Why has this come up now, and what is the debt ceiling issue?
The debt ceiling is the maximum that the government has been authorized to borrow by congress. This practice dates to WWI so that congress wouldn't have to constantly keep voting to approve new borrowing, and could just set broad limits periodically - they still are constantly having to boost the ceiling, but this is still easier than approving all new borrowing separately.
What happens if we hit the ceiling?
If the debt reaches the level of the approved ceiling, the government cannot issue any new debt - this means if a bill for something comes due (say, payrolls for employees, social security benefits, bill for military supplies ... whatever) then much like the rest of us, the only options are to either go into default, drastically cut spending in other areas (layoffs or benefit cuts), or liquidate some assets for cash (sell off public land, etc.). The other solution would be to increase revenue (raise taxes) however this option has been mostly off the table politically. A nice summary presentation of some of the practical issues of prioritizing who gets paid, etc. can be found here.
So why don't we just raise the ceiling like we have every other time for the last 100 years?
Having the world's largest borrower go into default would obviously not be a good thing for an already shaky global economy, and so fiscal conservatives are using brinksmanship strategies (take my game theory class!) as a very strong bargaining chip to try to force spending cuts.
In a broader sense, the argument is that we can't perpetually continue to spend more than we have and that we should work to reduce our debt.
Is our debt too high now? Should it be zero ideally?
It's always nice to have less debt - a fact students will loans will soon find out. I would argue, however, that while this is in a large degree true, we often fall in a logical trap of equating the government budget to an individual household's budget. For an individual, we don't want to run up more debt than we can afford to pay back or we run the risk of going bankrupt. However, this doesn't stop us from undertaking massive debt in the form of student loans and housing among other things. It wouldn't be out of the question for a recent college graduate to have $100,000 of college loans and then take out a mortgage on a $200,000 house when they get their first job. Their debt-to-income ratio at this point in their life might be 5 or 6 to 1 ... or in other words they might owe 5 or 6 times their annual salary (or more if they buy a nice car). While this is not an ideal situation, if that college education ends up increasing their lifetime earnings, that debt is still worth undertaking as an investment in their future growth - the average college grad earns $1million more over their career, and thus that initial investment is worth it.
Much of government spending is similar to taking out those college loans ... having a stable government, good education system, supporting scientific innovation, promoting public safety, and other things contribute to economic growth ... and if growth is high enough, having $100 of debt today is no big deal if it's going to allow us to make $200 tomorrow. The question is really more about whether the debts we're undertaking are good investments in the future, not so much about the magnitude of how big the debt is. Because, unlike an individual, a country doesn't have "retirement" to save for - we continually have new workers being born and are to a certain extent, perpetually in "young adult" mode for thinking about debt and investments- not retirement planning. (and for frame of reference, our current debt to GDP ratio is a little less than 1:1, no where near the ratio of an average young adult household). Thus, while things like the Debt Clock are scary to look at, thinking about the government budget in a year-to-year "Are we over the budget this year?" way is very misleading and counterproductive in the long run. This is not saying that debt doesn't matter and we can run up as much as we want, it's just to say that there is "good debt" and "bad debt" and thinking about the raw magnitude of the debt on the balance sheet at a given point of time is not the correct way to view the issue.
Isn't a recession (or the recovery period) the worst time to be focusing on cutting spending and reducing the debt?
Yes. Yes it is, (generally). Revenue automatically falls as incomes fall during a recession and spending automatically rises as there is greater need for unemployment benefits, welfare aid, job training support, and other similar programs. These things can even themselves out as the economy cycles through expansion and recession, but the deficit is necessarily at its worst when the economy is struggling. It would be best to do work on the debt during good times, but because we associate the national budget with our own budgets, as we find ourselves tightening our belts in our individual household budgets it seems like the government should too - when things are going well, we're getting raises, and unemployment is low we tend to fall into the trap of thinking things will always be good and we don't need to worry about cutting our spending. Thus, somewhat perversely the best time politically is the worst time economically.
So how does the trillion dollar coin play into all of this?
Here's the deal - there's actually another option to pay off our debts ... we can just print new money. Now, under most scenarios congress would have something to say about that, and if they weren't up for raising the debt ceiling they wouldn't be up for printing money either, so that you would think would be an irrelevant option. HOWEVER, there is a provision that allows the treasury department (part of the executive branch and thus under the direction of the president) to print *Platinum* (and only platinum) coins in any denomination it wants. So, the president technically (probably, there is some constitutional debate here) has the power to direct the treasury to mint one (or more) $Trillion coins and have them deposited in the U.S. government's account at the Federal Reserve. That would instantly credit our account with $1Trillion and viola! a trillion dollars less debt. Thus, we would not go over the debt ceiling.
Whaaaaaa!??!?!?! Hold on, wouldn't this cause crazy inflation? This is the kind of thing they do in places like Zimbabwe, right?
Yes and no. If you did it all the time, then yes - you can't be stamping these things out willy-nilly every day and expect to not end up with crazy hyperinflation problems. BUT, if you do it at the same rate that the debt ceiling is raised, the two are functionally equivalent (under some theoretical assumptions - there is debate here in different macroeconomic schools, but that's a digression I'm not going to take you down today). If you issue a $1Trillion worth of debt, then you are actually printing Treasury bonds which will in turn be sold for $$$ to pay off the bills. Removing the additional middle step of printing IOU pieces of paper really doesn't change anything fundamentally, it just feels different.
As for inflation, if you listen to Paul Krugman and others, the problems with the economy relate to us being in a liquidity trap much like Japan has been for it's lost decade(s). Thus, the current worry is about inflation that is too LOW, not too high. Interest rates are at a crazy low right now (see this Treasury page for current yield rates):
Daily Treasury Real Yield Curve Rates
| DATE | 5 YR | 7 YR | 10 YR | 20 YR | 30 YR |
|---|---|---|---|---|---|
| 01/02/13 | -1.36 | -1.06 | -0.62 | 0.22 | 0.47 |
| 01/03/13 | -1.30 | -0.99 | -0.54 | 0.31 | 0.56 |
| 01/04/13 | -1.31 | -0.99 | -0.55 | 0.27 | 0.53 |
| 01/07/13 | -1.34 | -1.02 | -0.60 | 0.18 | 0.49 |
| 01/08/13 | -1.36 | -1.06 | -0.60 | 0.24 | 0.46 |
| 01/09/13 | -1.41 | -1.09 | -0.64 | 0.20 | 0.44 |
Wednesday Jan 9, 2013, 4:28 PM
This table is showing that the current real yield on a 10 year treasury bond is NEGATIVE ... that is like saying that if you wanted to buy a treasury bond (IOU) that would pay you $1000 in 10 years, you'd have to pay MORE than $1000 for it today. (keep in mind you could simply put that $1000 under a mattress and pull it out in 10 years and it would be cheaper under current rates - this is an oversimplification to avoid getting bogged down in issues real vs. nominal rates, but hopefully you get the gist that rates are shockingly low right now). This is not the sign of a government near default, nor of an economy worried about inflation.
In fact, if you look at this (very unclear, and full of acronyms, sorry) graph from the federal reserve, you can see that as the debt has risen (red line) the interest rate we're paying on that debt has plummeted (blue line).
Where are we going to get $1Trillion worth of platinum?
We don't need to. The coin doesn't need to be backed by anything, much like your current dollar bills aren't backed by gold or silver. The $1Trillion coin could technically be as small as you wanted and contain as little platinum as possible. In fact, the less the better as it reduces the risk of it being stolen ... as this article highlights, as tempting as it might seem to steal a Trillion dollar coin in a James Bond/Goldfinger- Ft. Knox & Pussy Galore kind of scheme, you could never launder it or spend it anywhere (it's very difficult to get change anywhere for a trillion) and thus it's only value would be to melt it down. An ounce of platinum is currently about $1,500 bucks and thus not worth the trouble to steal from the vault.
[By the way, a highly recommended article that gets at the problems with thinking about monetary policy with an incorrect "gold-standard" mindset can be found here with the awesome title: "Why The Fight Over The $1 Trillion Coin Is The Most Important Fiscal Policy Debate You'll Ever See In Your Life"]
OK, so is this going to happen?
Highly dubious. It's main value as a plan is to serve as a bargaining chip for the White House. President Obama can say: "either pass the debt ceiling hike or I'll think about minting the coin" which removes some of the power that the House Republicans have in holding the negotiations hostage and threatening to let us hit the ceiling. There is also some concern about the precedent this would set, and the president has seemed reluctant to go this route, as he has been reluctant to pursue the 14th amendment provision, an artifact of the Civil War which states that:
“The validity of the public debt of the United States, authorized by law, including debts incurred for payments of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”Some have argued that this clause makes any debt ceiling irrelevant. Interestingly, this provision was passed to prevent political wrangling over the debt after the war as some feared Southerners returning to Congress would use the public debt to extract political concessions. Hmmm. The more things change, the more they stay the same, it seems? Those who don't learn their history are doomed to repeat it, I suppose.
Here's an interesting story with an email from the former US Mint Director who originally wrote the law:
ReplyDeletehttp://gawker.com/5974218/former-mint-director-who-wrote-trillion+dollar-coin-law-explains-why-the-coin-isnt-a-bad-idea