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Put Away Your Wand, Platinum Coins Aren't Magic

By Josh Barro
January 09, 2013 4:35 PM EST

One barrier to acceptance of the platinum coin strategy to avoid the debt ceiling is that most observers are overstating its bizarreness. In particular, numerous media outlets have been describing the coin as "magic." But there would be nothing magic about minting one or many large-denomination platinum coins -- it would just be another way of printing money.

Under this strategy, the government would pay its bills by printing money instead of borrowing it. That's it. It's not magic or even all that novel. Indeed, we should probably give this option a more dignified name -- I propose "The Seigniorage Option" -- to de-emphasize questions like whose face will go on the coins.

Remember, we are only even talking about using platinum because that happens to be required by the federal law that authorizes the Treasury secretary to issue money in unlimited denominations and quantities. Sending a trillion dollar coin to the Federal Reserve and sending a trillion dollars in newly-printed $100 bills would have exactly the same economic effect -- it's just that only one of these options is legal.

Of course, financing government through seigniorage is usually a sign of severe distress -- governments do it because they lack the economic capacity to tax or borrow. But in our case, the barriers to taxing and borrowing are purely legal, not economic. The Federal Reserve can even be expected to demonstrate the government's ability to borrow by selling Treasury securities to offset Treasury's coin-financed expenditures. So, even as Treasury prints money, the markets can be expected to treat the government's actions like borrowing.

We can debate the merits of this strategy (I think they are excellent, compared to the alternatives), but there's nothing "magic" about it.

(Josh Barro is lead writer for the Ticker. E-mail him and follow him on Twitter.)

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