While celebrating Christmas with the family I had a conversation with my 8 year old nephew. He knows that I’ll explain anything to him in a comprehensible way. (Well, almost anything.) We were talking about money and I told him how you used to be able to trade your dollar bill in for silver but can’t anymore.
“So what can you trade it in for?” he asked
“You can’t. It’s not backed by anything now.”
“Then what makes it worth a dollar?”
After a brief pause looking around at the rest of my family who was now listening in.”Faith.”
“Yes. Because we believe it is worth something makes it valuable.”
After a moment of contemplation my nephew says. “Well that’s silly.”
We all laughed as I agreed. “It is silly.”
The whole trillion dollar coin idea is silly. But it is no more silly than the rest of our financial system. It will probably never happen and should be understood in that context. But if you leave out the silliness and likelihood of it happening, it is not a bad idea.
|2012 Infantry Soldier Silver Dollar|
The concept is that the United States Mint, minting coins since 1792 and today makes numerous commemorative coins, would issue a platinum coin with a face value of $1,000,000,000,000. Once minted it is legal tender. It is transported to the Federal Reserve Bank. Once there the US can either pay down its current debt with it or borrowed against thus nullifying the need to raise the debt ceiling. That’s silly.
Why would we do this? Because of the debt ceiling. My nephew would ask “What’s that?” Congress use to have authorize each debt occurred by the US separately. In 1917 to simplify things during World War 1 it established a “ceiling” on the total number of bonds that were available to be issued. Now instead of issuing bonds for every bill passed, we just raise the ceiling on how many bonds can be issued. It doesn’t stop the government from incurring obligations such as soldier’s salaries or ordering fuel and bullets for them, it limits our ability to pay those bills. Again, that’s silly.
If we don’t raise the debt ceiling, like some republicans seem to want, what happens? Our US deficit is around $1 Trillion or about $2.7 Billion in bills a day we couldn’t pay. First we would not be able to pay bonds coming due a.k.a defaulting on our debt. We would have to shut down the government, No border security, no federal judicial system, nothing would be open. The only things we could afford to do is pay Social Security checks and keep our military running. Peoples’ retirement in bonds would be worthless. The economy would collapse to the point of Greece or beyond. After we attempt to fix the problem by raising the debt ceiling, no one would want to buy our bonds anymore so interest rates would skyrocket. Thus turning the below inflation borrowing power (<1% interest on 5 year bonds) that we have now to interest as high as Greece. (17%) The resulting depression and credit downgrade would increase our deficit to unheard of heights. The very thing those who want to do this are fighting against. Unbelievably silly.
Which is sillier, issuing a $1 Trillion coin, or going over the debt ceiling? What is more interesting is if you continue this thought experiment out even further and say “Why not make ten or even a hundred of these coins?” We could pay off our US debt to the federal reserve. We could rebuild our infrastructure by paying people this legal tender money giving people jobs and saving our economy. We could give people a free collage education and make sure no one goes hungry or has to live in the streets. As long as the world believes the US dollar is worth something it would work. But that’s crazy silly.
No more silly than the Federal Reserve Bank giving no interest loans to the banks with money created by typing zeros into a spreadsheet in order to stimulate the economy. No more silly than the Federal Reserve Bank buying and holding US bonds it itself issues to stimulate the economy. No more silly than the US government handing over to the privately owned Federal Reserve Bank the power to create the 1.13 Trillion US backed Federal Reserve notes or, as they are known, US dollars.
The whole financial system is built on the belief and trust the US and the rest of the world has in the financial system. No one believes in the Greek government so it is failing. The world still believes in the US and that is why we pay out less in interest on our ever increasing debt than we did 2 years ago. Because the US is still the safest bet the world makes. What happens if we dissolve that trust? It would be silly to find out.