Reporting on the trillion dollar coin proposal has been abysmal, probably because most reporters, average citizens, and congressmen have no idea what the Federal Reserve does. Anyway, here's a quick and dirty explanation of how the trillion dollar coin solution would work.
The Federal Reserve issues money by purchasing securities, conversely, it retires money by selling off portions of its security holdings. Federal Reserve notes are therefore 100 percent collateralized by existing financial assets.
Historically, the treasury has also issued money in the form of gold and silver coins, as well as certificates which could be redeemed for specie. This 'treasury money' has not been a major part of the money stock since the 1950s. Today, it consists of a tiny sliver of the monetary base, comprised entirely of bullion and commemorative coins issued by the mint for numismatists. These coins, while technically legal tender, are never intended to be actually used as money. In fact, the melt weight of most of these coins is many times their nominal denominations.
For accounting purpose, the mega coin would increase the treasury balances by one trillion dollars. This would allow the treasury to issue a further one trillion dollars in bonds and bills without technically going over the debt limit. The coin itself, like other 'commemorative' coins issued by the treasury would not be used as money. The treasury would raise funds in the form of Federal Reserve notes by selling bonds of the international capital markets. The coin would merely create the necessary accounting fiction to empower the treasury to conduct these operations without authorization (in the form of a raising of the debt ceiling) from Congress.
It is sad when a the world's leading economic power flirts with crashing its own economy by refusing to pay its bills. Its tragic when the adults in the room are forced to float such silly ideas to avoid catastrophe.
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