Paul Krugman has big ideas about the manufactured debt ceiling crisis and shares them on Twitter:
About possible end runs around the debt ceiling. I have no inside information, but my guess is that premium bonds are a more likely route than the platinum coin. Why? Because nobody understands premium bonds, while people think — wrongly — that they understand the coin. 1/
Premium bonds: a bond has a principal or face value, which is what is paid when it matures, and a coupon that is paid every year until then. The idea is to issue bonds with, say, a $1000 principal and a $100 annual coupon. 2/
Since market interest rates are way below 10%, such a bond could be auctioned off for much more than $1000 — but Treasury could say that if the bond replaces an existing $1000 bond, it hasn’t increased the debt even though it’s raising a lot of money. 3/
Extreme example would be consols, which are just a perpetual coupon with no principal. In my experience, if you try to explain all this, people’s eyes glaze over — which is good! Hard to get outraged over something that baffles you. 4/
The coin: Treasury exploits a quirk that permits minting of platinum coins in any denomination to mint a coin with a face value of $1 trillion, deposits it at the Fed, then uses funds from that bank account to pay bills. 5/
I keep seeing people saying that this would be MMT (Editor’s note: Modern Monetary Theory), that we’d just be printing money to cover the deficit. But it wouldn’t be that at all. The Fed would surely sterilize any impact on the monetary base by selling off some of its huge portfolio of U.S. debt. 6/
Think of the Fed as a branch of the federal government, which from a fiscal point of view it is. Then this consolidated entity would in effect be covering deficits by selling bonds — i.e., normal deficit finance, just through the back door. 7/
But as I said, people who really should know better constantly get this wrong, and imagine that the coin would be inflationary. And that’s a reason to prefer a route that doesn’t inspire confident misconceptions. 8/
As for claims that Powell would refuse to accept the coin, or the Supremes would block premium bonds — well, nobody knows. But my guess is that nobody wants to be the guy who destroys the world economy. Even people happy to see it burn don’t want their fingerprints on it. 9/
