Money printing using a trillion dollar coin is counterproductive

The U.S. has a social responsibility to pay its debt, and make the debt have the appearance of being reliable and to facilitate the use of Treasuries as a form of international money. It is like the U.S. role of providing political stability for the world. It is a type of social responsibility, which if abandoned, could cause the world economy a lot of problems.

The world’s Central Banks use dollars as a form of reserves instead of gold. If the federal debt ceiling is not resolved then the dollar will lose credibility and the world’s Central bankers may withdraw their dollar denominated deposits from the U.S. These deposits may be in the form of owning Treasuries, since giant institutions are too big to use the $250,000 FDIC insurance limit that commercial banks offer. It could be said that the world’s money is U.S. Treasuries. When foreign economies expand they put their savings into Treasuries as a substitute for a bank account, since they are too big to use the FDIC insurance.

If the world flees from the dollar that means it flees from Treasuries and U.S. interest rates would go way up, which would hurt the stock market, the economy, the housing market.

Trying to get around the debt ceiling problem by having the Administrative branch of government unilaterally issue a platinum coin with a “fiat value” of a trillion dollars without Congressional approval is a blatant form of money printing to pay for deficit spending. It is worse than carefully planned money printing by the Central Bank because it is not done to stimulate or manage the economy but is done to simply cover a year’s federal deficit. This would make the U.S. look silly. The U.S. would lose gravitas and there would be less faith in the dollar. Ultimately the U.S. would be moving in the same direction as banana republics that created hyperinflation.

Running a fiat money regime requires creating the impression that the issuer is solvent, stable, reliable, cautious, exudes gravitas, avoids risky eccentric schemes, and avoids excessive rates of money printing. Minting a trillion dollar coin (valued only by fiat) to get around debt ceiling legislation would ruin the image of a reliable issuer of currency. This would send shock waves around the world as Central Banks move away from the dollar. The dollar is not backed by anything, so it is the prudent behavior of the dollar’s managers that makes the key difference between acceptance versus rejection.

Hopefully the Republicans will realize if they push too hard in terms of using debt ceiling negotiations to shut down the government they could damage their “market segmentation” or market brand which is one of providing global security through conservative behavior.

The economy and stocks have been propped up through Quantitative Easing which is reaching the point of diminishing returns. The debt ceiling problem, which will occur in March, could disrupt the psychological benefit of the QE stimulus, creating severe volatility in the market.

I have written an article “Fed’s QEi a radical new turn”.

Investors should seek independent financial advice.