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.

The Federal Reserve is an incredibly complicated pseudo-business/pseudo-governmental entity.  Whenever you have a complicated entity that very few people can understand, you have simplistic views of the entity that dominate.  Many Republicans and Libertarians will have you believe that the Federal Reserve is the epitome of all that is evil about the Federal Government.  They would like governmental economics to behave exactly like familial economics does.  They would like money to be backed by something tangible like gold.  This is magical thinking.  Gold backed securities may work fine in normal economic conditions, but they also hamstring efforts to fix economic issues in non-normal economic conditions.  And we are almost always in non-normal economic conditions.

Take, for instance, the tripling of the monetary base that has occurred in the last decade.  Under normal economic conditions, this would prove disastrous to the economy.  Under current economic conditions, when we are in a liquidity trap, inflation barely rears its head at all.  Another benefit to the printing of all that money?  The Federal Reserve made a record profit in 2012!  They made over $91 billion.  Even better, most of that profit,  $89 billion, went right back to the Federal Government!  All that money that is being printed is being put to use and making us a giant profit.

Given, that $89 billion only represents one month of money that will be printed in the coming year, but it is things like this that often go over the heads of anti-Fed agitators.  That money that is being printed will continue to be put to use and will continue to make us money as long as the Fed continues to buy the debt.

Don’t worry if this doesn’t make sense to you.  I only marginally understand all the intricacies of how this works.  Maybe this will help.  Say the Federal Government pays you $100,000 to perform work.  You may think that the Federal Government would then be out $100,000.  You would be wrong.  You are taxed on that $100,000.  Let’s say your tax rate is 20%.  That means that you’re really only getting $80,000.  So the Federal Government gives you money and almost immediately takes some of it back it back.  That is the gist of the relationship between the Federal Reserve and the Federal Government right now.

This is also why infrastructure spending is such a no-brainer.  It requires hiring a lot of workers and a good percentage of that money the Federal Government gives to those workers comes right back to the government!  All that and it improves conditions to grow the economy!