Economists love old grandpa coin act as fiscal-cliff solution, or something

When I was a very young lad, my grandfather used to amaze me by magically pulling coins out of my ear (and telling hilarious-but-terrible puns, but that’s another story for another day).  At that time in my life, I figured Grandpa was making me richer from money out of thin air.  How was I to know he was teaching me the kind of economics that would thrill the intelligentsia forty-five years later?

If President Obama wants to avoid an economic calamity next year, he could always show up at a news conference bearing two shiny platinum coins, each worth . . . $1 trillion.

Okay, that sounds utterly insane. But some economists and legal scholars have suggested that the “platinum coin option” is one way to defuse a crisis if Congress cannot or will not lift the debt ceiling soon. At least in theory.

It sounds utterly insane because, well … it is utterly insane.  Apparently, acts of insanity are totally legal in the US, though, as long as they’re committed by a Treasury Secretary:

Enter the platinum coins. Under current law, the Treasury is technically allowed to mint as many coins made of platinum as it wants and can assign them whatever value it pleases.

Under this scenario, the U.S. Mint would make a pair of trillion-dollar platinum coins. The president orders the coins to be deposited at the Federal Reserve. The Fed moves this money into Treasury’s accounts. And just like that, Treasury suddenly has an extra $2 trillion to pay off its obligations for the next two years — without needing to issue new debt. The ceiling is no longer an issue.

“I like it,” said Joseph Gagnon of the Peterson Institute for International Economics. “There’s nothing that’s obviously economically problematic about it.”

In theory, this is much like having the central bank print money. But, Gagnon said, the U.S. government would simply be using the money to keep spending at existing levels, so it would not create any extra inflation. And if it did cause problems, the Fed could always counteract the effects by winding down some of its other programs to inject money into the economy.

There’s nothing obviously problematic about it, except for the fact that we’re going to devalue world’s baseline currency by about two trillion dollars.  How exactly can that avoid stoking inflation?  It creates money that hasn’t been in circulation before, and it spends it almost immediately based on the completely artificial valuation of a couple of coins in a vault.  If it didn’t fund new spending, no one would need to create the coins and the artificial value of them in the first place.  The spending done under the debt limit comes from the sale of bonds, which may be a bad way to run government but actually have some future value based on a commitment from the Treasury.  The two coins are a bad parody of that process, and it won’t be long before bond investors discover that the joke is on them.

And it’s not as if this solution hasn’t been tried in the past.  In the 1920s, facing crushing debt and war-reparation obligations, the Weimar Republic in Germany did exactly the same thing: printed money to pay off their obligations.  They just didn’t do it with cool-looking platinum coins.  It destroyed the savings of the middle class, created massive poverty and a flight from German currency, and set the stage for the takeover by the Nazis a few years later.

These are the kinds of ideas that arise when governments go bankrupt, politically if not financially.  How about some real solutions, like reducing spending to FY2000 levels as a percentage of GDP and reforming the tax system to fund government appropriately?  Steven Crowder asked a few people about the options on the table in his latest vox populi, and ended up discovering that some Democrats may want to check in on their party’s policies:

Update: Added a bit more to the first paragraph after the second excerpt.

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