When the going gets tough, the ideas get absurd and bizarre. No one said that. I just happened to 'coin' it after coming across one of the craziest things I have heard in recent times. It all about 'coining' a trillion dollar platinum coin that could 'supposedly' solve one of the biggest financial problems of our times.
The nub is this: The US government can't print currency. Only the Federal Reserve can. But the government can mint platinum coins of any denomination. So the wacky idea is that if the Republicans won't do a deal to raise the US debt ceiling and allow the Fed to print more money and prevent the economic from stalling, the US government can mint coins and get around the debt ceiling.
But before we get to that some background information is required here.
The budget deficit of the American government has been greater than a trillion dollars for the last four years. The budget deficit is the difference between what a government earns and what it spends.
In order to finance this deficit the American treasury department (or what we call the ministry of finance in India) borrows money. But there is only so much money going around to be borrowed. And with trillion dollar deficits, borrowing beyond a point is not possible.
So what does the government do? Common sense tells us that it can print dollars and finance the deficit. But the American government is not allowed to print money. Instead it borrows from the Federal Reserve of the United States (the American Central bank, the equivalent of the Reserve Bank of India).
Now where does the Federal Reserve get money to lend to the government? It simply prints it. The Federal Reserve as the central bank is allowed to print money. As John Truman Wolfe, author of Crisis by Design: The Untold Story of the Global Financial Coup, puts it: "How bizarre is it that instead of simply printing the money themselves, governments "chose" to borrow it from their respective central bank. The US is currently $16 trillion in debt-and the debt is growing at the rate of $49,000 a second! Last year's interest on the debt here was $454,000,000,000. Why borrow money from the Fed (who simply creates it out of thin air by making a book entry and clicking a mouse) when the government could simply print its own without borrowing it and paying interest on it."
The debt ceiling: There is a ceiling to how much the American government can borrow and it is $16.4trillion right now. This was breached on 31 December 2012. After this Treasury Secretary Timothy Geithner put in place some "extraordinary measures" that will give a headroom of round $200 billion and help the American government avoid a default on its maturing debt as well as continue meeting its various expenditures. The American government has reached a stage where it has to take on more debt to pay off previous debt. But with the debt ceiling being hit, more debt cannot be taken on. The American politicians have been unable to find a solution to this till date.
The loophole: The US Code Section 5112 states this: "The (Treasury) Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary's discretion, may prescribe from time to time."
The above section basically allows the American Treasury Secretary to mint absolutely any kind of platinum coin. When it comes to gold and silver coins, he is not allowed such a leeway. The Code prescribes the exact dimensions as well as weights of gold and silver coins that can be minted. In case of platinum coins no such prescriptions are made.
So what is the idea? This loophole allows the Treasury Secretary of the United States to get the US Mint to mint a platinum coin and deem it be worth $1trillion (or any big amount for that matter). The amount of platinum in the coin doesn't really matter. It could be one gram or one troy ounce (28.31 gm). Hence the face value of the coin (i.e. $1trillion) would have no link with the amount of platinum in it.
Having minted such a platinum coin, the Treasury Secretary can then use the coin to repay the money that it has borrowed from the Federal Reserve. The Federal Reserve would have to accept the coin simply because any creditor cannot refuse what is legally deemed to be money, when it comes to the settlement of a debt. And the $1trillion coin would be a legal tender.
Once the $1trillion coin is presented to the Federal Reserve, the total debt outstanding of the American government would come down below the debt ceiling of $16.4trillion. As on 2 January 2013, the American government had borrowed around $1.67 trillion from the Federal Reserve. And that way the American government could continue to borrow more.
The Krugman push: The Nobel prize winning economist Paul Krugman gave a push to the idea by recommending it on his blog a couple of days back. Krugman feels that even though the idea is silly it makes sense simply because the US Congress has the right to approve the spending bills but then it won't let the President to borrow money required to implement those bills.
As Krugman wrote, "we have the weird and destructive institution of the debt ceiling; this lets Congress approve tax and spending bills that imply a large budget deficit - tax and spending bills the president is legally required to implement - and then lets Congress refuse to grant the President authority to borrow, preventing him from carrying out his legal duties and provoking a possibly catastrophic default."
There are others who do not buy the idea at all. As Kevin Drum, a famous blogger, wrote recently: "Is this really the road liberals want to go down? Do we really want to be on record endorsing the idea that if a President doesn't get his way, he should simply twist the law like a pretzel and essentially do what he wants by fiat?"
The big danger in this case is that if something like this were to be implemented, the American government can easily keep getting the Federal Reserve of United States to keep printing money and keep repaying that money through issuing one trillion dollar platinum coins. That cannot be a good idea after all. A government which has the power to print unlimited amount of money, even though indirectly, is not something that world wants, specially given that the dollar continues to be the international reserve currency.
To conclude, it is 'absurd' ideas like this one that make me remain bullish on gold despite the recent attempts to discredit the yellow metal as being useless.
Vivek Kaul is a writer. He can be reached at firstname.lastname@example.org
Updated Date: Dec 20, 2014 15:09 PM