At some point everyone has heard an idea being discussed in Washington, D.C. and thought or said, “That’s insane.” Americans generally recognize there is, more often than not, something not quite right about inside-the-Beltway thinking. But to those who have never lived or worked in the D.C. area, let me tell you: You don’t know the half of it.
For example, today the Washington Post’s Wonkblog has a story about the “platinum coin option”, a method for President Obama to get around the debt ceiling:
Enter the platinum coins. Thanks to an odd loophole in current law, the U.S. Treasury is technically allowed to mint as many coins made of platinum as it wants and can assign them whatever value it pleases.
Under this 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.
“I like it,” says Joseph Gagnon of the Peterson Institute for International Economics. “There’s nothing that’s obviously economically problematic about it.”
If you read that last sentence and agree that there is “nothing that’s obviously economically problematic” then it’s likely you (a) have no understanding of basic economics, or (b) are a policy wonk working in D.C.
Mr. Gagnon, who has a PhD in economics from Stanford University, falls into the latter category. Despite having worked for both the US Federal Reserve Board and the Treasury Department (or maybe because of that), he is unable to understand why such a ludicrous idea is not “obviously economically problematic.”
Here’s why, as Reason’s Anthony Randazzo explains:
Here is how things work now: When the government borrows money, it is transferring dollars from private investors to other private vendors by buying goods and services and paying federal workers. Treasury issues a bond, taking money out of the economy by borrowing, but then puts it right back through federal spending (promising to pay the loan off with tax revenues in the future).
However, if government decides it magically has $2 trillion worth of coins (that just happen to be made ofplatinum) this would immediately create $2 trillion worth of inflation. The coins would be deposited at the Fed, into the Treasury Department’s account to spend. Money has been created out of thin air here, backed by nothing but arbitrarily denominated coins. The government buys goods and services with this money, and pays federal workers with it (as usual). But in this hypothetical scenario the government is not borrowing any money any more (because it has the money to spend), so the investors who would have loaned that $2 trillion to the government by buying Treasury bonds will have to use that money elsewhere in the economy. This means money has been printed and spent, while the $2 trillion that would have been borrowed and used in its place continues to exist. Simply put, that is going to be inflationary.
Perhaps Dr. Gagnon (who has more than two decades at the Federal Reserve and Treasury Department) does not fear the inflation that would result from $2 trillion more being printed and sent into circulation. But he would be sorely mistaken if so. Where quantitative easing has injected hundreds of billions into bank balance sheets (where it has largely remained, thus having only indirect inflationary impact by driving up stock and commodities prices), this coin plan would drop all that new money in circulation right into Main St., driving up prices for everyone.
It’s obviously problematic.
For those of us who buy goods and services in the real world, it is obvious that massive and instant inflation would obviously be problematic. But in D.C. the obvious ain’t always so obvious.