You hear about it every so often. The idea that we could wipe out the national debt with a single coin. The U.S. Mint has the authority to produce special edition coins of any face value. Those commercials for commemorative silver coins with the twin towers that go for $20 are actual currency, although the likelihood of them being spent is pretty slim. So, in theory, they could mint a single one trillion dollar coin to pay off the national debt in one fell swoop.
Ain’t fiat currency great?
Of course, there is one problem with the trillion dollar coin. And it’s a pretty big problem. Minting such a coin would lead to rampant inflation. Adding a trillion dollars to the money supply would simply flood the US economy with extra cash.
The trillion dollar coin will cause inflation
There are several measures of money supply, but the most comprehensive is called M3. It is an estimation of all the cash and liquid assets in an economy. Currently, the M3 for the US economy is roughly 15 trillion dollars. The trillion dollar coin would be injecting an additional trillion dollars, or nearly 7%. That is a HUGE spike.
In economics, you learn about the law of supply and demand. Usually, people use an example of increased demand. If the demand for something increases but the supply of it stays steady, it leads to price increases as competition bids up the price, just like in an online auction. But it works in reverse as well. If you increase the supply faster than the demand, then it’s price is going to decrease. Then competition works in the other direction. Each item in the supply is competing for buyers attention.
So how does that work if you are talking about money? Well, if you increase the supply of money, faster than the demand for buying things, there are more dollars around to buy the same amount of stuff. Each dollar competes more with each other dollar and purchasing power decreases. And that is pretty much the definition of inflation.
But we have inflation all the time, right? How bad can it be? Just ask post-WWI Germany, or 19990’s Zimbabwe what happens when you print more money to pay your bills.
Other problems with the trillion dollar coin
The other problem with using a trillion dollar coin, or any other trick to pay off the national debt faster, is the simple fact that we probably can’t even legally do it.
Have you ever had a mortgage or other loan that had a pre-payment penalty? Banks sometimes do that because they are greedy bastards. Well, sort of. Banks deal with millions of dollars going in and out every day. Interest rates they charge are their source of revenue. If you were hired to do a job, and based your budget around that income, how would you feel if you completed it 6 months early and they let you go? Banks build their budget around knowing that they are going to earn a certain amount of interest on the money they loan out. If that loan gets paid early, they lose on that interest. You win, but the banks lose.
The national debt is no different from a giant mortgage. The debt is actually comprised of billions of loans in the form of U.S. Treasury bonds. Each of those bonds was printed and sold with a value, a maturity date (when it will be paid off) and an interest rate. People, companies, and foreign nations that buy bonds do so with the understanding that they are going to earn that amount of interest up to the date the bond finally matures. When bonds are sold on the open market, how much more interest it is going to earn is baked into the price.
If you then try to pay off these bonds early, you are cheating the buyers out of an income they were expecting. If increasing the money supply by 7% doesn’t wreak havoc on the economy, the entire world dumping Treasury bonds surely will.
That’s if we even can pay off Treasury bonds early. My understanding of the matter is that the maturity date of a bond is part of its legal contract. If that is true, then the Treasury simply can’t pay off a bond before then.
What are your thoughts on the trillion-dollar coin?