1 trillion dollar coins instead of more national debt?
China’s credit risk and Washington’s debt ceiling drama are driving precious metals markets this week. Gold and silver attracted some significant safe haven buying as the stock markets succumbed to sales.
The story trumpeted in the financial media is that October will face a government shutdown and possible debt default unless the Senate comes to an agreement on raising the debt ceiling.
There is some truth to these headlines. And we would certainly count unsustainable government debt among the main reasons investors own physical precious metals.
But let’s get real. The likelihood of an actual default on US Treasuries in 2021 is slim to none.
As is so often the case, brinksmanship will almost certainly give way to compromise. Either way, the debt ceiling will be raised.
At the moment we are mainly experiencing political theater.
Republicans pose to show they are against the Democratic spending agenda. And the Democrats are trying to force the Republicans to vote to raise the debt ceiling.
The reality is that the establishment Republicans have approved most of the spending that is now being funded. And the Democratic leader Chuck Schumer could authorize the government at any time through a procedural vote in the Senate to take out additional loans.
“Democrats have the votes to do it alone,” admitted left-wing CNN.
But if they did, “they would get the worst parts of the debt ceiling increase or suspension without the benefits.”
By “benefits” they mean political cover for Democrats at risk in the mid-term election campaign.
Meanwhile, CBS News reports that a “US debt default could destroy 6 million jobs and $ 15 trillion in assets,” based on calculations by Moody’s Analytics.
Janet Yellen warns of “economic disaster” if Congress fails to raise the government’s credit card limit.
These alarmist warnings are misleading. Government bonds and the dollars they are denominated in are claims to property – not property itself.
In the event of a sovereign debt collapse, purchasing power is transferred from bondholders in favor of taxpayers, who are no longer responsible for paying interest and principal.
Of course, a domino effect would hit financial markets and credit risk sensitive sectors of the economy. The financial system would be forced to stand on a more solid footing – a painful process that wouldn’t necessarily be bad in the long run.
But a default is not allowed.
Even if the Senate does not act, the Treasury Department and the Federal Reserve could take immediate action on their own initiative.
Some unconventional options that are being discussed concern precious metals – but not in terms of a return to healthy money.
One suggestion would be for the Treasury Department to mint platinum coins with an arbitrary face value of $ 1 trillion. These coins could then be deposited with the Federal Reserve, which would credit the government with the trillions of dollars it needs to pay its bills.
Voila, no new debt!
As wacky as this idea may sound, it was first pushed over the debt ceiling by the hard left during the Obama administration to circumvent the political deadlock and is being pushed again as a possible last maneuver.
Of course, individuals who own American Eagle platinum coins (face value $ 100) would not become trillionaires immediately. However, platinum and other hard assets could still soar significantly in dollar terms due to fears of inflation if the Fed used its digital printing machine to buy coins that the US government says are worth $ 1 trillion.
Regardless of the form, the Fed is ready to print all of the currency the government needs to pay its bills.
Former Fed chairman Alan Greenspan has said that default in our monetary system is essentially impossible.
Instead of fear of a formal US default, investors should fear the inflationary consequences of averting it. In the years to come, many new currencies will be created to sustain the $ 28.8 trillion (and growing) national debt and allow politicians to continue running multi-trillion dollars in annual budget deficits.
The greatest risk of default of all is the Federal Reserve’s failure to meet its obligation to maintain a stable currency.
Without a meaningful anchoring in gold or other precious metals, nothing stands in the way of a sharp decline in the value of the Federal Reserve Note – especially since a currency devaluation is more convenient for politics than a budget adjustment.