The idea that the US treasury will mint a one trillion dollar platinum coin in order to avoid the debt ceiling seems somewhat absurd, but faced with a government threatened with deadlock and inaction it is being entertained. The premise behind this coin is that it avoids entering a debate scenario similar to August of 2011 where “Tea Party” Republicans toyed with the idea of the US government defaulting on their debt payments and liabilities. That being said, not raising the debt ceiling, which has been done on 78 separate occasions since 1960, and pursuing alternative measures to avoid exhausting the US Treasury’s coffers will ultimately shock both creditors and rating agencies.
The glutinous spending of the US government is no secret by now. And it is known that there is a very serious debate to be had in the US about the structure of their entitlement programs and their continuing problems with their deficit financed spending. It seems the approach, however, of the current administration is to simply leave addressing these issues to someone else as politically palatable actions seem to be the more favoured course of action. And just like passing a budget deal without addressing entitlement programs, the idea around issuing a one trillion dollar coin is exactly that; putting off the job of addressing the structural issues of their deficit for someone else.
Despite all the structural issues in the US, there has been a serious shift of optimism in equities, and thus moving away from fixed income, as investors start to hope this global recovery continues to takes place. And the speed bump to a rallying stock market, as many have predicted will rally in the beginning of 2013, will be debt ceiling talks in the US. The media exemplifies polarized views, either extremely left or right wing when discussing the idea of the treasury issuing this coin, but the implications of it are not political and in fact quite simple.
US lawmakers along with the over glorified president are too dysfunctional to sit down and debate spending such that the Treasury has to take its own course of action. Such a vote of non-confidence by minting this coin will not only disrupt their currency and the price of the US dollar, but also their credit rating. This will be a signal to international lenders that when it comes to finances, parties involved can only travel to the extremes to achieve this charade. It is almost unbelievable. The US government is losing any shred of creditability they have left.
And that is really what the problem is. When Obama got re-elected for a second term he must have truly believed that he had a mandate to do whatever he wanted. John Boehner, who is a moderate Republican, is under pressure from the fringe of his party to get some compromise in terms of spending cuts, and the president, to use a baseball metaphor, will not even come to bat.
To paraphrase PIMCO Bond King, Bill Gross, the US Treasury is in essence writing cheques for free. They issue bonds to be bought by the Fed, and then receive back the interest that the bonds have paid. His claim is that there must be a cost for this as, simply put, cheques cannot be written for free. Ultimately, the cost will be inflation.
Some think inflation is palatable. I am on the other side of that bet and that is why I believe in real assets like gold and land. But the message is that every action has its costs. If the US opts for minting a trillion dollar coin, the costs will be insurmountable.