Tags: Obama | trillion | coin | default

A Default Would Be Better than the Trillion Dollar Coin

By Jacob Wolinsky   |   Thursday, 10 Jan 2013 07:38 AM

The United States has a law that the government cannot run a deficit over X amount of dollars. The latest threshold was reached on Dec. 31, which would technically lead to a default by the government. However, through some gimmicks the treasury is able to push it off for approximately two months. After that time period the United States will default if the debt ceiling is not raised.

A few days ago, someone put forth a loophole of getting around the debt ceiling. They suggested that the government could mint a $1 trillion platinum coin to avoid defaulting. The idea has gained a lot of traction ever since the idea was suggested. On Wednesday, Jay Carney, White House press secretary, stated that President Barack Obama did not rule out this option. Many others are urging the president to in fact mint the coin.

I think it would be a really bad idea to default. I believe that the GOP should allow the ceiling to be raised if Obama agrees to cut down on government pork. However, if Obama ends up being stubborn and allowing us to default, that would likely be a better scenario then printing the coin.

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First, some economists who have not expressed fear over inflation believe that this coin could be inflationary. However, there is a more important reason why the idea is dangerous.

Obama seems to think that he can govern however he wishes. He has even stated in regard to immigration reform, “believe me, the idea of doing things on my own is very tempting.” Statements like these the media give him a pass on. However, printing $1 trillion out of thin air is something people would notice.

Domestically, it would cause the country to fracture further along partisan lines. Democrats in general support anything Obama does, so they would go along with the idea.

Additionally, it would create the perception that Obama is acting childish, dictatorial or however you want to label it. It could end up hurting him politically, as Congress would have no interest in negotiating with him. It could also cause fear when people hear or read how the government is acting with impunity. When people are scared they stop spending, which causes economic slowdowns (or downturns).

Abroad, the impact would be even worse. Despite our woes, the United States is still viewed as the strongest economy in the world. However, this would change overnight if the government took an action so radical. Talk of the dollar losing its reserve status would gain a lot of traction, and other countries could retaliate economically against the United States. The country would likely get a downgrade, as it would show further how dysfunctional the government is.

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Would a default be better? In this situation, the answer is likely yes. The United States has defaulted previously for short periods of time. Like after Lehman Brothers collapse, a default would force Obama into a compromise. It would be better not to default, but a default could cause more compromise and bring the country together.

Obama should carefully weigh his options before going nuclear. Obama is a man who likes to do whatever he wants, but in this case, compromise may actually be his best option.

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