“Change is good, but dollars are better.”

-Unknown

Recently I penned an article highlighting the country’s fiscal condition.  This year’s Ides of March (15th) acquires special significance with the expiration of the Obama-Boehner debt ceiling deal, the Fed meeting, and an election in the Netherlands. 

Unless there’s an increase in the debt ceiling, the Treasury will be limited to servicing the government’s expenses to their operating cash balance.  The Treasury publishes a Daily Treasury Statement that tells the world how much cash they have on hand.  On the first day of the 2017 fiscal year (10/3/16), they had $339 billion.  The day after the election (11/9/16) they had $365 billion.  On January 25th, a few days after the inauguration, their balance was $401 billion.  Since that time, the Treasury drained their coffers to the tune of $370 billion to a balance of $30 billion as of the close of March 10, 2017. 

I’m not sure how long the $30 billion will last.  When that balance falls to zero, they’ll have to resort to other techniques to keep the government afloat.  This will be a politicized event.  What follows, is an excerpt from my upcoming book where I muse about a number of economic and social topics.  The excerpt discusses an alternative once considered for circumventing the debt ceiling.  I’m not advocating this approach.  Rather, I want to illustrate the extent of financial machinations considered in times of financial crisis.  Enjoy.

The debt ceiling is north of $20 trillion.  This represents the current, funded debt of the United States.  It in no way represents the entirety of the country's obligations which includes unfunded trillions for Social Security, Medicare, and federal employees' future retirement benefits.  The estimates for the unfunded liabilities vary though by any calculation they are numbers too large to count. 

One reason for funding gaps was government redirecting Social Security tax receipts towards current spending.  For a time, Social Security tax receipts were greater than obligations.  Rather than separate those funds for future use, the federal government used them.  In exchange for their use, the government created IOUs for the Social Security Administration.  These IOUs are unlike traditional bonds since they don’t exist on paper and are non-negotiable.  They exist in electronic form whose records are stored in the Parkersburg, West Virginia offices of the Bureau of Public Debt.  The value of these IOUs is in the trillions, they’re not invested in anything and have no market value.  

Why talk about IOUs?  During the debt ceiling discussion of 2011, the Obama administration wanted to circumvent the debt ceiling by minting $1 trillion platinum coins.  I’m not making this up.  Let's understand the mechanics of this.  After minting these coins, the Treasury would deliver them to the Federal Reserve who would then credit the Treasury's account with equivalent multiples of one trillion dollars. Sounds easy, huh?  The Fed typically credits the Treasury's account through their acquisition of Treasury bonds, bills or notes.  Since the debt ceiling is a statutory limit, the Treasury cannot issue debt above the limit.  Hence the debt ceiling debate. Through an obscure law from 1996, the Treasury has the capacity to issue platinum coins to fund government.   The platinum coins permit the Treasury to evade the debt ceiling.

Now let's go back to the Social Security IOU example.  In that exchange, the government took funds destined for a retirement program and exchanged it for something, an IOU, of zero intrinsic value. In order to evade the debt ceiling, the government wanted to exchange something of minimal intrinsic value (the value of the platinum) for $1 trillion from a private entity, the Federal Reserve.  Though the Fed's balance sheet swelled by accumulating government and other debt, at least that debt has a market price closer to the debt’s face value.  For the $1 trillion coin, how many buyers will line up to buy that platinum coin when the Fed wants to sell it?  Heck, that ring in Tolkien’s novels may not be worth a trillion.

Members of Congress, as well as Nobel economist Paul Krugman, floated the idea of the trillion dollar coin.  We should be concerned when neither Congress nor a Nobel laureate recognizes intrinsic value.  I would also be concerned if our central bank, the Federal Reserve, willingly adopted this scheme of accepting a small amount of platinum in exchange for $1 trillion.  An ounce of platinum is worth roughly $1,000.  To mint a platinum coin worth $1 trillion, the coin would need to contain more than 1 billion ounces of platinum.  The largest producer of platinum in 2012, with roughly 40% of world production, mined 1.18 million ounces.  This means there were roughly 3 million ounces produced in the world.  At this rate, it would take 333 years of platinum production to equal the value of one trillion dollar coin. I make these points not to educate readers about platinum but rather to point out the absurdity of the proposal.  

Come to think of it, how tough would it be to ship a billion ounce coin to the Fed?  What would you say when the shipping clerk asked you if you wanted insurance on the coin?  Would that be next day or second-day shipping?