Platinum Loophole

Written by The Financial Express | Updated: Jan 12 2013, 06:02am hrs
As the world prepares itself for another round of Washington brinkmanship over the debt ceiling, a queer suggestion in the Beltway circle has sparked off much discussion because of its propensity to sidestep the entire process. Once the US runs out of money some time in March, the Treasury could simply mint a trillion dollar platinum coin and deposit it at the Fed. The Fed can hold that as security for lending more money to the Treasury, and the administration can sidestep the debt ceiling altogether. This is perfectly legal, because a loophole in the American Constitution allows the Treasury to, well, mint platinum coins of any denomination.

Some very prominent left-liberals, notably Nobel Laureate Paul Krugman, have openly come out in its support. Their argument goes that, given the extremism of the Republican Party, President Obama may have to unnecessarily concede a lot just to get the debt ceiling raised (as he did in 2011). Threatening the use of the mint option may force them into a compromise, or otherwise, the administration always has a choice to fall back on. But this notion could be heavily mistaken. Even though minting a coin is perfectly legal, it still goes against the intent of law (minting was intended for commemorative purposes), which would surely attract bad press. Secondly, it would exacerbate the political gridlock in Washington. The real problem, as columnist Ezra Klein notes, is not the debt ceiling but a political system (and its political parties) that allows instruments like debt-ceilings to be used as a bait for any meaningful concessions or reform. If the President actually sidesteps the Congress, it would further energise the extreme wing of the Republican party into being more obstructionist, and this time without the fear of taking the US to default or the world economy into a tailspin. So, perhaps, the President should stick to the more simple option of negotiation.