Trillion Dollar Coin: Rocket Fuel for Bitcoin
Think the Fed's good for Bitcoin? Meet the trillion dollar coin.
Yesterday Congress announced their debt armageddon is postponed a few months until December. Which is useful because Christmas is good for heartstring pulling about impoverished federal workers digging for used eggnog in dumpsters. It only cost Americans $480 billion to kick that can for roughly the hundredth time, but more is coming in time for the holidays.
Now, the obvious way to fix the problem is what I wrote about two weeks ago: just default. But some don’t like this since it could permanently shrink governments. One of their alternatives is for Treasury to simply stamp out a random coin, declare it worth a trillion, and poof the debt ceiling’s gone.
The gimmick’s actually been around since 1992, and it got chatter during the 2008 crisis when Paul Krugman endorsed it. Since then the loophole’s been randomly popping up whenever somebody needs a fast trillion, including congressional socialist Rashida Tlaib last year. Alas, Joe Biden has so far dismissed the idea, betraying a rare lack of intellectual vim. Still, don’t give up hope with Christmas around the corner.
The reason it came on my radar is that the otherwise intelligent Joe Wiesenthal of Bloomberg tweeted a full-throat endorsement of the gimmick, writing “Being opposed to the trillion dollar platinum coin is a fundamentally unserious position.” I assumed Joe was joking, since he’s smart and the idea’s dumb, but he doubled down unironically. So it’s on.
The idea here is the US Treasury would free itself from worldly constraints and just mint a platinum coin — which normally sells for $1,000 — and declare that coin to be worth $1 trillion. Thus could Treasury slip the Cross of Gold we call the debt ceiling.
Of course, the first question is why stop at $1 trillion. Go big or go home; there’s $28 trillion in national debt, so either 28 coins or one really big one. Of course, you can keep going – there’s about $90 trillion of money in the world, and perhaps $400 trillion of total assets worldwide. Both easily defeated by slapping a couple more zeros on a tiny hunk of metal. Treasury may need a smaller font, true, but they make those nowadays.
Still, as they say, the first trillion’s the hardest. So let’s stick with this coin for now.
Why Platinum and not Donut?
First, why platinum? After all, surely there’s a broken stapler in Treasury’s basement that could be worth a trillion. Or perhaps Jerome Powell’s half-eaten donut from Tuesday morning could sport a trillion-dollar price tag.
The reason is that both platinum and coin is a gimmick to exploit a legal loophole where the US, like many countries, allows its Treasury to mint commemorative coins. These are usually issued to celebrate anodyne things like the flag, the local bird or local Olympics, or notable things Americans have achieved like creating peanut recipes or not killing all the buffalo. They generally sell for a bit more than production cost, just so Treasury’s not losing money.
The trick here is that commemorative coin authorization doesn’t dictate what the price should be. So, in theory, Treasury could probably mint the trillion coin, fail to sell it since it’s only worth $1,000, then keep it on the books as a trillion dollar asset. Wine from water.
By the way, lest you think America is weird, most countries could do this as well, with the same outcomes that we’ll get to below.
Can a Half-Eaten Donut Save America?
So is it a good idea? Can a trillion-dollar half-eaten coin save America?
Well, what changes? First, the debt ceiling vanishes, but not much else on day 1. Treasury continues selling debt by promising to pay interest and principle in future. Some of that debt continues to be bought by the private sector, some of it by the Fed. So, mechanically, there’s little change beyond evading the debt ceiling.
But there’s actually a much more pernicious change. Because the trillion-dollar donut moves control of monetary policy from the Fed to the Treasury. After all, today the Treasury is limited by how much debt investors and the Fed will buy. If the Treasury wants to issue an extra $10 trillion in debt, and the Fed disagrees, then the Fed won’t buy that debt. And investors certainly won’t without demanding a very high interest rate. How do we know investors won’t pick up the slack? Because even at today’s deficits the Fed is hogging up half of all Treasury debt. If they weren’t buying that, private investors would demand much higher rates to pry them away from whatever else their money is parked in.
So toss in a Fed protesting at money growth and those rates start to soar.
The Day After the Trillion-Dollar Coin
Now let’s imagine a trillion-dollar coin scenario.
Initially, if the Fed thinks Treasury’s minting too many trillions, the Fed can counteract by selling its own stockpile of Treasuries. Economist William Luther recently argued this is precisely what would happen. The problem is that the Fed runs out of assets to sell faster than Treasury runs out of random things to stick trillion-dollar price tags on.
To illustrate, the Fed currently has $5.5 trillion in Treasuries. Even a hard-money Fed, which we haven’t had in some time, could only cancel 5 and a half super-coins. Indeed, Treasury could simply declare the next broken stapler they see as worth $5.5 trillion and cut to the chase. Of course, the Fed could then keep going with their other $3 trillion of assets, mostly mortgage-backed securities. But then Treasury discovers a $3 trillion ketchup packet in the galley and it’s checkmate for the Fed. At which point Fed’s out of the money game, and it’s in Treasury’s inflationist clutches.
What happens next, does debt go to infinity? No, but close: Without the Fed involved, Treasuries become a two-man game between Treasury vs private bond buyers. After all, even if Treasury feels it can issue all the debt zeros can count, somebody’s got to buy that debt. They have to either buy it directly as investors, or they have to be willing to accept it as IOU because they think somebody else will buy it.
And so the unstoppable force of a Treasury with unlimited credit card meets the immovable object of market acceptance. Going by the history of such “bond vigilantes,” markets will punish radical jumps in government spending with obscene rates of interest. Perhaps reaching double digits or higher, which future generations get to pay until we actually do default.
So, boiling it down, the end result of a trillion-dollar coin is radically higher money creation, radically higher government absorption of real resources from the private sector, and a federal government that has finally maxxed out the credit card once and for all. Bringing them at last face to face with the universe’s ultimate debt ceiling: the bond market.
What does this mean for Bitcoin?
Wonderful things. First, the mere fact that we’re having this discussion is extremely bullish for Bitcoin. The trillion-dollar gimmick got a hearing in 2008, but now we’re arguably in much more serious headwinds with slowing growth and already-rising inflation. Moreover, the fact that governments seem to be settling in to a pattern of destroying the world every decade bodes very well for any asset protecting you from those thundering incompetents, of which Bitcoin is far away the best.
I’ll write more in future about what government control of money does to inflation, but the short of it is that if you think central banks like printing money, just wait til you meet Congress. And, as corollary, if Bitcoin’s price likes the Fed’s money printers, wait til they meet a Treasury that shoots out trillion-dollar scrip for sport.
So, in sum, if you care about the country and the economy, you’d oppose these gimmicks, whether in the US or imitated worldwide. But your Bitcoins, and the wealth they protect, will toast the lunatics running the asylum.
Final point, will it actually happen? A trillion-dollar coin will almost certainly not come to pass — it’s just too gimmicky. Still, the inflationists are very much on the march, and sooner or later will stumble across something more sellable but just as insane. One of many reasons to stay long Bitcoin.
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