Debt Ceilings and Trillion Dollar Coins

After the farce of the phony ‘fiscal cliff’ crisis at the end of last year, a new debate now rages in the US over the issue of the debt ceiling.

In the US, budgets are approved by congress, but at the same time, the government is constrained by the ‘debt ceiling’. This places a limit on the total amount of government debt that may be issued. If the ceiling is hit, the government cannot continue to issue new debt. This means that although congress has approved a certain level of spending, the government may be unable to carry it out without further approval to raise the debt ceiling.

Previously, the debt ceiling has been raised as and when it was needed without incident, but since Obama became president, the Republicans have used it as a weapon to try to force through savage spending cuts. A previous debt ceiling ‘crisis’ played out in 2011 which led to the fiscal cliff fiasco – automatic spending cuts and tax increases, that last week’s deal only partially put a stop to. Now the issue of the debt ceiling has raised its ugly head again, leading to some to suggest creative ideas to avoid the genuine crisis that would ensue if the debt ceiling is not raised.

One such idea was first raised as a response to debt ceiling crisis part 1, when one blogger pointed out a law which allows the US Treasury Secretary to authorise the minting of platinum coins of any denomination. In theory, the US Treasury could mint a $1 trillion coin and deposit it at the Federal Reserve, which would mean the government could get round the debt ceiling and continue spending as approved by congress. This idea has been gaining some traction in the US recently, and the hashtag started by MMT economist @deficitowl, #mintthecoin even trended on Twitter for a while. While it’s unlikely this idea would ever be acted upon by the President, (and probably unnecessary, as even the Republicans are not actually stupid enough to not raise the ceiling aren’t they?), it does demonstrate further the absurdity of worrying about a government with it’s own currency running out of money or being beholden to the bond markets. We don’t have a debt ceiling or the option of using coin minting in the UK, but we do could sell bonds directly to the central bank rather than to the markets, and run a deficit without incurring more debt.

The debt ceiling debate looks set to run and run. Hopefully along the way, people will learn something about how the monetary system actually works!