Can the U.S. avoid default with a $1 trillion coin?

The deadline for Democratic and Republican representatives to reach an agreement to avoid default is getting closer and closer. On January 19, the U.S. debt reached its most recent ceiling of $31.4 trillion dollars. There are several options to avoid default, but none of them can be considered a flat path.

The first solution is to raise the debt ceiling as the US has been doing since it has existed as an independent nation. This measure is proposed by representatives of the Democratic Party in Congress. However, the Republicans reject it and propose a second solution: to make cuts in social spending. They argue that, with these cuts, the ceiling would not be reached.

Considering that neither the first nor the second proposal will be accepted by the opposing parties, the need for a compromise emerges. Consequently, the Republicans could approve the increase in the ceiling if the Democrats commit to cut investments in some social programs. The stalemate occurs at this stage, as ideological positions collide and neither side wants to budge.

The Treasury wants to avoid default at all costs

As reported by Investor Times, Treasury Secretary Janet Yellen sent a letter to Congress in which she presses for an agreement. The official assures that her institution can avoid default for a limited time (until June 5). This is done through the activation of cash management measures. But these funds are limited and can only prolong the nation’s solvency for a short time.

In other words, Yellen hints that those funds were released as an extension for the parties to work out their differences and come to an agreement. However, representatives in Congress seem to be focused on anything but a bipartisan agreement to keep the country from defaulting. In that regard, Democrats are openly talking about the possibility of issuing a $1 trillion coin by the Treasury to give to the Federal Reserve.

Predictably, the mere proposal to issue such a coin generated discomfort in the Republican camp. Similarly, at the central bank, they seem less than enthusiastic about issuing platinum coins of that value. Although detractors consider this to be “financial blasphemy”, the fact is that a law passed in 1997 allows the Treasury to proceed with the coin.

In fact, the aforementioned law allows the head of the Treasury to issue such platinum coins of any denomination. Thus, to avoid default, the Treasury can mint the coin and deposit it with the Fed. Then, the government could comfortably meet its obligations.

The problem of non-payment by the State

Although opponents of the trillion-dollar currency issue consider the idea dangerous, even worse would be default. Over the past 62 years, “Congress acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit: 49 times under Republican administrations and 29 times under Democratic presidents,” explains the Treasury Department as quoted in The Street.

The fact that despite the great differences between the two parties, an agreement is always reached has obvious reasons. Defaulting on debt would be catastrophic for the markets and for the entire financial system as a whole. To get an idea of the magnitude, it should be remembered that Treasury bonds are the most important safe havens of value in the world. That status has remained unchanged for decades.

The safe haven nature of bonds makes them the foundation of global financial markets. Thus, if the Treasury is unable to pay these bonds, the international meltdown would be of enormous magnitude. The Treasury Department criticizes the lack of agreement and says that a possible default would be unprecedented in history. For this reason, it recalls that it is normal for the debt capacity ceiling to be raised.

Bearing in mind the danger of default, the authorities believe that avoiding such a situation must go beyond partisan differences. In any case, the game seems to be deadlocked with a Democratic party pushing for an increase in the ceiling at all costs without making concessions. At the same time, Republicans are calling for sharp cuts in Social Security and Medicare, which is out of the question for the Biden administration.

Is a platinum currency viable in the current scenario?

As already highlighted, the bid for a $1 trillion or more currency to pay government obligations is seen as anathema. Republicans are the main enemies of the idea and their hostility is similar to that of 2010. Back then, the idea became a possibility when the Obama administration faced a pitched battle over raising the debt ceiling.

But the principals responsible for issuing such a currency have publicly rejected the possibility. Both Janet Yellen and Jerome Powell (Fed chair) say such an idea is an “unenforceable gimmick.” So far not everyone is sure that the central bank will accept the deposit in case the Treasury issues the currency. The truth of the matter is that if it does, that amount of liquidity would create serious problems with inflation.

The voices in favor of minting are also notable and one of them is from none other than Nobel laureate, Paul Krugman. “What we all hope, of course, is that the prospect of the coinage or some equivalent strategy will simply remove the debt ceiling,” he explains. He made those statements in 2013 in an article in The New York Times. Right there he added that if the strategies don’t work, then “mint the damn currency.”

Democrats are the most enthusiastic about this proposal. For them, any possibility of avoiding default without giving up their social spending programs is worthy of attention.

Is it really possible to avoid default with the platinum currency?

Conservative sectors are the main critics of the minting of a high-value platinum coin. For them, proceeding with such a plan could cause “economic chaos” in all financial sectors of the country. Among the serious problems would be inflation, considering the enormous amount of liquidity that would be added to the economy.

On portals close to the conservative bank such as Fox, there is a crude, and perhaps exaggerated, explanation of how a platinum currency would proceed. “If the Fed plays along, it would pay for the coin by waving its hands and writing 1,000,000,000,000,000 on an Excel sheet, thus conjuring up the necessary dollars,” the article notes. At the same time, the author wonders “is that legal?”

“Any move outside of an agreement would cause severe convulsions in the economy and put the entire financial system at risk.”

While the answer to that question is yes, so are the chances of a dire economic situation. Currently, the Fed is desperately struggling to defeat inflation with a series of tight monetary policies. If more liquidity is added, policymakers would be forced to take rate hikes a step further and the recession that many expect would deepen.

In other words, the Democrats’ desperate move to avoid default could push citizens’ living standards to the bottom. Republicans call that possibility capricious and claim that it is irresponsible to pass on more reasonable options such as cutting social spending.

This heated climate is the prelude to the deadline by which the world’s leading economy could default. The sides have little more than three months to overcome some of their fundamental differences and reach an agreement.

Given history, it is unlikely that partisan differences will lead to a U.S. default. This is despite the fact that this Congress is one of the most polarized in decades.