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Will minting a $1-trillion platinum coin actually help in debt reduction? We explore what the effects of such a measure may be, and how precious metals shall retain their value regardless.
Published: 16-01-2013 00:00
A popular proposal
For months, there has been a proposal to cut the US debt and budget deficit by having a platinum coin, or coins, minted, and given a legal tender value of US$1 trillion. This amount would then be paid off, presumably to institutions holding government debt.
While the US Treasury recently dismissed this particular proposal, influential academics have expressed their interest and support for it. It may not be the policy of today, but who’s to say a similar one won’t be taken up seriously tomorrow? This is why an analysis of the proposal’s flaws is still necessary.
Use of platinum
Why platinum anyway? Apparently, the US Constitution limits the assigning of such values as $1 trillion to gold and silver, but no such limitation on platinum is expressly mentioned.
In fact, such a proposal would have no need of being limited to a precious metal such as platinum. If policymakers had the mind for it, they could assign such arbitrary values to any commodity like wheat or coffee. Platinum, for some reason, seems to lend legitimacy to the proposal, but it is no less arbitrary to assign a platinum coin the value of $1 trillion, when an ounce of it actually costs closer to US$1,600 (as of January 14, 2013).
Same with dollars
Actually, dollar bills are assigned value in the same way, without the backing of a valuable asset such as gold, which has a certain market price per unit of weight.
Dollars are constantly multiplied and this makes for an increase in the money supply. Through what are called open market operations, bond-holding institutions such as banks can sell their bonds to the central bank and have an increase in their cash balances, even if such cash had not existed prior to a central bank’s purchase of these bonds.
What happens when a $1-trillion item suddenly comes into being without this amount having been previously saved? The total money supply increases. And the greater the money supply, the higher the prices of goods and services are bid up. This is conventionally known as ‘inflation.’
In other words, paying off debts via increase of money supply means a devaluation of a currency. Holders of the currency are able to buy less things as time goes by. The greater the inflation, the greater the depreciation, and there is no escaping this.
Perhaps paying with a $1-trillion coin might lower the nominal budget balance. But the corresponding inflation makes everyone that much poorer in terms of purchasing power. In addition, a government’s credit standing may be in jeopardy, which will dissuade investors from lending in the future. The government would then have no choice but to offer higher and higher interest rates for people to buy bonds. Where is the money for debt interest payments going to come from, but from more and more printing and devaluation?
28 times in the 20th century, a rising debt problem somewhere in the world had led to hyperinflation, where the rate of printing money renders a currency worthless. When this happens, people turn to assets that could not be inflated, that thus retain their value. This is where gold and other precious metals come in as a safe haven amid inflation. As a currency is debased, metal prices rise likewise. Precious metals are found to be the most ideal media of exchange, due to their durability, relative rarity and more convenient divisibility.
It is too early to say whether the situation in the US or Europe or other parts of the world will lead to hyperinflation, but regardless of the degree of devaluation, precious metals are the safest place to park one’s savings. Gold, silver and platinum, provided their values are assigned by markets, could be said to be the safest currencies, in good times and bad.
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