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Current Affairs

US plan for 1 trillion dollar platinum coin

Date: 15 October 2021 Tags: World Economy

Issue

Some members of Democratic Party have suggested that a $1 trillion platinum coin may be issued to bypass the debt ceiling of the government.

 

Background

Republicans and Democrats are involved in a conflict over the ceiling on U.S. Government debt.

 

Details

  • The debt ceiling is the maximum amount that the government can borrow to finance its spending in a particular year.

  • The ceiling has been slowly increasing over the years from around $4 trillion in the early 1990s to $28.4 trillion in August, 2021. 

  • The main aim of the debt ceiling is to prompt the government to spend within its limit. Most of the time the government is facing deficit, forcing it to borrow.

 

Conflicts

  • Conflicts on debt ceiling are common between Republicans and Democrats whenever the other is in power. The incumbent government is always in fear of defaulting on its payment.

  • The current conflict is regarding plans by President Biden to spend $3 trillion on various social programmes. This needs the debt ceiling to be raised.

 

The $1 trillion coin

  • The token coin of the face-value will be paid to the U.S. Federal Reserve after getting issued from US treasury. The government does not have to borrow from market.

  • In existing system, the US Federal Reserve sells bonds in the market to finance government’s borrowing. This increases government’s debt as bonds have to be paid back along with interest.

  • When the $1 trillion coin is issued to the Federal Reserve, there will not be liabilities and debt ceiling will also not be elevated.

 

The mechanism

  • A loophole in US law allows US treasury to mint platinum coins worth any denomination regardless of the actual platinum content.

  • The US treasury can thus mint a coin of any denomination and deposit it to US Federal Reserve and get equal amounts in dollars.

 

Concerns

There are concerns that pumping money into the economy will increase prices of goods and services. This has already been observed.

 

Supporting claims

To prevent inflation, the US Federal Reserve will sell bonds worth the same amount in the market. This will suck out money and prevent inflation.