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The Trillion Dollar Coin

If you’ve been following the news lately, you’ve probably heard talk about a $1 trillion platinum coin that could solve the current fuss going on in Congress. It revolves around a legislation technicality that would allow President Obama to fulfill the government’s debt obligations without needing to get congressional approval to raise the debt ceiling. John Cochrane at The Grumpy Economist explains how this would work:

“Although the Treasury is not allowed to print money or regular coins and pay bills with them, it can issue “commemorative” coins and sell them directly. So, most simply, it could in principle, pay for a trillion dollars of deficit by minting a trillion dollars worth of commemorative coins.

That’s not very practical. But as a little favor to the platinum lobby, there is no limit to the denomination of platinum coins the Treasury can issue. So, the idea is this: make a trillion dollar coin out of platinum. Deposit the coin at the Fed, just as the Treasury now deposits cash. The Fed creates a trillion worth of reserves in the Treasury’s checking account, and the Treasury can merrily write checks.

(Sidenote: As we’ve discussed in the past, the debt ceiling arguments are ridiculous because it has nothing to do with future spending. The debt ceiling merely needs to be raised in order to pay bills that Congress already approved and incurred in the past.)

But I digress, back to the coin. The idea has been endorsed by Paul Krugman, so it has some economic merit. Regardless, I just can’t wrap my head around this little problem of practicality:

platimum needed

one does not simply mint a trillion dollar coin

Economics is funny like this sometimes.

Cost of the Olympic Games

I read an interesting post the other day about why the Olympic Games always end up costing more than originally proposed. Essentially, organizers submit an appealing budget that legislators will accept, especially when compared to the perceived benefits of hosting the games. Once additional funds are needed, legislators tend to look at all the money already sunk and go along with it.

Just look at the about this very topic. According to them, the predicted cost in 2005 when London won the bid was £2.37 billion. The figure is now more than £12 billion and continues to rise. It’ll be interesting to see what the final cost comes to once the games are completed.

Follow-Up: Koch deal with FSU

A few months ago, I posted about a deal granting Charles G. Koch the right to fill two teaching slots in the economics program at Florida State University.

Yesterday, Jodi at Economists Do It With Models made a post expanding on the many implications the deal may have. It’s definitely an interesting read.

As an undergrad in FSU’s economics department, I will definitely be keeping a close eye on the deal and where it leads.

To the debt ceiling, and beyond!

With all the hubbub going on recently about the debt ceiling, many people are confused. That’s understandable considering the raising of the debt ceiling has always been a very unremarkable, bipartisan act of Congress. To help you understand what’s happening right now, I’ll briefly discuss what the debt ceiling is and why understanding it is important.

The debt ceiling, quite simply, is the cap set by Congress on the amount of debt that the federal government can borrow.

The limit was first set in 1917 and has been routinely raised 74 times since then without opposition. This time around, some politicians are refusing to raise it until Congress and President Obama agree to spending cuts and other ways to curb debt.

Unfortunately, this is a flawed approach because the debt ceiling has nothing to do with future spending; the debt ceiling needs to be raised in order to pay bills the country has already incurred. (Bills that, ironically, Congress approved at one time or another.)

If the debt ceiling isn’t raised by the August 2nd deadline, the United States will not be able to pay its bills. This could lead credit rating agencies to downgrade their assessment of the government’s finances, causing more damage to financial markets and leading to rises in interest rates. (Moody’s has already placed the United States’ Aaa debt rating on review because of this debacle.)

A last resort could be President Obama raising the limit himself, citing the 14th Amendment which assets the full faith and credit of the United States.

To follow new developments as they happen, check out the Huffington Post’s live blog.

Bitcoin: Currency of the Future?

Bitcoin has been gaining much media attention due to its recent rise in popularity. Rather than relying on a central monetary authority to monitor transactions and manage the money supply, Bitcoin uses peer-to-peer technology to allow users to make purchases online without using a credit card or bank account.

The rate of inflation for the Bitcoin currency is mathematically-based and predetermined. The amount of Bitcoins in circulation increases by 300 coins every hour, with that rate being cut in half every four years. The currency will level off around 2030 at 21 million coins.

The real question here is can the Bitcoin become to the currency of the future? Many dismiss the Bitcoin as being nothing more than a modern-day gold standard. The two do have many similarities: both are limited in supply and are increased through a “mining” process, while neither is regulated by a central banking authority.

Beyond this comparison, The Economist explains several issues Bitcoins may face:

Bitcoin may be useful for trading goods and services but it does not yet allow borrowing or lending. A virtual Bitcoin bank might spring up but that would create problems of its own. How would a saver be assured that he would get his money back when he wants? If a bank got into trouble, who would be the lender of last resort? The usual answer is a central bank: exactly what Bitcoin is trying to avoid.

With no central bank or real assets backing Bitcoins, I believe it has too many issues to take off in the way some are predicting. While it is a very interesting endeavor, the Bitcoin lacks as a monetary system.