How would the trillion-dollar coin save the United States' economy?

Question

Recently I read in a news post that the Treasury Department is able to order the coinage of a coin made of platinum with a value of 1,000,000,000,000 USD, or 1 trillion US dollars. You can read about this subject The Trillion Dollar Coin Idea To Save The Economy(courtesy of Business Insider):

The premise of the idea is this: Although the Treasury can't just create money out of thin air to pay its bills, there is a technicality in the law that says the Treasury has special discretion to create platinum coins of any denomination, and the thinking is that Tim Geithner could make the coin and walk it over to the Federal Reserve and deposit it in the Treasury's bank account.

The opinion of the winner of the Economics prize in memory of Alfred Nobel Paul Krugman (Conscience of a Liberal, The Opinion Pages):

First, as a legal matter the Federal government can’t just print money to pay its bills, with one peculiar exception. Instead, money has to be created by the Federal Reserve, which then puts it into circulation by buying Federal debt. You may say that this is an artificial distinction, because the Fed is effectively part of the government; but legally, the distinction matters, and the debt bought by the Fed counts against the debt ceiling.

The peculiar exception is that clause allowing the Treasury to mint platinum coins in any denomination it chooses. Of course this was intended as a way to issue commemorative coins and stuff, not as a fiscal measure; but at least as I understand it, the letter of the law would allow Treasury to stamp out a platinum coin, say it’s worth a trillion dollars, and deposit it at the Fed — thereby avoiding the need to issue debt.

My questions are:

• Is this legal? If I am not wrong, only the Fed has the power to print official money?
• Who will accept this coin, and how will this coin save the economy?

Answer 1

The purpose of the coin isn't to raise the amount of money in circulation, it's to alter the debt-load of the government, which prevents an un-raised debt ceiling from negatively impacting the economy. In Krugman's description, this is the key bit:

First, as a legal matter the Federal government can’t just print money to pay its bills, with one peculiar exception. Instead, money has to be created by the Federal Reserve, which then puts it into circulation by buying Federal debt. You may say that this is an artificial distinction, because the Fed is effectively part of the government; but legally, the distinction matters, and the debt bought by the Fed counts against the debt ceiling.

By making the coin, and depositing in the Federal Reserve, it means that the amount of money in existence has been drastically altered. However it's been done in a way that avoids buying Federal debt. So the government has more money to spend without having increased its debt load.

The debt ceiling is a law where Congress authorizes the total amount of Federal debt. Normally, Congress just votes to increase this as a minor bureaucratic action (this is separate from the budget, which lays out how the government will spend money). During the most recent debt ceiling raise in late-2011, it became an issue.

Since the debt ceiling is decoupled from the budget, the federal government is essentially ordered by Congress to spend money as allocated in the budget. In order to do this, the government borrows money to finance things. But if the debt ceiling isn't raised, then the federal government is essentially stuck unable to pay its bills because it can't borrow more money. So the trillion coin idea is a way to avoid hitting the debt ceiling without borrowing more money. There would likely be some economic impact to this, but since this it's never been done, it's not precisely known what the impact would be. On the other hand, we know the impact of a government shutdown, which is what would happen without a debt ceiling raise or a trillion dollar coin being minted.

Answer 2

It doesn't make much sense to me.

Money is a measure of the amount of wealth of a country and printing this coin doesn't alter the wealth of the US.

The effective value of one dollar is, in other words, the total wealth of the US, divided by the number of dollars in circulation.

If they were to increase this number by 1 trillion, the value of each dollar in circulation will be decreased in inverse proportion, or, in other words, the "value" of this super-coin will be "drained" from the whole economy.

The overall effect would be inflation.

More info here

Answer 3

A trilion dollar coin isn't going to be very useful unless you can find an industry that regularly makes trillion or close to a trillion dollar transactions.

Not only do you have to find someone who's going to sell you a trillion dollars worth of something, but in order for them to actually use the coin, they'll have to find someone else who wants to give them a trillion dollars worth of capital for it.

On the other hand, if the Fed mints a trillion dollars worth of smaller detonations, that will cause the value of the dollar to go down, considering that there are a trillion more dollars.

Answer 4

It doesn't make sense to do this for other countries, since the "Supply and Demand balance" decreases money value.

But for the US it makes sense, because the US dollar is the world reserve currency. So the US can share it's "decrease of money value" (and debt) with other countries. This would be the biggest robbery in history.

Answer 5

There is a small chance this could save the economy by a very oblique path:

It would persuade enough citizens that our economy is in the hands of morons, to the point that there would be enough people to finally do something about it.