The “Trillion Dollar Tooth Fairy” Straight “From The Land Of Fiscal Make Believe”

Tyler Durden @ Zero Hedge:

A year ago, out of nowhere, the grotesque suggestion to “resolve” the US debt ceiling with a platinum dollar coin came, and like a bad dream, mercifully disappeared even as the debt ceiling negotiations dragged until the last minute, without this idea being remotely considered for implementation, for one simple reason: it is sheer political, monetary and financial lunacy. And yet there are those, supposedly intelligent people, who one year later, continue dragging this ridiculous farce, as a cheap parlor trick which is nothing but a transparent attempt for media trolling and exposure, which only distracts from America’s unsustainable spending problem and does nothing to address the real crisis the US welfare state finds itself in. And while numerous respected people have taken the time to explain the stupidity of the trillion dollar coin, few have done so as an integral part of the statist mainstream for one simple reason – it might provide a loophole opportunity, however tiny, to perpetuate the broken American model even for a day or two, if “everyone is in on it.” Luckily, that is no longer the case and as even Ethan Harris from Bank of America (a firm that would be significantly impaired if America was forced to suddenly live within its means), the whole idea is nothing more than “the latest bad idea” straight “from the land of fiscal make believe.” We can only hope that this finally puts this whole farce to bed.

From Bank of America:

The trillion dollar tooth fairy

From the land of fiscal make-believe

The budget skirmishes over the past few years have spawned a lot of bad ideas. The latest is that the US Treasury issue a trillion dollar coin to get around the debt ceiling. We see several problems with this plan. First, its legality is open to question. Second, it would worsen the coming battle over spending cuts. Moreover, it would further deepen the distrust between the two political parties. Finally, it risks being the first step down a slippery slope of debt  monetization.

Finding change in the Treasury’s sofa

A hot idea for resolving the fiscal crisis is for the US Treasury to issue a trillion dollar platinum coin in order to avoid the looming debt ceiling. The idea  comes from a broad interpretation of law that gives the Treasury secretary the ability to mint and issue commemorative platinum coins “in such quantity and of such variety as the secretary determines to be appropriate.”

The trillion dollar coin plan work as follows: the Treasury would deposit this coin at the Fed, which acts as the Treasury’s banker. The Treasury then could draw upon its account to pay for outlays. This action would allow funding for an additional trillion dollars of spending without having to worry about raising the debt ceiling, buying another year of breathing room. If the debt ceiling isn’t raised a year from now, then presumably the Treasury could mint another coin.

Wouldn’t this action be massively inflationary? Proponents argue no. With the economy operating below potential, allowing this already-authorized spending to occur would prevent a further collapse in aggregate demand. Were the Fed concerned about possible inflation, it could “sterilize” the impact by selling from its existing stock of bonds. In the limit, the Fed could sell a trillion dollars worth of bonds — that should squelch any inflationary impetus and remove any hint of outright debt monetization, according to supporters.

More debt limit desperation

This plan is just the latest in a string of “solutions” to the debt crisis. In the summer of 2011, several ideas were floated to get around the debt ceiling altogether. One proposal was for the Treasury to sell gold holdings to the Fed in exchange for cash. A second was for the Fed to simply extinguish some portion of its Treasury debt holdings. With one stroke of the pen, it would wipe out a big chunk of the debt and allow the Treasury to issue more. A third idea — which is making a bit of a comeback among some commentators — is to invoke the 14th amendment and declare the debt ceiling unconstitutional, as “the validity of the public debt of the United States … shall not be questioned.” Others took a different tack, and argued the US should just default to force a compromise. Thankfully, none of these options were seriously pursued at the time.

A wooden nickel

If this trillion dollar idea sounds a bit too good to be true, it is.

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