Wouldn't this start a precedent though? And possibly lead to crazy inflation rates? I'm of course running this under the assumption this loophole is taken advantage of every time a situation like this were to arise.
The Treasury would mint this coin and then deposit it into its bank account at the Federal Reserve. Now because this coin is legal tender, the Fed would have no choice but to accept it. It would work pretty much like a regular bank deposit, the Treasury's bank account would increase by one trillion dollars, real money, which then the Fed would put into circulation by buying Federal debt.
So, yes, this loophole would render the debt ceiling meaningless, because the government -when in need of money- would simply create money to pay its bills. Hence, no real need for borrowing anymore.
This wouldn't necessarily cause inflation, at least not directly. The exact same amount of money will be in the financial system whether the Treasury Department uses this platinum coin or simply continues borrowing. Printing money isn't at all inflationary under current conditions i.e. with the economy depressed and interest rates up against the zero lower bound. The vast majority of the debt right now is simply an accounting exercise, the debt is just a claim by one more or less governmental agency on another governmental agency.
However, the coin could increase inflation expectation (i.e. the rate of inflation that workers, businesses and investors think will prevail in the future, and that they will therefore factor into their decision) and this in turn could increase the actual inflation. Empirical evidence shows that the state of inflation expectations greatly influences actual inflation and, thus, the central bank's ability to achieve price stability, that's due to the fact that beliefs about the future affect the current behavior of economic agents. The theory is that if inflation is expected to be persistently high, workers bargain for higher nominal wages to protect their real income. This creates a pressure on firms' costs and they may in turn increase prices to maintain their profits. Independently, the producers' own inflation expectations also affect inflation directly by influencing their pricing behavior. If companies expect general inflation to be higher in the future, they may believe that they can increase their prices without suffering a drop in demand for their output.
So, to recap:
We don't know if it will cause inflation. It shouldn't, but it could.
Anyway, the main problem with this coin-idea is as you said that it would set a precedent, which would reduce the credibility of the U.S. government and scare the financial markets and consequently make an already weak recovery feebler.
The financial system is based on trust, it can't function without it and no investor is going to trust a government that pulls money out of thin air.
It's a joke. The US doesn't have a trillion dollars of platinum
The coin would contain only one ounce of platinum, worth about $1,500 in reality. By law, it would be magically assigned a value of one trillion dollars.
At least, i hope it's a joke.
It's seriously under consideration! haha Paul Krugman supports it.
