“Here’s what you need to know about the debt ceiling.
The main player in this drama is the US congress. Congress is the legislative body of the federal government, similar to parliaments in Europe. Congress makes the laws.
In particular, Congress specified how much the US should spend on things like social security and the military. Congress also passed laws on taxation.
These laws are executed by the Treasury, what we call the Ministry of Finance in Europe.
Because expenditures exceed the tax revenue approved by Congress, the Treasury needs to borrow the difference. So US government debt goes up.
And that’s where the debt ceiling comes in.
In addition to laws on spending and taxation, Congress also passed a law on the maximum level of government debt. This so-called “debt ceiling” is currently somewhat above 28 trillion dollars.
If Congress doesn’t raise the debt ceiling, the Treasury has a huge problem.
To comply with the law, Treasury has to spend money on existing programs. But according to the debt ceiling, it cannot borrow any more money. And Treasury cannot create new taxes, that’s the responsibility of Congress.
So it seems that the Treasury is trapped in an impossible trinity, where it cannot satisfy the three demands of Congress (spend, tax, debt ceiling) at the same time.
But some smart lawyers have discovered a loophole.
Treasury has the right to make money. Specifically, the Treasury can mint coins from platinum, a precious metal. But the value of the coins isn’t in the metal. The coin can be whatever value the Treasury says it is. Just like a 100 dollar bill is worth a hundred dollars because it is issued by the Federal Reserve, not because the material is worth a hundred dollars.
So when Congress doesn’t raise the debt ceiling, Treasury can make a trillion dollar platinum coin. That way, it has extra money to keep paying the existing spending programs approved by Congress, without increasing the debt.
There’s a website, mintthecoin.org, which has answers to a lot of questions on the proposal to mint a trillion dollar coin. For example, whether it’s legal (yes, it is) and whether it would lead to hyperinflation (no, it won’t).
I hope you enjoyed this episode of the Finrestra Podcast. Don’t forget to listen to our first episode with Uuree Batsaikhan of Positive Money Europe. You can follow me on Twitter @janmusschoot, that’s @ j a n m u s s c h o o t. Our website is finrestra.com. Thanks for listening!”