Just Say No To The Platinum Coin
While the White House remains mum about it, the rather bizarre idea of solving the debt ceiling crisis, even just temporarily, by minting a trillion dollar platinum coin continues to get much attention out in the media. With the exception of Kevin Drum, pretty much every major pundit and economics writer on the left seems to be in favor of the idea, while the right largely rejects the idea as a gimmick. In all honesty, I don’t think anyone expects President Obama to go down this road, but many people seem to be suggesting that the threat of doing so would potentially be something that would force the House GOP to act on the debt ceiling rather than taking the hard line of demanding commensurate spending cuts for every increase in the debt ceiling. Given the utter absurdity of the idea, though, I can’t see how that would actually work. Just as President Obama thinks that he can call the GOP’s bluff because, in the end, they’ll be afraid to actually let the economy hit the debt ceiling limit, it seems rather clear that the GOP would think that they can call Obama’s bluff by daring him to take a step that, in all likelihood he will not take.
Felix Salmon points out why the threat of the platinum coin is unlikely to have the impact its proponents believe:
[T]here are two problems with this approach. The first is that it’s a version of Hank Paulson’s famous dictum that “if you have a bazooka in your pocket and people know it, you probably won’t have to use it”. That wasn’t true for Paulson, and in general it’s not true of bazookas. In politics as in the markets, if you have a bazooka in your pocket, you’re likely to be backed into a position where you’re forced to use it, sooner rather than later.
The second problem is that what we’re talking about here has a kind of Cold War mutually-assured-destruction mentality: “don’t you dare try to force a debt default, because if you do, I’ll come out and render you entirely irrelevant with my platinum coin”. The nihilistic logic of the Cold War was brutal and scary at the time; but at least it was played by people who respected each others’ intellectual prowess. In this case, we’re basically talking about Barack Obama trying to bluff the House Republicans. And as any poker player knows, when you’re up against a very stupid opponent, you should never try to bluff.
The solution to the fiscal cliff crisis was to let the House Republicans overstretch, self-destruct, and render themselves powerless: that’s how to best deal with such people. There’s exactly zero chance that the House Republicans, faced with the Coin Threat, will suddenly turn logical and decide that they’re not going to play political games around the debt ceiling after all. Rather, the Coin Threat is a political game, played by the other side: it’s the executive branch bringing itself down to the House Republicans’ level.
If you believe that the country is best run by grown-ups, you can’t believe in #mintthecoin, because it simply isn’t a grown-up strategy. If you believe that the House Republicans behave in crazy and illogical ways, then you can’t believe in #mintthecoin, because the threat of minting the coin doesn’t work against someone who’s crazy and illogical. And if you believe that the best way to approach the debt ceiling is to try and abolish it altogether, then you can’t believe in #mintthecoin, because the entire strategy is based on the idea of keeping the ceiling where it is, and then trying to circumvent it.
Salmon is largely correct. Rather than suddenly making the House GOP more reasonable, the Platinum Coin Threat is only likely to cause them to dig in their heels even further while at the same time reinforcing, for them and their supporters, the idea that Obama is a President willing to operate outside the law and without the consent of Congress regardless of the costs. If the President actually did go through with the Platinum Coin, the response wouldn’t be capitulation. Instead, as Tyler Cowen notes, it’s likely that what we’ll see in response is a renewed round of partisan warfare, including a plethora of lawsuits challenging the President’s authority. Regardless of what a Court ultimately decides, and I think there are numerous reasons that the Courts would act to strike down what would appear for all the world to be a clear act of Presidential overreach, it would take time for any legal challenge to have an air of finality and, during that time, the resulting uncertainty would be bad for the American economy and our position as the world’s financial capital. We would be the laughingstock of the world. Granted, this would likely happen if we didn’t raise the debt ceiling, but you don’t respond to one really bad idea by proposing another, equally bad, idea in response.
As we learn more about this idea, it’s becoming exceedingly clear that the legal argument in its favor is far less clear than proponents would like us to believe. Edward Moy, a former director of the United States Mint points out several practical and legal flaws with the idea that the President could solve the debt ceiling crisis by minting a platinum coin worth $1 Trillion:
First, it may be legal to mint a platinum bullion coin with a $1 trillion face value, but it’s not legal to pass it off as actually worth $1 trillion if there isn’t $1 trillion of platinum in it. That’s because it’s a bullion coin and not a legal circulating coin. The face value of a bullion coin has no relationship with the metal content because the value is in the metal, whose price fluctuates daily.
Second, for a coin to be worth its face value, it has to be made as a circulating coin.
Here’s how a circulating coin is made. Congress needs agree on the metal content, dimensions, the designs on the heads and tails sides, weight, and other details. Then they have to pass legislation to create a $1 trillion circulating coin. The President needs to sign it. Then the Mint would have to design it get the design approved, procure whatever new materials they need, make the dies, test production, and then make one. Then a bank would have to order one because a business customer needed it to make change. The Fed would pay the Mint face value for the coin. After deducting the cost of the coin, the Mint would return the balance to the Treasury. All this needs to be done before we run out of money. Good luck with that.
Third, the current law does allow the Mint to make a platinum proof coin and does not specify whether this applies to a bullion coin or a circulating coin. A proof coin refers to a mirror-like finish and is made for coin collectors. However, a proof coin must be accepted at face value. Some have argued that the law can be stretched to allow for a platinum circulating coin, but this would not be consistent with the intent of the original legislation.
In other words, if the President went ahead and did this, all we’d really end up with is a really nice Commemorative Coin that says “One Trillion Dollars” on it. That’s not a solution to our fiscal problems in either the short or long term, and it’s no way to run a country.