Nobel Prize-winning economist Paul Krugman claimed that issuing premium bonds or minting a $1 trillion platinum coin will break the impasse in raising the U.S. Treasury's debt ceiling.
Krugman stated in a tweet that there are four different ways that the debt ceiling situation might be resolved. The first alternative is to discharge the petition and force a floor vote that gets the support of a "handful of sane Republicans," which, according to Krugman, would most certainly be President Joe Biden's preferred choice.
The second requires invoking the 14th amendment, in which Congress declares that the debt ceiling is unconstitutional.
The third and fourth suggestions are drawing the most attention: the Treasury minting a trillion-dollar platinum coin or issuing premium bonds with a 10% coupon rate.
Between the last two options, Krugman would prefer to issue premium bonds rather than a platinum coin because no one understands the formers while many people mistakenly believe they understand coins.
It's "a route that doesn't inspire confident misconceptions," Krugman said.
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/
— Paul Krugman (@paulkrugman) May 3, 2023
How Would A Treasury Premium Bond Work?
Premium bonds, as proposed by Krugman, would come with an annual interest rate of 10%, which comprises a principal or face value of $1,000 paid at maturity and a coupon of $100 paid annually.
Since market interest rates are well below 10%, such a premium bond could be auctioned off for significantly more than its $1,000 face value.
Despite raising a substantial amount of money, the U.S. government debt wouldn't increase if the Treasury says that the premium bond replaces an existing $1,000 bond.
Krugman Accused Of MMT-Style Debt Financing Ideas
Krugman's ideas have elicited a wide range of reactions, with some accusing the economist of supporting inflationary and unrealistic concepts similar to the Modern Monetary Theory (MMT).
"I keep seeing people saying that this would be MMT, that we'd just be printing money to cover the deficit, but it's not at all," Krugman replied.
The Fed would very certainly sterilize any effect on the monetary base by selling part of its massive holdings of US bonds. It's a way of "covering deficits by selling bonds — i.e., normal deficit finance, just through the back door,'" Krugman stated.
On whether Fed Chair Jerome Powell would ever accept a $1 trillion coin or if the Supreme Court Justices would prohibit the issuing of premium bonds, Krugman responded, "nobody wants to be the guy who destroys the world economy."
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