What do you do when you can’t borrow any more money? Well, if you’re a person, you reduce spending, start paying down debts, live within your means or in worse case scenarios, go bankrupt. Well, if you’re the federal government, you usually just raise the amount that you can borrow, in other words, raise the debt ceiling. Recently, with all the fiscal cliff issues, the idea of raising the debt ceiling, which is a necessity on a current spending binge, has become a very unpopular topic. So… what are our options? Well, one of the newest ideas that is surprisingly getting legs is for the President to have the Fed mint a $1 trillion dollar coin and give it to the Treasury. The Treasury could then use these funds to pay bills instead of asking for more debt.
Sounds like a joke and I wish it was. The question becomes where does the value of the $1trillion come from? Well, the value of the coin would be the value of the platinum that it is made with which in today’s market is worth around $1600. Why would it be worth $1 trillion? Well, that’s because the government says it is. See, that is how fiat money works. In a weird way this is no different than how money has value today. We basically believe that a $20 bill has value because we have all agreed that it has value (it’s not the value of the paper that it is printed on). So basically we are seeing the first glimpse into what our next option will be when we can no longer borrow money. In this particular case, it is self imposed by the debt ceiling, but what if we didn’t have demand for our debt? Well, we would have to do one of two things, raise interest rates or print money. Both of these things would be detrimental to our economy in our fragile state (think of the housing market, what would happen if interest rates skyrocketed). It will be interesting to see how this story develops. I imagine that we will not actually create a $1 trillion coin, but rather will debate until the last minute and then raise the debt ceiling. But it is very scary to think this is actually being talked about.