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US: Will minting a $1 trillion platinum coin help fix the debt crisis?

By mid-October, Yellen warned Congress, the Treasury will be out of manoeuvring room

US-dollar-foreign-reserves-Reuters Representation image | Reuters

Members of the US Congress pushed through a short-term increase to the nation's debt limit on Tuesday, ensuring that the US would not default on its bonds and averting a historic financial crisis. Last week, the Senate passed a $480 billion increase in the country's borrowing ceiling on a party-line vote. The president can now sign the bill into law because it has received congressional approval.

Treasury Secretary Janet Yellen recently told the US Congress that the Treasury Department will most likely use all of its exceptional measures to avoid a default by October 18. By mid-October, Yellen warned Congress, the Treasury will be out of manoeuvring room.

 Senate Majority Leader Chuck Schumer had said on Thursday that an agreement has been reached with Republicans to extend the government's borrowing authority into December. Republican leader Mitch McConnell had earlier stated that he wanted the Democrats to take the politically uncomfortable debt ceiling vote on their own. “Republicans are not rooting for a debt limit breach,” he said.

 In their agreement, Republican and Democratic leaders edged back from a perilous standoff over lifting the nation's borrowing cap, with Democratic senators accepting an offer from McConnell.

Some Democrats have suggested issuing a $1 trillion platinum coin to bypass the debt ceiling if Republicans refuse to raise it.

The $1 trillion platinum coin is a one-trillion-dollar token coin that can be issued by the US Treasury and deposited at the Federal Reserve Bank of the United States. It will benefit the US. When the US government needs money, it usually issues Treasury bonds to investors. The Fed then purchases these bonds on the secondary market, where they are actively traded. However, the issuing of these bonds adds to the government's overall debt. This, in turn, might lead to a debt ceiling breach unless the Treasury also retires bonds of similar value by repaying investors. 

Treasury Secretary Janet Yellen on Tuesday dismissed the idea of using a legal to mint a $1 trillion coin, despite the popularity of the concept on social media. She warned that the US could plunge into a recession if lawmakers fail to raise or suspend the debt ceiling in the coming two weeks.

 The idea, however, garnered backing from a few notable economists, including Nobel Prize winner Paul Krugman, Forbes reported.

 According to Yellen, minting the coin would compromise the Federal Reserve, which is charged with overseeing monetary policy. Yellen called it a ‘gimmick.’ Several Democratic Reps. Including Jerry Nadler and Rashida Tlaib jumped on the #MintTheCoin trend on Twitter. 

 Though minting a trillion-dollar coin appears to be out of the question, for the time being, lawmakers do have a few alternatives for raising or suspending the debt ceiling before the deadline. In 2011, during a similar debt crisis, a few experts discovered a legal provision permitting the Treasury to manufacture a platinum coin without a maximum limit, which sparked the notion of minting a trillion-dollar coin. 

Other detractors of the idea, argue that circumventing the debt ceiling through such means will result in a loss of fiscal discipline. Modern monetary theory (MMT) has been a source of concern for American fiscal conservatives during the debt ceiling debate. MMT proponents argue that government debt is unimportant because it can be simply paid off with new dollars issued by the Federal Reserve.

Supporters of the platinum coin idea, feel that when the Fed credits the Treasury with $1 trillion in new money, it will sell US dollars at the same time. This will drain $1 trillion from the economy and keep inflation at bay.

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