how the $1 trillion coin minted by the United States and deposited into the treasury doesn’t help resolve the outstanding debt without ramifications.
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Well, you can’t spend that coin, so it’s pretty pointless. The US has been running a deficit since the Clinton administration and while the coin could make the treasury look better, it couldn’t be used to pay off the bonds the treasury issues, so it doesn’t actually do anything.
It would cause ramifications.
Understanding what money actually is and why we have a debt should come first before this ludicrously stupid idea. Why didn’t anyone think of it before? It’s because you’re just kicking the can down the road. Debt has to be repaid at some cost, whether to the borrowers or the lenders. By printing a $1 trillion coin, you’re putting the onus on the primary users of the currency, making their existing money worth less, and therefore requiring them to work harder to earn the same amount of money to acquire the same necessary goods.
The value of money is based on it being guaranteed by assets the market value at least at the value of the money it guarantees.
This $1 trillion coin will not be worth $1 trillion on the market, so using it to guarantee $1 trillion means that there’s more federal reserve money than federal reserve assets at market value. That will reduce the confidence of people in the US dollars, making it being used less internationally and creating inflation.
If the US does it too much, it will create hyperinflation, that is when monthly inflation is at least 50%, so the value of money goes down by at least 130 times a year. What you can buy with $1 now will cost $130 dollars minimum after a year of hyperinflation.
The Federal Reserve would deposit the coin in the Treasury, thereby reducing the national debt and postponing or eliminating the need to raise the U.S. debt ceiling….
Think about it like your rent is due, your need to hit groceries and you have no money, then all of a sudden you find $100. Basically it’s a loophole, that the Fed isn’t entertaining
Every comment here is wrong.
First, we need to understand the problem. It is really easy to get the order of things wrong. The US government already ordered so much spending, which, yes, is greater than the taxes it brings in. In order to finance the spending the US issues debt, that is sought after and wanted by many parties both inside and outside the US. Since Congress ordered this spending, the government has no right not to spend the money.
The debt limit is a relic of WWI where congress went from approving every individual bond issued by the US to telling the treasury, “you do it, just don’t go above this limit without our say so”. Now, the US government has hit that limit and needs permission to go higher since the spending has already been ordered. This is analogous to buying something on a credit card and deciding at a certain point you have too much debt, so you just aren’t going to pay the bill. Not that you will spend less, but that you won’t pay for what you already bought.
This long explanation is to say the only problem with the US government paying its debt is not lack of funds or willing creditors it is an arbitrary limit that was decided on for no real reason.
The coin gets around this arbitrary, made-up limit by increasing the assets the US officially has, so the net debt is lower, and thus, the debt limit has not been reached. If it is legal it will have no, zero, knock on effects to the economy. Of course, that isn’t going to happen because if it did, then Congress could just normally raise the limit normally and the coin would not be necessary.
This doesn’t resolve outstanding debt.
It solves the debt CEILING.
The debt ceiling is problem Congress created that only Congress can solve.
Congress during the Reagan/Clinton/Bush/Obama/Trump Era spending ran up the US credit card because no one wants to take out the political fallout for cutting programs or raising taxes.
But Congress ALSO passed a law, the debt ceiling, which is the credit card limit.
So Congress says “keep spending” but also caps the credit card limit. And luckily for them, because the President actually needs to execute on this, he gets the blame.
So what can the President do? He can stop paying federal employees, who will sue him for stolen wages. He can stop paying government contractors (default), who will sue him (furlough/sequestration). He can stop paying interest on existing bonds (default), who will sue him. Or he can beg Congress to solve a problem they caused by raising the credit card limit (raise the debt limit).
He can try to cook the books by printing $, and deposit it in the bank (the Federal Reserve). This technically reduces the credit limit by adding $1 trillion jn assets.
To hopefully avoid hyperinflation, he doesn’t actually spend this $, but instead continues to borrow $ through bonds.
This is legally questionable, but it’s fundamentally a way to cheat the books because it’s easier than getting Congress to do its job.
The only way to fix the budget is for Congress to actually cut spending or raise taxes. And the ultimately, this means cuts to Social Security, Medicare or the military, and raising taxes.
Money is tough and a lot of these answers miss the point. The debt ceiling is the dumbest thing in finance and it’s strictly political, not economic at all. It’s like if my partner refused to let me pay our joint credit card bill because she didn’t like the fact that I purchased a Persian rug that was out of our price range and didn’t match her tastes. I wouldn’t be able to go get a new credit card with the same terms from the bank because I didn’t honor my last agreement.
Money is a store of value, a medium of exchange, and up until 1971 it was generally backed by a fixed amount of gold held in a bank vault in Fort Knox or Manhattan or a few other hard-to-rob places. This gold standard was $35/ troy ounce (31.10 g), set in 1944 by some dudes in a ski hotel in a New Hampshire town called Bretton Woods.
In 1971 when Nixon took us off the gold standard (for a few reasons), the amount of dollars that the US Treasury could now mint was technically infinite.
What **didn’t change** between 1970 and 1971 was that money has to be **credible**. There are loads of historical banknotes in existence (German marks, confederate states dollars, etc.) that are valuable in the same way a baseball card is valuable, but not valuable in the sense that you can actually pay debts with them (well I guess technically you could, but that would be a form of bartering, and not payment.) These extinct bills are not credible because people ceased to believe they are worth anything because they think that other people don’t think they’re worth anything. If that sounds like a giant circular reference, you’re on track.
In 1970 the US dollar was credible because people believed we had the ability (which we probably did?) to exchange all dollars in the entire economy (plus or minus 1%) for an equal amount of gold because we had enough gold to do a physical exchange. In 1971 the money was credible because nothing bad happened when it was no longer backed by gold (“what good is gold in practice anyway?”, one might fairly argue. “It’s shiny!”, one might fairly respond.), and everyone still accepted it in exchange for labor and investment payouts.
Right now one (simplified) transaction the Treasury could make is:A. Print a single $31.42 trillion billB. Deposit that bill in the Treasury’s checking account held at the TreasuryC. Look across their balance sheet, noticing they now have 31.42 trillion dollars, and pay back all the debts they’ve incurred and still owe various investors from over the last 234 years, which also happens to be $31.42 trillion.D. Look down at $0 Cash, $0 Debts, and effectively start over with a clean slate.
That would work perfectly if everyone had a sudden case of amnesia and it was wiped from the history books. There are a few financial / economic problems with this. I have no idea what the legal consequences of this would be as I’m not an expert at all in that area, but honestly those are the least of your problems.
There are currently ~2.2 trillion dollars currently circulating in the economy (I think that’s a global number but I’m not sure). US GDP (the economic value of everything we do as a country in a full calendar year), is roughly $23 trillion. After step D above, there would be 15x more money in circulation, essentially flooding the economy with a about 18 months of all US economic production overnight. This would be a disaster for most people.
The value of money is in a constant dynamic play of supply and demand. When you increase the supply / availability of something by 15x overnight, the value of that thing goes down, which is why OPEC and oil production are so closely controlled and monitored and fought about. Who doesn’t want money, though, right? After all, there’s not a physical storage issue for money like there would be for oil, especially because all those transaction steps would most likely happen digitally anyway. For a short time, yes, everyone would be glad to pad their bank accounts and take what was available to them. Except. The people that would be paid back are the *existing US creditors* (read: retirees, foreign investors, the US govt itself, and the Federal Reserve).
This means that the **supply of money has increased dramatically** for those who already own the majority of legitimate wealth producing assets: machines, land, factories, software companies, anything unrelated to crypto, etc.
But the **supply of wealth producing assets has stayed the same.** Therefore, the prices of wealth producing assets will sky-rocket in real dollar terms, further widening the wealth inequality gap. (Same supply, more demand; investors don’t like to hold cash, the like to own assets). Increased demand drives up prices, and the value of each incremental dollar is less and less.
US social unrest increases, the confidence in the management of the treasury and federal reserve decreases, the value of the dollar decreases… it’s just a messy situation. No silver bullets.
TL;DR: The government has to honor its debts and maintain a level of financial stability that maintains the “full faith and credit” of the United States in order to maintain is position as global financial hegemon. No games allowed.
If you want a country playing this financial engineering game with disastrous consequences, China and her real estate market is a great place to start. This school of thought is also sometimes espoused by people who identify as “modern monetary theorists”.
Trust in your financial system is a game you can play liberally until you can’t, and when you can’t there’s no restart button.
You need to understand what money is first. It is a medium of exchange but also *stored labor*.
When government prints money it devalues all past labor (savings) and future labor (wages falling behind inflation) for everyone in the whole country. But it ALSO devalues debt (including their own) and they get to spend it… which is why they do it.
The reason currency gets devalued is rate of exchange. If a country has 100 labor and $100 in circulation (in the hands of the population, etc) then each dollar can afford 1 unit of labor. If they print a bunch more money suddenly each dollar can only afford a fraction of a unit of labor. It’s pretty easy to see from there how it hurts savings. Beyond that is little more complicated.
An important bit that others have mentioned but is sometimes getting buried is that *the coin would not be used to pay debts*. The government would do whatever it would have done in the financial markets in the absence of a debt limit, so the economy, value of the dollar, etc. would be unaffected.
The coin would just be used to keep the nominal value of the US debt below the debt ceiling. The government would have all the same debt it wanted to have (and that Congress in fact demanded it have), but there would also be a “trillion dollar coin” sitting in the bank that makes the total value of the debt 1 trillion less and so below the ceiling.
Here’s a metaphor: Congress has asked the President to publish an edition of War and Peace with a page limit of 50. The Department of Formatting has done everything it can to shrink the font sizes and margins but can only get the text down to 51 pages. Out of desperation, the President declares that the book actually starts on page 0. Nothing is cut from the book, but the highest page number is now 50, thus fulfilling the letter (if not the spirit) of Congress’ irrational demand.
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