US Elections

One last Get Out Of Jail Free card to play on the debt ceiling?

By Jonathan Bradley in Sydney, Australia

28 July 2011

Jack Balkin has a novel suggestion for what President Barack Obama can do if Congress doesn't pass a debt ceiling increase before the government runs out of funding. He presents it as a brief piece of fiction, complete (naturally) with Joe Biden jokes. Check it out.

An excerpt:

"That left one other possibility. We could use coin seigniorage."

"Senior what?" Reid exclaimed.

"Seigniorage. Sovereign governments like the United States can print their own money. We have a system of fiat currency and we've been off the gold standard for many years now. With fiat currency, you issue coins and simply assert that they have a certain value, which may have little to do with the value of the raw materials you use to make them. But as long as people believe that your money is worth something, the system works.

"The difference between the face value of the coin and the cost of the materials it takes to produce it is called seigniorage. So if you create a hundred dollar coin made mostly of copper and nickel, the seignorage is likely to be close to a hundred dollars. That's new monetary value pumped into the system."

Geithner continued: "Now it turns out that under federal law, there's a limit to how much paper money we can have in circulation at any time.

"However, there's no limit to the amount of coinage we can make. There are rules that limit what we can do with gold, silver, copper, and other metals.

I'd been wondering if, absent inflation fears, whether the Treasury had the authority to simply print their way out of the debt ceiling bind. According to Balkin's suggestion, they may not be able to print their way out, but they can mint their way out. The idea is that Treasury would issue a couple of platinum coins worth a trillion dollars each, which would be added to the government coffers, replenishing its funding without requiring further borrowing. Since there's a lot of slack in the economy, it would not result in hyperinflation. Even so, it's a radical proposal that is only preferable to the so-called "Constitutional option" in that its legality is a bit less contentious. Hopefully it won't be necessary.

A word of caution to Obama administration, however. I saw an episode of "The Simpsons" where they did something similar, though in that case it the currency in question was a trillion dollar note. Wealthy industrialist C. Montgomery Burns swiped the note and fled with it to Cuba. So, y'know: be sure to keep it out of the hands of cold-hearted billionaires.

Tags: 14th Amendment, C Montgomery Burns, Coin Seigniorage, Currency, Debt Ceiling, Television, The Simpsons, Trouble With Trillions

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