Uh Oh, the $1 Trillion Coin Idea is Back

It’s hard to believe, but the $1 trillion coin “solution” to America’s fiscal issues is once again circulating around the internet (see here and here). I wrote about this a while back and explained my reasons for thinking this was an utterly stupid idea. Despite an unchanged fiscal outlook and an even more dysfunctional government, my opinion on the issue hasn’t changed. I sincerely hope this idea never gains traction.

Risking Serious Inflation In the Future

The biggest problem with creating a $1 trillion coin to pay off debt is that it can stoke inflation, resulting in higher prices on everything we buy. When more money is circulating in the economy, it creates more demand for goods and services and drives up prices. We might not be seeing an enormous amount of inflation now, but that doesn’t mean we won’t in the future.

I don’t agree with economist Paul Krugman too often (he believes more spending is the solution to our bad economy), but he explains very well why this $1 trillion coin idea is risky:

It’s true that printing money isn’t at all inflationary under current conditions — that is, with the economy depressed and interest rates up against the zero lower bound. But eventually these conditions will end. At that point, to prevent a sharp rise in inflation the Fed will want to pull back much of the monetary base it created in response to the crisis, which means selling off the Federal debt it bought. So even though right now that debt is just a claim by one more or less governmental agency on another governmental agency, it will eventually turn into debt held by the public.

The key phrase is “under current conditions”. We might be able to get away with injecting another $1 trillion of liquidity without stoking inflation now, but it will likely make the Fed’s job of controlling inflation much tougher later. Already the Federal Reserve has an enormous amount of money to pull out of the economy; it’s System Open Market Account (the account used to inject money into the economy) holds around  $2.9 trillion in assets – up from less than $800 billion in 2006.  That’s a lot of money that has to be pulled back from the economy to prevent a spike in inflation in the future.

Beware the Unintended Consequences

I see the coin idea as fraught with unintended consequences beyond just the inflation risks. If investors in our debt start believing we’re going to use gimmicks like this to “solve” our fiscal woes, they may start demanding higher rates to invest in our debt – which will impact rates on mortgages, car loans, credit cards, etc., and be negative for our economy.

Higher rates would also make it much harder for the federal government to pay the interest on its existing debt, greatly exacerbating its already dire fiscal situation. This also creates moral hazard; if we resort to gimmicks once, it will be much easier to resort to them again in the future, further eroding confidence in the ability of the federal government to make good on its commitments.

The Problem is Spending

Folks, the federal government doesn’t have a revenue problem, it has a spending problem. Even if we used this coin to pay down the debt and avoid another debt ceiling fight this month in Congress, how long will it be until we’re right back in this same situation again? This solves absolutely nothing. The government is in the red $1 trillion or more every fiscal year, so it’s sure bet that until we solve the spending problem, we’ll be right back in this same situation again within a year.

What we need to solve our fiscal woes is leadership – from both Congress and the president. These people need to get together and figure out real solutions for America’s ugly finances and not resort to gimmicks and endless can kicking.

Stay current with Mortgages By Mark! Get free email blog updates or subscribe to my RSS feed.

About Mark Fitzpatrick

Mark Fitzpatrick is a reverse mortgage professional with over seven years of experience in mortgage banking. In his spare time he enjoys reading, skiing, surfing, and spending time with his family and friends. You can stay current with Mortgages By Mark by getting free email blog updates or subscribing to my RSS feed. NMLS #382064.
This entry was posted in Economy and tagged , . Bookmark the permalink.

Comments are closed.