Don’t be fooled by shiny objects: The solution to the debt ceiling is to cut the debt
Last week President Biden signed legislation raising the nation’s borrowing limit by $480 billion, to $28.9 trillion, pushing the debt limit deadline off until approximately Dec. 3. While the debt ceiling is generally raised after partisan fanfare from both sides, it is never guaranteed to be raised, and fights over this matter have previously called the full faith and credit of the United States into question.
With tension rising over the debt ceiling, some commentators have yet again called for the U.S. Mint to issue a $1 trillion platinum coin that could be deposited at the Federal Reserve and exchanged for cash in the U.S. Treasury General Fund. The idea is that this deposit would serve as an interest-free loan over the life of the coin. Such commentators believe the legal basis of this idea to be “rock solid” and unlikely to impact inflation. But this is not necessarily true and is certainly unwise.
The legal basis for minting a $1 trillion platinum bullion coin is uncertain. While many esteemed legal scholars believe the statutory text to be clear, others believe that the legislative history of the operative provision only allows the Mint to issue platinum bullion commemorative coins of limited value. One theory even posits that the Mint would only be credited with providing the Federal Reserve with a product equal to the intrinsic value of the coin it delivers, rather than the fiat value engraved upon such a coin until the difference were paid off in full. This could lead to a shortfall of $999,999,998,300 between the expected value of the coin and the amount attributed to it based upon its intrinsic value, thereby delaying the coin’s ability to constitute legal tender for an undetermined period.
A better approach may be to ask why we would ever risk the full faith and credit of the United States on an untested theory opposed by numerous presidential administrations and based upon a murky provision that does not even mention the national debt?
The inflationary impact of a $1 trillion coin is likewise unclear. In its most extreme articulation, proponents of the idea have stated that there would be “no additional soaring inflation” resulting from the coin. But this blanket statement is hard to swallow. One trillion dollars represents roughly 50 percent of currency in circulation, 25 percent of depository institution reserves, 15 percent of the monetary base and 5 percent of publicly-held currency and deposits. To suggest that one trillion new dollars being suddenly injected into the economy would not impact inflation is outlandish.
Yet, even if such a coin were minted to pay down some existing debt, this approach would risk an even worse default if not subsequently upheld by the courts. However, even if upheld, the $1 trillion coin approach could simply lead to new government spending above the modified debt limit, spiraling our debt obligations further out of control ad infinitum.
Fortunately, there is a reasonable answer to the perennial fight over the debt ceiling and calls for minting a $1 trillion coin. Rather than kowtowing to the political whims of the moment, our political leadership could choose to embark upon a long-term path toward fiscal responsibility that entailed raising taxes and cutting spending in order to pay down our national debt. Although politically unlikely at the moment, taking measures to address the root cause of the soaring debt may ultimately prove the best strategy toward achieving financial stability and avoiding future debt ceiling debates.
Harry William Baumgarten served as legislative director and counsel to members of the House of Representatives. His writings on American politics have been featured in leading domestic and international publications.