The proposed Trillion Dollar Coin, like any special-edition notionally-legal-tender coin, would have a face value in excess of its commodity value. It could be composed of, for argument’s sake, just one ounce of platinum. In theory the Treasury would deposit it at the Fed, which would then credit the Treasury’s account with $1 trillion and “solve” the debt ceiling crisis.
The Fed would as a consequence have negative equity as its liabilities would exceed the market value of its assets — if the Fed tried to sell the coin no-one is actually going to give them $1 trillion for it.
There is a precedent for the Fed buying assets at a par value vastly in excess of market value. Toxic Mortgage-Backed Securities purchased from QE1 onward are probably worth cents in the dollar.
But let us take this Trillion Dollar Coin to its logical conclusion — “Reductio ad Krugman”. What if the Treasury simply fabricated ten million $100,000 platinum coins instead – do you think the Fed would be able to offload those for $1 trillion in cash?
At some point, maybe overnight, ordinary people would realize how absurd it is that a coin can be ascribed so much value by fiat. They will intuit that the US dollar is a scam. US dollar bills are worth literally nothing. At least you can say that a coin, 1 ounce of platinum, actually has melt value. Only $1600 worth, but better than nothing.
But, and this is quite ironic, the Treasury could unintentionally fulfil its promise that, yes, a one ounce platinum coin could actually become accepted legal tender at its face value of $100,000! How? Well the US dollar would have devalued so much that platinum really would be priced at $100,000 per ounce… and gold at $100,000 per ounce, and silver… let’s just pick a number.
The Trillion Dollar Coin is a terrific idea. You can add your name to the petition here.