The "Trillion Dollar Coin" is a hot topic amongst economic policy analysts these days. For those of you that might not have yet heard of it, the Trillion Dollar Coin idea consists of a proposal for avoiding the inconveniences caused by the congressionally imposed "debt ceiling" in the US.
By way of review, and as most readers undoubtedly are aware, under current US law, Congress must establish a limit or "ceiling" for the amount of funds that the US Treasury is allowed to borrow. By early 2013, the US Treasury will reach the most recently legally established limit and Congress must approve an increase in this ceiling in order for the U.S. Treasury to be able to fund government operations and obligations. In recent weeks, concerns have been mounting that due to legislative gridlock, Congress will not legislate an increase in the debt limit. The feared consequence is that the US Treasury will not be able to fully fund government operations, and might even be forced to default on US government debt obligations.
In the face of such a dire scenario, political and economic analysts have been proposing a number of ways in which the US Treasury can invoke various legal loop-holes in order to evade the congressionally imposed debt-ceiling restriction. In this article, I will evaluate one of the ideas that has been garnering a great deal of (mostly favorable) press: The Trillion Dollar Coin.
Background on the Trillion Dollar Coin Idea
First a bit of history. The Trillion Dollar Coin idea appears to have arisen from a comment posted by a person that goes by the name of "Beowulf" on a popular and well-regarded blog called "Pragmatic Capitalist." Contributors to this particular blog, as well as others sympathetic to a monetary doctrine generally referred to as "Modern Monetary Theory" (MMT), latched on to the idea and started to spread it around. The Trillion Dollar Coin idea has proved catchy to the point where it has become a frequent topic of conversation amongst political and economic analysts of different persuasions. It there are credible reports that the idea has even been discussed at the highest levels of government.
The Trillion Dollar Coin is the name given to a proposal that would enable the US Treasury to avoid the restrictions legally put in place by the congressionally mandated debt ceiling. The idea behind it is disarmingly simple: If you don't have the money, and you can't borrow it, just make it up! Rather than adhere to long-established and institutionalized procedures for issuing debt when the government's projected outlays exceed its revenues (which would increase the debt beyond the debt ceiling), it is proposed that the Treasury seize upon a legal loophole that would enable it to spend unlimited amounts of money without having to suffer the inconvenience of incurring debt. According to the plan, exploiting this loophole would enable the US Treasury to create as much money as it wishes out of thin air as long as those dollars are obtained through issuance of platinum coins.
Let us review for a moment the mechanics of how this might work. First, it must be understood that the US Treasury is by design strictly limited in its ability to issue various types of money. However, despite the very clear institutional design and intent to severely limit the US Treasury from financing its operations by directly issuing money, there is a loophole in subsection (K) of 31 USC 5112, which governs "Denominations, specifications, and design of coins": The Secretary (Treasury) may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary's discretion, may prescribe from time to time." This generally worded provision enabling the Treasury to mint platinum coins appears to have been hastily thrown in at the end of a section that deals with the minting coins used for small change as well as novelty coins made of silver and gold.
Advocates of the trillion dollar coin idea propose that the US Treasury seize upon this broadly worded clause and create one or more platinum coins with a face value of one trillion dollars. This coin(s) would be deposited at the Fed and the Treasury would proceed to write checks or otherwise debit its account funded in this fashion.
It is quite clear that subsection of 31 USC 5112 in the numismatic legislation approved by Congress was never conceived of to enable the sort of shenanigans contemplated by the trillion dollar coin proposal. Indeed, it is very safe to say that it never occurred to the legislators that such mischief could be dreamed up, much less seriously considered for implementation. Nonetheless, proponents of this idea argue that subsection of 31 USC 5112 is drafted in such a way that does not technically preclude it.
Apparently oblivious or otherwise indifferent to the notion that the original intent of a law could have any legal or moral bearing on the matter, commentators all over the web have waxed positively giddy about the purported brilliance of this solution.
Proponents of The Trillion Dollar Coin idea essentially argue three things on its behalf: First, they claim that this is a "legal" way to avoid a potential economic calamity caused by dysfunction of the democratic system. Second, it is argued that the idea will "work," in the sense that the Treasury will be able to pay its bills. Finally, it is argued that the creation of money by the US Treasury in this fashion is analytically almost indistinct from the manner in which the Fed already creates money via open market QE-type operations; the only thing that changes is the name of the government agency that is doing the "printing."
Evaluating the Trillion Dollar Coin Idea
Some very smart people have come out in support of The Trillion Dollar Coin idea, starting with well-known blogger economic/financial blogger Cullen Roche, Yale legal scholar Jack Balkin and Joseph Gagnon, a Stanford PhD in Economics currently serving as a Senior Fellow at the prestigious Peterson Institute.
Let us analyze this proposal.
First, let us set aside for the moment whether The Trillion Dollar Coin proposal is viable from legal perspective and could withstand judicial review. Furthermore, let us also set aside any arguments about whether the proposal would "work" in the narrow sense that the Treasury would be able to pay its bills. Even granting those assumptions, several considerations remind of us why this proposal is a testament to the capacity for human folly.
1. Makes an utter mockery of the rule of law. People need to understand that there is a very profound distinction between a society governed by the rule of law and a society governed by legalism. Anybody that is familiar with the study of jurisprudence knows that history is replete with examples of regimes, which arbitrarily ran roughshod over the rule of law while adhering strictly to the doctrine of legalism - Nazi Germany being a prime example studied by virtually every student of the philosophy of law. In any regime, because of the inevitable conflicts, gaps and ambiguities inherent in any system of laws, almost any arbitrary injustice can be deemed legal through a strict application of legalism. Whereas the rule of law is concerned with neutral application of certain fundamental principles of justice, legalism is an instrument of power wielded to advance particular interests through the legal system. Legalism is a doctrine sometimes employed by well-intentioned, but ultimately naïve, individuals that wish to utilize the law and its authority to advance causes they believe to be just and/or expedient. But this is ultimately the same doctrine employed by evil individuals to advance causes that they believe are just and/or expedient, utilizing the law and its authority to make what is precluded to appear legal; to make what is immoral appear ethical; and to make what is absurd appear rational. If subsection of 31 USC 5112 can be utilized to implement this Trillion Dollar Coin scheme, then there is virtually no outrage or injustice that cannot be carried out by US leaders in the name of some law or another on the books.
2. Flagrantly violates democratic principles and institutions. A plain reading of democratically approved US legislation and institutions reveals, beyond any doubt, that: 1) The US treasury must finance any amount of government spending in excess of government revenues via the issuance of debt; 2) The US Treasury must seek congressional approval to issue debt beyond a certain level. 3) The quantity of the monetary base in the US is to be set by the Federal Reserve. There are very important reasons why democratically elected legislators enacted these laws and designed monetary institutions the way they did. In particular, US monetary institutions were explicitly designed to limit the ability of the US Treasury from issuing money, thereby creating a clear separation of powers between the tax and spending authority on the one hand, and the monetary authority on the other. You can like or dislike the system. But this is the system that has been put in place through a system of representative democracy over a period of about 100 years. If a loophole such as the one found in subsection of 31 USC 5112 can be utilized to overturn 100 years of democratically guided institutional development then there is no institution in US constitutional democracy that is safe. There is not a single institution or law in the US that could not be brought crashing down by a legalistic interpretation of some law or another. Don't believe me? Do an internet search on the controversies surrounding the ratification of the 13th, 14th, 15th, 16th and 17th amendments, for example. What you will learn if you study these examples is that there exist extremely sound legal(istic) arguments that prove that the constitutional amendments that outlawed slavery, that provided citizens with the right to equal protection and due process, that guaranteed the right to vote, enabled the Federal government to collect income taxes and that provide for the direct popular election of senators, were never properly ratified according to the strict procedures established in the constitution and other enabling legislation and therefore that these constitutional amendments are legally null and void. Want to live in a legalistic dystopian society where the 13th through 17th Amendments of the US Constitution could be swept away by the executive in an instant citing technicalities and loopholes? Want to live in a society where no right nor institution is safe from legalist self-annihilation? Then go right ahead keep advocating for that Trillion Dollar Coin.
3. Destroys a fundamental cornerstone of a sound modern economy. Advocates of so-called "Austrian" economics don't like independent central banking because they say that generally too much money is created. Advocates of so-called "Modern Monetary Theory" don't like independent central banking because they say that not generally enough money is created. Only one thing is certain: Independent central banking is a fundamental pillar of all existing modern liberal societies governed by the rule of law. Furthermore, this is an institution that finds very strong support in economic theory, political theory and the empirical record of modern history. The Trillion Dollar Coin proposal essentially blows the principle of central bank independence to smithereens. Therefore, it is right for democratic citizens to expect that fundamental changes to the institution of independent central banking should be brought about through the democratic process and not through legalistic subterfuge.
4. Destroys the currency. Advocates of the Trillion Dollar Coin claim that there is little difference between the US Treasury issuing money and the Fed issuing money. First, this claim simply ignores the importance of the principle of separation of powers and the importance of checks and balances. Vast empirical evidence demonstrates that this has substantive long-term implications, not merely procedural ones. Second, if the US Treasury could issue a trillion dollar coin to finance its spending, it would be creating money that has absolutely no fundamental backing. By contrast - and contrary to popular belief - when the Fed engages in QE-type open market operations, it is not "creating money out of thin air." The Fed is tendering one valuable asset (money) in exchange for another (US Treasury bond). The Federal Reserve notes (money) are a liability of the central bank that is "backed" by an extremely valuable and powerful asset (the ability of the US government to tax any and all assets in the US economy) that in many ways can be worth more than gold. Thus, all money issued by the US central bank is backed by very valuable assets. By contrast, any money issued by the US Treasury under the Trillion Dollar Coin proposal would not have any such backing. The economic (e.g. supply and demand of money) and psychological implications of this distinction for the value and stability of the US dollar are profound.
The proponents of the Trillion Dollar Coin say that their proposal is "legal" and/or that "it will work." They also claim that implementing this option would be preferable to enabling the consequences that might arise from the US running into the debt ceiling. These arguments completely miss the point.
Weimar Germany was widely considered to be one of the most democratic, humane and "progressive" societies in the West at that time, backed by a legal system and institutions considered throughout the world to be exemplary. To this very day, legal scholars marvel at the ability of Hitler's administration to take the preexisting system of laws in Germany and use it to erect a monstrous and arbitrary tyranny. Hitler's administration was hugely popular because its policies "worked" (in stark contrast to the situation under the parliamentary gridlock experienced prior to Hitler's arrival) and they were accepted because they were technically "legal."
If subsection of 31 USC 5112 can be utilized to implement the trillion dollar coin scheme, then there is virtually no outrage or injustice that cannot be carried out by US technocrats and leaders under the guise of enforcing some law or another.
When you reflect upon the economic and political implications of bestowing unlimited power upon the US Treasury to issue money with no backing it becomes clear that the notion of the Trillion Dollar Coin is just plain stupid. Most importantly, when you look at the wider political, legal and ethical implications of this scheme for the rule of law and liberal institutions, it is beyond stupid.
Having said that, I have no illusions about the far-sightedness of financial markets. It is entirely possible that the prospect of a Trillion Dollar Coin, or some such other legalistic subterfuge that enables violation of the rule of law by legal means, could cause stocks such as Apple (AAPL), Microsoft (MSFT) and Intel (INTC) along with broad index ETFs such as (SPY), (DIA) and (QQQQ) to rally. Indeed, hopes that such legalistic solutions might avert the sort of problems caused by the fiscal ceiling may account for some of the complacency evidenced in stock prices.
A final note: Just for the record, I do not believe that the culture of the USA has reached a level of depravity that would enable a proposal such as The Trillion Dollar Coin to be considered seriously to any significant degree, much less be enacted. One would really have to wonder about the long-term health of any society where a proposal such as The Trillion Dollar Coin idea were taken very seriously. Depending on the seriousness with which such a proposal were put forth, any healthy society would treat this sort of idea with a proper dose of bemusement and/or disdain. Indeed, one might be able to use this episode as a litmus test of the overall societal health of US culture as regards to the shared commitment to the rule of law and liberal institutions. For example, in this regard I am somewhat relieved to say that even the strongest advocates of this idea such as the folks over at Pragmatic Capitalism and Monetary Realism seem to be treating the Trillion Dollar Coin with a modicum of humor. But I will also say that I am not sure that there is not just a little to much earnestness lurking behind that humor amongst some folks where this idea is being promoted.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.