We are, once again, quickly running up to the debt ceiling. And Republicans are, once again, holding the economy hostage by demanding draconian economic cuts in order to raise the debt ceiling. It’s like deja vu all over again.
An interesting, though inelegant, solution to this problem is for President Obama to authorize the minting of a $1 trillion platinum coin and have the Federal Reserve buy it. This is because there is a law that authorizes the President to mint only platinum coins in any denomination he so desires.
The debate for and against it is absolutely fascinating. Some say that it is illegal. They are clearly wrong. Some say that it’s immoral. They have a better argument, but it’s certainly less immoral than defaulting on the debt in an attempt to score political points. Some say it’s a bad idea, which it is, but see the prior sentence for why it’s less bad than the alternative. Some say that it goes against the spirit of the law. They are almost certainly right. The platinum coin law was almost assuredly meant for seigniorage and not for increasing the debt limit.
Which brings us to the fascinating topic of seigniorage. Take a look at that $1 bill in your pocket. How much is it worth? Most people will say $10. They are only partially correct. It’s actually worth about 3 cents in materials and labor. The Federal Government just makes a promise that that 3 cent item will always be worth $1. Coins work the same way. The Federal Government will mint a $1 coin commemorative coin that costs them pennies and sell it for $1. They then pocket the difference since the coin will, in all likelihood stay out of circulation. The Federal Government makes around $25 billion a year this way. So if Obama goes the $1 trillion commemorative coin route, it will probably show on the books as a $1 trillion seigniorage profit. Strange days indeed.