Can a $1 tn Coin Save the US?
The US is running out of cash. What options does it have to save itself?
The US was dangerously close to running out of money this month. It did not have enough cash to pay off its debt. But can't the US just borrow more money? Oh, if only the two leading parties could stop fighting and agree to raise the country's 'debt ceiling'.
Umm… What is the debt ceiling, though?
The debt ceiling is the maximum amount of money that the US government can borrow to fund its financial obligations. You see, the government needs money to take care of the economy and keep the country running smoothly.
And well, the US has been in debt literally since it has been in existence.
Before it gained independence in 1776, the US, like us, was a British colony. But independence came at a great cost: over $75 million! This is the amount of money the US had spent in the Revolutionary War of independence.
Since then, the US got sucked up in one tragedy or the other: the US Civil War, the Great Depression, the 2008 recession, and currently the Covid pandemic. All this forced the US to be constantly in debt.
In fact, over the last year, the US has been spending twice as much as it has been earning through taxes.
Now, in order to spend more than what you earn, you need to take on debts. But why did the US have to introduce a debt ceiling?
Let's go back to the times of World War I. Many US lawmakers were not in favour of the US taking part in the war as it would cost a lot of money, drain the economy of vital resources and increase the country's debt. To calm them down, lawmakers in favour of the war introduced a debt limit, promising they wouldn't borrow more than $1 billion, in the same way that we promise our parents we won't ask them for money again.
But, promises are meant to be broken.
As US' spending increased, it kept increasing the debt ceiling to catch up to these increased expenses. So far, it has raised the debt ceiling almost 100 times!
The US' debt limit in August 2021 was $28.4 trillion but its outstanding debt had reached $28.7 trillion, leading to the political standoff regarding raising the debt ceiling.
For the time being, the problem has been solved. The Senate has agreed to raise the debt ceiling by $480 billion. This will allow the US Treasury Department to pay the bills till December 3.
But what will happen if the US doesn't raise the debt ceiling after that?
To understand this, we first need to answer how the US borrows money.
The US raises money by issuing Treasury Securities, which common people, companies, and foreign governments can buy. What are those?
Treasury Securities are basically loans that the US government takes from investors. From foreign reserve banks to the common man, all buy these securities. What do they get in return? Each investor receives interest on their investment.
But, if the US doesn't raise the debt ceiling, it cannot borrow more money and cannot pay the money it already owes to people. That means it would be defaulting on its loan. This would have long-lasting repercussions for both the US and those who have invested in its debt.
The US debt is generally considered to be a safe and risk-free investment by all. That is why countries like Japan, China, and the UK have invested a large amount in Treasury Securities. If the US fails to make payments on time, its credit rating will go down.
Investors will no longer have unshakeable faith in the US' capability to return the money and would ask for a much higher return on investment later. This would cost the US more interest if and when it wants to borrow money in the future.
But, isn't there a better way to pay off the US debt rather than just increasing the debt ceiling and impending the inevitable?
Well, a US lawyer has a trillion-dollar idea.
In 2011, when the US was facing a similar debt ceiling crisis, Carlos Mucha suggested that the President could mint a "commemorative" $1 trillion coin. This coin could be used to pay off all the US obligations without borrowing more money.
The idea sounds too good to be true, no?
Because it probably is.
US Treasury Secretary Janet Yellen rejected the idea, saying that it was a "gimmick" that would not pay off. But isn’t the idea worth considering? What if the US does mint a trillion-dollar coin?
For starters, creating a $1 trillion coin out of thin air could lead to hyperinflation. There would be more money chasing the same amount of goods and services. As demand for goods and services will increase, without any increase in output, it will lead to an increase in the price of things. But that’s not the only problem.
Doing so could also make people less confident about the dollar and have negative consequences.
Also, isn’t it Congress' responsibility to deal with the US debt and the debt ceiling? If the President intervenes, it could be grounds for impeachment causing a whole constitutional crisis in the country, further complicating matters.
What is the solution then?
President Biden wants to increase the US' income by raising corporate taxes and taxes paid by billionaires. Will he be able to implement these measures? And can they actually reduce the US' tax burden?
Only time will tell...
Until then. Read On.
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