Monday, January 14, 2013

$1 Trillion Platinum Coin OR Hit the Ceiling

If you thought that delaying the solutions by few weeks regarding spending cuts issue of the American Government was essential to ponder upon the right strategy to be used to get over the Fiscal Cliff trouble completely then think again because the spending cut issue would collide now with a gargantuan pain called as raising the Debt Ceiling for the American economy to survive.

The American government could run out of cash to pay all its bills in full as early as Feb. 15, according to one authoritative estimate, and congressional Republicans want significant spending cuts in exchange for raising the borrowing limit. (KUHNHENN, 2013)[1] This dilemma has forced the entire think tanks to come out with a solution that would not drag the issue for a long time and would make it easy for the Federal Reserve and the Treasury to absorb the implications of the economic steps.

The most talked about solution is to mint $1 Trillion Platinum Coins by the Treasury which can then be deposited with the Federal so that it can be used to pay the debt obligations of the government to its lenders. Though it sounds a bit ridiculous to mint a coin of such a great monetary value but there are certain loopholes that actually let the Treasury create coins in whatever value it wants, even $1 trillion. Astonishing but True!!

 The Treasury can't print money on its own, because the money supply is in the strict purview of the Federal Reserve but the restriction lies only with minting monetary notes and not the coins. So that gives the Secretary of the Treasury the authority to mint platinum coins, and only platinum coins, in whatever denomination and quantity he or she wants. (O'BRIEN, 2013)[2] Even a $1 trillion coin is a possibility.  Treasury can after minting the coin can deposit the denomination with the Federal in its account and when the time arises they can meet the obligations and prevent the country from defaulting and get its economy intact.

People have mixed views on the implication of minting such coins in terms of its effect on the economy through inflationary problems. Nobel Laureate and world renowned Economist Paul Krugman backed the idea of minting the coin as well as emphasized that though in the short term inflation won’t impact the implications of the coin minted to prevent defaulting of the country but in long term this can create an issue. Paul Krugman also points out that there's a limit to how much seigniorage (Seigniorage is the difference between the face value of a coin and its cost of production) a government can extract before hyperinflation sets in, and that's certainly far less than $1 trillion. (Weisenthal, 2013)[3]

Though there was a solution in the offing but with the latest update it seems that The Obama Administration has rejected the views of minting the platinum coin to avert the debt crises which means that once again the political phenomenon would settle in and parleys & discussions would go on before a political stand comes out to the fore with consent of both the Democrats and Republicans which seems unlikely in few weeks time. 

Let’s wait and watch the political act to unfold and witness the volatility in the world stock indices as we move closer towards the days of settlement.

[1] KUHNHENN, J. (2013, January 14). Yahoo News. Retrieved January 14, 2013, from Yahoo News:
[2] O'BRIEN, M. (2013, January 8). Retrieved January 14, 2013, from The Atlantic:
[3] Weisenthal, J. (2013, January 8). Retrieved January 14, 2013, from Business Insider:

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