I’ve seen some discussion on very liberal blogs about a possible way out of default called coin seigniorage. The advocates essentially want the Treasury to strike a 2 trillion dollar coin to pay debts and finance the country. Assuming this proposal of dubious legality (I’m no expert, but the advocates do put forward some law backed analysis) could be done, what would the effect on the economy be?
This is an idea that’s circulating in Modern Monetary Theory circles, and I believe that it’s legally mistaken.
That said, conceptually it highlights a very accurate point. If you think of the United States government as a consolidated entity, it’s not possible for us to “run out of money” or “go bankrupt.” The government of Ireland owes euros, but it lacks the legal authority to create Euros. Governments of small developing countries often owe dollars, but lack the legal authority to create dollars. Under a gold standard, a government might owe gold and lack the physical capacity to create it. But the United States is owed dollars, and can create dollars, so it’s absurd to think that we might not be able to pay our bills.
Now what might happen is that people lose willingness to lend us dollars in the future. We also might have inflation. Money was lent in the past on the assumption that dollars would be able to purchase real goods and services. Monetization of debt would reduce the real purchasing power of dollars, and might call into question the wisdom of agreeing to lend dollars in the future. But these are different issues.
[UPDATE] I now think this might be legal after all, provided the coin is made of palladium.