Okay, so the Treasury mints a Platinum coin, and deems it to be worth One Trillion Dollars. We have a fiat currency, so what is the problem?
There are fiat currencies, and there are fiat currencies. Depositing something as collateral into the central bank where the "melt value" is decidedly less than one million, much less trillion dollars, is ridiculous. I realize that many believe that the Fed can do whatever it wants, but eventually cash flows will catch up with a central bank as inflation rises.
The Trillion dollar coin would have value only because the taxation authority of the US Government stands behind it. But that is not the way the government is behaving. The taxation authority is not taking in as much and more so that they can redeem the promises inherent in the coin. Instead, they are looking to the Fed to absorb losses in a stealth monetizing of the debt.
[Related -A Delicate Balance For US Macro Outlook Via Treasury Yields]
Monetizing government debt leads to inflation. Receiving something worthless, and deeming it to be of high worth is the same as monetizing the debt. Yes, the Fed can try to sterilize the effects, but it leaves the Fed with a problem — it will never be able to shrink its balance sheet to 2007 levels. Thus inflation, eventually.
The platinum coin is a bad joke, and bad policy if eventually done. This is what I wrote at Felix Salmon's blog yesterday:
If they tried the platinum coin(s) once, Congress would legislate to eliminate the practice. The Purple party would take back their authority.
[Related -Two Firms On The Cusp Of A Major Turnaround]
It is also possible that the Supreme Court would make them reverse the transaction, on the grounds that only Congress can regulate what is money. The executive may not. The minor exception made by Congress for platinum coins was only intended for numismatic coins — not anything large.
But yes, Felix, you are right. This would end the concept of the dollar as a reserve currency. Only banana republics monetize their debt. Hey, maybe even the Fed would develop a backbone, and refuse the coin, or tell them it is only worth $1000. They don't want to be stuck with QE not of their own design. Their QE is bad enough, but the coin, which will be a hole in the Fed's balance sheet for as long as it lasts will be far harder to reverse.
You can't get something for nothing. Monetary stimulus is garbage, it steals from savers to reward solvent debtors. Insolvent debtors can rot. As with all monetary policy, stimulus helps the solvent.
This is a huge advertisement to get the government out of the economics business. It has never been good at it, and this is proof. The government might be able to goose things in the short-run, but it never succeeds in the long-run.
As it is, our government is addicted to short-run policy, and as such, does not consider long-run solutions that might be painful in the short-run.
Too bad. Your kids lose, while you don't seem to lose much for now. This is a lousy position to be in. People play for short-term advantage while while inflation increases.
You can't get something for nothing. Either there will be inflation, or taxation to pay back the platinum coin.