Really Big Coins, Constitutional Amendments & Other Stupid Ideas

I haven’t yet commented on the Trillion Dollar Platinum Coin option to avoid the debt ceiling because it is so stupid that I couldn’t fathom that anyone might actually take it seriously. Silly me. It appears that I underestimated the desire of certain politicians to keep spending ever larger amounts of our cash. No less than Paul Krugman – Nobel prize winner, New York Times columnist and all around shill for the Democratic Party – has not only taken the proposal seriously but appears to approve. Of course, he only approves of this crazy option because he believes the Republican opposition is nuts. If they would just come to their senses, stop paying attention to those stupid voters who elected them and remember what Dick Cheney said about deficits, Democrats wouldn’t have to match their craziness with a proposal even more insane than not raising the debt ceiling.

The Platinum Coin option exists due to a loophole in legislation passed years ago that gives the Treasury Department the authority to mint commemorative platinum coins. All you really need to know is that the platinum coin option is the equivalent of paying the nation’s bills with Monopoly money. Those crazy Republicans won’t raise the debt ceiling without some offsetting spending cuts so the loony wing of the Democratic party would have the Treasury mint up a commemorative platinum coin, stamp $1 trillion on it and ask the Fed to make some change. Since that only covers about a year of the current deficit, I guess they plan to mint up another one next year. Presumably the market wouldn’t notice that the US government had just gone banana republic, conjuring cash from thin air to pay its bills. If someone does notice and the value of the dollar starts to fall like some kind of gringo peso we can always just mint a whole roll of the darn things. Here’s an idea: make the Trillion Dollar Coin the same size as a quarter and have Geithner use it to buy a Coke (or Pepsi, whoever pays off the most politicians first). You want creative stimulus ideas? Come on down, I’ve got a trillion of them. Whoever gets that coin for change is going to feel pretty darn stimulated.

The other often mentioned option for avoiding a confrontation with the reality of our fiscal situation is for the President to invoke the 14th amendment and just keep issuing debt, paying for necessary and stupid programs alike just as Congress passed them. The only problem I see with this theory is the amendment itself:

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.

That first phrase would seem to be pretty important; “The validity of the public debt of the United States”. You’ll notice that it doesn’t say diddlysquat about spending authorized by Congress that hasn’t yet created a public debt for the United States. It doesn’t say that the validity of any crazy crap enacted by Congress and signed by the President but for which Congress has yet to approve borrowing to pay for shall not be questioned. It doesn’t say that since the President has to pay the interest on the existing debt he is free to keep incurring more too. So I don’t think this is going to work for those politicians who think the President can just bypass the fools in Congress who think they should have some say in how much the government borrows and spends.

Since the administration itself has said that it doesn’t believe the 14th amendment gives them the necessary authorization to ignore the debt ceiling and the Treasury and Fed have just rejected the Trillion Dollar Coin option, it appears we are headed for a showdown over spending and debt in the near future. Or are we? President Obama is adamant that he won’t negotiate over the debt ceiling and he may not have to if Republicans lose their nerve. The fear is that cutting spending so abruptly as would be required if the ceiling is not raised, would damage the economy badly. This Keynesian view of the economy is so ingrained in the fabric of American society that it is almost an article of faith. I suspect that enough Republicans in Congress believe it to one degree or another that it will never get tested and Obama will get his debt ceiling hike.

The problem with that is that a hike in the debt ceiling without some kind of spending restraint means the US economy will just keep chugging down the same crazy train track we’ve been on for a decade or more. You’d think that after eight years of spending like drunken sailors under Bush and four years spent embarrassing drunken sailors (and I speak with some experience in the drunken sailor milieu) under Obama that we could maybe try something other than spending a lot of money as a solution to all things economic in this country. Federal spending has more than doubled from $1.8 trillion to $3.8 trillion since 2000; if we have economic troubles it would seem hard to blame it on a lack of government spending.

I suppose you can make the case – and Democrats are implicitly making this argument now – that the money hasn’t been spent wisely. And I would agree wholeheartedly. However, if you believe that Democrats would have spent it better than Republicans or vice versa, I would be forced to respectfully – or not so respectfully depending on how nasty you are in asserting it – disagree. If the money is being spent poorly it isn’t because the wrong political twits have been in charge of the spending. It is being spent poorly because all the political idiots have the wrong incentives when it comes to deciding how to spend money that isn’t their own. James Buchanan, who passed away this week at the age of 93, taught us with public choice theory that “individuals who behave selfishly on markets can hardly behave wholly altruistically in political life.”

Regardless of the outcome of the debate over the debt ceiling, it is high time we had a serious conversation about government spending and its effects on the national economy. Minting trillion dollar coins and torturing Constitutional Amendments to avoid having the debate is not serious – even when you have your very own Nobel Prize winner supporting your argument.

For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, Joe Calhoun can be reached at: jyc3@alhambrapartners.com or  786-249-3773.

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