We admit to not paying much attention to the periodic congressional debates over raising the “debt ceiling,” if only because the outcome is preordained. There’s no more doubt to it than in say, how a Popeye cartoon will end. Popeye will eat his spinach, beat up Bluto, and win the heart of Olive Oyl.
Thus, it came as little surprise that on October 14, President Biden signed legislation raising Uncle Sam’s borrowing limit by $480 billion; to $28.9 trillion. That’s only enough to keep the government running until around December 3. So count on more partisan fighting in the weeks ahead to raise it once more.
But what if there were an easier way to raise the borrowing limit without a partisan fight in the sacred halls of Congress? For instance, could President Biden order the Treasury Department to create a $1 trillion coin or a $1 trillion bill? Or a $100 trillion coin or bill, for that matter?
It’s not a new idea. The first time we heard of it was during the 1992 presidential campaign, when James “Bo” Gritz, the candidate for the Populist Party, promised that he would pay off America’s then $4 trillion national debt in full merely by minting a coin.
Gritz received only 0.14% of the popular vote, but the idea that if the government was running out of money, the president could prevent a government shutdown this way quickly became popular. It even became a staple of pop culture.
In 1998 the Fox Network released a classic episode of The Simpsons; “The Trouble with Trillions.” Homer Simpson, the main character in the series, was arrested for tax fraud. The IRS promised to settle Homer’s tax obligations if he retrieved a $1 trillion bill believed to be stolen by the evil Mr. Burns. Homer agreed to try to get the bill back. But upon encountering Mr. Burns, he switched sides. Homer and Mr. Burns then fled America in search of a freer country, ending up in Cuba.
Meanwhile, in 1996, a Republican-controlled Congress enacted amendments to the Coinage Act, authorizing the US mint to “mint and issue bullion and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the [Treasury] Secretary, in the Secretary’s discretion, may prescribe.”
The original Coinage Act, enacted in 1792, created specific coin denominations and sub-denominations. Amendments to the act before 1996 always authorized specific denominations as well. The fact that the 1996 amendments didn’t specify this detail was unprecedented—and according to Philip Diehl, then director of the US Mint, deliberate. Diehl wrote that the legislative intent of the bill was to allow the Treasury to add “to the general fund of the treasury without requiring additional borrowing.”
This is possible due to the principle of “seigniorage”; the difference between a coin’s face value and its cost of production. When the mint ships a coin from its vaults to those of the Federal Reserve, it books this difference as a profit and transfers it to the Treasury’s general fund. When the coin is returned to the mint due to damage or wear, the process is reversed.
Seigniorage is like an interest-free loan over the life of the coin. If the coin is never returned to the mint, it’s an interest-free loan that never needs to be repaid.
As if the characters from The Simpsons had emerged from the television screen into real life, the stage was now set for an actual trillion-dollar coin. And the first serious policy debate over the proposal came in 2013, when the Obama administration was locked in battle with a Republican-controlled Congress over raising the debt ceiling.
By then, the idea of a trillion-dollar coin had gained mainstream attention, in both liberal and conservative circles. Nobel Prize winning economist Paul Krugman wrote in favor of it in an article for The New York Times. So did Donald Marron, a Republican economist and then head of the Tax Policy Center (although he favored a much smaller value for the coin). And it was popularized with the hashtag #MintTheCoin by numerous bloggers.
Our take on #MintTheCoin is influenced by its supporters, which include Stephanie Kelton, the former economic advisor to the presidential candidate and “democratic socialist” Bernie Sanders. She’s a proponent of an old idea once called chartalism that’s been revamped and renamed “modern monetary theory” (MMT). Kelton argues that like Germany in the 1920s, the US can simply print money to pay for its financial obligations.
MMT is now the accepted policy of both the Democratic and Republican parties. Despite occasional protests from killjoys like Kentucky Senator Rand Paul, both parties are content with Uncle Sam running annual multi-trillion deficits.
Supporters of the trillion-dollar coin say it won’t lead to inflation, because it exists merely as a workaround for Uncle Sam to continue spending trillions of dollars more than it takes in normally.
We’re not so sure. In a 2020 article, we expressed concern about MMT leading to inflation. And of course, that’s what we now have, with the Consumer Price Index (CPI) rising 5.4% in September from a year ago. We’ve also observed that the actual inflation rate is far higher than the “official” rate as measured by the CPI. One service that we follow, Shadowstats, calculates that the inflation rate as it was measured in 1980 is now approaching 15% annually.
Previously, economist Kelton said that if MMT were to lead to inflation, Congress should simply increase taxes to fight it. But if you were a member of Congress and voters in your district were complaining about inflation, would you advocate for a tax increase?
Hardly. You’d be more inclined to vote for a tax decrease to help your constituents increase their disposable income. At that point, the economy could enter an inflationary spiral with no easy way out.
Remember Maximilian Bern. And don’t forget to eat your spinach.