Unbalanced budgets have led Congress to raise or temporarily extend the national debt limit on 78 separate occasions since 1960, but political gridlock has some experts worried this time could be different. The potential for a worst-case scenario where lawmakers can't come to an agreement leaving the U.S. unable to pay its debts has reinvigorated the debate around potential borrowing limit workarounds, including the absurd-but-plausible proposal that was once Nobel laureate Paul Krugman’s favorite—minting a $1 trillion coin.
“By minting a $1 trillion coin, then depositing it at the Fed, the Treasury could acquire enough cash to sidestep the debt ceiling—while doing no economic harm at all. So why not?” the economist explained in a 2014 New York Times op-ed. This was a sea change in trillion-dollar-coin discourse, which had been popularized by former Insider editor Joe Weisenthal, who is now ensconced at Bloomberg as the co-host of the Odd Lots podcast.
However, Krugman appeared to have a change of heart about the $1 trillion coin Wednesday, arguing that “premium bonds” would be a better solution to the debt ceiling problem in a lengthy Twitter thread. With so many critics of the coin firmly believing it’s a “gimmick” that could cause inflation to soar, there’s a credibility issue, according to the economist, and negative perception alone could undermine the viability of the idea.
“People who really should know better constantly get this wrong, and imagine that the coin would be inflationary,” Krugman wrote, clarifying that he still thinks the coin would be a workable solution, but it basically has a public relations problem. “And that's a reason to prefer a route that doesn't inspire confident misconceptions.”
To Krugman’s point, even Federal Reserve Chair Jerome Powell has chimed in on the coin question, albeit just to dismiss the idea. "There are no rabbits to be pulled out of hats here," he said when questioned about the topic at a meeting of a House Financial Services Committee meeting in early March. "That would be a rabbit coming out of a hat."
Krugman also noted that the complexity of his new solution, premium bonds, could be a good thing. He believes the Treasury could offer premium bonds, or bonds that trade higher than their face value due to a high coupon rate relative to prevailing market rates, and raise money without increasing the national debt.
“In my experience, if you try to explain all this, people's eyes glaze over—which is good! Hard to get outraged over something that baffles you,” he argued, adding that “nobody understands premium bonds, while people think—wrongly—that they understand the coin [to be inflationary].”
Krugman’s potential solution comes after Janet Yellen warned in a letter to Congress on Monday that in less than a month, the U.S. won’t be able to pay its bills. Since the federal government hit its $31.4 trillion debt limit back in June, the Treasury Secretary explained that she has relied on “extraordinary measures” to continue meeting its obligations—but that can’t continue forever.
“If Congress fails to increase the debt limit, it would cause severe hardship to American families, harm our global leadership position, and raise questions about our ability to defend our national security interests,” she wrote.
The debt ceiling debate has grown increasingly heated in Washington over the past few months, with Republicans pushing for strict spending cuts in a bill that Democrats have labeled a “ransom note,” while the Biden administration insists the debt ceiling must be lifted with no strings attached. Biden aides even recently began debating whether the debt ceiling in and of itself is unconstitutional. They point to the 14th Amendment, which they argue requires the Treasury to continue issuing new debt to pay bondholders, Social Security recipients, and government employees, even if Congress fails to lift the debt ceiling.
Either way, if lawmakers can’t come to an agreement and the U.S. is forced to default on its debts, Moody’s Analytics found, nearly 6 million jobs and $12 trillion in household wealth would be lost. And Krugman warned in an April Times op-ed that failing to raise the debt limit could lead to “disastrous consequences" globally as well.
"At minimum, it would disrupt the functioning of the federal government. At worst, it would precipitate a global financial crisis, possibly as bad or worse than the crisis of 2008," he wrote.
