Invincible Ignorance and the $1T Platinum Coin Folly

It's stories like this that really make me fear for our country. The rank ignorance of economic matters that one finds at the highest levels of our country just sends chills down my spine.

A few weeks ago a college professor threw out the idea of the Federal Treasury Department minting a one ounce platinum coin and assigning a value of $1 Trillion to it. Apparently there is a loophole in the law that technically allows the Treasury to assign whatever value it sees fit to 1 ounce platinum coins.

The professor suggested this as a way of addressing the government's revenue shortfall.

I am not sure if the professor wasn't joking but the idea didn't die. It has now gone mainstream. There is a petition to the White House to mint such a coin and now we have the likes of Krugman endorsing the idea:

"...by minting a $1 trillion coin, then depositing it at the Fed, the Treasury could acquire enough cash to sidestep the debt ceiling — while doing no economic harm at all."

Plus others are saying they can find nothing wrong with the idea. Just check out hashtag #MinttheCoin.

Here is the reason why it is a bad idea: were the Treasury were to mint such a coin with a statutory value of $1T and put it on the market, they would not get $1T for it. Let Krugman and a bunch of his friends pool their money and buy that coin if they think that's such a good idea. They wouldn't do it. Nobody would. It's that simple.

All the rest is nothing more than a scheme to side-step the value that the market would assign to such a coin.

Were the Fed to give the Treasury $1T in cash in exchange for the $1T platinum coin, the Fed would instantly become bankrupt. Because a 1 ounce platinum coin is not worth $1T no matter what is written on it. The Fed's liabilities would go up by $1T because Federal reserve notes and their electronic equivalents are liabilities on the Fed's balance sheet. The Fed's assets go up by $1T also because of the platinum coin. Except everybody would then know that the quoted value of the Fed's assets (or rather one particular asset) was bullshit! The Fed's balance sheet would be a pack of lies and, AND (!) everybody would know it!

Why? Because the Fed could never sell that coin for $1T. All the rest of the assets on the Fed's balance sheet the Fed could sell and get something in the vicinity of what it's listed for in its balance sheet. Not so in the case of the $1T platinum coin. Not even close. We would have a Fed that is insolvent that would have to be bailed out by...the Treasury! Where the Treasury get the money to bail out the Fed? Borrowing or taxes. So the $1T the Treasury were to get from the Fed in exchange for the $1T platinum they would sooner or later have to use to bail out the Fed.