Here we go again. It looks like the debt ceiling is going to become a problem in the coming months. It’s ridiculous and I’ll tell you why. The only reason this debate even occurs is because the Congress has ALREADY decided on a certain allotment of spending. So, Congress votes to pass XYZ spending for the future and then later on we hit this fictitious constraint where Congress then turns around and says “wait a minute, that’s too much spending!” I’ve compared this to eating a bunch of cheese pizzas, tying your intestine in a knot and then threatening your stomach not to digest the food because it might kill you. It goes without saying that that would be incredibly stupid.
Anyhow, silly debates deserve silly solutions. And the trillion dollar platinum coin proves just how silly this whole debate is. But this is a very serious matter and if push comes to shove this is a loophole that should be implemented. In short, the US Treasury could order the US Mint to create a platinum coin of any denomination, deposit it in the Fed’s account and the Fed could then retire some portion of the national debt in what is essentially an exchange of the bonds they hold for the coin. Then the government spends the money they were already told (by themselves) to spend and we don’t get held hostage by the very same government.
Banking guru and MR co-founder JKH has a superb post up at the MR site regarding the mechanics behind the platinum coin. It’s a short and simple piece, but it highlights the simple reality here. He calls it “platinum coin easing”. In essence, the monetary dynamics are simple. The coin would replace some of the bonds that the Fed currently holds solving three issues:
1) A non-inflationary way for the US Government to spend.
2) It circumvents the debt ceiling by effectively reducing the debt balance by $1T.
3) It’s a completely legal workaround.
I know, I know. The whole thing sounds like a bad theory from the Zimbabwean central bank. But the simple reality is that this isn’t inflationary and is a rather simple way around a very silly constraint. But as silly as this solution might sound, this is serious stuff because the US Congress shouldn’t be allowed to play Russian Roulette with the US monetary system just because they don’t like the bills they already passed. I’m totally in favor of a debate about government spending and efficiency, but holding the US economy hostage in this manner once every 6 months is totally unacceptable. And if it happens again the President and Treasury Secretary should very seriously consider this solution.
NB – Just in case anyone was curious, this policy loophole was discovered by fellow MR co-founder & attorney Carlos Mucha.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.