Paul Krugman Tells Why Trillion-Dollar Coin To Resolve US Debt Crisis Won't Be Inflationary

Nobel laureate and noted economist Paul Krugman has countered some of the criticisms about several strategies to resolve the looming debt ceiling crisis that includes minting a trillion-dollar coin.

"If the strategies are undignified, so is having a financial crisis because a faction in Congress refuses to allow the government to pay bills it has already incurred," Krugman noted. “You don't refuse to wear a helmet in a construction zone bc you think it looks dorky."

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In an opinion piece in the New York Times, Krugman highlighted the possibility of using financial engineering to bypass the debt limit. He pointed out the possibility of minting a platinum coin — an idea that has been widely proposed through various economic and political circles — with a face value of $1 trillion, depositing that coin with the central bank and “spending out of the bank account thus created.”

However, Treasury Secretary Janet Yellen shot down the idea earlier this month in an interview with The Washington Post. She said it wasn’t a given the Federal Reserve would even accept the coin as legitimate, which could kick off a whole slew of legal battles.

Inflation: Refuting the argument that the “coin” solution would be inflationary, Krugman explained how such a step would not lead to an increase in the monetary base.

"It's true that the Fed would have to release funds if Treasury drew on a coin-backed account, but this wouldn't have to increase the monetary base; it could be offset by selling Fed-held securities," he tweeted.

“In effect, the govt broadly defined as Treasury+Fed would be doing exactly the same borrowing as before — except that the Fed rather than Treasury would be selling securities to the private sector. Zero inflation impact,” he added.

In their first meeting on the debt ceiling crisis, President Joe Biden and House Speaker Kevin McCarthy won't come with any specific proposals to avert a possible default, both sides indicated on Tuesday according to a Reuters report.

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Photo by Rachel Maddow on Flickr