potential economic crisis.
Writing on his blog, Krugman, somewhat half-serious, suggests that if the Republicans, who are looking for spending cut pledges to tackle the debt, would be willing to force America into default by refusing to vote to raise the debt ceiling, U.S. President Barack Obama should be willing to take this step.
"He will, after all, be faced with a choice between two alternatives: one that’s silly but benign, the other that’s equally silly but both vile and disastrous. The decision should be obvious," he wrote.
The debt ceiling is the government's borrowing limit that can only be raised thorough congressional authorization.
Krugman notes that a legal loophole allows the Treasury to mint platinum coins in any denomination it chooses. By minting a $1-trillion coin, then depositing it at the Federal Reserve, "the Treasury could acquire enough cash to sidestep the debt ceiling — while doing no economic harm at all," Krugman wrote.
And Krugman isn't the only one raising the idea. New York Democratic congressman Jerry Nadler has expressed support for it and a formal White House petition has been started, as has a Twitter hashtag (#Mintthecoin)
But is this a plausible course of action?
"The platinum coin is a silly, but elegant, solution to a silly problem," Mike Moffatt, assistant economics professor at Western University's Richard Ivey School of Business, wrote. "The platinum coin proposal gives the Obama administration an alternative if House Republicans are completely intransigent on the debt ceiling issue."
Antony Davies, an economics professor at Pittsburgh's Duquesne University, took a dimmer view. He said minting a trillion-dollar coin is the same as printing money, and is all part of the "money illusion."
"Money illusion is the [false] belief that one is better off when one has more money," he wrote. "It certainly sounds reasonable until we distinguish between 'money' and 'purchasing power.'"
For example, he said that if the government announced that everyone was to add a zero to their money, every dollar bill would become a 10, just as $1,000 in a chequing account, would become $10,000.
"Would you be better off? The answer is no. All that would happen is that businesses would add a zero to their prices. A 75-cent hamburger would cost $7.50," Davies said.
What makes money valuable, he said, is the goods and services money buys.
"Minting a trillion-dollar coin doesn’t change the amount of goods and services. Therefore, all the trillion-dollar coin does is to take the value of existing goods and services and spread it around a larger number of dollars – thereby making each dollar worth less. We call this inflation. Printing more money [or minting more coins] simply causes inflation."
Moffatt agreed that if there was no response from the Federal Reserve, the trillion-dollar coin move would be inflationary. But he said the Fed would almost certainly respond by taking an equal amount of money out of the economy, by selling some of the large inventory of bonds.
This, in technical terms, would "sterilize" the deposit, meaning there would be no impact on inflation, Moffatt said
Leaving nothing to chance, Oregon Republican Greg Walden said Monday he's planning to introduce a law that would bar the Treasury from minting such coin.
"This scheme to mint trillion-dollar platinum coins is absurd and dangerous, and would be laughable if the proponents weren’t so serious about it as a solution," he said in a statement. "I'm introducing a bill to stop it in its tracks."
