Why Minting a Trillion-Dollar Coin Would Be a Horribly Inflationary Idea

A s the government approaches its debt limit, cries from the usual suspects to “mint a trillion-dollar coin” have flooded the policy-idea sphere. Proponents suggest Congress use its minting power to create new money in the form of a trillion-dollar coin to fund itself and sidestep the debt limit. The Constitution explicitly gives Congress the power to coin money. Though such a move would be legal, the economic implications would be disastrous.

The idea is not new. It first emerged over ten years ago in the midst of a similar debt-limit standoff that ultimately resulted in S&P downgrading U.S. debt and a significant market selloff (this was also in the same era as the Bowles-Simpson debt commission). More broadly, governments around the world and throughout history have frequently resorted to currency debasement during fiscal crises.

The trillion-dollar coin would, in essence, permanently add new currency to the liability side of the Fed’s balance sheet. This type of money creation sharply contrasts with the quantitative-easing strategies of the past. With quantitative easing, the Fed issues temporary bank reserves to fund bond purchases rather than issue new currency altogether. According to research by one of the co-authors, quantitative easing has a marginal effect on long-term bond yields and minimal effect on inflation. On the other hand, economists since David Hume have known that helicopter-money drops — which are permanent additions to the balance sheet — are highly inflationary. A trillion-dollar helicopter drop, which would equal about 5 percent of the M2 money supply, would be one of the largest in American history.

With inflation not yet under control and the Treasury putting upward pressure on inflation by minting a trillion-dollar coin, the Fed would face an impossible dilemma. If it raised rates in response, which would be the logical move to counteract such a large expansion of the money supply, that could cause two problems. First, it could induce recession. Second, following “unpleasant monetarist arithmetic,” it could make our country’s fiscal problems worse by raising the costs of servicing existing debt, which has the potential to increase inflation if the government pays for that cost increase with further monetization. But if the Fed did nothing, inflation would likely rise, the Fed’s independence would be threatened, and the potential for the Treasury to do it again would increase without corresponding congressional reform. The cure is worse than the disease.

As the debt-limit negotiations continue, there should be some serious reflection around the incredible amounts of government spending over the past few years. Despite the largest inflationary spiral since the 1970s and 1980s, the government shows no signs of embracing fiscal responsibility. Political convenience may lead some to chalk up the recent inflation to “supply shocks,” but the connection between excessive deficit spending, money creation, and inflation is indisputable.

As the FREOPP inflation-inequality indices and heaps of academic evidence demonstrate, inflation has considerable consequences for all households along the income distribution. If Congress doesn’t take this opportunity to address its role in creating inflation, it will only be easier for future lawmakers to repeat today’s mistakes, and households, especially poorer ones, will be hurt in similar ways again.

Economists have known for decades that an independent monetary authority is critical for maintaining price stability. By directly creating currency on its own, the Treasury would shred the appearance of the Fed’s control of monetary policy (something even Secretary of the Treasury Janet Yellen has recognized in discussing the trillion-dollar-coin proposal, which she called a “gimmick”), sending the country 50 years backward institutionally. Without a fight, inflation expectations risk becoming completely unmoored. Given the decades it took to build up trust in the Federal Reserve in the first place, such an action would be destabilizing and completely irresponsible. It is high time to retire the trillion-dollar coin to its rightful place in the dustbin of crackpot ideas.

Jon Hartley is an economics Ph.D. student at Stanford University and a research fellow at the Foundation for Research on Equal Opportunity. Jackson Mejia is an economics Ph.D. student at MIT and a visiting fellow at the Foundation for Research on Equal Opportunity.