It is first-order, stupid humor to make fun of this trillion dollar coin idea with a Dr. Evil joke. But I can't resist. I also can't resist calling it the Diet Coke of evil.
So I'm sure by now everyone has heard of this ridiculous trillion dollar coin idea, and while I don't think anyone understand the mechanics of it (certainly not anyone in Congress, whose members don't even know how a bond works), what the dummies do understand is that it is an end-around on the deficit, and that's all they care about. So let me walk through this step by step and try to deconstruct what would happen if we actually did this.
So the Treasury has the authority to mint whatever they want to mint. For background, let it be known that the silver bullion coins that Treasury mints are a $1 denomination (interestingly, they are $5 in Canada) and the gold coins are a $50 denomination. Currently, platinum coins are a $100 denomination (paradoxically, because platinum is cheaper than gold nowadays), but have not been minted in the U.S. since 2008.
Now, Treasury can make bullion coins whatever denomination they want (leaving aside the whole discussion about how dimes and quarters are essentially made of junk and the whole seigniorage phenomenon). So, yeah, if they want to mint a trillion dollar coin, they can mint a trillion dollar coin.
What happens next is interesting. The Federal Reserve is a big holder of Treasury debt (obviously), so the Treasury could retire (i.e., pay off) that debt by paying the Fed that trillion dollar coin. The Fed now has a trillion dollar coin and there is a trillion dollars less debt out there. We avoid the debt ceiling for another year. Huzzah!
This is where things really get amazingly, blindingly ridiculous, because the whole problem withcurrency is that it is worth whatever the government says it is, and the problem with that is that the government can take something that is totally useless (paper) and make it worth something. By making, by law, something that is essentially worthless (in this case, a coin, which, by market prices, is worth about $1600, or, a little more with the premium owing to scarcity value) worth something does not mean that it is actually worth something. The quarter in your pocket is still essentially junk and the fact that you can buy something, anything with it rests in the confidence of the full faith and credit of the U.S. government.
Well, if the U.S. government goes around playing a joke on everyone with a trillion dollar coin (the pinnacle of stupidity, the freaking zenith of it), it won't be long before people don't trust the government anymore, to the extent that they do in the first place. People will correspondingly lose faith in the currency in circulation, and will resort to other stores of value and/or barter. This is an interesting lead-in into the whole purpose of gold in the first place (are you listening carefully, gold bears?) because gold, which has value only because it is scarce, and whose value is determined by market prices, which is almost infinitely indivisible and also portable, meeting all the definitions of a medium of exchange. Therefore, this should settle once and for all the discussion about whether gold is an asset or a currency. Ben Bernanke thinks it is an asset. He is wrong. I don't own hundreds of ounces of an asset, I own lots and lots of the world's only true currency.
This is all exclusive of the fact that M0 actually goes up by a trillion dollars, which is inflationary in principle, even though it is very unlikely that the Fed would ever allow that coin into circulation, although it would be fun to get your hands on it and buy the entire state of...Florida. In fact, they should keep that sucker under lock and key, like the anthrax virus. Although it would be the best Ocean's Fourteen movie of all time if Danny Ocean and Rusty Ryan break into Fort Knox and abscond with it.
The really interesting aspect of this whole "discussion" is that the Democrats, and Paul Krugman, are in favor of it! They love it! That is the part of this sad story that is actually not funny at all, it is quite scary. It shows the extent to which people will resort to gimmicks and tricks to continue their irrational behavior. So in terms of gimmicks and tricks, this is pretty junior varsity. The real legerdemain is the printing of money to buy bonds, which we have been doing for four years, because that is a lot harder for people to understand than minting a stupid trillion dollar platinum coin, because not even Joe Sixpack is fooled by that (only Democrats).
From the dailydirtnap.com