Jumping Off the Fiscal Cliff

The federal government is nearing the edge of the “fiscal cliff.” The term is used to describe the simultaneous expiration of tax cuts, increase in tax rates and supposedly massive spending cuts. Some argue that allowing the federal budget to be cut by $500 billion across the board will send the economy into another recession and this must be prevented. Others, like Frank Shostak, argue “that a cut in government outlays is actually going to be good news to wealth generators. It is, however, going to be bad news for various nonproductive activities that emerged on the back of increases in government outlays.”

There are more than two options for the federal government to take. One proposal includes having the US Mint produce 2 (or more) platinum coins with a face value of $1 trillion, each. This is an actual proposal by Joseph Gagnon of the Peterson Institute for International Economics. Gagnon is not the first person to mention this idea. During the 2011 “showdown” over the debt-ceiling, Yale Law School Professor Jack Balkin proposed the idea, as did Cullen Roche from Pragmatic Capitalism.

The Washington Post describes the scenario, “the U.S. Mint would produce (say) a pair of trillion-dollar platinum coins. The president orders the coins to be deposited at the Federal Reserve. The Fed then 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.”

Surprisingly, this monetary con-game appears to be perfectly legal. According to 31 U.S.C. § 5112 (k), “The Secretary 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 new money would solve everything, right? Balkin now says the platinum coin option is “very uncertain, and… could lead to complicated litigation.” And Gagnon claims, “There’s nothing that’s obviously economically problematic about it.” Gagnon’s statement couldn’t be farther from reality.

Whenever anyone creates money out of thin-air, there are going to be economic problems. Gagnon also claims that the “government would simply be using the money to keep spending at existing levels, so it wouldn’t 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.”

Yes, injecting money into the economy to solve the problems created by injecting money into the economy sounds like a wonderful idea. Maybe the next time I’m on a sinking boat, I’ll try putting more water into the boat to keep the boat from sinking. It is past time for Congress to admit publicly the debt will never be paid off and repudiate the debt, because it is invalid.