Could a $ 1,000 billion platinum coin save the US economy?

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The United States could end up with a big problem in the coming weeks. According to Treasury Secretary Janet Yellen, the Treasury will run out of money on October 18.

One proposed solution to this crisis is to strike a platinum coin worth $ 1,000 billion.

How can the United States run out of money?

In the United States, tax rates and expenses are set by Congress. When the amount of spending is less than the amount of taxes collected, the government borrows money, by selling bonds, to have enough money to spend.

This is all relatively normal and this is how most governments work.

The United States, however, has a limit on the amount of money it can borrow which is set by law, regardless of the budgeting process.

This means that every once in a while the country finds itself in a place where legally it has to spend more money than it has, but is also not allowed to borrow money.

This “debt ceiling“, as it is called, potentially creates a situation where the United States would be unable to meet its obligations. This includes things like government salaries, veterans benefits, and Social Security checks, but more importantly, interest on government bonds.

When an issuer is unable to pay the interest on the bonds, this is called a default. The faults have a number of implications.

First, interest begins to accrue at a penalty rate of 6% per annum, making any potential catch-up payments much larger than normal interest payments.

Second, borrowers may be less likely to lend money to an issuer with a history of default. This means that borrowing costs would likely be higher in the future.

US Treasuries, bonds and notes are not just any bonds however, they play an important role in the global financial system. If banks and money market funds are the plumbing system of the global financial system, treasury bills make up most of the water.

While it’s impossible to know exactly what would happen in the event of a default, the potential fallout is severe enough that most experts think it’s best to avoid at all costs.

How did we get here?

The last big showdown, in 2011, coincided with a nearly 20% drop in the S&P 500. Since then, there have been a few relatively minor skirmishes around the debt ceiling, but nothing quite like the showdown. of 2011, nor to our current situation.

The debt ceiling has been suspended three times under the Trump administration, all three with bipartisan votes. In these cases, rather than voting to increase the limit, the bill said that the debt ceiling did not matter until a particular date, when it would be reinstated regardless of the debt. then current. The last of those suspensions ended earlier this year and the Treasury paid bonds from reserve funds and used other “extraordinary measures” to keep things funded since then.

Republicans in the Senate blocked bills that would raise the debt ceiling, voting against a measure just yesterday. GOP caucus leader Mitch McConnell has repeatedly said his party will not vote for a bill to raise the debt ceiling, thus preventing such a bill from being passed under normal rules of the Senate, which require 60 votes to end debate and allow a real vote on the legislation.

#MintTheCoin

The idea of ​​a platinum coin was first popularized during the 2011 crisis, but it was mostly an idea promoted on social networks and which had little success with elected officials.

Under the Currency Act, the Treasury has the power to mint and issue platinum coins in any denomination desired by the Secretary of the Treasury. Supporters of the coins say such a coin could then be deposited into the treasury account at the Federal Reserve and used to redeem and withdraw treasury bills, which would reduce the amount of outstanding debt and free up debt. place under the ceiling.

The idea of ​​using a platinum coin to fund the government has been proposed more recently as a way to fund Covid relief, but the ABCAct has not gone anywhere in Congress.

Should it be $ 1,000 billion?

No, the coin can be any denomination chosen by the Secretary of the Treasury, $ 1,000 billion is just a very large number that would provide great borrowing capacity.

What big room are we talking about?

Size doesn’t matter. Dimes are smaller than Nickels, but are worth more. The dollar value of the coin is set by the Secretary of the Treasury, not by the size of the coin or the amount of platinum it contains.

Is it legal?

Incredibly, it is absolutely legal for the Mint to do this. There is no legal restriction on the total quantity of coins that the Mint may issue on behalf of the Treasury. The Mint may issue coins in such amounts as the Secretary deems necessary to meet the needs of the United States in accordance with the Currency Act.

Would that make Congress foolish?

Every penny of the current debt, as well as billions in additional spending has already been approved by Congress. Is having a separate law that prevents the treasury from doing what Congress told it to do in the budget foolish?

What is the probability?

Probably not very likely. Washington’s leaders would prefer to treat the debt ceiling the traditional way, but as the deadline draws near, it’s unclear what kind of extraordinary steps the Biden administration could take to avoid a default.

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