What We Learned From the Trillion Dollar Coin Debate

The debt ceiling debate reached a new level of absurdity when some pundits began tossing around the idea of a $1 trillion coin. Instead of advocating for spending cuts to avoid hitting the $16.4 trillion debt limit, proponents of the one trillion dollar coin believe that the Federal Reserve just needs to create more money. They want the U.S. Treasury to mint a platinum coin, declare it worth $1 trillion, and then deposit it in the Federal Reserve, which will then credit the Treasury’s bank account with one trillion dollars.

Voilà! The federal government has another trillion dollars to spend.

Many have asked, “can they actually do that?” Well, the U.S. Treasury has rejected the idea—so it won’t mint any trillion dollar coins. The politically divisive plan would generate too much bad press for the current administration for it to ever happen. But I welcome the discussion about the one trillion dollar coin because it has sparked a broader debate on the Federal Reserve’s funny money.

Some were shocked to find out that minting a one trillion dollar coin does not require $1 trillion worth of platinum. That would be impossible as it would require over 17,000 tons of platinum, which is more than all of the platinum ever mined. The U.S. Treasury could mint a coin with the tiniest amount of platinum and then stamp $1 trillion on it. Or $2 trillion. Or $100 trillion.

How is this even possible? Austrian economist Robert Murphy writes that:

The Federal Reserve has the power to buy whatever assets it wants at whatever price it wants. In principle, Treasury Secretary Geithner could sell a paperclip to the Fed for $2 trillion. The Fed would simply write a check made out to the Treasury, drawn on the Fed itself.

When the Treasury deposited this check with its own bank — which just so happens to be the Fed — then its own “checking account” balance would go up by $2 trillion. [Emphasis mine.]

Why stop at a $1 trillion coin? Why isn’t Paul Krugman advocating a $16 trillion coin? Deep down, I hope, advocates of the coin gimmick realize that rampant inflation would significantly devalue the dollar and cause the prices of goods and services to skyrocket.

But here’s the interesting thing: the Federal Reserve doesn’t even need any platinum coins or material goods to print more money. It simply prints money out of thin air all the time and there is no limit on how much it can print. Since the financial crisis hit in 2008, the Federal Reserve has created more than two trillion dollars. Economics Professor Laurence Kotlikoff explains that the Fed has done the one trillion dollar coin trick before—just without the coin:

Indeed, over the past five years, the Treasury has, in effect, done its $1 trillion coin trick twice.

Come again?

Well, substitute a $2 trillion piece of paper called a Treasury bond for the platinum coin.  Suppose the Treasury prints up such a piece of paper and hands it to the Fed and the Fed puts $2 trillion into its account.  No difference right, except for the lack of platinum.

It makes you wonder why such outrage about the trillion dollar coin in the mainstream press—but not a lot of outrage about our current monetary policy. Professor Kolikoff goes on to say:

In 2007, the monetary base – the amount of money our government printed in its entire 231 years of existence totaled $800 billion.  Today it totals $2.8 trillion.  And it increased by this amount via the process just described – the Treasury’s effective minting out of thin air two $1 trillion platinum coins.

Perhaps we owe the advocates of the trillion dollar coin a thank you for highlighting the problems with our current monetary problem. More people are now aware that the Federal Reserve prints money out of thin air– the dollar is not backed by anything, it only has value because the government says so.

Enough with the fake funny money… is it time to End the Fed? Let us know in the comments below.

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